Introduction to trusts - Roles of settlor, trustee, and beneficiary

Learning Outcomes

This article outlines the fundamental roles within a trust structure: the settlor, the trustee, and the beneficiary. It details their respective functions, legal duties, and rights associated with the creation and administration of express trusts. For the SQE1 assessment, you need to understand the distinct legal positions and responsibilities of each party, including the concept of fiduciary duty owed by trustees and the nature of beneficial interests. Understanding these core principles is essential for applying trust law concepts to SQE1-style multiple-choice questions concerning the validity and operation of trusts.

SQE1 Syllabus

For SQE1, you are required to understand the distinct roles and responsibilities fundamental to a trust relationship. Your knowledge should cover the practical implications of these roles in the formation, administration, and potential termination of trusts.

As you work through this article, remember to pay particular attention in your revision to:

• The function of the settlor in establishing a trust.
• The legal status, duties (especially fiduciary duties), and powers of trustees.
• The nature of the beneficiary's equitable interest and their corresponding rights.
• The interaction between these roles within the framework of an express trust.

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.

1. Who holds the legal title to property in a trust?
   1. The settlor
   2. The beneficiary
   3. The trustee
   4. The protector
2. Which of the following is a primary fiduciary duty owed by a trustee?
   1. Duty to maximise personal profit from the trust
   2. Duty to favour one beneficiary over others
   3. Duty to act in the best interests of the beneficiaries
   4. Duty to follow the settlor's wishes blindly after creation
3. What type of interest does a beneficiary hold in trust property?
   1. Legal interest
   2. Equitable interest
   3. Fiduciary interest
   4. Contingent interest only
4. Under the rule in Saunders v Vautier, who can potentially terminate a trust early?
   1. The settlor alone
   2. The trustees alone
   3. A single beneficiary with a life interest
   4. All beneficiaries acting together, provided they are sui juris and absolutely entitled

Introduction

A trust is a fundamental concept in English law, creating a relationship where property is managed by one party for the benefit of another. This arrangement involves distinct roles with specific legal implications. Understanding the functions of the settlor (who creates the trust), the trustee (who manages the property), and the beneficiary (who benefits from the property) is essential for applying trust law principles relevant to the SQE1 examination. This article provides an overview of these core roles and their interactions.

The Settlor

The settlor is the individual (or entity) who creates the trust. They initiate the process by transferring property to the trustee(s) and defining the terms under which the trust will operate.

Key Term: Settlor The person who creates a trust by transferring property to a trustee for the benefit of beneficiaries.

The settlor's primary function is to establish the trust framework. This involves satisfying the 'three certainties' for an express trust:

1. Certainty of Intention: A clear intention to create a trust must be demonstrated through words or conduct. Ambiguous or precatory language (expressing a hope or wish) is generally insufficient.
2. Certainty of Subject Matter: The property subject to the trust (the trust fund or capital) must be clearly identifiable. Vague descriptions like 'the bulk of my estate' may invalidate the trust.
3. Certainty of Objects: The beneficiaries must be clearly identified or ascertainable.

Once the trust is properly constituted (i.e., the property is vested in the trustees), the settlor typically steps back. Their direct involvement usually ceases unless they have reserved specific powers in the trust instrument (the document outlining the trust terms). These reserved powers might include the power to appoint new trustees or, in rare cases, the power to revoke the trust. Settlors may also provide non-binding 'letters of wishes' to guide trustees, particularly in discretionary trusts.

The Trustee

The trustee (or trustees) holds the legal title to the trust property. They are entrusted with managing these assets according to the terms set out by the settlor and the general principles of trust law, always acting in the best interests of the beneficiaries.

Key Term: Trustee The person or entity holding legal title to trust property and managing it for the beneficiaries according to the trust terms and fiduciary duties.

Trusteeship carries significant responsibilities and duties, most notably fiduciary duties.

Key Term: Fiduciary Duty A legal obligation of utmost loyalty, trust, and good faith owed by one party (the fiduciary, e.g., a trustee) to another (e.g., a beneficiary), requiring the fiduciary to act solely in the other's best interests.

Key duties include:

• Duty of Care: To manage the trust with the care expected of an ordinary prudent person of business (Trustee Act 2000 imposes a statutory duty for certain functions like investment). Professional trustees are often held to a higher standard.
• Duty of Loyalty: To act solely in the beneficiaries' interests, avoiding any conflict between their personal interests and their duties to the trust. This includes the 'no profit' rule (not profiting from the trusteeship unless authorised) and the 'self-dealing' rule (not purchasing trust property).
• Duty to Account: To keep clear and accurate accounts of the trust property and administration, and to provide information to beneficiaries when appropriate.
• Duty to Invest: To invest trust property prudently, considering suitability and diversification, unless the trust instrument specifies otherwise.
• Duty of Impartiality: To act fairly between different beneficiaries or classes of beneficiaries (e.g., between a life tenant entitled to income and a remainderman entitled to capital).

