Chapter 1

Introduction to
trusts
Key points In this chapter we will be looking at:
 The historical development of equity and  The terminology of trusts
the Court of Chancery
 The terminology of wills
 The maxims of equity
 Different types of trust
 The development of the trust and why we
need trusts  Trusts distinguished from other concepts
 The anatomy of a trust  Modern uses for trusts

Introduction
Imagine a young man, let us call him Alec, is a member ‘sorry’ but he needed the money to pay off a gambling
of the armed forces. He is about to embark upon an debt. He has no way of returning the money and
extended tour of duty in Afghanistan. Theirs is a peace- property to Alec and, in the eyes of the law, Alec gave
keeping mission but the country is in a state of political Brendan his money and property anyway: from the
turmoil and the relationship between the soldiers and time Alec transferred the property into Brendan’s
civilians is volatile at best. He knows he will be gone name, Brendan became the legal owner of that prop-
for a long and uncertain period of time and that there erty and any obligation Brendan might have towards
is a possibility he may not return. He leaves a wife, Alec’s family was a moral one at best. Legally, there is
Claudia, and two young children, Charlie and Cecile, nothing Alec can do to protect his family’s rights.
behind him. Clearly this situation is unjust. And it is the very
Concerned for the financial welfare of his young situation described above that the concept of the
family in the event of his prolonged absence, Alec trust was designed to protect. Throughout the course
asks his brother, Brendan, to look after his affairs of this chapter we will be considering what is meant
whilst he is gone. Brendan agrees and, in order to by the term ‘trust’ and considering how trusts work
allow him to manage Alec’s assets effectively whilst on a practical level. We will also be looking at some
he is away, Alec transfers all of his property into of the basic terminology appertaining to trusts and
Brendan’s name. trust law which you will come across throughout the
Five years on, Alec returns home to find his house course of this book. And finally we will be considering
has been sold, his savings spent and Claudia and the some examples of the everyday uses of trusts. But
children living with Claudia’s mother. When he confronts first it is necessary to spend a little time giving the
his brother about the situation, Brendan simply says trust a bit of historical context.

4
 The development of the court of equity

The development of the court of equity

In medieval times the only court was the court of the common law, in which the king’s judges
enforced the law of the realm. The common law was developed on the basis of previously set
precedent, judges adhering to judgments made in the cases that went before them. This
provided a strict body of law for the courts to follow. If the decisions of the judges were
regarded as unfair, or if the rules laid down by precedent were too slow to change where
change was required, the parties to the claim had the option to appeal directly to the king,
‘throwing themselves upon the king’s conscience’, for his ultimate judgment in the matter.
The king soon became inundated with applications, however, and so he began to delegate
his powers to his secretarial department, under the supervision of the Lord Chancellor. The
secretariat of the king, which was commonly known as ‘the Chancery’, soon began to resemble
a judicial body, and by the fifteenth century the Chancery was formally recognised as
having judicial power. It was at this time that it became known as the ‘Court of Chancery’.
The Court of Chancery was not without its flaws, however. Unlike the court of the
common law, which was administered by lawyers and guided by precedent, the Court of
Chancery had at its head the chancellor, who was traditionally a member of the clergy
and had no formal legal training. Neither was the chancellor guided by precedent. This
naturally led to a wide disparity between the judgments of different chancellors. In con-
trast to the rigid and unbending application of the common law, the law of equity, called
such because of its basis on the principles of impartiality and fairness, seemed to be
almost entirely dictated by the chancellor’s own personal moral code. This highly unsatis-
factory state of affairs continued right up until the end of the sixteenth century, when a
lawyer, Sir Thomas More, was appointed Lord Chancellor and a new precedent was set.
Sir Thomas strove to provide the Court of Chancery with a more ordered, legal frame-
work, and records of proceedings started to be kept. This in turn led to the development
of a number of equitable rules, or doctrines, and to the formation of the maxims of equity.
As a result, the Court of Chancery also began to base its equitable judgments on pre-
cedent, as the court of the common law did.
This new development of the laws of equity within the Court of Chancery was not with-
out its problems, however. There were now two fully fledged but completely separate legal
systems in England, each with their own courts: the common law, which dealt with strict
matters of law in the common law courts, and equity, which dealt with matters of fairness,
or conscience in the Court of Chancery. This lack of cohesion was a problem: as the two
systems were autonomous the developing law of equity, as enforced by the Chancery, soon
began to conflict with the rules of the common law, and even to rival them. Tensions broke
out between the rival jurisdictions and it became clear that something needed to be done.
Eventually, the matter was referred to the Attorney-General of the time, Sir Francis Bacon.
Sir Francis, on the authority of King James I, held that, in the event of any conflict between
the common law and equity, equity would prevail. Thus, the law of equity was held to
override the common law in the event of a conflict between the two courts.

