Learning Outcomes
This article examines the essential elements required to create a valid express private trust, focusing on the foundational principles of the three certainties: intention, subject matter, and objects. It distinguishes between fixed interest trusts and discretionary trusts, outlining the specific tests for certainty of objects applicable to each. Additionally, it touches upon the necessary formalities and the concept of constitution for inter vivos trusts. Your understanding of these topics will enable you to analyse scenarios and apply relevant legal principles to SQE1-style single best answer questions regarding the validity and nature of express trusts.
SQE1 Syllabus
For SQE1, you are required to understand the creation and requirements of express trusts, including the distinction between fixed interest and discretionary trusts. You will need to apply your knowledge of the three certainties and related formalities to assess the validity of purported trusts in practical scenarios. Revision should focus on:
- The requirements of an express trust: the three certainties.
- Certainty of intention to create a trust.
- Certainty of subject matter (trust property and beneficial interest).
- Certainty of objects: the tests for fixed interest and discretionary trusts.
- The formalities required for creating an express inter vivos trust.
- The constitution of express inter vivos trusts: transfers to trustees and declaration of self as trustee.
- Exceptions to the rule that equity will not assist a volunteer (in the context of constituting trusts).
- The classification of beneficial entitlement into fixed, discretionary, vested, and contingent interests.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What are the 'three certainties' required for a valid express trust?
- Which test for certainty of objects applies to a fixed interest trust?
- Which test for certainty of objects applies to a discretionary trust?
- True or false: A trust concerning land must be created in writing to be valid.
Introduction
An express trust arises when a person (the settlor) deliberately creates an arrangement where property is held by one or more persons (the trustees) for the benefit of others (the beneficiaries). For an express trust to be validly created during the settlor's lifetime (inter vivos) or by will (testamentary), certain requirements must be met. These include demonstrating the necessary certainties, complying with any required formalities, and ensuring the trust is properly constituted. This article focuses primarily on the three certainties and the distinction between fixed interest and discretionary trusts.
The Three Certainties
The foundational requirement for a valid express trust is the presence of the 'three certainties', as established in case law. These ensure that the trust is clear enough for the trustees to administer and for the court to supervise if necessary. The three certainties are: certainty of intention, certainty of subject matter, and certainty of objects.
Certainty of Intention
The settlor must have clearly intended to create a trust, imposing a mandatory obligation on the trustee to hold the property for the beneficiaries. Merely expressing a wish, hope, or desire (using 'precatory words') is generally insufficient.
Key Term: Settlor The person who creates a trust.
Key Term: Trustee The person(s) holding the legal title to the trust property and managing it for the beneficiaries.
Key Term: Beneficiary The person(s) for whose benefit the trust property is held; they hold the equitable interest.
The court looks at the substance of the words used, or the conduct of the settlor, rather than the specific form. Using the word 'trust' is not essential if the intention to impose a binding obligation is otherwise clear. Conversely, using the word 'trust' does not automatically create a trust if the overall context suggests no true intention to create one (e.g., a sham arrangement).
If there is no certainty of intention, the arrangement may fail as a trust. If the property was transferred to a third party (intended trustee), that person may take the property as an absolute gift. If the settlor declared themselves trustee, they remain the absolute owner.
Certainty of Subject Matter
This requires clarity on two aspects: the property subject to the trust and the beneficial interests the beneficiaries will receive.
Certainty of Trust Property
The property intended to form the trust fund must be clearly identifiable. Vague descriptions like 'the bulk of my estate' are typically too uncertain. However, phrases like 'a reasonable income' have been upheld where the court can objectively determine the amount.
Key Term: Trust Property The assets held within the trust (e.g., money, shares, land).
Trusts of part of a collection of assets require careful consideration. For tangible assets (e.g., wine bottles), the specific items intended for the trust must usually be segregated or clearly identified. For intangible assets that are identical (e.g., shares of the same class in the same company), segregation may not be necessary, provided the number or proportion is certain.
Certainty of Beneficial Interests
It must be clear what share or interest each beneficiary is entitled to receive. If the shares are uncertain (e.g., 'a generous amount'), the trust may fail. For fixed trusts, the shares are specified by the settlor. For discretionary trusts, the trustees have discretion, which satisfies this requirement provided the class of objects is certain.
