EQUITY AND TRUSTSLECTURE 3 Equity & Trusts 3 The trust

Learning outcomes: After this lecture, you will be able to: Explain the origin of the trust Understand the development of the trust Understand the underlying concepts of the trust Understand the differences between trusts and other legal concepts Have knowledge of the different types of trust

Problems I want to leave my house to my wife when I die. However, I do not want her to be able to sell it, because I ultimately want it to go to my children. I have two nieces. I want to give my shares to my brother, so that he can, if he so wishes, give the income from these shares to my nieces for their education, but, after 10 years, I want the shares to go to the Wan Chai Childrens Hospital I have a pet dog, Fido. I want to leave money to be used for his upkeep when I die. Exceptions to rules I want to leave money in my will for my mistress and illegitimate children, but I do not want my wife and children to find out about this.

What is a trust? the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence- Maitland [A] trust can be said to arise whenever equity imposes on a person (the trustee) a duty to deal with property under his control, either for the benefit of other persons (the beneficiaries or cestuis que trust), any of whom may enforce the obligation, or for a charitable purpose, . or for some other purpose permitted by law though unenforceable. (Pettit, p.27)

Definition of a Trust Imperative to grasp idea of 2 simultaneous types of ownership of property Separation of ownership of property Westdeutsche Landesbank Girozentrale v Islington LBC [1996] (Lord B-W) Absolute owner- legal title alone Separation of title- ownership split into legal & equitable A trust is .

The development of the trust-the use The Crusades the use was may have derived from: The Fideicommissum ; The Salmannus And been influenced by: The Waqf or wakf; The Franciscan lay representative

The Use Simon conveys land to Trevor on Trevors promise to hold it for benefit & use of Ben (e.g. because Paul was going on Crusade, to avoid Pauls creditors or feudal dues) Trevor now owner at law Three parties: the feoffer to use, the feoffee to use and the cestui que use. Feoffor to useFeoffee to use Cestui que use By transferring your trust, you minimise liability, avoid taxation etc

Uses- Problems Ben not recognised by common law only interested in legal title How could Ben be protected? (King) Chancellor - personal order against Trevor In personam- Trevors conscience (equity not common law) Trevor still legal title = legal owner But Ben eventually regarded as owner in equity Proprietary interest and right (but not in rem!) Interests that are good against third parties. Can take action against others to recover property for the benefit of the beneficiaries Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust). per Lord Browne-Wilkinson : Westdeutsche Landesbank Girozentrale v Islington LBC [1996]

Historical Context- Uses Tax avoidance/ testamentary choice: feudal system- the use cost the state a fortune Henry VIII Statute of Uses- attempt to abolish uses & increase Kings revenue Statute of Uses executed most uses- beneficial owner would become legal owner E.g. I give property to Trevor for the use of Benjamin This would take effect as a straight conveyance to Benjamin - the green italics would be executed Immediate effect: the Pilgrimage of Grace & Statute of Wills

The use upon a use Simple idea- I give property to Trevor for the use of Tracey for the use of Benjamin First use would be executed by the Statute of Uses Second use would not be caught by statute of uses- Tracey would hold for Benjamin Draftsmen began to omit Trevor from instruments- so I would transfer the property unto and to the use of Tracey in trust for Benjamin Soon, the unto and to the use of dropped- the modern trust- I give the property to Tracey on trust for Benjamin

Terminology Simon conveys property to Trevor & Tracey to hold on trust for Ben & Belinda Simon = Settlor/ Testator/ Testatrix Trevor & Tracey = Trustees Ben & Belinda = Beneficiaries Simon held absolute interest- conveyed property to Trevor & Tracey subject to trust obligation, Trevor & Tracey have legal title, but only bare legal title because Ben & Belinda hold beneficial interest- i.e. owners in equity

Key Characteristics of Trusts When constituted Will not fail Mandatory: To observe the terms of the trust deed Fiduciary: good faith- Not to profit from position of trustee No conflict of interest and duty Non-revocable- Re Bowden [1936] Ch 71 Create a separate equitable interest in property which gives the beneficiaries enforceable rights.

Proprietary Aspect Suppose trustee sells trust property and keeps the sale proceeds for himself Beneficiaries have a personal remedy against the trustee Beneficiaries have a proprietary remedy (very useful if the trustee cant pay or is bankrupt) Bankruptcy/ Liquidation- trust interests But Isnt this unfair to the buyer from the trustee? 3rd parties: knowing receipt/equitys darling

Classification of Trusts Trusts can be classified in a number of ways: By the type of beneficiary- private or public; By the trustees duties- bare trust or a special trust; By how they are created- express or non-express; By the discretion afforded the trustee- fixed or discretionary. Many other special forms of trust such as the secret and half-secret trust, the life-interest, the non-charitable purpose trust, and the Quistclose trust.

