Creation and requirements of express trusts - Constitution of express inter vivos trusts

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Overview

Express inter vivos trusts are essential to modern asset management and estate planning, having a significant function in English property law. For SQE1 FLK2 exam candidates, a strong understanding of these trusts is vital, as they present a key connection between property law, equity, and testamentary disposition. This article provides a thorough examination of the creation and requirements of express inter vivos trusts, concentrating on the three certainties, statutory formalities, and important case law. Understanding these ideas will equip students to address complex trust situations both in examinations and in their legal careers.

The Three Certainties: Foundations of Trust Formation

The doctrine of the three certainties, set out in Knight v Knight (1840), is critical for forming express trusts. Each certainty must be accurately met for a trust to be legally sound.

1. Certainty of Intention

The settlor's objective to form a trust must be evident and provable. This aim doesn't necessitate explicit pronouncements but should be apparent from the settlor's words or conduct.

Case Study: Paul v Constance [1977] 1 WLR 527
The court decided that the expression "the money is as much yours as mine" confirmed certainty of intention despite lacking official trust terminology.

Considerations:

  • Background and circumstances of trust formation
  • Written proof or witness accounts connected to the settlor's aim
  • The knowledge of the parties and their comprehension of trust ideas

2. Certainty of Subject Matter

The trust assets must be explicitly identifiable. This entails two aspects:

  1. Clearly stipulated assets to be retained on trust
  2. Clearly described beneficial entitlements of beneficiaries

Case Studies:

  • Palmer v Simmonds (1854): A trust for "the bulk of my estate" was invalid because of ambiguity.
  • Hunter v Moss [1994]: A trust of 50 out of 950 identical shares was upheld as the shares were considered interchangeable.

Considerations:

  • Differentiate between tangible and intangible assets
  • Appraise the effect of changing asset values on certainty of subject matter
  • Think about the effect of trusts over future assets or prospects

3. Certainty of Objects

Trust receivers must be identifiable, with certainty varying depending on whether the trust is fixed or discretionary.

  • For fixed trusts: All receivers must be identifiable
  • For discretionary trusts: It must be possible to ascertain whether any person is a member of the receiver category

Case Study: McPhail v Doulton [1971] AC 424
The House of Lords determined the 'is or is not' test for certainty of objects in discretionary trusts, shifting from the 'complete list' test.

Considerations:

  • Examine the wording defining the receiver category
  • Effect of changing events on receiver identification
  • Practicality of identifying receivers in large or complex trusts

Statutory Requirements and Formalities

Certain trusts must fulfill specific statutory formalities, particularly those concerning land or testamentary dispositions.

Trusts of Land

Section 53(1)(b) of the Law of Property Act 1925 mandates declarations of trust concerning land to be written and endorsed by the person making such a trust.

Case Study: Hodgson v Marks [1971] Ch 892
A spoken declaration of a land trust was void because of non-compliance with s. 53(1)(b), despite clear settlor objective.

Considerations:

  • Interplay between statutory stipulations and equitable principles
  • Outcomes of non-compliance on trust legality
  • Potential for equitable solutions with flawed formalities

Testamentary Trusts

Trusts formed by will must follow formalities dictated by the Wills Act 1837.

Case Study: Marley v Rawlings [2014] UKSC 2
The Supreme Court dealt with the repercussions of a couple erroneously signing each other's wills, stressing the significance of strict adherence to formalities.

Considerations:

  • Compare formalities needed for inter vivos and testamentary trusts
  • Courts' method to correcting faulty wills
  • Equilibrium between testamentary liberty and formal stipulations

Constitution of Trusts: Declaration and Transfer

The constitution of an express inter vivos trust involves either a declaration of trust or asset transfer to trustees.

Declaration of Trust

A settlor may pronounce themselves as trustee for specified receivers, forming a trust without needing a transfer.

Case Study: Milroy v Lord (1862)
The court determined that a trust is fully constituted when the settlor has taken all necessary steps to transfer legal ownership to the trustees.

Considerations:

  • Proof needed to demonstrate a valid declaration
  • Implications of self-declared trusts on asset security and tax strategies
  • Potential for abuse in dishonest conveyance situations

Transfer to Trustees

When other trustees are intended to hold the assets, legal ownership must be effectively transferred to them.

Case Study: Re Rose [1952] Ch 499
The court maintained that equity would perfect an incomplete gift where the settlor had done everything feasible to transfer the assets, even if legal formalities weren't finalized.

Considerations:

  • Stipulations for transferring different asset categories (e.g., land, possessions, choses in action)
  • Doctrine of 'equity's darling' and its use to imperfect transfers
  • Possibility of resulting trusts where transfers are unfinished

Landmark Case Law: Exploring Trust Formation Complexities

Choithram International SA v Pagarani [2001] 1 WLR 1

This Privy Council judgment dealt with trust formation where there's an incomplete transfer to trustees.

Key Principles:

  • A settlor’s trust declaration can be effective even if not all planned trustees are selected
  • Courts aim to uphold the settlor’s objective wherever feasible

Considerations:

  • Equilibrium between formal stipulations and settlor objectives
  • Implications for multi-jurisdictional trusts and conflicts of law
  • Use of this principle in other situations of incomplete trust formation

T Choithram International SA v Pagarani [2001] 1 WLR 1

Further clarified the principles surrounding trust constitution.

Key Principles:

  • A settlor pronouncing themselves trustee need not take further action for asset transfer to themselves as trustee
  • Courts won’t permit a settlor to exploit their own inability to finalize a transfer to negate the trust

Considerations:

  • Compare with previous cases on incomplete transfers, such as Milroy v Lord
  • Potential for abuse in instances of incapacity or undue influence
  • Implications for trustees’ responsibilities when taking on roles under these situations

Practical Scenarios and Exam-Relevant Applications

Scenario 1: Family Trust Complexity

A wealthy person, Sarah, intends a trust for her extended family, including children, grandchildren, and future offspring, incorporating current assets and potential future inheritance.

Analysis:

  • Appraise certainty of objects for a discretionary trust with a broad category
  • Think about including future assets in the trust
  • Assess formalities needed for various asset categories (e.g., real estate, shares, intellectual assets)

Scenario 2: Corporate Trust Structure

A global company wants to set up a trust for worldwide employee benefit with local trustees in each jurisdiction.

Analysis:

  • Obstacles in meeting the three certainties across multiple jurisdictions

Conclusion

Appreciating express inter vivos trusts requires understanding legal frameworks, statutory stipulations, and case law principles. By merging theoretical knowledge with real-world uses, FLK2 students can successfully manage possible obstacles within trust law, ensuring a solid understanding needed for the examination.