Trusts (FLK 2)

Trusts (FLK 2)

1. Fiduciary relationships and obligations

   • Fair-dealing - There is a presumption of undue influence between a trustee and a beneficiary. However, this can be rebutted if the trustee can show that they have not taken advantage of their position, that the transaction was fair and honest, and they made full disclosure to the beneficiary and they were not therefore subject to undue influence
   • Investment duties - trustees must meet the standard investment criteria

2. Trustee Powers and Duties

   • Duties
     • Where a trustee delegates their duties, the trustee remains liable for the delegate's actions as if they were the trustee's own actions - must appoint the agent in writing and give them a policy statement setting out the investment objectives
     • Trustees are under a duty to keep trust property under the joint control of all trustees
     • Core duty = not entitled to make an unauthorised personal profit for themselves - exception = trustees can make and keep authorised profits (i.e. by trust instrument or al sui juris beneficiaries (over 18 with mental capacity))
     • A Trustee must not purchase trust property (self-dealing) - all purchases of trust property by a trustee are voidable regardless of whether the price is fair and whether the trustee took advantage (strict liability)
     • Trustees cannot recover remuneration unless 1) it is authorised in the trust instrument (‘charging clause’), 2) the beneficiaries consent, 3) the trustees obtain a court order, or 4) s. 29 Trustee Act 2000 applies - the trustee acts in a professional capacity but is not a trust corporation, a trustee of a charitable trust or a sole trustee
     • The trust instrument always overrides statute
     • Incidental profits (from a 3rd party) can be authorised if there's a clause in the trust instrument to that effect or the beneficiaries or the court authorises retention
   • In the absence of any express provision in the trust deed, a professional trustee is entitled to remuneration for their services as long as there is more than 1 trustee in office and the other(s) agree to the charge in writing
   • Can delegate their powers by appointing the delegate by deed and giving written notice to the other trustees - the appointment can last for up to 12 months (or a shorter period if in the trust deed)
   • Can invest in land for rent free occupation by a beneficiary

3. Remedies against Trustees

   • Proprietary Claims
     • No limitation period for proprietary claims but the doctrine of laches may apply
     • Doctrine of laches = prevents a party from bringing an equitable claim if they unreasonably delay in asserting their rights
     • Tracing Rules
       • Where a trustee has mixed trust funds with their own money, the Tracing Rules apply
       • Re Oatway enables the beneficiaries to assert a charge over the mixed fund and any withdrawals made from that fund in priority to the guilty trustee - if the beneficiaries use Re Oatway, they should be entitled to the increase in value in the shares (Foskett v McKeown)
       • The guilty trustee is deemed to spend their own money first (Re Hallett)
       • Beneficiaries cannot trace beyond the lowest intermediate balance - once the trustee's account has sunk to nil there can be no claim against any money later paid into that account
       • Cannot trace money which has been dissipated (i.e. spent at a casino or used to pay a credit card bill)
     • A proprietary claim would have priority over the trustee's creditors if the trustee was declared bankrupt, whereas a personal action to account wouldn’t.
   • Breach of Fiduciary Duty
     • Liability for breach of fiduciary duty is strict – the courts do not concern themselves with whether the trustees had good reason or whether the trustees thought they were doing the right thing
     • A claim for breach of fiduciary duty can be made even where that breach has not caused the trust any loss
     • If it appears that a trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, then the court may relieve him either wholly or partly from personal liability for the same (s.61 TA 1925)
   • Personal Claim against Trustees
     • Limitation period = 6 years from the date the youngest beneficiary reaches 18
     • A claim can be brought against a single trustee for breach of trust if the other trustees were not in breach of trust and were not passive to the administration of the trust
     • A trustee can make a contribution claim against co-trustees who are also in breach of trust
     • Beneficiaries must establish causation by applying the 'but for' test – they must show that the loss would not have occurred but for the breach of trust
   • Where more than 1 trustee is liable for breach of trust, liability will be joint and several
   • Trustees can bring a defence of consent for an actionable breach of trust if the beneficiaries gave informed consent
   • Where a trustee makes a profit in breach of their duties, the beneficiaries can elect for a personal or proprietary remedy
   • Compensation will be equal to the loss caused to the trust plus interest from the date of the breach
   • Quia timet injunction = requires the defendant to prevent harm from occurring

