Express Trusts: Concept, Certainty and Creation PDF

8/27/24 Express Trusts: Concept, Certainty and Creation LAWS2500/8010 EQUITY AND TRUSTS DR MICHAEL NANCARROW 1 Concept of the Express Trust 2 1 ...

8/27/24 Express Trusts: Concept, Certainty and Creation LAWS2500/8010 EQUITY AND TRUSTS DR MICHAEL NANCARROW 1 Concept of the Express Trust 2 1  8/27/24 Introduction Express trusts are a form of wealth management The Trustee manages trust property for the beneficiary’s benefit. In the modern context it is necessary/desirable to split management from benefit in these situations Family wealth and Family trusts Managing property for people under disability or minority Group investment through Unit Trusts Trading Trusts Testamentary trusts under Wills Superannuation Trusts Trusts used to secure borrowings 3 Definition: What is a Trust? Never authoritatively defined Lack of definition partly responsible for evolution as flexible and effective method of managing wealth ‘an obligation enforceable in equity rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes’ 4 4 2  8/27/24 The trust is a structure that is known/part of Equity- the bene t of it is that it splits the ownership between legal ownership and bene cial ownership. But a trust is not a legal person. Essential characteristics E&T TB 156 Trust Trust has NO distinguishable legal from gift personality Trustee owes Rule in fiduciary duties Saunders v to Beneficiaries Vautier OFFICE | FACULTY | DEPARTMENT 5 5 Property can be tangible, intangible and it's property that the settlor owns- who is saying that I want to put this property in the hands of another person or entity- but not for their bene t but to manage the property Trust for other persons names speci cally as members of a class for their bene t. 6 Settlor (S) transfers property Trustee(T) to Trustee upon has legal interest trust for Beneficiary The trustee has to have legal ownership of the Beneficiary (B) has the equitable property- the bene ciaries interest can enforce in Equity even before they even receive the property. 6 3  8/27/24 Express trust Fixed the trust names the beneficiaries specifically or Discretionary the trustee Charitable must be for a by reference to their Private created for the has the power to decide purpose that is recognised membership of a particular benefit of individuals who will benefit or the as charitable class (my three children, quantum of each share students named in Laws 2500 Equity) the trust names the beneficiaries specifically or by reference to their the trustee has the power created for the benefit of must be for a purpose that membership of a particular to decide who will benefit or individuals is recognised as charitable class (my three children, the quantum of each share students named in Laws 2500 Equity) OFFICE | FACULTY | DEPARTMENT 7 7 Express Creation of express trust 3 Certainties Trusts: by declaration Certainty of words, or Creation and by transfer of property on trust, intention Certainty of subject Certainties by direction of the Certainty of object (or beneficiary to the trustee beneficiary) The object or objects are the Or what if you nominate a particular bene ciaries. Have the class of individuals and is that bene ciaries been clearly identi ed? nominated class su ciently clear? You would think this is E.g. all the inhabitants of the straightforward but what if the municipality of Ryde? bene ciaries have the same name? E.g. Thomas and Thomas Junior? 8 by declaration; where the person is manifesting that intention themselves (of their own volition) by transfer of; by transfer of property that's placed on trust by direction; anticipate situations that are not only unilateral but also bilateral. 4  8/27/24 The nature of the trustee’s ownership At common law the titleholder is absolutely Equity will look to see if the entitled to the exclusive and titleholder is subject to an unrestricted right to obligation to use the possess, use and otherwise property for the benefit of enjoy the asset for his or someone else. her own benefit OFFICE | FACULTY | DEPARTMENT 9 9 The Trustee The trustee may be an individual or a corporation or any number or combination of both. The creator of an inter-vivos trust is called the settlor. Where the trust is created under a will it is referred to as a testamentary or post-mortem trust and the creator of the trust will be the testator or testatrix. Interestingly Public Trustee's have their Role of Public Trustee own set of rules regulated by legislation. OFFICE | FACULTY | DEPARTMENT 10 10 What is a public trustee? A Public Trustee can hold on to your money, pay your bills, and handle any nancial decisions with enduring powers if you have lost capacity. 