UNIT 1 INTRODUCTION TO EQUITY AND TRUSTS

Introduction to Trusts

What is a Trust?

 Binding obligation placed on a person  a “trustee”;

 To look after property for benefit of another  a “beneficiary” – OR for a purpose

permitted by law.

 Note: there is an obligation placed on the trustee which can be enforced by the
beneficiary.

 Note: a “settlor” is a person who sets up a trust; trustee manages and controls the trust
property; beneficiary is the real owner as he enjoys benefit of the property.

Features of a Trust

 Trustees hold the legal title / interest in the trust property and beneficiary has an
equitable interest in the trust property.

 Equitable interests also known as “beneficial interests”.

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Legal interest held by the trustee

 The holder of a legal title, a trustee, is the owner of the trust property.

 In contrast to an outright owner though, trustees are obliged to hold the property for
the benefit of those possessing the equitable title.

 Beneficiaries get the benefits from the trust property by enforcing the trust obligation
against the trustee.

 Law imposes rigorous duties on trustees so as to guard against the misuse of the trust
property.

 The duties derive from statute and case law, but can be varied by settlors when they
create the trust.

 If trustees breach a duty, the beneficiaries can sue them to make good any loss out of
the trustees’ own money.

Equitable interest held by the beneficiary

 Equitable interest gives beneficiaries two rights: personal and proprietary.

 Beneficiaries have a personal right to enforce the trustees’ duties because it is

enforceable against the trustees personally.

 Beneficiaries also have a proprietary right, i.e. an ownership interest in the trust
property itself.

 Significance of the proprietary right is twofold:

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 1) Can be enforced not only against the trustee but also against successors in title
(i.e. people who later get the legal title to the trust property);

o E.g. beneficiaries’ proprietary interest binds not only the original

trustee but also, if he dies, the trustee’s personal representatives who
acquires legal title to the trust property.

o E.g. where trustee goes bankrupt all his property and the legal title to
the trust property will pass to his “trustee in bankruptcy”; the
beneficiaries proprietary interest means the trust property is preserved
for the beneficiaries and will not be available for creditors; the trust
binds not only the original trustee but also the trustee in bankruptcy,
who subsequently acquires legal title to the trust property.

2) The proprietary nature of the beneficiary’s interest means that it is itself an

item of property which can be sold or given away.

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Different Types of Trust

Fixed Trusts

 “Fixed trusts” define the share of the trust property which the beneficiary will receive.

o A trust may be conditional, e.g. for someone to attain the age of 21;
o A bare trust is one with no limitations or conditions attached.
o Trust for X for life, remainder to Y  trustees would give X income only
and on X’s death, they would transfer the capital to Y, or continue to hold it on
trust for Y.

Discretionary Trusts

 Discretionary trust gives the trustees a discretion as to the amounts any beneficiary
may receive and/or whether particular beneficiaries receive anything at all.

o E.g. “to hold on trust for such of my children and in such shares as my trustees
think fit”.

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Understanding Beneficial Interests

Terminology

 Nature of a beneficial interest under a trust varies depending on the terms of the trust:

a) Whether beneficiary’s interest is unconditional or conditional and liable to fail

if the condition is not satisfied;

b) When he will get it; and

c) To what he is entitled.

 A beneficial interest may be:

a) Vested OR contingent;

b) In Possession OR in Remainder;

c) Absolute OR Limited.

Vested and contingent interests

 Beneficiary has a vested interest if that beneficiary exists and does not have to satisfy
any conditions imposed by the terms of the trust before becoming entitled to trust
property.

 Beneficiary has a contingent interest if it is conditional upon the happening of some

future event that may not happen, or if the beneficiary is not yet in existence (e.g. trust
for grandchildren not born yet).

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 o If the condition is satisfied, the beneficiaries interest becomes vested.

o If the condition is not satisfied, the beneficiary never becomes entitled to the
trust property and his interest fails (settlor may provide substitutional gift).

o If settlor does not provide, he has failed to dispose of the whole beneficial
interest in the property; trust property will have to be returned to the settlor,
this would be an example of a resulting trust.

Interests in possession and interests in remainder

 Beneficiary has an equitable interest in possession if he can enjoy that interest

immediately.

 Beneficiary has an interest in remainder if he cannot enjoy it immediately and instead

has to wait until some other beneficiary’s right to enjoyment expires  interest said
to be postponed.

 Note: the fact the enjoyment of the interest is postponed to the future does not
necessarily make it contingent or limited, one does not have to satisfy any conditions.

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Absolute and limited interests

 An absolute interest is capital.

 A limited interest is income only  an income only will normally be limited in

duration, e.g. for the duration of that beneficiary’s life.

 Note: beneficiary may have an interest only in the income generated by investing the
capital held in the trust, or an interest in the capital of the trust or in both income and
capital.

Changing nature of beneficial interests.

 Nature of beneficial interest may change according to the current circumstances 

interest may begin as contingent and/or in remainder but become vested and/or in
possession.

 If beneficiary’s interest is vested and in possession and not limited in enjoyment the
beneficiary is “absolutely entitled”  sole adult beneficiary may then bring trust to an
end by requesting the trustees to hand the whole trust fund over to him or other
trustees  this is known as a “bare trust”; beneficiary can compel the trustees to end
that trust by handing the trust property to him; rue has been extent to include trusts
which have more than one beneficiary; beneficiaries can end the trust by calling for a
transfer of trust property to themselves or other trustees if all the beneficiaries under
the trust who could possibly become entitled (meaning between them they must be
absolutely entitled):

a) Are in existence and ascertained;

b) Are 18 or more and of sound mind; and
c) They all agree.

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Creation of Trusts

Creation of trusts in settlor’s lifetime

 Settlor may create an express trust in his lifetime in one of two ways:

a) Settlor declares self a trustee;

b) Settlor transfers property to trustees on trust.

o Settlor does not retain legal title to the asset but transfers it to a trustee
to hold on trust for a beneficiary.

o Trustee may number one or more;

o Settlor may choose a beneficiary, but a sole trustee cannot be the only
beneficiary, there would be no trust; he may make himself a
beneficiary though, so long as there is more.

Implied Trusts

 Not all trusts are created expressly, there are two types of implied trusts: “resulting
trusts” and “constructive trusts”.

Resulting trusts

 Under a resulting trust, the trustees hold on trust for the settlor.

 Resulting trusts are implied in certain defined situations.

 E.g. where there’s gap in beneficial ownership, say settlor creates a trust for X if he
attains 21 but does not say what is to happen if X dies before 21, X’s interest never
vests, because he3 dies aged 20.

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Constructive trusts

 These arise in certain circumstances when it would be unconscionable for the legal
owner of property to deny the claimant an equitable interest.

 E.g. X buys a house in his sole name, but his partner, Y, paid part of the purchase
price on the understanding that she would get an interest in the property  court
likely to say that X holds legal title on a constructive rust for himself and Y in equity.