Trustees also possess powers, granted either by the trust instrument or statute (like the Trustee Act 1925 and Trustee Act 2000), enabling them to administer the trust effectively. These often include powers of investment, sale, maintenance (using income for minor beneficiaries), and advancement (paying capital to beneficiaries before they are fully entitled).

Trustees can be held personally liable for losses resulting from a breach of trust. However, they may have defences, such as authorisation by the trust instrument, consent from fully informed adult beneficiaries, or relief granted by the court under s. 61 Trustee Act 1925 if they acted honestly and reasonably.

Worked Example 1.1

Scenario: A trustee, Tom, invests a significant portion of the trust fund in a highly speculative venture recommended by his friend, without seeking independent financial advice. The investment fails, causing a substantial loss to the trust. The trust document is silent on investment restrictions beyond statutory duties.

Question: Is Tom likely to be in breach of his duties?

Answer: Yes, Tom is likely in breach of his duty of care. Trustees must invest prudently and are generally required to seek proper advice (Trustee Act 2000, s. 5). Investing heavily in a speculative venture without advice, especially if it contradicts the need for diversification or suitability (Trustee Act 2000, s. 4), falls below the required standard of care. He may be personally liable to compensate the trust for the loss.

The Beneficiary

The beneficiaries are the individuals or entities for whose benefit the trust property is held and managed. They hold the equitable interest in the trust property.

Key Term: Beneficiary The person or entity entitled to benefit from the property held in trust.

Key Term: Equitable Interest The beneficial interest in property held on trust, recognised and protected by equity. It represents the real value and enjoyment of the property.

The nature of a beneficiary's interest depends on the trust terms:

• Fixed Interest: The beneficiary's share or entitlement is determined by the settlor (e.g., '£10,000 to A' or 'income to B for life, remainder to C').
• Discretionary Interest: Beneficiaries are part of a class, and the trustees have discretion over who receives benefits and how much. Objects of a discretionary trust have a right to be considered but no automatic right to payment.
• Vested Interest: An unconditional interest. It can be 'vested in possession' (a present right to present enjoyment, e.g., a life tenant receiving income) or 'vested in interest' (a present right to future enjoyment, e.g., a remainderman whose interest will take effect after the life tenant's death).
• Contingent Interest: An interest conditional upon a future event occurring (e.g., 'to D if she attains the age of 25').

Beneficiaries possess key rights to ensure the trust is managed correctly:

• Right to Enforce the Trust: Beneficiaries can take legal action to compel trustees to perform their duties or to seek compensation for breaches of trust.
• Right to Information: Subject to certain limitations (e.g., trustees' deliberations), beneficiaries are entitled to information about the trust accounts and management.
• Right to Terminate the Trust (Rule in Saunders v Vautier): If all potential beneficiaries are adults (sui juris), have mental capacity, and are collectively absolutely entitled to the trust property, they can unanimously agree to terminate the trust and direct the trustees to transfer the legal title to them.

Worked Example 1.2

Scenario: A trust provides income to Ben for life, with the capital to be distributed to Chloe upon Ben's death. Chloe is 25 and has full mental capacity. Ben is 60. Both Ben and Chloe want the trust to end now so they can split the capital between them.

Question: Can Ben and Chloe compel the trustees to terminate the trust under the rule in Saunders v Vautier?

Answer: Yes, potentially. Ben (life tenant) and Chloe (remainderman) together hold the entire beneficial interest. Provided they are both adults (sui juris) and have mental capacity, and they both agree, they can collectively direct the trustees to transfer the trust property to them (or their nominees), thereby terminating the trust. The trustees would be obliged to comply.

Summary

The structure of a trust relies on the distinct roles of the settlor, trustee, and beneficiary.

Understanding these roles and their associated legal principles is fundamental to comprehending trust law for the SQE1 assessment.

Key Point Checklist

This article has covered the following key knowledge points:

• A trust separates legal title (held by the trustee) from equitable interest (held by the beneficiary).
• The settlor creates the trust and defines its terms, usually having limited involvement thereafter.
• Trustees manage the trust assets subject to stringent fiduciary duties, including the duty of care and loyalty.
• Beneficiaries hold the equitable interest and have rights to enforce the trust and receive information.
• The nature of a beneficiary's interest (fixed/discretionary, vested/contingent) dictates their entitlement.
• Under Saunders v Vautier, beneficiaries who are sui juris and collectively absolutely entitled can terminate the trust.

Key Terms and Concepts

• Settlor
• Trustee
• Fiduciary Duty
• Beneficiary
• Equitable Interest