5  8/27/24 The Beneficiary’s rights The beneficiary’s right The beneficiaries also can be enforced have rights in the trust The beneficiary is free against the trustee property and may to alienate their and the trustee’s trace it into the hands interest in property successors in title. of wrongdoers. OFFICE | FACULTY | DEPARTMENT 11 11 Contract, Trusts and Debts OFFICE | FACULTY | DEPARTMENT 12 12 6  8/27/24 So we move into some of the case law- how is a trust di erent to other types of legal relationships that we're already aware of? We can explore this by looking at cases concerning contracts and debt. See the Quistclose Investments case. Co-existence of contract and trust: Barclay’s Bank v Quistclose Investments Ltd AC 567 (SB Facts Quistclose Investments made a loan of ₤210,000 to Rolls Razor for the express purpose of paying a dividend that RR had declared in favour of its shareholders. The loan monies were placed in a separate account at Barclays Bank. RR became insolvent before the dividends could be paid and Barclays as the principal secured creditor sought priority in a claim over the money 13 13 We had the monies that had been put in a separate account and we had the bank then aware that the money's were in that account of the purpose (to pay the dividends) Quistclose argued that the amount it had provided for a speci c purpose (to pay the dividends) had been frustrated- so the amounts were impressed with a trust. What did the House of Lords (HOL) decide? They held that the arrangement created a trust in favour of Quistclose when it became impossible to pay the dividend. Quistclose scenario 14 The Issues: Was the language used in the loan agreement between RR and Quistclose sufficient to create a trust over the ₤210,000. If so did the bank have such notice of the trust as to make it binding on them. Quistclose debt Rolls dividend shareholders Razor $$ $$ Barclays Bank 14 7  8/27/24 Wilberforce J 15 “The mutual intention of the respondents and of Rolls Razor Ltd and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor but should be used exclusively for payment of a particular class of creditors….A necessary consequence from this, by process simply of interpretation, must be that if for any reason the dividend could not be paid the money was to be returned to the respondents: the word ‘only’ or ‘exclusively’ can have no other meaning or effect” 15 Lord Wilberforce 16 The arrangement between Quistclose and Rolls Razor was basically contractual, but alongside the contractual arrangement there was a primary trust in favour of the shareholders in whose favour the dividend had been declared, and a secondary trust in favour of Quistclose that arose when the first trust became impossible to perform. Barclays had notice of both trusts and so was bound by them. Because of the nancial circumstances of the company (as such the dividends were unpaid) Lord Wilberforce is saying (in essence); even though this would present as a contractual relationship the reality is that it doesn't prevent the identi cation of a trust and if that is in existence and we're prepared to recognise it then the money is locked for the purpose of the bene ciary (in the rst instance the shareholders) and if that couldn't be ful lled then it will revert back to Quistclose. Because it's a trust it means that those funds can't be touched by the bank. If this was purely contractual then Quistclose could only take action in contract. We've seen that before where when common law in insu cient- equity will step in. 16 There has been criticism of the Quistclose analysis. 8  8/27/24 Trusts Public policy and Trusts Secrecy We have a Trustee Act but we've found that it Sparseness of regulation doesn't quite operate in the same way as trusts are dealt with in Equity Flexibility of design See: ‘Panama Papers’ disclosure (discussed in SB 348) OFFICE | FACULTY | DEPARTMENT 17 17 Trust and Debt: Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 (SB 13.4.4a 355) (AETT case) Gummow J “…it would be an error to treat references by Lord Wilberforce in Quistclose to ‘purpose’ as characterising an express trust which did not have to satisfy the requirements for any private (as distinct from public) trust. ‘The striking feature of the Quistclose litigation was that whilst previously it might have been thought that debt and trust were distinct and separate norms, it was thereafter clear that in a given case the transaction under analysis might bear a dual character.’ NB. Gummow J noted that in Quistclose there was a distinction between the condition of the primary trust and the gift over of the secondary trust. 18 AETT was a charity and one of the bene ts of being a charity in Australia is that you can have charitable status under tax income assessment. It was an arts organisation, it put on performances and it was a company limited by guarantee and certain gifts quali ed as deductible. Some gifts were passed to other arts bodies that could not o er the same tax bene ts to their donors. By 1989 it was found that other arts bodies were using the AETT to solicit donations. The AETT was placed into provisional liquidation in 1991 and where 9 the donations held on express trusts for the arts bodies- which were nominated on the forms completed by the donors.  8/27/24 PPSA: Trusts excluded The PPSA is the Personal Properties and Securities Act s8 Interests to which this Act does not apply: (Exclusionary clause) 8(1)(f)(x) a transfer of the beneficial interest in a monetary obligation where, after the transfer, the transferee holds the monetary obligation on trust for the transferor; 8(1) (h) a trust over some or all of an amount provided by way of financial accommodation, if the person to whom the financial accommodation is provided is required to use the amount in accordance with a condition under which the financial accommodation is provided OFFICE | FACULTY | DEPARTMENT 19 19 Certainty Requirements in the Law of Trusts But what is necessary for that trust to be enforceable? 20 10  8/27/24 Certainty of Intention Did the settlor actually intend to create an express trust? What can we look to in order to conclude whether that intention has been manifested. OFFICE | FACULTY | DEPARTMENT 21 21 Certainty of Intention to Create a Trust Intention may be discerned from language or conduct. No formal or technical words, such as ‘trust’ or ‘trustee’ are necessary The creator of the trust need not be aware that the relationship he intends to create is, in law, a trust. OFFICE | FACULTY | DEPARTMENT 22 22 11  8/27/24 Certainty of Intention Byrnes v Kendle Re Williams 2 Cobcroft V Bruce HCA 26 Ch 12 NSWSC 774 (SB 14.2a 367) (SB 14.2b 370) (SB 14.2c 372) In Cobcroft is a start contract to the lack of imperative language not used in Re Williams. In Cobcroft he left his wife Denise to deal with shares in his companies but on condition that he gave the remainder of the shares to his sons David and Nicholas. See 373 of your SB (Sourcebook) OFFICE | FACULTY | DEPARTMENT 23 23 Byrnes v Kendle HCA 26 SB 14.2a 24 Gummow and Hayne JJ The Q is: What is the meaning of what the parties have said? NOT What did the parties mean to say? Whether in substance a sufficient intention to create a trust has been manifested. Heydon and Crennan JJ The Q is what the settlor did NOT what they intended to do. Intention is to be extracted from the word used Subjective intention is irrelevant to both whether a trust exists or what its terms are Distinguish bilateral from unilateral trust declarations 24 Facts of Byrnes v Kendle; the federal government has this scheme to subsidise a ordable housing. So you can buy the property at a much more a ordable rate through the loan and in that scenario the husband had signed a deed stating that he held a half share of the property on trust for his wife. The house was leased to the husband's son from a previous marriage- but after the marriage broke down the husband failed to collect rent from the son. In proceedings for breach of trust the husband argued that he never intended to create a trust in favour of his now ex wife. Because the husband had legal title and had no intention of sharing it. But the HC 12 held that the deed re ected that the husband did intend to create a trust. The Court doesn't need to determine what's in the mind of the settlor but what's actually been done.  8/27/24 Facts Re Williams; In this case, we had Dr. Williams who left his estate to his wife (absolutely). It sounds like a trust because he's leaving it to his wife for a speci c purpose. But is it? He could have been more directive- he could have said 'on the condition of.' He says 'in the fullest con dence' that she will carry out my wishes instead of something that is more directive. Re Williams 2 Ch 12 SB 14.2b A bequest is a