Understanding Express Trusts: Nature, Creation, and Key Concepts, Exams of Law

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Nature  and  Creation  of  Express  Trusts     Trust  –  is  an  arrangement  involving  property  whereby  one  person,  the  trustee,  has   an  obligation  to  hold  the  property  for  the  benefit  and  on  behalf  of  another,  the   beneficiary.   - The  most  common  type  of  trust  arises  when  the  trustee  is  the  legal  owner  of   the  property  and  the  beneficiary  has  a  equitable  beneficial  interest.   - The  trustee  will  always  have  a  fiduciary  obligation  to  hold  the  property  for   the  beneficiary.     - The  beneficiary  will  always  have  an  equitable  interest,  which  is  enforceable   in  equity.       The  nature  of  the  trustee-­‐beneficiary  relationship  11.2   - Fiduciary   - Relationship  of  utmost  trust  and  confidence   - Enforceable  only  in  the  courts  of  equity   Indicia  of  a  trust   The  three  indicia  of  a  trust  are:  trustee,  property  and  beneficiary.   Characteristics  and  elements  which  both  indicate  the  existence  or  and  are  essential   for  a  trust:   Trustee:  The  legal  or  equitable  interest  in  the  property  is  held  by  one  or  more   persons  and/or  corporation.     The  holder  of  the  interest  must  have  an  obligation  to  deal  with  and/or   administer  the  property  on  behalf  of  and/or  for  the  benefit  of  another  person   or  persons  -­‐  This  is  a  trustee.   Property:  There  must  be  some  form  of  property  that  is  capable  of  being  held   on  trust.  Must  be  clearly  indentified  and  identifiable.  If  there  is  uncertainty  as   to  the  indentity  of  the  property,  there  can  be  no  trust.  The  property  which   forms  the  substance  of  the  trust  is  called  ‘the  subject.’   Beneficiary:  There  must  be  one  or  more  persons  for  whose  benefit  the   trustee  is  obliged  to  hold  the  property.  These  are  ‘beneficiaries’  or  ‘objects’   of  the  trust.  A  trustee  may  be  the  beneficiary  of  a  trust  if  there  is  one  of  more   other  beneficiaries  but  cannot  be  the  sole  beneficiary.  If  this  occurs,  the  title   to  the  property  and  the  beneficial  interest  in  the  property  will  merge  and  the   trust  will  no  longer  exist:  Re  Cook  [1948]     Obligations/Duty:  Finally,  the  trustee  must  be  under  an  obligation  to  hold  and   administer  the  subject  matter  of  the  trust  for  the  benefit  of  the  beneficiary.  This   obligation  creates  corresponding  rights  in  the  beneficiaries.  If  the  person  who  is   holding  the  property  is  not  holding  it  for  the  benefit  of  another  person,  there  is  no   beneficial  interest  and  therefore,  no  trust.       Categories  of  trusts   Express  Trust   Express  trusts  are  trusts  created  with  the  intention  that  the  trustee  holds  the   property  for  the  benefit  of  the  beneficiaries.     Terminology:   The  settler  –  The  person  who  creates  the  trust  and  who  transfers  the  property  to  the   trustee.  A  person  may  declare  that  they  are  holding  property  for  the  benefit  of   another  and  thereby  become  both  the  settler  and  the  trustee.   The  trust  instrument  –  Express  trusts  are  usually  created  by  the  execution  (or   signing)  of  a  trust  deed,  this  is  sometimes  called  a  trust  instrument.  The  deed  sets   out  the  name  of  the  trustee,  the  exact  identification  of  the  property  and  the  names   of  the  beneficiaries.  Under  some  circumstances  a  trust  may  be  created  by  oral   declarations.   Public  trusts  –  Are  created  for  the  charitable  purpose  which  benefit  the  public   generally.     