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Trusts Law Cheat Sheet (DRAFT) by

Trusts Law Cheat Sheet

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Trusts: Key Facts

A trust is an equitable duty relating to property.
There is no single definition of a trust.
A trust allows the separation of the powers of the legal owner (held by trustees) from the benefits resulting from the exercise of those powers (enjoyed by benefi­cia­ries).
A trust can confer different types of rights on different benefi­ciaries at different times.

Charac­ter­istics of Trusts

Trust property:
There must be an identi­fiable trust property.
 
The property is the subject matter of the trust.
 
Almost every asset or right can be held on trust.
 
A chose in action is a right (intan­gible) - e.g. a debt / company share.
 
A chattel is a tangible item (other than land) - e.g. cars, computers, jewellery.
 
A trust ceases to exist if the trust property is destroyed or consumed (without fault of the trustee).
 
Where the trustee is at fault for loss of trust property, they will be liable to restore the property or pay compen­sation so the trust will not cease to exist.
Trustees:
A trustee owns the property and has all the rights and powers of legal ownership.
 
The functions and duties of trustees are not unitary.
 
The function and duty of any specific trustee is determined by the nature of the trust they are admini­ste­ring.
 
Role of trustee is a voluntary office and is typically unpaid although profes­sional trustees are entitled to remune­ration.
 
A trustee can be one of the benefi­ciaries of a trust.
Trustee duties:
Basic duty of a trustee is to hold or apply trust property for the benefit of the benefi­ciary.
 
Trustees who are also benefi­ciaries still owe duties to the other benefi­ciaries so cannot simply use the trust fund for their own benefit.
Objects:
A trust must have a benefi­ciary or be for a permitted purpose.
 
A purpose trust is a trust for the promotion or realis­ation of a purpose (i.e. a trust without a benefi­ciary).
 
Most trusts will have a benefi­ciary or benefi­cia­ries.
Equitable propri­etary interest:
A benefi­ciary's interest is good against third parties into whose hands the property or its traceable proceeds may have come.
 
Unlike legal propri­etary interests, it cannot be enforced against everyone.
 
Equitable propri­etary interests cannot be enforced against a purchaser of a legal interest who does not have notice of the trust.
 
As an equitable propri­etary interest in trust property, the property does not form part of the trustee’s estate for the purposes of the bankruptcy and insolvency regimes: cannot be distri­buted to trustee's creditors.
 
Thus, a benefi­ciary enjoys ‘priority’ over the unsecured creditors of the trustee in the event of the latter’s bankruptcy or insolv­ency.
............Catego­ris­ations...........
Express:
A trust which is delibe­rately created.
 
The person who creates the trust is known as the ‘settlor’.
Resulting or Constr­uctive:
Trusts which arise by operation of law.
 
They are imposed by the courts.
 
"­Implied trusts­".

Trusts: Compar­isons & Distin­ctions

Trusts vs Contracts:
It is possible to contract to create a trust - this happens regularly.
 
But, a contract is a creation of common law where a trust in the creation of equity.
 
In a trust, there is no requir­ement for an agreement between any of the parties.
Trusts vs Debts:
Unlike a trust, a debt does not relate to specific assets or funds.
 
A creditor has a personal right to payment but a benefi­ciary has an equitable propri­etary interest in the trust property.
Trusts vs Charges:
Both a benefi­ciary and a chargee have a propri­etary interest in (respe­cti­vely) the trust property and the charged property.
 
But, a chargor can use charged property for their own benefit.
 
A charac­ter­istic of a charge (but not a trust) is a right of redemption.
Trusts vs Agency:
Both are subject to fiduciary duties.
 
Unlike an agent, a trustee cannot commit a benefi­ciary to a contract with a third party.
Trusts vs Bailment:
Bailment is the transfer of possession of chattels from one person to another.
 
Only tangible property can form the subject matter of a bailment.
 
Bailment involves transfer of possession but does not impact the bailor’s legal title to the property.
Trusts vs Companies:
A trust does not have a legal person­ality.
 
A trust cannot bring or defend a legal action in its own name.
 
Company shareh­olders do not have a propri­etary interest in the company’s assets, but in the company.
 