gift in a will that transfers your property to someone at the time of your death 25 Facts A husband made a bequest of the residue of his estate to his wife in the following terms ― ‘unto my wife Lucy her heirs executors administrators and assigns absolutely, in the fullest confidence that she will carry out my wishes in the following particulars, namely that she’… The testator then listed his wish that she leave the proceeds of 2 insurance policies, one on the wife’s life (for £1,000) and one on the testator’s own life (for £300) to his daughter, Lucy. When the wife died she left the ₤300 policy to Lucy but she left the ₤1,000 policy to someone else and the issue was whether the husband’s will created a trust. Held The testator had not used sufficiently clear language to impose a trust or condition on the bequest to the wife Lindley LJ: Not only in wills but in daily life an expression may be imperative in its real meaning although couched in language which is not imperative in form So it needs to have su cient imperativeness (directness) to be clear enough to impose an obligation. You don't have to use particular words but you have to use words or language that is characteristic of that imperative nature. Of course that imperative language can also arise in your assessments. 25 Certainty of Subject Matter Two issues : it must be possible to ascertain with certainty which property is to be the subject matter of the trust. you must be able to specify the quantum of the beneficiaries’ interests OFFICE | FACULTY | DEPARTMENT 26 26 13  8/27/24 Certainty of Subject Matter Hunter v Moss White v Shortfall 1WLR 452 (2006) 68 NSWLR 650 (SB 14.3a 376) (SB 14.3b 377) OFFICE | FACULTY | DEPARTMENT 27 27 In Hunter v Moss; Moss owned a certain percentage of shares issued by an electrical company which he created. Hunter was employed by that company and Moss had orally agreed to give Hunter 5% of shareholding in the company and later Moss refused to transfer the shares to him. The primary judge held that a trust had been established so that the consequence of recognising and imposing that trust was that the shares would be held on trust for Hunter. (On the Court of Appeal) Trusts, Powers and Certainty Trusts and Powers (TB 13.13) Powers and Certainty (TB 14.40) Trust power v ‘bare’ power Powers of appointment give the trustee power Criterion certainty: A special power of appoint property among a class of beneficiaries appointment will be valid if trustees can say Bare power of appointment gives discretion to with certainty that any given individual is or appoint property among a class of beneficiaries but places no obligation on the trustee to exercise is not a member of the class of objects of the this discretion power. In the case of a bare power of appointment, nominated beneficiaries have a gift over in default A hybrid power of appointment will be valid if of the trustee’s exercise of discretion the members of the excluded class of Trust instruments may include both trust beneficiaries satisfy the criterion test. obligations and powers of appointment Types of powers: General power; Special power and Hybrid or intermediate power See 13.20 TB 28 In White v Shortfall; during the breakdown of their de facto relationship he wrote to the plainti stating that he held $1.5 millions shares in a particular company in trust to eh plainti but was unable to transfer those shares to the plainti at the time. But CJ Campbell held that there was a valid trust and that there was no need to 'perfect an imperfect gift.' We're looking for certainty of intention, certainty of subject matter, certainty of objects. See more of CJ Campbell's reasoning in White v Shortfall. 14  8/27/24 Certainty as to the Object of the Trust 2 tests: ‘List certainty” – it must be possible for the trustee to draw up a complete list of all the beneficiaries of a trust. “Criterion certainty” - it is only necessary for the trustee to be able to determine whether or not any particular person was within the class of possible beneficiaries OFFICE | FACULTY | DEPARTMENT 29 29 Certainty as to the Object of the Trust What is the level of certainty required? In a fixed trust the court must be able to apply the ‘list certainty’ test i.e. to be able to draw up a complete list of beneficiaries at the time their interests come into effect. In a discretionary trust it is only necessary that the court be able to determine whether anyone ‘is or is not’ a member of the class. 