Private  trusts  –  are  formed  for  the  benefit  of  specific  beneficiaries  or  classes  of   beneficiaries.     Testamentary  trusts  –  These  are  trusts  created  pursuant  to  the  terms  of  a  will.       Bare  trusts   A  bare  trust  is  the  most  straightforward  form  of  express  trust.     The  trustee’s  obligation  –     • Hold  property  until  the  beneficiaries  require  title  to  be  transferred  to  their   name;  Wade  v  Wade  [2009]     • Generally  agreed  that  the  trustee’s  primary  obligation  is  to  preserve  trust   property.     • The  trustee’s  duties  depend  upon  the  circumstances  in  which  the  trust  is   created;  Chief  Commissioner  of  Stamp  Duties  v  ISPT  Pty  Ltd  (1998).     A  Quistclose  trust  is  a  particular  type  of  trust  which  arises  when  A  provides  or  lends   money  to  B  and  the  parties  intend  that:   - The  funds  are  to  be  held  by  B  for  a  specific  purpose,  but   - If  that  purpose  cannot  be  achieved,  or  can  be  only  partly  achieved,  then   - B  will  hold  the  money  on  trust  for  A  until  it  has  been  repaid  to  A.   Developed  from  the  below  case:   Barclays  Bank  Ltd  v  Quistclose  Investments  Ltd   Facts  –  In  this  case  “Rolls”  was  in  severe  financial  difficulty.  It  had  to  borrow  money   from  Quistclose  Investements  so  that  he  could  pay  dividend  to  shareholders.  The   declaration  to  the  dividend  created  a  debt  owed  by  the  company  to  the   shareholders.  It  was  agreed  between  Rolls  and  Quistclose  that  the  funds  should  not   form  part  of  the  assets  of  Rolls,  but  would  be  used  solely  for  the  payment  of  the   dividend.  The  funds  provided  by  Quistclose  were  accordingly  paid  into  a  special   account  held  with  Barclays  Bank  and  Barclays  were  informed  by  Rolls  of  the  purpose   of  the  special  account.  Before  the  dividends  could  be  paid,  however,  the  directors  of   Rolls  placed  the  company  in  voluntary  liquidation.  Barclays  attempted  to  use  the   funds  in  the  special  account  to  pay  off  Rolls  indebtedness  to  the  Bank.   Issue:   - Whether,  because  of  the  arrangement  between  Rolls  and  Quistclose,  Rolls   held  the  fund  son  trust  for  Quistclose   - Whether  the  funds  became  part  of  the  assets  of  Rolls  as  a  result  of  the  non-­‐ payment  of  the  dividend   - If  Rolls  were  a  trustee  of  the  funds,  whether  Barclays  has  been  given  notice   of  the  fact.   Outcome  –  it  was  held  that  the  agreement  between  Rolls  and  Quistclose  in  regard  to   the  purpose  of  the  funds  and  their  disposition  in  a  special  account  gave  rise  to  a   ‘primary’  trust  in  favour  of  the  shareholders.    It  was  the  intention  of  Rolls  and   Quistclose  that  if  the  money  was  not  paid  out  as  a  dividend,  the  fund  was  to  be  held   on  a  ‘secondary’  trust  in  favour  of  Quisclose.     Quistclose  had  the  right  to  be  repaid  and  also  the  beneficial  interest  in  the  funds;   ‘the  secondary  trust.’     Distinction  between  trusts  and  other  forms  of  property  relationships   Trust  –  fiduciary  obligation   A  fiduciary  has  a  fundamental  obligation  to  act  in  the  best  interests  of  his  principal   and   not   to   put   himself   in   a   position   in   which   his   duty   conflicts   or   may   possibly   conflict   with   his   interest,   unless   his   principal   gives   his   informed   consent   after   full   disclosure   Whilst   all   trustees   are   fiduciaries,   not   all   fiduciaries   are   trustees.   