Unification of the courts

Once equity had became a fully recognised body of law, rather than an arbitrary exercise
of the king’s (or chancellor’s) conscience, the need for a separate court system to run

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Chapter 1 Introduction to trusts

it became obsolete. In fact, the running of two entirely separate legal systems was rather
unwieldy and often inconvenient, parties having to use both courts simultaneously in
the resolution of a single dispute. The advent of the Judicature Acts in the 1870s changed
all this. The new body of legislation swept away the previous system of separate courts
and created one single Supreme Court in their stead. This meant that whilst the two
systems of common law and equity still operated under very different rules they could
now be administered from one single court, with a single judge (or panel of judges,
as appropriate) giving judgment on both legal and equitable matters in the course of a
single case. Claimants would no longer have to bring two separate
actions in order to resolve issues arising under one claim. It is worth
this fusion of the stressing that this fusion of the common law and equity was only an
common law and administrative advance in the law: it was not a melting together of
the two systems. The rules of equity and the common law are still
equity was only entirely separate and distinct; it is simply that they can now both be
administrative administered under the same roof. This system still forms the basis
of our courts today.

The equitable maxims

It was mentioned above that the development of the Court of Chancery into a fully-
fledged legal system entailed the developments of a series of equitable maxims. These
maxims of equity are, in effect, a set of guidelines or standards devised by the court of
equity as an aid to deciding cases which come before them. The equitable maxims are
therefore not a strict set of rules, such as those which might be used in the courts of the
common law, but rather they serve as an aid or a set of ‘moral markers’ for the court in
making its decisions. This means that the court is not bound to follow the maxims
(although they usually will), but they can draw upon them as and when required in order
to justify their decisions on something more than simply the judge’s personal moral
compass.
There are quite a number of equitable maxims and you do not need to know them
all by heart. However, it will certainly be useful in your study of the law of trusts to be
familiar with the most commonly used of the maxims, and to understand their meanings,
which are outlined below. As you will see from the various examples given in the follow-
ing text, there is no shortage of evidence of the maxims in use. The examples given here
are not the only examples you will find within the book, though: keep an eye out for the
use of equitable maxims as you read through the rest of the text.

Equity will not suffer a wrong without a remedy

This first equitable maxim is linked to the very origins of equity. The maxim alludes to
the fact that equity was devised specifically with the intention that it should act as a
supplementary, or alternative, court of justice where the common law is not able to
provide a remedy. So as we shall shortly see in the case of the trust, an invention of equity,
the legal owner of the property will be prevented from asserting their rights in respect of
that property because they are deemed, in equity, to hold the beneficial, or equitable,
interest in the property on trust for the beneficiary.

