Creation and requirements of express trusts - Fixed interest trusts and discretionary trusts

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Overview

Express trusts are a vital part of equity and trusts law, pivotal in estate planning, asset protection, and wealth management. For the SQE1 FLK2 exam, knowing how to create and establish express trusts, especially fixed interest and discretionary trusts, is essential. This article delves into the legal principles guiding these trusts, their distinctions, and the challenges in their formation and operation.

Nature and Creation of Express Trusts

An express trust is created when a settlor transfers property to trustees for named beneficiaries. The process requires following specific legal formalities and principles, notably the 'three certainties' doctrine.

The Three Certainties Doctrine

Outlined in Knight v Knight (1840), the three certainties are:

  1. Certainty of Intention: The settlor must show a clear intention to create a trust. Just hoping or expecting isn't enough.

    Example: In Re Adams and the Kensington Vestry (1884), the court found that precatory words alone didn't establish a trust.

  2. Certainty of Subject Matter: The trust property must be clearly identified, including assets and beneficiaries' interests.

    Example: In Palmer v Simmonds (1854), a trust for "the bulk of my estate" was void for uncertainty.

  3. Certainty of Objects: Beneficiaries must be identifiable. This varies between fixed and discretionary trusts:

    • For fixed trusts, all beneficiaries must be individually identifiable.
    • For discretionary trusts, following McPhail v Doulton [1971], it should be clear whether any person is within the beneficiary class.

Constitution of Express Trusts

Creating an express trust involves transferring the property to trustees. The principle in Milroy v Lord (1862) requires the settlor to complete all necessary steps to transfer the legal interest for a voluntary settlement to be valid.

Exceptions to "Equity Will Not Assist a Volunteer"

  1. The Re Rose Principle: If a settlor has done everything possible to transfer property, equity considers the gift complete, even if some formalities remain (Re Rose [1952]).

  2. Unconscionability: Equity may perfect an incomplete gift if it's unjust for the donor to withdraw their intention (Pennington v Waine [2002]).

  3. The Rule in Strong v Bird: If a donor intends to make a gift but doesn't complete it during their lifetime, the gift may be perfected if the donee becomes the executor (Strong v Bird (1874)).

Fixed Interest Trusts

Fixed interest trusts have predetermined beneficial interests, where trustees lack discretion in distributing trust property or income.

Key Features

  1. Defined interests for beneficiaries
  2. Limited trustee discretion
  3. Predictable outcomes

Example

"£100,000 is to be held on trust, with income paid equally to my three children annually, and the capital distributed equally when the youngest turns 25."

Legal Considerations

Beneficiaries of fixed interest trusts have a proprietary interest from the trust's creation. This can be enforced against third parties and can be assigned or disposed of by the beneficiary (Saunders v Vautier (1841)).

Discretionary Trusts

Discretionary trusts give trustees significant powers to distribute trust property among a class of beneficiaries.

Key Features

  1. Extensive trustee discretion
  2. Flexibility to respond to changing needs
  3. Uncertain individual benefits until trustee decisions

Example

"Trustees shall hold £500,000 on trust, with discretion to distribute income and capital among my descendants according to their needs and circumstances."

Legal Considerations

McPhail v Doulton [1971] established the "is or is not" test for certainty of objects in discretionary trusts.

Comparative Analysis: Fixed Interest vs. Discretionary Trusts

Understanding the differences between these trust types is essential for the SQE1 FLK2 exam:

  1. Beneficiary Rights:

    • Fixed Interest: Enforceable rights to specific property or income
    • Discretionary: Right to be considered for distribution

  2. Trustee Powers:

    • Fixed Interest: Limited discretion, mainly for investments
    • Discretionary: Broad powers for distributions and management

  3. Tax Issues:

    • Fixed Interest: Generally straightforward
    • Discretionary: More complex, allowing tax planning flexibility

  4. Suitability:

    • Fixed Interest: Best for predictability
    • Discretionary: Suited for flexibility

Complex Scenarios and Judicial Approaches

Hybrid Trusts

Some trusts combine fixed and discretionary components. In Re Weir's Settlement [1969], the court analyzed a trust with both features, emphasizing careful examination of trust instruments.

Letters of Wishes

Non-binding letters often accompany discretionary trusts, providing guidance to trustees. Re Rabaiotti's Settlement [2000] noted that while not legally binding, trustees should consider these letters seriously.

Sham Trusts

Courts investigate trusts to ensure they aren't shams meant to dodge legal obligations. Snook v London and West Riding Investments Ltd [1967] defined a sham as a document intended to create a false appearance of rights and obligations.

Conclusion

Mastering express trusts, particularly their distinctions, is vital for excelling in the SQE1 FLK2 exam. Key points include:

  1. The three certainties doctrine is central to creating express trusts.
  2. Fixed interest trusts provide certainty but less flexibility, while discretionary trusts offer flexibility but less predictability.
  3. Trust constitution requires diligent compliance with legal principles, with some exceptions in equity.
  4. Understanding trust types is crucial for advising clients and handling complex legal issues.
  5. Recent case law continues to influence trust law, illustrating its dynamic nature.

By understanding these concepts, future legal professionals will be prepared to handle complex trust scenarios and provide effective client advice in this evolving field.