Lecture 4

Introduction to Trust
BY : UZA. HAWWA SHAZNA AHMED
2023 / FSL / VILLA COLLEGE
 DEFINITION OF TRUST
◦ The classic definition of a trust was stated by Underhill as follows:

◦ ‘A trust is an equitable obligation, binding a person (called a

trustee) to deal with property over which he has control (which is
called the trust property) for the benefit of persons (who are
called the beneficiaries or cestuis que trust) of whom he may
himself be one, and any one of whom may enforce the obligation.’
A Underhill and D Hayton, Law of Trusts and Trustees (16th edn,
Butterworths, 2002), p1
 ILLUSTRATION
◦ Samuel Stone wishes to provide income for the private
education of his granddaughter, Brenda. He decides to do this
by creating a trust of his 20,000 shares in Abbott plc, which
will generate enough income to pay for Brenda’s education.

◦ Sam could create this trust in three ways.

◦ Example 1 – an inter vivos trust: Settlor vests legal title in trustees

Sam
◦ The trust that Sam is going to create is an (Settlor)

inter vivos trust, meaning ‘between the

living’, i.e. made between Sam (the settlor) Tim & Toby
(Trustees)
and Tim and Toby (who have agreed to act as
his trustees).
Brenda
(Beneficiary)
 ◦ Example 1 – an inter vivos trust: Settlor vests legal title in trustees

◦ Step One
Sam
◦ Sam who owned 20,000 Abbott Plc shares, (Settlor)
transfers legal title to these shares to Tim and Toby
Tim & Toby
◦ Step Two
(Trustees)
◦ The Trustees will receive dividends on these
shares, which will be used for the benefit of Brenda Brenda
as set out in the trust instrument (i.e.., document) (Beneficiary)
◦ Example 2 – an inter vivos trust: Settlor declares himself trustee

◦ This is a different way of creating a trust in which the settlor

declares himself trustee.

◦ For example, instead of vesting legal title in trustees, Sam

could declare that he was now holding the 20,000 Abbott
shares in the capacity of trustee for the benefit of his
granddaughter, Brenda.
 ◦ Mr Constance and Ms Paul lived together
as man and wife.
[1977] 1 WLR 527
Paul v Constance
◦ Mr C received a sum in compensation for
an industrial injury and he put the
money in a deposit account in his own
name.
◦ He told Ms Paul on several occasions
that the money in the account was as
much hers as it was his.
◦ Later joint winnings from bingo were
paid into the account and a subsequent
withdrawal was regarded as a
withdrawal of joint money.
[1977] 1 WLR 527
Paul v Constance
◦ After his death Ms P claimed the fund
from the administratrix Mrs Constance,
his surviving wife.
◦ It was held that Mr C had declared
himself to be trustee of the fund by his
words and by his actions, and so 50 per
cent of the fund was held for Ms P.
◦ Example 3 – A will trust/testamentary trust

◦ Sam, the testator, may create the trust for Brenda in his will.
On his death, Sam’s estate will vest in his executors who are
under a duty to transfer legal title to the trust property to his
trustees.

◦ Note: the above trusts made by Sam are all express private trusts
because they have been expressly created by him for the benefit of
an ascertained person.
WHAT KIND OF PROPERTY
MAYBE HELD IN TRUST?
Property that may be
the subject of a Trust

Personal Property Real Property

(i.e., Personalty) (i.e., Realty)

Choses in Possession Choses in Action

(i.e., Things in
Possession) (i.e., Things in Action)
 SUB - TRUST
Settlor (1)

Trustee (1)

Beneficiary (1) – Declares himself Trustee

(2) of his Equitable Interest for

Beneficiary (2)
 KEY FEATURES OF A TRUST
The Settlor

◦ The settlor In Paul v Constance [1977], you may have noticed

that Mr Constance was not only the settlor but also the trustee
and a beneficiary.

