Trusts are primarily about money and the preservation of wealth. The idea of the trust developed as a means for providing for the family, although these days’ trusts are used for many more purposes. ‘The trust’ continues to be a form of property-holding of ever increasing importance because of its adaptability and convenience in effecting complicated forms of settlement. A definition of a trust can be found in the Hague Convention, which provides that “for the purposes of this convention the term ‘trust’ refers to the legal relationship created inter vivos or on death by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specific purpose.”
Trusts can be created without any formalities at all. However various statute requirements are in place to prevent the casual creation of trusts. In general anyone who has the capacity to own property has the capacity required to create a trust. Infancy and poor mental health are two common reasons for lack of capacity. As mentioned above, equity looks to substance and not form. However the Will Act 1873 and the Law of Property Act 1925 require formalities in setting up a trust so that proper records may be kept regarding the dealing with property. A trust may be declared inter vivos without the need to satisfy any formal requirements. With regards to declaring a trust over a legal interest in land, s. 53 of the Law of Property Act requires that any interest in land must be proved by a document signed by the settlor, or proved by the testators will. Where formalities are required it is not because trusts demand them per se but because of other policy concerns such as the need for certainty in dealing with land. Lord Langdale MR, stated in Knight v Knight that a court will not acknowledge that an express trust has been created unless three certainties have been shown. The court needs proof that the parties involved had the necessary intention to create a trust. This can be proved by either words or by the conduct of the parties. There are no hard and fast rules for determining whether words of disposition have created an absolute gift or a trust. In Re Diggles a testatrix left all her real and personal property to her daughter whilst expressing her ‘desire’ that her daughter should pay an annuity of £25 to a named relative and ‘allow’ that relative to use whatever household furniture her daughter did not need. The daughter paid the annuity for a number of years but then stopped. The annuitant applied to the court claiming that the daughter had been constituted a trustee by the wording of the will and was therefore obliged to pay the annuity. The court held that there was no trust imposed upon the daughter and that the daughter merely a ‘moral duty to pay reasonable attention to the wishes of the testatrix.’ This case shows that the words used are the primary indicator of intention but that it is crucial to understand the context in which the words appear.
The subject of the trust must also be certain. If, for example, the trust involved the transfer of shares, that amount of shares must be certain. Uncertain objects may indicate uncertain intention as was the case in Lambe v Eames. This case involved a gift by a testator to his widow of his entire estate “to be at her disposal in any way she may think best for the benefit of herself and her family.” The wording makes it unclear as to whether he intended a gift to his wife or a trust where his wife would be a trustee and her family would be the beneficiaries. It was held to be ineffective to create a trust and the widow took the estate absolutely.
Finally, Lord Langdale said that the third requirement is certainty of object. The beneficiary or beneficiaries under the trust must be a calculable amount. Declaring that “all employees and their families” are beneficiaries would be too vague for the court to declare it to be a valid fixed trust. Lord Evershed stated in Re Endacott, that “in order [for a fixed trust] to be effective, [it] must have ascertained or ascertainable beneficiaries.”
These three certainties must be satisfied for the protection of the trustees. If the trustees do not know the terms of the trust they might breach the trust and be personally liable for any loss. In the case of Morice v Bishop of Durham, Sir William Grant said that “there can be no trust over the exercise of which this court will have no control, for an uncontrollable power of disposition would be ownership and not a trust.” In order for a trust to be controlled by the courts, its object and subject must be certain.
A trust is said to be completely constituted when “the trust property is vested in trustees for the benefit of beneficiaries; until that has been done the trust is incompletely constituted”
There are three ways to benefit an intended donee. The first is by making an outright transfer. Depending on the type of property, the settlor can transfer his absolute interest, legal and equitable. Secondly, a settlor may declare himself a trustee for the benefit of someone else. All that is necessary is a declaration of trust in favour of beneficiary. There is no need to transfer the legal title to anyone because the settlor becomes the trustee. Finally, by transferring the legal title to a trustee to hold for the benefit of another provided that the legal title is correctly transferred to the trustee, according to the type of property concerned and provided that an intention to create a trust in favour of the beneficiary is sufficiently manifested. It is important that the title is correctly transferred according to the type of property concerned. Where the trust property consists of shares, most private companies require a ‘stock transfer form’ to be executed and delivered to the ‘trustee’, together with the share certificate followed by the transfer of both documents by the trustee to the company. The company must then accept the transfer and register it in its books.
In the leading case of Milroy v Lord, a settlor owned shares in a bank which he purported to transfer to Lord by deed, to be held by him on trust for Milroy. The settlor later passed the share certificate to Lord. Lord was the settlor’s solicitor and was therefore authorised to transfer the share to Milroy but ultimately the transfer could only be completed by registration, at the bank, of Milroy as owner of the shares. This registration never occurred. The issue was whether Milroy could claim the shares under a trust created by the settlor.
