A collection of notes for the Equity and Trusts module on the PGDL course at University of Law. I took the online course in 2023/2024, and achieved a 90% using these notes.
unit 1: introduction to trusts
and the nature of beneficial
interests
Tags Completed
1. Introduction to Trusts
1.1 What is a Trust?
1.2 Features of a Trust
1.2.1 Legal interest held by the trustee
1.2.2 Equitable interest held by the beneficiary
1.2.3 Consolidation
1.3 Different types of trust
1.3.1 Fixed trusts
1.3.2 Discretionary trusts
1.3.3 Example
1.4 Understanding Beneficial Interests
1.4.1 Vested and contingent interests
1.4.2 Interests in possession and interests in remainder
1.4.3 Absolute and limited interests
1.4.4 The changing nature of beneficial interests
2. Creation of Trusts
2.1 Express Trusts
2.1.1 Creation of trusts in settlor’s lifetime
2.1.2 Creation of trusts by will
2.2 Implied Trusts
2.2.1 Resulting trusts
2.2.2 Constructive trusts
3. The law of succession on a person’s death: Some basic principles
3.1 Administration
3.2 Wills
3.2.1 Formalities
3.2.2 Codicils
3.2.3 Legal effect of wills and codicils
3.2.4 Types of gift
unit 1: introduction to trusts and the nature of beneficial interests 1
, 3.2.5 Failure of gifts
3.2.6 Revocation of wills
3.3 The Intestacy Rules
3.3.1 When applicable
3.3.2 Who benefits?
3.4 Comparison between Trustees and Personal Representatives
4. Trusts in Context
4.1 Pensions
4.2 Collective Investment Schemes
4.3 Trusts and Insolvency
4.4 Fiduciary Duties
4.5 Constructive Trusts
1. Introduction to Trusts
1.1 What is a Trust?
A trust allows the separation of control of prperty from its enjoyment and use. The
trustee has management and control of the property subject to the trust (the ‘trust
property’), but the beneficiary is the ‘real’ owner on the sense that he enjoys the
benefit of the property.
‘Settlor’: The person who sets up a trust in his lifetime.
1.2 Features of a Trust
1.2.1 Legal interest held by the trustee
The fact that trustees hold the legal title enables them to manage the trust property.
As far as the outside world is concerned, the holder of the legal title, the trustee, is
the owner of the trust property. In contrast to an outright owner, however, trustees
are obliged to hold the property for the benefit of those possessing the equitable title.
This obligation is the trust. The beneficiaries get the benefits indirectly by enforcing
the trust obligation against the trustee.
To guard against the trustees misusing the trust property, the law imposes very
rigorous duties on them.
The duties derive from statute and case law (and can be varied by settlors when
they create the trust).
unit 1: introduction to trusts and the nature of beneficial interests 2
, The duties require trustees to dispose of the trust property in accordance with
the terms of the trust. This ensures that the beneficiaries get the benefit the
settlor intended.
Further, trustees must do their best for the trust.
Trustees owe a duty to invest the trust property so that it brings in a reasonable
return and must avoid speculative investments.
If trustees breach a duty, the beneficiaries can sue them to make good any loss
out of the trustees’ own money.
1.2.2 Equitable interest held by the beneficiary
The equitable interest gives beneficiaries two rights: personal and proprietary.
Beneficiaries have a personal right to enforce the trustees’ duties and to seek
compensation for any breaches.
It is called a ‘personal’ right because it is enforceable against the trustees
personally.
Beneficiaries also have a proprietary right (i.e. an ownership interest in the trust
property itself).
The significance of the proprietary right is twofold:
i. First, it can be enforced not only against the trustee, but also against successors
in title (i.e. people who subsequently get the legal title to the trust property).
Example 1: The beneficiaries’ proprietary interest binds not only the
original trustee but also, when he dies, the trustee’s personal
representatives who acquire legal title to the trust property.
unit 1: introduction to trusts and the nature of beneficial interests 3
, Example 2: The trust binds not only the original trustee but also the
trustee in bankruptcy, who subsequently acquires legal title to the trust
property.
The trustee in bankruptcy cannot use the trust property; the
beneficiaries’ proprietary interest means that the trust property is
preserved for the beneficiaries and will not be available for creditors.
There is one type of third party who will not be bound by the trust - a
bona fide purchaser for value who has no notice of the beneficiaries’
rights (known as ‘Equity’s darling’). If a trustee sells trust property to
such a bona fide purchaser, the purchaser takes the property free
from the beneficiaries’ interests. The beneficiaries cannot assert their
rights against the property in the bona fide purchaser’s hands (but
they can sue the trustees for any loss in a claim for breach of trust).
ii. Secondly, the proprietary nature of the beneficiary’s interest means that it is itself
an item of property (just like shares in a company or money in a bank) which can
be sold or given away.