Express TrustSettlorTrustee|VBeneficiaries Holds property on trust and subject to duties prescribed by the Settlor No direct transfer of an equitable interest

Non-Express Trust: Trusts Arising by Operation of LawCourtTrustee|VBeneficiaries

Fixed Trusts Number & ID of beneficiaries and extent of beneficial shares specified in instrument Settlor >> Trustees A & B B1 10%, B2 20%, B3 70% S transferred property- no further interest Ts have legal title- mandatory duty to distribute in accordance with trust Bs- fixed interests- when adults, can enforce distribution: Saunders v Vautier

Discretionary Trusts Property given to trustees to distribute between beneficiaries as they in their absolute discretion shall think fit- Settlor >>Trustees A & B B1 B2 B3 B4 (discretion) Discretionary trust good for larger numbers of potential beneficiaries- e.g. grandchildren/ employees Quite recent- used as a type of protective trust Settlor again has no interest in the property E.g. my brother has discretionary trust to control beneficiaries and when/whether or not they receive the trust

Discretionary TrustsThe Position of the Trustees: Trust is MANDATORY- trustees must perform the trust Trustee is under a duty to select from among a class of beneficiaries those who are to receive, and the proportions in which they are to receive, income or capital of the trust property. (Mettoy v Evans) Exercise discretion (from within class): who & how much If we have no discretion, and have to give the trust property to specific beneficiaries in specific proportions, that is referred to as a fixed trust no discretion Discretion discretionary trust Unlike power of appointment there is a duty to distribute Re Hays ST [1980]: later exhaustive discretionary trusts- trustees must distribute all property non-exhaustive- trustees can retain & invest some trust property

Discretionary TrustsThe Position of the Beneficiaries Fewer rights than under fixed trust- only entitled if appointed But beneficiaries, together, own the trust property Individual beneficiary cannot demand payment If duty is not fulfilled any potential beneficiary can apply to court which can make trustee carry out trust or divide the property Vestey v. I.R.C. (No.2) [1979]-individual beneficiaries can compel trustees to exercise their discretion

Life Interest Trusts Standard trust- e.g. I leave my residuary estate to Trevor to hold on trust for Ben and Belinda in equal shares Concurrent interests: Ben and Belinda have equitable interests existing at the same time life interest trust e.g. I leave my house to Trevor to hold on trust for Ben for life and to Belinda in remainder Successive interests: Ben has a life interest only, Belinda can only take beneficially when Ben dies

Rule in Saunders v Vautier(1841) LJ Ch 354 Uncle had provided in his will that his nephew was to receive a certain number of shares in a company. He placed them in a trust. Gave shares to his trustees to hold on trust for his nephew. Provided that when the nephew was of full age (21), the trustees could give the nephew any income that the shares generated. When the nephew was 25, the trustees could give him the shares. The beneficiary took action, he wanted the shares at 21. He argued he was the only beneficiary and they were his shares, he is of full age arguing why he had to wait until 25 when he was already of full age. Argued undue restriction of his ownership of the shares Trustees here tried to argue that the beneficiary did not have a vested interest and that his trust was conditional. He will only get the shares conditional upon him reaching the age of 25 contingent interest COURT: No, it is a trust for the nephew to give him the income when he is 21 and to give him the shares when he is 25, there is a vested interest. Reading the words plainly. There was no statement that says IF he reaches the age of 25. Vested interest vs Contingent interest Vested You either have the property, or you DEFINITELY will enjoy the beneficial interest E.g. Wife Son, Wife will DEFINITELY die, so the son has a vested interest Contingent There is a possibility that you may not E.g. Son will get it IF he becomes a barrister before the age of 30, Son has a contingent interest because if he doesnt fulfil the condition then he doesnt receive the beneficial interest Based on vindication of beneficiaries proprietary rights The beneficiaries own the property When we have a creation of the trust, the settler is no longer involved unless they retain some power to themselves to control the trust. Fixed trust- Bs- fixed interests- when adults, can enforce distribution: Saunders v Vautier Discretionary trusts: Re Smith If no one has been identified to have the discretionary trust, use the rule in SAUNDERS v VAUTIER If you are of full age, legal competence you can take the trust and divide it amongst yourselves Settler try to stop this rule in SAUNDERS E.g. add a baby into the class It is better to add a contingency which has to be fulfilled before having a vested interest that you will definitely get the property Life interest trusts