Company directors' obliga­tions are owed to the company, not to the shareh­olders.
Trusts vs Estate Admini­str­ation:
The function of a personal repres­ent­ative is to administer and distribute the deceased's estate ASAP.
 
Express trusts are created to endure for many years so trustees have ongoing asset management functions.
 
A person interested in a deceased person’s estate does not have an equitable propri­etary interest in any of the estate assets.
 
Benefi­ciaries of a trust do have an equitable propri­etary interest.
Trusts vs Gifts:
A "gift on trust" is a gratuitous transfer on trust.
 
An outright gift =
- the absolute transfer of full legal ownership
- donor is full legal owner
- donee becomes full legal owner upon transfer
- no separate equitable interest in the property at any stage
 
With a trust, the settlor creates a new equitable interest for the benefi­ciary.

Private Express Trusts: Requir­ements

............Trust Duration...........
Trusts are **not intended to be permanent
In a discre­tionary trust, trustees are obliged to exercise their discretion within a reasonable timeframe, limiting the duration of the trust.
Often a trust instrument will contain rules dealing with how and when the trust is brought to an end - Trust Period.
Where there is no mechanism to limit the trust, the law limits the duration by means of rules known as the perpetuity rules.
............Perpetuity Rules...........
1. The rule against remoteness of vesting:
Statutory rule which requires that a person (or charity) must obtain a vested interest in the trust property within a recognised ‘perpe­tuity period’.
 
This period is 125 years.
 
It is possible for a trust instrument to limit the duration of the trust to a shorter period.
 
Trust interests which do not vest within the statutory perpetuity period is void.
1a. Wait and see rule:
The trust can exist until it becomes apparent that the interest cannot vest within the perpetuity period.
 
Anything done before this time will remain valid.
1b. Class closing rule:
Objects can be excluded from the trust who might otherwise cause the trust to fail because their interest would vest outside the perpetuity clause.
2. The rule against inalie­nab­ility:
Assets cannot be tied up on trust for longer than the common law perpetuity period of a specified life in being plus 21 years
 
This rule no longer applies to most trusts but is relevant for non-ch­ari­table purpose trusts.
 
There is no wait and see rule: it must be clear from the outset that the trust will end within the prescribed perpetuity period.
 
Hence, the trust instrument for these trusts must contain an express perpetuity period. If not, the trust will fail.
 
Express perpetuity clause examples:
- 21 years
- as long as the law allows
- 21 years following the death of the last surviving descendant of Queen Elizabeth II who is alive at the date of my death

Trusts Arising by Operation of Law

Resulting trusts:
An implied trust.
 
Arise where a legal owner transfers ownership of their property to a third party but equity recognises that they should retain­/regain the beneficial interest in that property.
 
There are 2 sub-ca­teg­ories:
 
1. Automatic resulting trusts:
Default trusts which arise when a transfer on trust fails wholly or partly.
   
If a trustee is holding legal title but the trust has failed, equity imposes a resulting trust meaning that they hold the property on trust for the settlor.
   
The settlor gets Saunders v Vautier rights: they can collapse the trust and recover the property.
   
Equity’s way of ensuring that the property returns to its original owner when it is otherwise unclear what should happen to it.
   
These trusts do not respond to the actual intention of the settlor.
 
2. Presumed resulting trusts:
These trusts do respond to the actual intention of the settlor.
   
Where a person makes a gratuitous transfer of property to a third party, equity raises a presum­ption of a resulting trust.
   
If a person transfers their property to someone else, equity will presume that they wanted that other person to hold it on trust for them.
   
The presum­ption of resulting trust can be rebutted by evidence.
   
A resulting trust will only arise if there is no evidence rebutting the presum­ption.
Constr­uctive trusts:
An implied trust.
 
All constr­uctive trusts are imposed to correct uncons­cio­nab­ility.
 
3 broad situations where constr­uctive trusts arise:
 
1. Instit­utional constr­uctive trusts:
Arise because the conscience of a legal owner is affected in some way.
   
Imposed automa­tically in response to a trigger event.
   
E.g. Constr­uctive trusts imposed to:
- prevent fraud
- perfect an imperfect gift
- profits made in breach of fiduciary duty
 
2. Constr­uctive trusts as remedy:
Awarded by court as a remedy following misapp­lic­ation of property.
   
Not imposed automa­tic­ally.
   