If the trust property is certain but the beneficial interests are not, the property is usually held on a resulting trust for the settlor (or their estate).
Key Term: Resulting Trust An implied trust where the beneficial interest in property returns (results back) to the settlor or their estate, typically arising when an express trust fails or does not dispose of the entire beneficial interest.
Certainty of Objects
The beneficiaries (objects) of the trust must be certain. The required level of certainty differs between fixed interest trusts and discretionary trusts.
Key Term: Certainty of Objects The requirement that the beneficiaries of a trust must be identifiable.
Fixed Interest Trusts
In a fixed interest trust, the share or interest of each beneficiary is determined by the settlor in the trust instrument. The trustees have no discretion regarding who benefits or what share they receive.
Key Term: Fixed Interest Trust A trust where the beneficiaries and their respective entitlements are fixed by the settlor.
For a fixed trust, the test for certainty of objects is the 'complete list' test. It must be theoretically possible to draw up a complete list of all beneficiaries at the time distribution is due. This requires both:
- Conceptual certainty: The description of the class of beneficiaries must be clear and objectively defined (e.g., 'my children', 'my nephews and nieces'). Vague terms like 'my old friends' are generally conceptually uncertain.
- Evidential certainty: It must be possible, based on available evidence, to identify every member of the class. If records are missing that prevent a complete list from being drawn, the trust may fail for evidential uncertainty.
Mere difficulty in ascertaining the whereabouts or existence of a known beneficiary does not invalidate the trust; trustees can apply to the court for directions in such cases.
Discretionary Trusts
In a discretionary trust, the trustees are given the power (and often a duty) to select which beneficiaries from a defined class will receive distributions and/or how much they will receive.
Key Term: Discretionary Trust A trust where the trustees have discretion over which beneficiaries within a defined class will benefit, and potentially the amount of their benefit.
The test for certainty of objects for discretionary trusts is the 'is or is not' test (also known as the 'given postulant' or 'individual ascertainability' test), established in McPhail v Doulton. It must be possible to say with certainty whether any given individual presented is or is not a member of the defined class of potential beneficiaries.
This test requires conceptual certainty (clear definition of the class, e.g., 'employees', 'relatives') but does not require evidential certainty (the ability to list every member).
Key Term: The 'is or is not' Test The test for certainty of objects in a discretionary trust: can it be said with certainty that any given individual is or is not a member of the class of potential beneficiaries?
However, a discretionary trust may still fail if it is administratively unworkable (the class is so hopelessly wide that it cannot be surveyed, e.g., 'all the residents of Greater London') or capricious (the settlor had no sensible rationale for choosing the class).
Consequences of Uncertainty of Objects
If a trust fails for uncertainty of objects, the property is held on a resulting trust for the settlor or their estate.
Formalities for Creating Express Trusts
While the three certainties relate to the content of the declaration of trust, certain formalities may be required for the declaration itself, depending on the type of property involved.
Key Term: Declaration of Trust The words or actions by which a settlor manifests their intention to create a trust, specifying the property, beneficiaries, and terms.
- Trusts of Personalty (excluding equitable interests): Generally, no formalities are required. An oral declaration can create a valid trust of personal property like money or shares, provided the three certainties are met.
- Trusts of Land: Section 53(1)(b) of the Law of Property Act 1925 requires that a declaration of trust respecting land or any interest therein must be manifested and proved by some writing signed by the person able to declare the trust (usually the settlor) or by their will.
- The declaration itself can be oral, but it is unenforceable unless and until evidenced in signed writing.
- The written evidence must contain all the material terms of the trust.
- Failure to comply makes the trust unenforceable, not void. Equity may still impose a constructive trust to prevent fraud (the statute cannot be used as an instrument of fraud).
- Testamentary Trusts: Trusts created by will must comply with the formality requirements of the Wills Act 1837 (in writing, signed by the testator, witnessed by two witnesses).
Constitution of Express Trusts
For a lifetime (inter vivos) express trust to be fully effective and binding on the settlor, it must be 'constituted'. This means the legal title to the trust property must be properly vested in the trustee(s).
