Creation and requirements of express trusts - Administrative unworkability

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Overview

Aspiring legal professionals preparing for the SQE1 FLK2 exam need a thorough understanding of trust law. This guide explores the creation and requirements of express trusts, focusing on administrative challenges that can impact their validity. Understanding these aspects is vital for academic success and practical legal work.

Key Elements of Express Trusts

An express trust's validity depends on meeting three fundamental requirements known as the "three certainties":

Certainty of Intention

This involves a clear intent from the settlor (the person creating the trust) to establish a trust. The settlor must show a binding obligation on the trustee to manage the trust property for the beneficiaries.

Legal Test

Courts use an objective test to assess intention, examining the settlor's words and actions rather than personal thoughts. As demonstrated in Paul v Constance [1977] 1 WLR 527, even informal language can indicate an intention to create a trust.

Example

In Re Kayford Ltd [1975] 1 WLR 279, a company's action of placing customer payments into a separate account was sufficient to establish the intention to create a trust, even without formal language.

Certainty of Subject Matter

Trust property must be clearly defined and identifiable. It should be easy to determine what assets the trust covers. Vague descriptions can invalidate the trust.

Legal Principles

  • Fixed trusts require precise property identification.
  • Discretionary trusts require a clearly defined set of property over which trustees have discretion.

Example

In Palmer v Simmonds (1854) 2 Drew 221, a trust for "the bulk of my estate" was ruled void, as it was unclear what constituted the bulk.

Certainty of Objects

This focuses on the trust's beneficiaries. They must be identifiable, either individually or as members of a defined group. The court must be able to determine who the beneficiaries are and how the trust property is shared among them.

Legal Tests

  • Fixed trusts: The 'complete list' test from IRC v Broadway Cottages Trust [1955] Ch 20 requires all beneficiaries to be identifiable.
  • Discretionary trusts: The 'is or is not' test from McPhail v Doulton [1971] AC 424 requires it to be possible to determine if someone is a potential beneficiary.

Example

In Re Gulbenkian's Settlement [1970] AC 508, a trust for "any person or persons in whose house for the time being Nubar Gulbenkian is residing" was found valid, as it was possible to identify individuals in the category.

Understanding Administrative Challenges

Even if the certainties are met, a trust might fail due to practical difficulties in administration. This happens when a beneficiary class is too broad or unclear, making effective management impossible.

The Principle of Practical Workability

Courts evaluate if a trust is manageable, considering factors like:

  • Size of beneficiary class
  • Difficulty in identifying beneficiaries
  • Terms of the trust
  • Administrative burden

Key Case Law: R v District Auditor, ex parte West Yorkshire Metropolitan County Council [1986] RVR 24

This case set a significant precedent for administrative challenges in trust law.

Facts

The West Yorkshire Metropolitan County Council attempted to create a trust for "all the inhabitants" of West Yorkshire, covering millions of people.

Decision

The court declared the trust void due to practical obstacles. The size of the beneficiary group made effective administration impossible.

Reasoning

  • Trusts must be capable of practical execution.
  • It was unmanageable for trustees to make informed decisions for such a vast group.

Modern Applications and Challenges

Administrative issues remain important, especially with developing social, technological, and legal contexts. Modern issues include:

Digital Assets and Trusts

The growth of digital assets presents new obstacles for trust administration.

Example

A trust for "all users of a specific social media platform" could be void due to the extensive, fluctuating user base.

Cross-Border Trusts

Globalization increases trust administration complexity across jurisdictions.

Legal Considerations

  • Trustees must handle diverse legal and tax requirements across countries.
  • A trust viable in one region may become problematic when crossing borders.

Environmental and Social Governance (ESG) Trusts

A focus on ESG factors in investment adds complexity to trust management.

Example

A trust established for "organizations effectively combating climate change" might struggle to define and assess effectiveness, creating administrative issues.

Practical Considerations

Difficulties with trust administration can lead to issues like:

  • Trust invalidation
  • Administration difficulties
  • Legal disputes

Practical Steps for Trustees

To reduce the risk of management problems, trustees should:

  1. Set clear objectives: Define the trust's purpose and desired outcomes.
  2. Limit beneficiary groups: Identify a well-defined, manageable group of beneficiaries.
  3. Draft detailed guidelines: Outline clear procedures for decision-making and distribution.
  4. Seek professional advice: Consult lawyers and tax advisors for compliance.
  5. Regular review: Periodically check trust administration to identify potential problems early.
  6. Use professional trustees: Appoint specialists in complex trust management.
  7. Use technology: Use management software to handle data and beneficiary details.

Conclusion

Addressing administrative hurdles is critical in express trusts. While meeting the three certainties is essential, practical management must also be considered. By defining specific objectives, limiting beneficiaries, and establishing procedures, trustees can minimize risks and ensure effective operation.

Understanding these concepts is key for both academic progress and practical legal applications, particularly for those preparing for the SQE1 FLK2 exam. As trust structures become more complex, legal professionals must skillfully handle these challenges, guiding clients to create durable, manageable trusts.