For   example,   company   directors   are   not   trustees:   Re   International   Vending   Machines   Pty   Ltd   [1962]  NSWR  1408  per  Jacobs  J,  comparing  the  company  director  with  the  Trustee   A  trustee  always  holds  property  for  the  beneficiary.     ii)  Trustee  –  executor   An  executor   is   like   trustee   in   that  he  owes   fiduciary  duty   to   the   legatees  of  a  will.   However,   although   after   probate   the   executor   holds   legal   title   to   the   deceased’s   estate,  he  does  not  become  a  trustee.  An  executor  will  only  become  a  trustee  if,  for   some  reason  there  has  been  a  delay  in  the  distribution  of  the  assets  (“the  executor’s   year”)  AND  the  court   thinks   it  appropriate.  Commissioner   of   Stamp  Duties   (Qld)   v   Livingston  [1965]  AC  694   iii)  Trust  –  bailment   A  bailor  delivers  chattels  to  the  care  of  the  bailee  subject  to  a  condition  that  they  be   returned   to   bailor,   when   the   purpose   of   the   bailment   has   been   carried   out.   The   bailee  obtains  only  possession  of  the  property,  not  legal  or  equitable  title  to  it.   iv)  Trustee  –  legal  mortgagee   A  mortgagee  holds  the  legal  title  whilst  the  mortgagor  has  an  equity  of  redemption.   Thus,  the  mortgagee  has  a  security   interest  in  the  property  for  his  own  benefit.  On   the  other  hand,  a  trustee  holds  the  property  for  benefit  the  benefit  of  a  beneficiary.   A   mortgagee   can   purchase   the   property   which   is   subject   to   the   mortgage,   while   trustee  cannot  purchase  trust  property  for  his  own  benefit.       v)  Trust  –  agency     Agency   arises   when   person   (agent)   has   an   express   or   implied   authority   to   act   on   behalf   of   another   (principal),   usually   in   a   contractual   arrangement.   Equitable   consequences   have   been   superimposed   on   this   common   law   relationship,   so   that   the  agent  is  treated  as  a  fiduciary.       However,  an  agent  does  not  hold  legal  title  to  the  principal’s  property,  although  he   may  have  the  right  to  sell  it  on  the  principal’s  behalf.    On  the  other  hand,  whilst  an   agent  can  bind  his  principal  to  a  contract,  a  trustee  when  he  enters  into  a  contract,   cannot  bind  the  beneficiaries.  Palette  Shoes  Pty  Ltd  (in  liq)  v  Krohn  (1937)  58  CLR  1.       Express  Trust   A  trust  created  by  the  settlor  (the  person  who  transfers  to  property  to  the  trustee)   with  the  intention  that  the  trustee  should  hold  the  legal  and  equitable  property  on   behalf  and  for  the  benefit  of  the  beneficiaries.   • SETTLOR  –  Assigns  legal  title  to  the  trustee.   • TRUSTEE  –  Holds  legal  title  to  the  property  for  the  benefit  of  the   beneficiaries.   • BENEFICIARIES  –  Derive  some  sort  of  benefit  from  the  property  being  held  by   the  trustee.     The  Essential  Elements  of  an  Express  Trust   The  following  a  necessary  for  an  express  trust  to  be  valid:  (all  discussed  in  detail   below)   1.Three  certainties:   ü Intention   ü Subject  Matter   ü Object.   2.Beneficiary  principle:   ü Must  be  for  the  benefit  of  persons  or  for  charitable  purposes;  Morise  v   Bishop  v  Durham  (1804)   3.Trust  must  be  either:   ü Fully  constituted  or,   ü Supported  by  valuable  consideration   4.Writing  Requirement:   ü Only  where  statue  require  that  the  trust  must  be  created  in  writing.  Eg.   Conveyancing  Act  s23C.   5.Must  be  no  “buried  flaw”  such  as”   ü Incapacity  on  the  part  of  the  creator  of  the  trust   ü Illegality  of  purpose   ü Or  other  vitiating  factor