Trust law in England and Wales

Trust law in England and Wales is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person (a "settlor") gives assets (e.g. some land) to another person (a "trustee") to keep safe or to manage on behalf of another person (a "beneficiary"). The law of trusts developed in the middle ages from the time of the crusades under the jurisdiction of the King of England. The "common law" regarded property as an indivisible entity, as it had been done through Roman law and the continental version of civil law. Where it seemed "inequitable" (i.e. unfair) to let someone with legal title hold onto it, the King's representative, the Lord Chancellor who established the Courts of Chancery, had the discretion to declare that the real owner "in equity" (i.e. in all fairness) was another person.

Formalities

There are several formality requirements that have been imposed on express trusts by, inter alia, section 9 of the Wills Act 1837 and section 53 of the Law of Property Act 1925 (LPA) .

Testamentary Trusts

Section 9 of the Wills Act 1837 provides that all testamentary trusts must be in writing, signed by the testator or by someone in his presence and by his direction, and be attested by two witnesses. However, secret trusts and now half secret trusts are recognised exceptions to this requirement.

A full secret trust occurs when a testator leaves what appears to be an absolute gift in his will, but has communicated to the legatee that she is to hold the property on trust for purposes communicated to her.A half secret trust occurs when a testator leaves property on trust in his will, but communicates the terms of the will to the trustee privately.

The two leading justifications for allowing these exceptions to s9 are the fraud theory and the modern theoretical approach. The fraud theory was laid down in "McCormick v. Grogan" and is based on the idea that to disregard evidence of an oral testamentary trust and allow the legatee to take the property absolutely would be against the testator's intent and would unjustly enrich the legatee. The modern theoretical approach is based on the analysis that the testator validly declared the trust in his lifetime, and it became constituted by the vesting of the property in the trustee on his death.

Land

s.53(1)(b) of the Law of Property Act 1925 provides that: ‘a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will.’The declaration itself need not be in writing. The writing required is that of evidence of the declaration and failure to comply with this requirement will render the declaration of trust unenforceable ("Leroux v. Brown").

Dispositions of Equitable Interests

Dispositions of equitable interests are void unless they are in writing signed by the person disposing of the interests or by an agent authorised by that person (s.53(1)(c) LPA 1925). By contrast to s.53(1)(b), the requirement here is that the disposition itself must be in writing. The requirement here also applies to dispositions of equitable interests in both land and personalty ("Grey v. IRC").

Exceptions

As regards formalities, the courts have made it clear that it will not allow a statute to be used as an instrument of fraud ("Rochefoucauld v. Boustead"). In this case, the claimant sold land to the defendant who had orally agreed to hold the land on trust for the claimant. The defendant later argued that because the purported trust was not evidenced in writing, according to the Statute of Frauds there was no valid trust. The court of appeal refused to allow the statute to be used as an instrument of fraud and held that it is a fraud for a person who has knowingly had land conveyed to him as trustee to later deny the trust and claim the land for himself. In such cases, oral evidence will be allowed to establish a trust.

"Prima facie", the courts appear to be allowing something expressly not allowed under the statute. This would appear to be at odds with the principle of parliamentary sovereignty. One argument against that conclusion is that if the purpose of the statute is to prevent fraud, then surely the court, in not allowing people to rely on the statute fraudulently, is merely giving effect to the statute? On this basis, some like Watt claim that the courts have actually upheld the integrity of the statute rather than undermine it .

Constitution of the Trust

For a valid trust, the "three certainties" must be present: See "Knight v Knight".In "Milroy v Lord", Turner LJ stated 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 upon himself."

He went on to say that the settlor may constitute an express trust by either transferring the property to the trustee or by a self-declaration of trust. In the latter case, no transfer is needed.

Depending on what type of property is involved, certain formalities need to be satisfied before the property is validly transferred, and the general principle is that equity will not perfect an imperfect gift. ["Jones v Lock"] Thus, in the case of land, there needs to be a deed , and in the case of shares, ss 182-183 of the Companies Act 1985 provides that in general, a share transfer form must be executed and delivered with the share certificates followed by entry of the name of the new owner in the company books.