1.2.3 Consolidation
1. An employee’s duty of loyalty to his employer does not create a trust. The
employee does not hold any property which could be subject to a trust. Trusts
can only exist over property.
2. Explain whether the beneficiary can give away the land to his son. The
beneficiary cannot give away the land (the legal title) because he does not hold
the legal title, but he can give away his equitable interest in the land to his son.
The result would be that the son replaces him as the beneficiary.
3. The trustees invested £30,000 of trust money in a hazardous bond, which
has subsequently become worthless. The beneficiary wants to recover this
loss to the trust by suing the trustees for compensation. The beneficiary will
bring a personal claim against the trustee for breaching his duty to invest trust
money in non-hazardous investments. The beneficiary should recover £30,000
in compensation from the trustee.
4. One of the trustees stole a painting from the trust and gave it to his
girlfriend. The beneficiary wants to recover the painting. In order to recover
unit 1: introduction to trusts and the nature of beneficial interests 4
, the painting, the beneficiary will have to bring a claim against the girlfriend who
has obtained legal title from the trustee. This claim will assert the beneficiary’s
proprietary interest in the painting. (If the beneficiary had only been interested in
recovering compensation equal to the value of the painting, he could have sued
the trustee in a personal claim for breach of duty.)
5. Tanya was a sole trustee holding on trust for Bethan. Tanya has died.
Should Bethan worry that this is the end of the trust? The trust is still alive.
By virtue of Bethan’s proprietary interest, the relevant property is still held on
trust for her.
1.3 Different types of trust
1.3.1 Fixed trusts
Fixed trusts: The terms of the trust define the share of the trust property which the
beneficiary will receive.
‘On trust for X for life remainder to Y’
This type of trust creates ‘successive interests’; it creates beneficial interests which
have effect one after the other.
X (the ‘life tenant’) has a ‘life interest’;
Y (‘the remainderman’) has an ‘interest in remainder’.
The trustees will pay only the trust income to X during his or her lifetime.
Trust income will consist of recurring receipts from the invested trust
property (e.g. interest from banks and building societies, dividends on
company shares and rent from land).
When X dies, the trustees will transfer the trust capital itself (the money, shares
and land) to Y, whereupon the trust will come to an end.
‘On trust for A if he attains 21 but if he dies before then, for B’
A’s interest is conditional (or ‘contingent’) on A attaining 21. In the meantime, the
trustees will look after the trust property for the benefit of A.
If A dies before attaining the age of 21, his interest fails and B becomes entitled.
‘On trust for Z’ where Z is an infant or cannot manage his affairs for some
other reason
unit 1: introduction to trusts and the nature of beneficial interests 5
, A trust is used here to ensure that the property is managed by trustees for the
benefit of Z.
‘On trust for C’ where C is an adult with full mental capacity
This is called a ‘bare trust’ because the trustees hold on trust for a sole adult
beneficiary possessing full mental capacity absolutely (with no limitations or
conditions attached).
This is an unusual type of trust because the trustees must handle the trust property
as the beneficiary dictates.
The beneficiary can end the trust at any time, by demanding that the trustees
transfer legal title to him so that he becomes the outright owner (Saunders v Vautier
(1841) 4 Beav 115).
Bare trusts may be created expressly and are quite common in the investment world.
E.g. if you own a large portfolio of company shares, you might transfer legal title
to a ‘discretionary portfolio manager’ (stockbroker or financial adviser) who will
manage them on your behalf. The manager needs the legal title to be able to sell
shareholdings at short notice and reinvest the money. However, he will hold the
legal title on a bare trust for you. The manager is sometimes called a ‘nominee’.
You can, of course, end the arrangement at any time and get the legal title to the
shares transferred back to you.
Bare trusts also arise when a beneficiary becomes solely and absolutely entitled to
the trust property.
E.g. in the trust ‘for X for life remainder to Y’, when X dies, if Y is an adult with
full mental capacity, Y is solely entitled to the trust property absolutely.
At this point, the trust converts into a bare trust.
In due course, the trustees will transfer legal title to the trust property to Y,
whereupon the trust will end.
1.3.2 Discretionary trusts
A discretionary trust gives the trustees a discretion as to the amounts any
beneficiary may receive and/or whether particular beneficiaries receive anything at
all.
E.g. The settlor gives property to the trustees ‘to hold on trust for such of my
children and in such shares as my trustees think fit’.
unit 1: introduction to trusts and the nature of beneficial interests 6
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