Key Term: Constitution (of a trust) The process of vesting the legal title to the trust property in the trustees.
- Settlor as Sole Trustee: If the settlor declares themselves trustee, the trust is constituted automatically upon a valid declaration (as the settlor already holds the legal title).
- Third-Party Trustees: If the settlor appoints others as trustees, the settlor must transfer the legal title to the property to the trustees according to the specific rules for transferring that type of asset (e.g., deed and registration for land, stock transfer form and registration for shares, delivery for chattels). Until the transfer is complete, the trust is incompletely constituted.
Equity Will Not Assist a Volunteer
Generally, if a settlor fails to properly constitute a trust (i.e., fails to complete the transfer of legal title to the trustees), equity will not intervene to perfect the trust or compel the settlor to do so. The intended beneficiaries, typically being 'volunteers' (having given no consideration), cannot enforce the incompletely constituted trust.
Key Term: Volunteer In equity, a person who has not provided valuable consideration for a promise or transfer.
There are exceptions to this rule (e.g., the rule in Re Rose where the settlor has done everything in their power, the rule in Strong v Bird where the intended trustee becomes the settlor's executor/administrator), but these are beyond the scope of this introductory overview.
Worked Example 1.1
Sarah orally declared to her friend Tim that she held her 1,000 shares in XYZ plc on trust for her nephew, Ben. She took no further steps before suddenly dying a week later. Her will leaves her entire estate to charity. Is there a valid trust of the shares for Ben?
Answer: Yes, likely. This concerns shares (personalty), so no specific formality (like writing) is required for the declaration of trust under s.53(1)(b) LPA 1925. Assuming the three certainties are present (intention seems clear, subject matter - 1,000 XYZ plc shares - is certain, object - Ben - is certain), the main issue is constitution. Since Sarah declared herself trustee, the trust was constituted immediately upon her declaration. The legal title was already vested in her. The shares are therefore held on trust for Ben and do not form part of her residuary estate passing to the charity.
Worked Example 1.2
David wants to put his house, 'The Hollies', on trust for his daughter, Emily. He tells his friend Fiona that he wants her to be the trustee. He signs a document clearly stating his intention to create the trust, identifying the property and beneficiary, and appointing Fiona as trustee. However, he forgets to sign and send the Land Registry transfer form (TR1) to Fiona before he goes on a long holiday. Is the trust constituted?
Answer: No. David intended to create a trust with Fiona as trustee. This requires constitution by transferring the legal title of the house to Fiona. Transferring legal title to land requires a deed (the TR1 form) and registration at the Land Registry. David has made a valid declaration (evidenced in writing signed by him, satisfying s.53(1)(b) LPA 1925) but has not completed the transfer steps. The trust is incompletely constituted. Unless an exception applies (like the rule in Re Rose), Emily, as a volunteer, cannot enforce the trust.
Revision Tip
Always check the type of property involved (land or personalty) to determine formality requirements. Also, identify who the intended trustee is (settlor or third party) to determine the steps needed for constitution.
Key Point Checklist
This article has covered the following key knowledge points:
- Express trusts are created intentionally by a settlor.
- Validity requires the three certainties: intention, subject matter, and objects.
- Certainty of intention requires a clear intention to impose a mandatory obligation, not just precatory words.
- Certainty of subject matter requires identifiable trust property and clear beneficial interests.
- Certainty of objects requires identifiable beneficiaries; the test differs for fixed ('complete list') and discretionary ('is or is not') trusts.
- Discretionary trusts must also be administratively workable and not capricious.
- Declarations of trust for land must be evidenced in signed writing (s.53(1)(b) LPA 1925). Trusts of personalty generally require no formalities.
- Trusts must be constituted: legal title must be vested in the trustees.
- If the settlor is sole trustee, constitution occurs upon valid declaration. If trustees are third parties, the property must be properly transferred to them.
- Equity generally does not assist a volunteer beneficiary to enforce an incompletely constituted trust.
Key Terms and Concepts
- Settlor
- Trustee
- Beneficiary
- Trust Property
- Resulting Trust
- Certainty of Objects
- Fixed Interest Trust
- Discretionary Trust
- The 'is or is not' Test
- Declaration of Trust
- Constitution (of a trust)
- Volunteer