The result of C asserting their rights in the property and seeking to claim beneficial ownership.
 
3. Common intention constr­uctive trusts:
Used to resolve disputes as to the beneficial ownership of land where there is no express trust declared over the land.
   
The court assesses the common intention of the parties to determine their respective equitable interests in the land.
Statutory trusts:
There are some circum­stances where a trust arises as a result of a legisl­ative provision.
 
E.g. the statutory trusts that arise under the Intestacy Rules when a person dies without leaving a valid will.
 
The intention of the legal owners of the property is not relevant.

Benefi­cia­ries: Rights

1. Propri­etary rights:
Fixed trusts:
Benefi­ciaries have equitable propri­etary rights.
   
Their rights may be vested or contingent but they are propri­etary.
   
These rights are assets which are capable of sale or other forms of transfer and can be asserted against third parties.
   
Power to bring the trust to an end by exercising the rule in Saunders v Vautier.
 
Discre­tionary trusts:
Benefi­ciaries do not have propri­etary rights, although some of their rights are akin to propri­etary.
   
Until the discretion is exercise, benefi­ciaries can only hope that the discretion is exercised in their favour.
   
They cannot assert their rights against third parties.
   
They do have sufficient interest in the trust property to compel its return to the trust fund.
   
Power to bring the trust to an end by exercising the rule in Saunders v Vautier.
2. Personal rights:
Fixed trusts:
The right to compel the proper admini­str­ation of the trust by the trustees: they can direct the trustee to take action such as suing a third party on behalf of the trust.
   
Right to be informed of their entitl­ement under the trust once their interest has vested.
   
Can sue the trustees for breach of trust if they act outside their powers or in breach of their duties.
 
Discre­tionary trusts:
Benefi­ciaries can enforce the trust by asking the court to ensure that discretion is exercised, but no right to request it be exercised in a particular way.
   
Once discretion is exercised in favour of a benefi­ciary, they have the right to be informed of their entitl­ement.
   
Can sue the trustees for breach of trust if they act outside their powers or in breach of their duties.

Beneficial Entitl­ement: Fixed & Discre­tionary

............F­ixed Trust...........
A trust in which the entitl­ement of the benefi­ciaries is fixed by the settlor.
Trustees have no discretion in relation to the distri­bution of the trust property.
Trustees must distribute as directed by the settlor.
The settlor cannot tell the trustees what to do once the trust has come into effect, unless they have a reserved power to do so.
Can have one or more benefi­ciaries who may have very different entitl­ements.
Successive interest trust:
A type of fixed trust.
 
Involves a series of consec­utive interests in the same trust property.
 
Gives some benefi­ciaries a right to income (income benefi­cia­ries) and others a right to capital (capital benefi­cia­ries).
Life interest trust:
A type of successive interest trust.
 
A benefi­ciary (life tenant) receives income during their lifetime.
 
Another benefi­ciary (remai­nde­rman) becomes entitled to the capital after the life tenant's death.

Beneficial Entitl­ement: Discre­tionary

A trust under which the trustees have discretion to distribute between the objects.
The settlor determines the objects, but the trustees must decide who from within that class of objects is to receive what sum.
Discre­tionary trusts are flexible.
Enable a settlor to make provision for different benefi­ciaries according to their future needs
The objects of a discre­tionary trust are only potential benefi­ciaries - they have no equitable interest in the trust property until the discretion is exercised in their favour.
The objects do have a right to ensure that the trustees exercise their powers properly.
Power of appoin­tment: a right to choose who, from within a specified class of objects receives, property.

Saunders v Vautier

............B­asic Princi­ple...........
A sole adult benefi­ciary of sound mind, with a vested interest in the trust property, is entitled to direct the trustee to transfer legal title to them, thereby bringing the trust to an end early.
If someone else could obtain a beneficial interest, the benefi­ciary has no entitl­ement to have it transf­erred to them and become the absolute owner.
If each benefi­ciary has a distinct interest in the trust property, which can be severed without impacting the others, they can separately exercise their Saunders v Vautier rights.
In more complex fixed trusts - e.g. successive interest trusts - the rights of benefi­ciaries are not easily severable, so Saunders v Vautier rights only exercised if all benefi­ciaries agree (for which they must be of age and capacity).