◦ However, as the following case illustrates, once the trust is

created, the settlor (in his capacity as settlor) loses his control
over the property..
 ◦ When becoming a nun, in accordance with her
Re Bowden [1936] Ch vows of poverty, Catherine Bowden agreed to
settle property to which she might become
entitled under her father’s will. Some years later,
when her father died, the property she inherited
was transferred to trustees. In 1935, 60 years on,
Catherine Bowden left the convent and sought
71

unsuccessfully to recover the property she had

settled on trust.
◦ Once a trust is created, the settlor has no control
over the property and cannot undo the trust the
beneficiaries of a trust may, in certain
circumstances, terminate the trust under the
rule in Saunders v Vautier [1841].
 KEY FEATURES OF A TRUST
The Trustee
◦ The trustees hold legal title to the trust property but have no
right to enjoy that property, the benefit of which is for the
beneficiary.
◦ Trustees are under a mandatory obligation to carry out the
trust and, if they fail to do so, they will be in breach of trust
and may be sued by the beneficiary.
◦ They are described as fiduciaries and, as such, they must avoid
any conflict of interest.
 KEY FEATURES OF A TRUST
The beneficiary
◦ With the exception of charitable purpose trusts and
unenforceable trusts, trusts must have a beneficiary who can
enforce the trust against the trustees, i.e., who can sue the
trustees if they fail to carry out their obligations.
◦ In the case of charitable purpose trusts, the Attorney General
is charged with enforcement.
The beneficiary

◦ The beneficiary has a proprietary interest in the subject matter

of the trust which means that, if necessary, he can recover it
from anyone who might acquire it wrongly or innocently, with
the one exception of a bona fide purchaser for value who
acquires the property without notice of the beneficiary’s
interest.
◦ As he has a proprietary interest, the beneficiary may, if he
wishes, transfer that interest to another.
The beneficiary

◦ It is important to know that under the rule in Saunders v

Vautier [1841], provided all the beneficiaries under a trust are
together absolutely entitled, and are of full age and mental
capacity (i.e., in Latin sui juris), they may join to terminate the
trust and may order the trustees to transfer the legal title to
them.
 CLASSIFICATION OF TRUST
Classification of Trust

Private Purpose
Trust Trust

Non-
Charitable
Resulting Constructive Statutory Charitable
Express Trust Purpose
Trust Trust Trust Purpose
Trust
Trust
Private Trusts

◦ Private trusts are trusts for ascertained beneficiaries and can

be subdivided into:

1. Express Trust:
◦ These are trusts which are expressly created by the settlor.
◦ We noticed that the trusts created by Sam for his
granddaughter were express private trusts.
2. Resulting Trust:
◦ These are generally based on the presumed intention of the
settlor/transferor.
◦ An example of a resulting trust would be when an express trust
fails for some reason, and the property is held on resulting trust
for the settlor, i.e., the property results back to him.

3. Constructive Trust:
◦ These arise by operation of the law.
◦ For example, where a person is unjustly enriched at the expense
of the claimant, he will hold the property on constructive trust for
the claimant.
4. Statutory Trust:
◦ As their name implies, these are created by Parliament and
are set out in a statute.
◦ An example is the Trusts of Land and Appointment of
Trustees Act 1996 which provides that joint legal owners of
land hold the legal title on a statutory trust of land.
Purpose Trusts

◦ Purpose trusts are for purposes rather than for people and are
of two kinds:

1. Charitable Purpose Trust:

◦ These are also called public trusts.
◦ They are created for charitable purposes as set out in the
Charities Act 2011 and are enforced by the Attorney
General.
2. Non- Charitable Purpose Trust:
◦ Are also called private purpose trusts.
◦ Apart from three exceptions known as unenforceable
trusts, non- charitable purpose trusts are void, the reason
being that there is no beneficiary to enforce them.
REASONS FOR CREATING A TRUST
◦ Land owned by more than one person must be held on a trust of
land which is governed by the Trusts of Land and Appointment
of Trustees Act 1996.
◦ A minor cannot hold the legal estate in land and therefore, it is
necessarily held on trust for him until he reaches his majority.
◦ A testator may wish to benefit his family in succession.
◦ For example, to achieve this, he could create a trust in his will
whereby his widow is entitled to his house and the income from a
fund of $600,000 for her life and, upon her death, the house and
the capital fund pass to his children absolutely.