30 30 15  8/27/24 Certainty of Object Re Gulbenkian’s McPhail v Doulton (Re Settlement Trusts Baden’s Deed Trust) AC 508 AC 424 (TB 145.42; SB 14.4a 380) (SB 14.4b 382) OFFICE | FACULTY | DEPARTMENT 31 31 He made a settlement intended to bene t his son Re Gulbenkian’s Settlement Trusts AC 508 (SB 14.4a 380) The Settlement ‘at their absolute discretion pay all or any part of the income of the property hereby settled and the investments for the time being representing the same (hereinafter called the trust fund) to or apply the same for the maintenance and personal support or benefit of all or any one or more to the exclusion of the other or others of the following persons….any person or persons in whose house or apartments or in whose company or under whose care or control or by or with whom the said Nubar Sarkis Gulbenkian may from time to time be employed or residing… The parts highlighted in red show how muddled the declaration is 32 16  8/27/24 Re Gulbenkian’s Settlement Trusts AC 508 33 Lord Reid: ‘If the donee of the power (whether or not he has any duty) desires to exercise it in favour of a particular person it must be possible to determine whether that particular person is or is not within the class of objects of the power. And it must be possible to determine the validity of the power immediately it comes into operation”. Gulbenkian's trust was valid "objects" means class of bene ciaries The test for bare powers should be whether or not it was possible to say with sufficient certainty whether or not any given individual is or is not a member of the class. L Upjohn observed that there's a distinction when we're looking at trust powers or mere powers (bare powers). The trustees have no duty to exercise it in the sense that they cannot control (bare power). However, if it is a trust power those that are entitled (and of full age) to compel the trustees to pay the fund over to them unless the fund is income and the trustees have the power to accumulate for the future. So what he's saying in essence is that; there's a di erence with what we refer to as trust powers where there is a requirement to act (and where the court will enforce that) and there is a bare power when there is not. 33 L Upjohn also said it's a matter of construction whether the power is a mere power or trust power and the use of inappropriate language is not decisive. We have to discern what is the nature of the language that's being used and even if the language is unclear, it won't be decisive in it's totality. McPhail v Doulton (Re Baden’s Deed Trust) AC 424 (SB 14.4b 382) 34 “9(a) The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependents of any such persons in such amounts at such times and on such conditions (if any) as they think fit…….” Was that su ciently certain in terms of a class of persons? Wilberforce J: bare powers “The conclusion which I would reach, implicit in the previous discussion, is that the wide distinction between the validity test for powers and that for trust powers is unfortunate and wrong….and that the test for the validity of trust powers ought to be similar to that accepted by this house in Re Gulbenkian’s Settlements for powers, namely, that the trust is valid if it can be said with certainty that any given individual is or is not a member of the class’” Lord Wilberforce J is saying that we're overdoing it, it's much more simple. Difference between “ ‘linguistic or semantic uncertainty’ and ‘evidential uncertainty’ 34 17  8/27/24 Objects and certainty: summation Linguistic/semantic uncertainty Evidential uncertainty Administrative unworkability Re Gulbenkian’s Settlements Re Gulbenkian’s Settlements McPhail v Doulton (1971) (1970) (1970) linguistic in nature: description concerns the evidence description of the range of in the trust instrument must available to identify potential eligible objects is clear but too be sufficiently clear for the beneficiaries available to wide for the purpose of court to determine whether identify potential beneficiaries forming a precise class of any given person is eligible to court may assist in beneficiaries; so ‘hopelessly be classed as an object, e.g.: overcoming problems of wide as not to form anything “friends”: Re Gulbenkian’s evidential uncertainty like a class’ e.g.: Settlements (1970) all the residents of Greater ‘my best students’ London insufficient to meet the NB - NOT applicable to criterion of certainty powers membership of class my change: i.e. ‘permanent employees’ OFFICE | FACULTY | DEPARTMENT 35 35 18