It was held on the facts that no valid trust had been created. Milroy had not provided consideration for the shares, the settlement was therefore made by the settlor ‘voluntarily’ and therefore Milroy was a ‘volunteer’ under the settlement. Applying the maxim equity will not assist a volunteer it followed that the settlement would not be binding unless the settlor had ‘done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property.’ The transfer failed because the bank required registration for a valid transfer of shares. The court also said that because the settlement was intended to take place by transfer, the court would not give it effect by declaring a valid declaration of trust. It was held, on this point, that if the settlor’s chosen mode of disposition fails, the court will not perfect the settlement by allowing it to take effect by another of the modes. This point was decided on another of equity’s maxims: Equity will not perfect an imperfect gift. The judge said that if the court were to allow the change of purpose of the settlement, that the court would be “creating a perfect trust out of an imperfect transaction.” In two later cases, firstly, Re Fry, it was held that the transfer of shares in this case was ineffective and that the intended gift was incomplete. This was due to a wartime restriction requiring consent from the treasury. The donor signed all relevant documents but died before receiving the consent from the external body, it was therefore held to be incomplete. Comparing this to Re Rose, where Rose had done everything in his power to transfer the legal and equitable interest but the factors which delayed the registration of the legal title were beyond his control. Re Rose allows a more relaxed interpretation of the requirement in Milroy which can now be understood as: the settlor must have done everything within his power which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him. The doctrine of Re Rose is concerned with whether a purported gift at law which is ineffective can nevertheless take effect as a gift of equity.
Recently the case of Pagarani brought up the same point of law, also concerning shares. The appellants’ main argument was that Mr Pagarani having executed the foundation trust in which he was one of the trustees and made a gift of all his wealth to the foundation he, therefore, held all his assets as trustee on the trust of the Foundation trust deed. The judge was concerned whether Mr Pagarani’s intention was carried up until his death. The reluctance of Mr Pagarani to sign the transfers shows that Mr Pagarani intended not to make the gift irrevocable. Their Lordships, in the Court of Appeal, did not agree with the first judge. They stated that many voluntary settlements are expressly made revocable but no-one suggests that they are incompletely constituted trusts. The words Mr Pagarani used, “I give to the foundation,” were interpreted by the Court of Appeal as words of gift on trust. In the case of Pennington, Mrs Crampton wanted to transfer shares to her nephew. She did everything which was required by the doctrine established in Milroy v Lord. Mr Penninton, the nephew, had not received the transfer form nor had he received the share certificate. It was held by the Court of Appeal that it did constitute a valid gift because, as per Arden LJ, “the donor will not be permitted to change his or her mind if it would be unconscionable, in the eyes of equity, vis a vis the donee to do so.”
Milroy and Lord require gifts to take effect precisely in the way in which they purported to take effect. The Doctrine of Re Rose, which was followed in Pennington, is concerned with whether a purported gift at law which is ineffective can nevertheless take effect as a gift in equity. The doctrine in Re Rose, according to the judgment in Pennington, is based on unconscionability. The courts now increasingly recognise that unconscionability is the foundation of many of the principles of equity. The case of Pennington will prove indispensable for those seeking to uphold gifts which are not formally complete. An appeal to unconscionability or benevolent principles of construction may enable a successful argument that the gift is valid even though the donee has not in his possession the documents necessary to obtain legal title.
To conclude, the case of Strong v Bird required that the donor to have the relevant intention and that their intention stayed fresh until the donor’s death. Milroy, required that the settlor do everything which is required to transfer property of that type. Re Rose required the donee only to do whatever was within his powers, Pagarani allowed the “words used” to create a gift on trust and finally Pennington was decided because the judge felt that it would be unconscionable for the donor to change their mind. From all these changes in the past one thing has become clear: As noble as the ‘ideology’ of equity is, it largely depends on the judge and how he feels on that certain day. There is a lot of debate about which decisions are good law and which are bad law but at the end of the day it’s up to the judges. Donors’ intentions die with them. It is impossible for anyone to be precise about the intentions of a dead person. Even if the donor put his or her wishes and intentions in a will, if that will is read by one hundred people, there will be many variations of the donors’ intentions. Equity, just like its Common Law brother, should be decided on case law and not maxims and dead peoples conscious. Approaches within modern equity to disputes concerning formalities and incompletely constituted trust have changed and will continue to change. Equity, compared to the common law, is very young and the outcome of cases, unlike the common law, is difficult to predict because it depends on how the court perceives the justice of the individual case.
Bibliography:
Martin J (1997): Modern Equity 15th Edition. London: Sweet & Maxwell
Penner J (2004): Law of Trusts 4th Edition. London: Butterworths
Stockwell N (2005): Trusts and Equity 7th Edition. Harlow: Pearson Longman
Watt G (1998): Law of Trusts 2nd Edition. London: Blackstone’s Press Limited
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Case Details:
All case facts and judgements were obtained from the following legal databases:
Earl of Oxford Case (1615) 1 Rep Ch 1
Principles of Equity (2nd Edition) page 18.
Penn v Lord Baltimore (1750) 1 Ves.Sen
Latin for ‘void from the beginning’
Strong v Bird (1874) LR 18 Eq 315
Latin for "among the living," usually referring to the transfer of property by agreement between living persons and not by a gift through a will. Does not apply to transfer of land.
Re Diggles (1888) 39 Ch D 253
Lambe v Eames (1871) 6 Ch App 597
Re Endacott [1959] 3 All ER 562
Morice v Bishop of Durham (1804) [1903 – 1913] All ER Rep 451
s.1 of the Stock Transfer Act 1963 and ss. 182 and 183 of the Companies Act 1985
Milroy v Lord (1862) 4 De G F & J 264
T Choithram International SA and others v Pagarani and others [2001] 2 All ER 492
Pennington and another v Waine and others [2002] 1 WLR 2075