4. Remedies against Third Parties

   • Accessory liability = 1) a breach of trust by the trustee/fiduciary, 2) assistance by the stranger and 3) dishonesty by the stranger. The test for dishonesty is primarily an objective one (what would an honest person have done in the circumstances taking into account that person’s knowledge of the facts and level of skill and experience). It is a personal claim against the stranger
   • Acting negligently is not sufficient to be liable as a dishonest assistant
   • There is no proprietary claim against a stranger who has not received the misappropriated property
   • Whilst a ‘clear conscience’ will defeat a personal claim for recipient liability, it will not defeat a proprietary claim
   • To defeat a proprietary claim, the third party would need to have a 'clear conscience' and have provided valuable consideration
   • A stranger becoming a trustee de son tort (or intermeddling) – where someone, who is not a trustee, does acts characteristic of a trustee, he will be liable for any misapplication of trust property or other loss caused to the trust just as if he had been appointed an express trustee (Mara v Browne (1896))

5. Types of Trusts

   • Presumption of Resulting Trust
     • There must be 1) an absence of clear evidence of intention and 2) a voluntary transfer from one person to another - but not their wife, fiance or child - wife can give to husband but not husband to wife
     • The donee is presumed to hold on trust for the donor
     • If held on resulting trust, then not available to creditors
     • Presumption can be rebutted
   • Resulting Trust (implied trust)
     • Applies if contributions to the purchase price are made at the time of the property purchase i.e. not via mortgage payments (Curley v Parkes)
   • Common Intention Constructive Trust (implied trust)
     • Applies if direct financial contributions to purchase price at any time e.g. via mortgage instalments makes the intention implied (Lloyds Bank v Rosset) - contributions to legal expenses and SDLT do not qualify
     • Intention can also be express
     • Implied common intention to share ownership and detriment
     • The court will try to ascertain the parties' intentions as to the shares, if unsuccessful, the court will assess what share would be fair
   • Proprietary Estoppel
     • Must be 1) an active or passive assurance to ownership and 2) a detrimental reliance e.g. contribution to mortgage payments and household expenses
     • Equity is established when a claim to proprietary estoppel is established
     • May give rise to an interest under a constructive trust
   • Presumption of Advancement
     • Intended as a gift and presumed in certain relationships e.g. father to child, husband to wife and male fiancee to female fiancee (if marriage occurs) - does not apply between mothers and their children or wife to husband
     • Presumption can be rebutted - burden on claimant to provide evidence to rebut the presumption and show a gift wasn't intended - the evidence must be of intentions before or at the time of the transfer - evidence of a person's intention after the transfer can only be used against that person
   • Express Trusts
     • The test for certainty of objects in relation to a discretionary trust = the ‘any given postulant’ test - must be able to say with certainty whether a particular person is or is not a member of the class of beneficiaries
     • Express trusts = trusts which the settlor intentionally sets out to create
   • Charitable and Non-charitable Purpose Trusts
     • A non-charitable purpose trust (e.g. to look after and maintain a particular animal) is valid so long as the trust does not offend the rule against inalienability of trust capital, i.e. the trust must be limited in time to 21 years or ‘for as long as the law allows’
     • A charitable purpose trust must be 1) for a charitable purpose, 2) exclusively charitable (can't be mixed purpose) and 3) for public benefit - the public benefit must be identifiable and cannot be too restrictive e.g. residents of 1 town or employees of a specific firm = not public
     • Trusts which have political purposes are not charitable
     • Non-charitable purpose trusts are un-enforceable because they lack a beneficiary who is legally capable of going to court to enforce them