Duties of trustees

Duties of trustees include:
# a duty to consider the proper investment of the trust assets
# a duty to prepare annual accounts except where the assets are held in specie
# a duty to keep adult beneficiaries informed at least annuallyTrustees must be unanimous in their decisions and are personally responsible to the beneficiaries for those decisions. In the event of dispute can apply to the Court of Chancery for directions as to the correct course of action.

Rights of beneficiaries

Beneficiaries who feel the trustees are not (properly) fulfilling their obligations have the right to take the trustees to the Court of Chancery for a declaration concerning the proper actions of the trustees.

Exceptions

As mentioned above, in order that a trust be constituted, there usually needs to be a transfer of trust assets to the trustees and in the course of doing so, there might be certain formalities that have to be complied with. Otherwise, because equity will not perfect an imperfect gift, the trust will not be constituted .

However, since "Milroy v. Lord", the court have at times appeared to have added the qualification that although legal title to trust property remains vested in the settlor, an attempted transfer by the settlor to the trustee might be effective in equity even though not all the formalities required for a valid transfer have been complied with. This might be the case where the settlor has done everything in his power to divest himself of trust property. In such cases, it is therefore possible for a trust to be constituted even though certain formalities have not been complied with.

An illustration of this principle is seen in "Re Rose". Here, the settlor had by voluntary deed transferred shares in a private company to be held on certain trusts. Under the company constitution, however, the directors of the company have the right to refuse to register transfers. Accordingly, they delayed registration by some two months after the deed had been executed. The question faced by the court was when were the shares transferred? Section 182 and s.183 of the Companies Act 1985 would suggest that the shares were only transferred when the directors registered the transfer. However, the court held that the shares were transferred when then the settlor executed the deed and the trust was constituted on that date. This is because the settlor had done everything in his power to divest himself of the shares.

"Re Rose" was applied subsequently in a number of cases including "Mascall v. Mascall" which concerned the transfer of registered land. More importantly, the "Re Rose" principle was reviewed in "Pennington v. Waine". Here the donor intended for her nephew to take up directorship in a private company. In order for him to do so, he needed to own shares in the company. Therefore, she executed a share transfer form concerning shares in the company in favour of her nephew. In contravention of the companies act, she had not delivered the share transfer form to her nephew. Neither had he been registered as a shareholder. The donor had sent the forms to her agent, the company auditor, who then told the nephew the he need not take further steps as regards the shares. The nephew then took up directorship of the company. The court held that the shares did not from part of the donor’s estate on her death as there was an equitable assignment of those shares. This was so despite the fact that the donor had not done everything in her power to transfer the shares. The court reached its decision partly on the basis that clearly the donor intended the transfer to have immediate effect and it would have been unconscionable for the donor to retract. Unconscionability would depend on the circumstances in each particular case but in this case, the court felt that it was because the Donor had told the nephew of her intentions and he, in taking up directorship, had acted detrimentally.

The problem with the concept of unconscionability, however, is that it is a very vague concept. What exactly does the court mean by unconscionability? Even in the context of the case, it seems doubtful that it can be said to be unconscionable for the donor to change her mind. The court mentioned some detrimental reliance on the part of the nephew in becoming a director, but how exactly is that detrimental? It was not suggested that the nephew had incurred expenditure or had been detrimentally affected by becoming a director. The court provided no great elaboration on how it decided unconscionability here. This is therefore somewhat of a grey area.

ee also

*Trust law

Notes

References

*Charles Mitchell and David Hayton, "Hayton and Marshall's Commentary and Cases on the Law of Trusts and Equitable Remedies" (Sweet & Maxwell, 2005) 12th edn
*Charles Mitchell, David Hayton and Paul Matthews, "Underhill and Hayton's Law Relating to Trusts and Trustees" (Butterworths, 2006) 17th edn (winner of the Society of Trusts and Estates Practitioners’ Book of the Year Award for 2007