Testator Transfers Legal Title to house and $600,000 to:

Who hold the property on Trust for the Beneficiaries in

Trustees Succession, i.e.. for the:

Widow For life (she is called the life tenant), and on her death for the:

Children Absolutely (They are called the Remaindermen).

◦ A testator may wish to provide for someone secretly after he dies.
He can do this by means of a secret trust.
◦ A testator may be anxious that his pet dog is cared for after his
death and therefore sets up a trust for the care of the animal. Such
a trust is called an unenforceable trust (because the dog cannot go
to court to enforce it).
The Distinction between a Discretionary Trust
and a Power of Appointment

◦ In a discretionary trust, the trustees have complete discretion as

to who from a class of beneficiaries should receive a beneficial
interest and the size of that beneficial interest.
◦ A discretionary trust may relate to the distribution of income as
in the example below, but it could relate to the distribution of
capital, or income and capital.
There are various reasons why the settlor might want to create a
discretionary trust.
◦ These include enabling the trustees to provide benefit only to
those who might be in need in the future when the settlor is dead
and safeguarding the trust fund from creditors.
◦ For example, where one of the class of potential beneficiaries is
declared bankrupt, it would not be prudent to distribute the income to
him; benefitting only those beneficiaries who prove to be deserving
and who will not dissipate the income from the trust; enabling the
trustees to pay the income to those who pay no/little income tax as
opposed to potential beneficiaries who, for the time being, are subject
to higher-rate tax.
KEY FEATURES OF A DISCRETIONARY TRUST
The rights of
A Discretionary Trust The rights of individual
beneficiaries as a group
may be exhaustive or beneficiaries under a
under a discretionary
non-exhaustive discretionary trust
trust
An exhaustive The beneficiaries as a whole (if
An individual Beneficiary they are all of full age and
discretionary trust is where
has no entitlement to the sound mind) may collectively
the trustees must
trust fund unless the terminate the trust and divide
distribute the income each the property between
trustees exercise their
year (or capital within the themselves under the rule in
discretion in his favor
Trust period) Sanders v Vautier

With a non-exhaustive Similarly, if the beneficiaries

However, an individual
discretionary trust, the are all of full age and under
beneficiary can require the
trustees may decide not to no disability, they may
trustees to exercise their
distribute the income but collectively assign the Trust
discretion bona fides and in fund to a third party – Re
may accumulate it instead
a responsible and fair way Smith (1928)
(i,e.. Add it to Capital)
The Nature of a Power of Appointment

◦ Here is an example of a power of appointment.

‘My residuary estate on trust for my widow for life with power to
dispose of it amongst my children and grandchildren as she may
think fit and in default of appointment to be divided amongst my
children equally.’
◦ The main difference between a power of appointment and a
discretionary trust is that the donee of the power (i.e., the
widow in the above example) has no duty to appoint an object
(i.e., the children/grandchildren) and if she chooses not to do
so, the gift over in default will take effect.
Question:

◦ Why did the testator (i.e., the donor of the

power) give this power of appointment to his
widow (i.e. the donee of the power)?
Answer:
◦ When the widow dies, as she has only a life interest under the
trust, someone will be entitled to the remainder.
◦ As the widow has survived her spouse, she will be aware of
changing circumstances amongst her children and grandchildren,
and therefore be in a better position than the testator would have
been, when he created the trust, to decide who should receive the
property after her death and so is given this power of appointment.
◦ If she does not exercise the power, i.e., does not choose to appoint,
then the children will receive the remainder interest equally.
 TYPES OF POWER OF APPOINTMENT
There are three kinds of power of appointment as follows:

An intermediate (or
A general power of A special power of
hybrid) power of
appointment appointment
appointment

Example: “My estate to my The power of appointment Example: “My estate to my

wife with power to allocate in the example we looked at wife with power to allocate
the estate to anyone she above was a special power the estate to anyone except
wishes” of appointment my brothers’”

As the testator’s widow The power of appointment

The power of appointment
could appoint the estate to can only be exercised in
can be exercised in favor of
herself, this is the favor of a class of people. In
anyone except members of
tantamount to a gift. the above example., the
a particular class, in this
General powers of class was the donor’s
case, the donor’s brothers
appointment are rare children and grandchildren
Thank You! ☺
Any Questions?