6. Retirement of Trustees

   • Beneficiaries can direct a trustee to retire if 1) they have given a written direction to the trustee, 2) reasonable arrangements have been made for the protection of the trustee's rights in connection with the trust, 3) the trust will continue as a trust corporation or with at least 2 trustees after the retirement and 4) either another person is appointed as trustee OR the continuing trustees consent to the retirement by deed (s.19 TOLATA 1996)
   • Beneficiaries must all be of age and capacity and together absolutely entitled to the trust fund - otherwise, they can apply to the court

7. Trust Income and Capital

   • Income
     • Trustees have discretion to apply/pay trust income to the beneficiaries' maintenance, education or benefit while they are under 18
     • Once the beneficiary is 18, trustees must pay them all future income (for their share) as it arises
     • Life tenants have an interest in income (not capital)
     • Held on trust for X for life = X is entitled to the trust income for the rest of their life
     • Even if an adult beneficiary has not yet reached the contingency age (so cannot receive their capital entitlement), the trustees will be under a duty to pay the income of the adult beneficiary’s share of the trust fund to them once they have reached the age of 18, unless the trust instrument instructs otherwise
   • Capital
     • Trustees have the power to make an advancement of capital to beneficiaries with an interest in capital if beneficiaries with a prior interest consent to the same in writing- trustees have discretion, not required to do so - the advancement must not exceed the beneficiary’s entitlement (or half their entitlement if the settlement pre-dates 1 October 2014)
     • Trustees do not have power to make capital payments to the life tenant, unless there is an express power to do so in the trust instrument
     • Remainder to Y = Y will receive the trust capital on X's death

8. Replacing a Trustee

   • If there's no express provision in the trust instrument, the remaining trustees can appoint a new trustee (s36(1) TA 1925)
   • Appointment must be in writing (preferably by deed) and executed by the continuing trustee
   • The settlor has no power to appoint replacement trustees unless there's an express provision in the trust instrument
   • Beneficiaries have no power to appoint a replacement trustee
   • Where a trustee is appointed by deed, trust property will automatically vest to the new trustee, SAVE FOR stocks and shares - a STF will need to be executed
   • Same rules apply to appointing an additional trustee

9. Constitution

   • Self-declaration
     • If the settlor declares "I now hold this property on trust for X" = valid even if property isn't transferred because the settlor already owns it
   • Transfer to 3rd party trustee
     • Settlor must properly transfer the property to the trustee, otherwise the trust will fail unless one of the exceptions apply
     • Land must be transferred with a deed and registration at the land registry (if registered title) or a trust deed and transfer deed
     • Shares must be transferred with a STF and registration by the Company or delivery of the STF and share certificate to the trustees - declaration of a trust of shares can be oral or written
     • Chattels must be transferred with physical delivery and intention to transfer or a deed
     • Money must be transferred by actual payment or bank transfer
     • Exceptions
       • Exceptions allow an imperfect gift or trust to be saved in equity
       • Strong v Bird
         • If the donor intends to make a gift during their life but failed to do so, and the intended trustee later becomes the executor of their estate, equity perfects the gift
         • The rule in Strong v Bird (1874) applies if 1) the settlor intended to create an immediate trust with a 3rd party acting as trustee, 2) that trust was not created due to a failure to comply with a transfer rule, 3) the settlor's intention continued to their death and 4) the intended trustee acquired legal title to the trust property by becoming the settlor's executor or administrator
       • Donatio Mortic Causa (Deathbed Gift)
         • Valid if a gift is made in contemplation of death, conditional on death and delivery of item or control of means e.g. keys or bank book
       • Re Rose
         • If the donor has done everything in their power to transfer property, equity will treat the transfer as complete
         • Must have parted with the STF or transfer deed
       • Pennington v Waine
         • Even if everything hasn't been done, equity may step in if it would be unconscionable to deny the gift