6
 The equitable maxims

He who comes to equity must come with

clean hands
This is probably the best known of all the equitable maxims. The idea behind the maxim is
that a person who has acted wrongly cannot then seek to rely on the court for assistance
in the bringing of a claim. The most extreme and obvious example of this would be in the
case of murder, as in Cleaver v. Mutual Reserve Fund Life Association [1892] 1 QB 147. Case
Summary
Here a woman who had murdered her husband was denied the right to claim the payout
under a life insurance policy underwritten in her favour, on the basis that she should not
be allowed to profit from her crime.
However, examples can be far more ordinary and involve only a moral, and not necessarily
a legal, wrong. Perhaps the most wide-ranging example of the maxim comes in the form of
the doctrine of proprietary estoppel. The doctrine itself is designed to prevent a legal owner
of property from asserting their legal rights against a third party where it would be uncon-
scionable, or unjust, for them to do so because they have misled that third party in some way,
encouraging them to act to their detriment as a result. An example of this might be the situ-
ation where a claimant allows the defendant to build a house on their land but then, once the
house is built, makes an application to the court to have the defendant evicted from the house
on the basis that the claimant is the strict legal owner of the land. In such a situation the
claimant would be viewed by the court as having ‘unclean hands’ and their action would fail.
The requirement of clean hands does not mean that someone of generally morally
reprehensible character will be barred from using the courts of equity at all, however. The
maxim will only apply if there is a genuine link between the claimant’s wrongful act and
the rights they wish to enforce. A good example of this is the case of Tinsley v. Milligan Case
Summary
[1994] 1 AC 340 (HL). The case concerned a couple who had bought a house together
but registered it in the name of just one of them so that the other could claim to be a
lodger in the house and continue to claim housing benefit. However, when the couple
separated the House of Lords nevertheless allowed Miss Milligan’s claim of an interest
in the house because her fraudulent behaviour had no bearing on the fact that she had
contributed to the purchase of the house. It should be noted that the outcome of this
case has been heavily criticised as condoning Miss Milligan’s fraudulent behaviour. For a
more detailed insight into this case see Chapter 7, on resulting trusts.

He who seeks equity must do equity

This maxim is closely related to the maxim which states that ‘he who comes to equity
must come with clean hands’. In essence, it means that, if a person wishes to make a
claim in equity, they must be prepared to submit to the judgment of the court in respect
of the rights of the other party to the action as well. So a person who wishes to claim
the equitable remedy of specific performance, for example, thus forcing the defendant to
complete the terms of a contract in accordance with their agreement, must also be willing
to complete all of their own obligations under that same contract.

Equity regards as done that which ought to be done

This equitable maxim is significant because it means that two parties contracting to
perform certain legal actions will, in the eyes of equity, be considered to have carried out

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Chapter 1 Introduction to trusts

those actions from the moment of contracting to do them, rather than when the contract
is actually performed. The best example of such a situation would be in the context of a
house purchase. From the moment of exchange of contracts (when the seller and buyer
enter into a legally binding contract to sell and purchase the property) the buyer will
acquire an equitable interest in the house, albeit that they do not become the legal owners
until after the formal legal transfer of the house is completed. This means that if either
party fails to go ahead with the sale or purchase, the injured party not only has the option
of claiming damages at common law for the breach of contract, but they also have the
option (albeit at the discretion of the court) of claiming the equitable remedy of specific
performance, thereby forcing the defaulting party to complete the sale or purchase. This
is on the basis that ‘equity regards as done that which ought to be done’: in this case, the
completion of the sale.

Equity follows the law

As the wording of this maxim suggests, in divining an answer to a problem in equity, the
court of equity will always look to the legal position first and, where appropriate, take their
lead from the common law. The best example of this might be where two people share
ownership of a piece of land. In the absence of a declaration to the contrary, at law the two
people will automatically own the property as joint tenants, meaning they both hold the
property together as one ‘joint owner’ and have no individual shares in that property.
If the two people approach the court of equity for clarification as to their beneficial, or
equitable, ownership of that property, the court’s starting point will be that they own the
property as joint tenants in equity too. It will only be on the provision of evidence from
either party that the position should be different in equity that the court will depart from
the common law position.
The maxim ‘equity follows the law’ also serves as confirmation of the fact that equity
will not allow a remedy that is contrary to law; in other words, the court of equity will
not seek to override the law. The common law is very much the
equity will not seek governing body for English law and it is only where the court of equity
is met with an issue which the common law rules do not account for
to override the law that equity will step in. As we have seen from the maxim ‘equity will
not suffer a wrong without a remedy’, therefore, equity’s role is to
work as a supplement to the common law, and not as an alternative form of justice where
the law already exists to cover a particular issue.