Trustee Powers: Investment and Delegation

............P­ower of Invest­men­t...........
A trustee can make any kind of investment that they could make if they were absolutely entitled to the trust assets.
A trustee cannot invest in land overseas under s 8 TA 2000 (unless allowed in trust instru­ment).
Trustees must:
- consider the standard investment criteria in s 4; and
- take advice (s 5).
Standard investment criteria:
Trustees must invest suitably and diversify the invest­ments.
Advice:
Trustees must obtain proper advice provided by a person who the trustee reasonably believes is qualified to give it by their ability and experience in investing.
 
Trustees do not need to seek advice if they reasonably conclude that in all the circum­stances it is unnece­ssary to do so.
These obliga­tions can be excluded, restricted or extended - s 6.
............S­ta­tutory duty of care...........
Trustees must exercise such care and skill as if reasonable in the circum­sta­nces.
The standard of care is higher for profes­sional trustees.
The standard of care is raised for lay trustees who are appointed due to special knowle­dge­/ex­per­ience.
The statutory duty of care only applies to trustee acts in Sch 1 TA 2000.
............P­ower to acquire land...........
Trustees have the power to acquire freeho­ld/­lea­sehold land in the UK but not overseas - S 8.
This power can be exercised for investment purposes but also more widely (e.g. a dwelling for a benefi­ciary).
The statutory duty of care always applies here.
............P­ower of Delega­tio­n...........
Trustees can delegate their powers of investment and aquisition of land.
Delegating investment powers:
Trustees must delegate investment powers by an agreement evidenced in writing - s 15.
 
Agreement should include term ensuring compliance with a written policy statement prepared by trustees.
 
Policy statement should give guidance.
Trustees must comply with the statutory duty of care when selecting and entering into agreements with agents.
If trustees comply with these duties, they will not be vicari­ously liable for any loss caused by the agent acting neglig­ently.

Trustees: No Conflict Rule

Self-d­ealing:
A trustee cannot purchase assets from the trust or sell assets to the trust.
 
If a trustee does so, the transa­ction will be voidable.
 
Benefi­ciaries can seek to rescind the transa­ction.
 
May be allowed by the trust instrument.
Fair-d­ealing:
A trustee may want to directly transa­ction with a benefi­ciary to buy their beneficial interest under the trust.
 
The trustee must be able to demons­trate that the transa­ction was conducted fairly.
 
Trustee should have made full disclosure to the benefi­ciary, acted honestly and fairly and did not take advantage of the benefi­ciary.
 
If the trustee cannot demons­trate this, the transa­ction will be voidable.
 
Benefi­ciaries can seek to rescind the transa­ction.
 
May be allowed by the trust instrument.
If the breach causes a loss to the principal, they can sue the fiduciary personally for breach of fiduciary duty.
If the breach results in a profit to the principal, they may not require a remedy although they may wish to end the fiduciary relati­onship.
If the breach results in a profit to the fiduciary, the principal can recover the profit from the fiduciary.

Trustees: No Profit Rule

Direct profit:
Trustees cannot make a profit from the trust.
 
Any income made directly out of the trust's property belongs to the trust.
Indirect profit:
Trustees must avoid making unauth­orised personal profits which arise from the perfor­mance of their role.
 
Where a trustee obtains a director position as a result of being a trustee, they must not accept remune­ration for this capacity and pay it to the trust.
 
This rule does not apply if the trustee is indepe­ndently appointed as director.
 
The trust instrument may allow trustees to retain remune­ration.
 
The trustee may also seek the fully informed consent of all benefi­cia­ries.
Exploiting opport­unities:
A trustee cannot keep a profit made as a result of an opport­unity that comes to them in the course of performing their fiduciary duties.
 
This rule is very strict.
Bribes­/secret commis­sions:
A trustee cannot accept money from a third party in return for performing their role in a particular way.
Breach of this rule will result in the trustee being stripped of their profits.
Beneficiaries may make a personal claim requiring the trustee to pay back an amount equivalent to the profit made.
Beneficiaries may make a propri­etary claim that the profit is held on constr­uctive trust, allowing protection from insolvency and an ability to trace into any subsequent profits made by the trustee.

Beneficial Entitl­ement: Fixed & Discre­tionary