#15704 - Constitution Long - Trusts and Equity

CONSTITUTION OF TRUSTS

An express trust only exists if the trust is constituted by title to the trust property being vested in the trustee. This is because there must be property upon which the trust obligations can bite; if the trustee has no property there can be no trust. A trust can be constituted in two ways:

• by declaration of oneself as a trustee;

• or by a transfer of property to trustees.

DECLARATION OF SELF AS TRUSTEE

If the settlor declares him or herself to be a trustee, there is no problem of constitution of the trust since the property is already vested in the settlor. The problem in this context relates to whether there has been a declaration of trust. It is necessary to show that the settlor manifested an intention to declare him or herself to be a trustee.

The two methods of constituting a trust —declaration and transfer —cannot be meshed together, so that if neither is quite effective the court will be satisfied. An intention to give will not be construed as an intention to declare oneself a trustee, as the following cases illustrate:

Milroy v Lord [1862]

Facts: Thomas Medley held shares in a company called the Bank of Louisiana, and wished to transfer them to his niece (Elenor Milroy). The bank required the shares be transferred according to regulations in the company constitution (i.e. entry in the books of the bank), but Medley did not comply with this requirement. Instead he signed a deed in Louisiana with Samuel Lord, for Lord to hold 50 shares on trust for Eleanor. He also gave Lord a power of attorney to receive dividends on the shares and to comply with the company constitution formalities. However, he did not comply with the company formalities before M’s death. M lived for three years, during that time the dividends were received by Lord. When M died, the shares remained in his name. Milroy claimed that the shares were held on trust for her (i.e. that a trust had been successfully created). She was successful at first instance, but failed on appeal.

Turner LJ:

• Notes that he wants to give effect to the settlement, but he can’t do so because it’s settled law that “in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding on him.” He can do this buy:

  • Transferring the property to those he intends to provide for: i.e. to transfer full legal and beneficial title —as a gift.

  • Transferring the property to a trustee for the purposes of the settlement: i.e. creating a trust by transfer.

  • Or, if the property is personal, a trust can be declared by parol: i.e. self-declaration of a trust.

• An imperfect gift is not a declaration of trust: “in order to render the settlement binding, one or other of these modes must, as I understand the law of this court, be resorted to, for there is no equity in this court to perfect an imperfect gift”

• If the intention is that a settlement is effectuated by one of the modes above, the court won’t give effect to it by applying one of the other modes: “if the settlement is intended to be effectuated by one of the modes to which I have referred [either self-declaration as trustee or transfer to another to hold on trust], the Court will not give effect to it by applying another one of those modes. If it is intended to take effect by transfer, the Court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust.

• Applying the law to the facts:

• Case isn’t mode 1: In this case, there’s no transfer of the legal title to the claimant, so the court needs to ask whether a trust has been created—with either Lord or Medley as trustee.

• Case isn’t mode 2: Clearly the purpose of the settlement wasn’t for Medley to be the trustee, so the intention was for the trust to be vested in Lord (i.e. there was no self-declaration of trust in this case).

• Case isn’t mode 3: The shares (trust property) were never legally vested in Lord (due to the bank’s formalities on transfers not being met) therefore there was no constitution, Lord wasn’t a trustee, and there was no valid trust in this case.

Jones v Lock [1865]

Facts: on returning from a business visit to Birmingham, Mr. Jones was reproved by his family for not bringing a present for his baby son. He produced a cheque for 900 payable to himself and said “look you here, I give this to baby; it is for himself, and I am going to put it away for him, and will give him a great deal more along with it.” He placed the cheque in his baby’s hand. His wife feared the baby might tear it, and Jones added: “Never mind if he does; it is his own, and he may do what he likes with it.” He then took the cheque back and locked it in a safe. Six days later he died. The question was whether the baby was entitled to the cheque.

Lord Cranworth LC: it was held that there had been no gift to the baby [at the time a gift of a cheque required indorsement —this is no longer the case under the Cheques Act 1992] and no declaration of trust in his favour.

• “I should have every inclination to sustain this gift, but unfortunately I am unable to do so; the case turns on the very short question whether Jones intended to make a declaration that he held the property in trust for the child; and I cannot come to any other conclusion than he did not. I think it would be of very dangerous example if loose conversations of this sort, in important transactions of this kind, should have the effect of declarations of trust.”

Lord Cranworth obviously regretted the result, but the claimant could not show that the father had intended to declare himself a trustee for the child.

Richards v Delbridge [1874]

Facts: a settlor attempted to assign a lease of business premises to his grandson by endorsing the lease and signing a memorandum: “This deed and all thereto I give to R from this time henceforth with all stock in trade.” He gave the lease certificate to R’s mother to hold on his behalf. On the death of the settlor, it was ascertained that his will made no reference to the business premises. The question in issue was whether the lease belonged to the grandson or to the residuary beneficiaries under the testator’s will.

Sir George Jessel MR: the lease was subject to an RT for the residuary beneficiaries. There was an imperfect gift inter vivos to the grandson as the assignment, not being under seal, was ineffectual to transfer the lease. Further, no trust had been created for the grandson, as the grandfather did not declare himself a trustee of the lease for him. The court will not construe an ineffectual transfer as a valid declaration of trust:

• “For a man to make himself a trustee there must be an expression of intention to become a trustee, whereas words of present gift show an intention to give over property to another, and not retain it in the donor’s own hands for any purpose, fiduciary or otherwise.”

• He endorsed the Milroy proposition that “the Court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust.”

NB: the word ‘trust’ does not need to be used explicitly in order to find that a person declared himself / herself to be holding property as a trustee: for example, in Paul v Constance [1977]¹, the court held that the words ‘the money is as much yours as mine’ in their particular context were sufficient to find that the speaker was declaring himself to hold the property as trustee for himself and the addressee of the words beneficially. Scarman LJ:

• “When one bears in mind the unsophisticated character of the deceased and his relationship with the plaintiff during the last few years of his life, Mr. Wilson submits that the words that he did use on more than one occasion, ‘this money is as much yours as mine’, conveys clearly a present declaration that the existing fund was as much the plaintiff’s as his won. The judge accepted that conclusion. I think that he was well justified in doing so and, indeed, I think that he was right to do so.”

One case which has caused difficulty in this area is the following, where the method of constitution of the trust was essentially by self-declaration:

T Choithram International SA v Pagarani [2001]

Facts: The donor, Pagrani (referred to as TCP in the case), who was seriously ill, executed a trust deed to establish a philanthropic foundation. Having appointed himself one of the trustees, he stated orally that he gave all his estate to the foundation. TCP died before deposit balances and shares had been transferred to the foundation. The plaintiffs (his children) claimed that they were entitled to TCP’s estate on an intestacy because he had not made a valid gift to the foundation.

Privy Council: held that TCP had intended to make an immediate irrevocable gift to the foundation. Since TCP was one of the trustees of the foundation he was bound by the trust and so the gift to the foundation was properly vested in all the trustees.

• Lord Browne-Wilkinson:

  • The central question is whether, “on the basis that TCP intended to make an absolute gift ‘to the foundation’ but had not vested the gift property in all the trustees of the foundation, are the trusts … enforceable?” He found that, in the context, the words ‘I give to the foundation, must mean, “I give to the Trustees of the Foundation trust deed to be...