Equity will not permit a statute to be used as an

instrument of fraud
This equitable maxim serves to prevent a person from relying on the absence of statutory
provision if to do so would result in unfairness to a third party. Evidence of this maxim
in practice can be seen in the chapters on resulting and constructive trusts. In Chapter 7
on resulting trusts you will see that, under section 37 of the Matrimonial Proceedings and
Property Act 1970, where a spouse makes a substantial financial contribution to improve
a property they will be treated as having then acquired a share in the beneficial interest of
that property, regardless of whether or not they have a legal interest in it. However, the Act

8
 The equitable maxims

only applies to married couples, and not to cohabitees. The law of equity has therefore
stepped in and provided that, under such circumstances the contributing party may be
entitled to an interest in the property under a constructive trust instead. As you can see,
this is also an example of equity ‘plugging the gap’ where the law makes no provision for
a particular set of circumstances, as opposed to overriding the law as it already exists
(‘equity follows the law’). For a more in-depth look at the law relating to constructive
trusts as it relates to the rights of cohabitees, go to Chapter 8.

Equity looks to substance not form

This maxim describes an important feature of the court of equity, which is that it is able to
look beyond the external appearance of any state of affairs that exists between the parties
and make its judgment based on the position of the parties as they genuinely intended it.
In other words, it will not simply adhere to the strict legal position as might be dictated
by the common law, where it is clear from the facts of the case that the real position is
actually quite different from the way it is portrayed to the outside world. The most famous
example of this comes from the case of Street v. Mountford [1985] 1 AC 809, which con- Case
Summary
cerned a licence to occupy land. The written agreement between the parties was given the
heading of a ‘licence’, because the landlord wanted to avoid the tenant acquiring a right to
remain in the property in accordance with the statutory provisions applicable to residential
leases at that time. However, the court saw through the pretence and held that, regardless
of what the parties had called the agreement, it was nevertheless a lease and therefore the
tenant was entitled to the full protection of the law under the statutory provisions. In giving
his judgment in the case, Lord Templeman famously said:

the manufacture of a five-pronged implement for manual digging results in a fork even if
the manufacturer, unfamiliar with the English language, insists that he intended to make
and has made a spade.

Equity acts in personam

This maxim derives from a historical distinction between the two courts of the common
law and of equity. During the time in which the court of equity was developing, one
important distinction between equity and the common law was that, whereas the courts
of the common law made judgments over the property in dispute, an action being brought
in rem (that is, over ‘the thing’), the court of equity made its judgments in personam: in
other words, judgment was made against the individual. The practical effect of this was
that the courts of the common law had the ability to adjust ownership rights in property,
giving all or part of the property in dispute to the claimant. The courts of equity, on the
other hand, had the ability instead to require an individual to obey their judgments, in
default of which they could take away that person’s liberty (by putting them in prison) or
issue fines until such time as they obeyed their edict.
Even today, and despite the fusion of the two courts of common law and equity, the ability
of equity to act in personam retains some very specific benefits. For example, in Chapter 16
on remedies, you will come across a type of injunctive remedy called a ‘freezing injunction’.
The purpose of a freezing injunction is to prevent the defendant from moving property or assets
out of the reach of the claimant before the matter gets to court, either by moving them out of

9
Chapter 1 Introduction to trusts

the UK, or from one jurisdiction to another. The making of such an injunction is possible
because equity acts in personam, and therefore the injunction is made by the court against
the person, not against their assets. This means that the location of the assets is irrelevant
to the proceedings and that the remedy is, effectively, worldwide.