Trusts v. Other Concepts At times the trust may resemble other legal concepts However, because of the fiduciary and proprietary nature of the trust, it is necessary to distinguish the trust from these other concepts Contract; Agency; Personal representatives; Representatives after you have died. Your executor appointed in your will. If you dont appoint one, someone has to apply as your Administrator. They administer and deal with your estate. Hold deceased property and distribute it subject to the rules of intestacy. They are subject to fiduciary obligations to the estate, considered legal owners of the property, but not considered trustees because they do not have identifiable interests and not as certain rights as beneficiaries have against the personal representatives themselves When all estates have been dealt with, their role may change into that of a trustee Difficult area. Sometimes are trustees, sometimes arent Powers of appointment. Equity allows sometimes the ability to decide who can receive someone elses property even though they arent a trustee Are they subject to fiduciary obligations? Depends on whether or not they are already a trustee

Chinese customary trusts in the New Territories: 1898: Tso; Tong; Wui. Occur ONLY in HK in a legal system, probably also carried out in Singapore, but not recognised in the legal system Chinese customary law for inheritance and succession of indigenous in New Territories preserved in NTO. Tso/ Tong primary purpose is veneration of a common ancestor Land is held by clan members in the name of the ancestor membership male descendents of ancestor Life tenants only: Tang Chun Kit (A Minor) v Tang Lo Ping Manager must be appointed and registered: s15 NTO- trustee (T.O.) Not common law trusts: pure purpose trusts : not subject to perpetuities: must be created inter vivos not by will. Wui: unincorporated- pooling resources for mutual benefit & business: Man Ping Nam v Man Tim Lup

Recognition of Trusts Ordinance (cap 76) - Hague Convention on Recognition of Trusts Art 2: 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 specified purpose. A trust has the following characteristics: the assets constitute a separate fund and are not a part of the trustees own estate; Title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; The trustee has the power and the duty, in respect of which he is accountable, to manage, employ, or dispose of the assets in accordance with the terms of the trust and the special duties imposed on him by law. The reservation by the settlor of certain rights and powers and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust Definitions trying to cover every single type of trust. Even trusts that arent considered to be trusts generally under HK and UK law. Courts must give recognition to these institutions if they come before the courts

Trusts in Asian Civil Law Jurisdictions Rush of civil law jurisdictions to create their own versions of trust Japan -1907 South Korea- Trust Act, No. 900, 1961 Taiwan-Trust Law, 1996, PRC- Trust Law, 2001 statutory - main purpose is commercial China: asset management, financial planning and charitable activities (Lee, 2009)- most investment funds structured as trusts main benefit - mandatory separation of the trust fund from the trustees own funds and priority on bankruptcy N.b. Completely different origin from common law trust Professional trustees? Implied trusts?

The Modern Trust Examples of how trusts can be used: Preservation of family estates (common C19) Hold property for incompetent persons Hold money for unincorporated associations Unit trusts & pension funds Co-habitees & trusts of land Tax avoidance Charity Special trusts: STAR trusts/ VISTA trusts etc Specially designed with provisions to attract settlers You can revoke your interest in the trust You can exclude the rules in SAUNDERS v VAUTIER

Benefits & Problems Benefits More flexible than gift Allow you to attach restrictions Bs Proprietary rights Priority in liquidation/bankruptcy Priority on bankruptcy Expertise of the trustee casual creation Trusts can be created in any way/form not obliged to post accounts No formalities Keep owners identity secret Can keep the ultimate owner of the properties a secret No requirement for anyone to know who the beneficiaries are Trustees can be completely hidden Pure purpose trusts: STAR trusts, Vista, Singapore Business Trust Avoid tax Problems Restrict beneficiaries Unfair on 3rd parties? Unfair on other creditors/3rd parties, or liquidated company decided as a trustee Unfair on other creditors? Inexpert trustees casual creation not obliged to post accounts Keep owners identity secret Often used for illegal purposes/money laundering All above= illegal purposes: fraud, money laundering, terrorism, drugs Have been used to hide proceeds of crime Pure purpose trusts Avoid tax

Creating the express trust 2 stages: A valid declaration of trust; and, Valid constitution of the trust. A valid express trust is created when a capable settlor makes a declaration, complying with required formalities and the law, imposing a certain trust obligation on a capable trustee to hold legal title to certain property for the benefit of certain beneficiaries, constituted by the transfer of legal title of the certain property to the trustee, who accepts or undertakes the trust.

Questions Next week