Equality is equity
The equitable maxim ‘equality is equity’ ensures that, where there is a dispute over property
in which more than one party has a beneficial interest, that property will be divided equally,
unless there is evidence showing that the property should be divided in some other way.
Case So, in the case of Midland Bank v. Cooke [1995] 4 All ER 562, which concerned a dispute
Summary
between husband and wife over the ownership of a matrimonial home, Lord Justice Waite
said that:

In such a case the court must first do its best to discover from the conduct of the spouses
whether any inference can reasonably be drawn as to the probable common understanding
about the amount of the share of the contributing spouse upon which each must have acted
in doing what each did . . . if no such inference can be drawn . . . the court is driven to
apply . . . the maxim ‘equality is equity’, and to hold that the beneficial interest belongs to
the spouses in equal shares.

You can find the full facts of this case in Chapter 8 on constructive trusts.

Delay defeats equity

If a person wishes to bring a claim in equity they must do so without delay or otherwise
risk their claim being rejected. This means that a person who delays unnecessarily in
making a claim in equity could be found guilty of acquiescing to the conduct complained
of by their failure to do anything about it. Alternatively, their claim could fail under the
doctrine of laches, where there has been a delay in bringing an action. The maxim ‘delay
defeats equity’ is often not required because of statutory limitations imposed on bringing
an action by the Limitation Act 1980. You can find out more about both the Act and the
doctrine of laches in Chapter 13 on breach of trust.

Equity will not assist a volunteer

A ‘volunteer’ in this context is not the person who helps out on the cake stall at the local
village fête. In equity the term ‘volunteer’ has a rather different meaning, which is that a
volunteer is someone who receives a benefit without consideration; in other words, that
person does not give anything in return for the benefit: they are the recipient of a gift.
Generally speaking, persons in receipt of gifts of property cannot rely on the court of
equity to enforce the promise of that gift because, having done nothing in return for it,
the volunteer has nothing to enforce against. Put simply, there is no bargain. To give an
example of how this might work, if Sannia were to give her old laptop to Nicola, Nicola
cannot then make a claim against Sannia if the laptop runs slowly, or is difficult to use,
because it was the subject of a gift.

10
 The equitable maxims

Equity will not perfect an imperfect gift

This maxim of equity is closely related to the maxim which states that ‘equity will not
assist a volunteer’. If a person makes an ‘imperfect gift’, that is a gift which lacks the for-
malities required at common law, the maxim says that equity will not assist the intended
recipient of that gift. This equitable maxim is particularly relevant in cases of gifts of land
or shares, which require a process of formal transfer rather than mere physical delivery of
the object in question. The courts’ application of this maxim has suffered a significant
amount of criticism in recent years, primarily because of a tendency of the courts to
waive, or ‘soften’, the rule wherever it would seem equitable on the facts of the case to do
so. This is particularly evident since the handing down of the Court of Appeal decision in
Pennington v. Waine (No. 1) [2002] EWCA Civ 227, in which an aunt’s botched attempt Case
Summary
to give 400 shares in a company to her nephew was considered to have been sufficient to
tranfser the equitable interest across to him. The full facts of this case are discussed in
Chapter 2, on formalities.
It should also be noted that an alleged exception to the maxim is the rule in Strong v.
Bird (1874) LR 18 Eq 315. The rule says that if a person appoints the intended recipient
of a gift as the executor of their will, on that person’s death the gift will be perfected.
However, the facts of the case applied to the cancellation of a debt and, although the rule
has subsequently been applied to outright gifts, it has never been tested in the context of
transfers of trust property. This issue is discussed in more detail in Chapter 2.

Equity abhors a vacuum

The idea behind this maxim is that it goes against the principle of the court of equity for
a piece of property to be left with no beneficial owner. This maxim is most commonly
seen in the context of resulting trusts. As we shall see in Chapter 7, one of the scenarios
in which a resulting trust will arise is where property has not been properly disposed of.
This might be because a trust has failed due to the identity of the beneficiaries not being
ascertainable, or in situations where there is surplus property left over after the trust has
come to an end. In such circumstances, the trustees are unable to keep the property for
their own benefit, and so the property in the trust ‘results’ or returns (in most cases) to
the original owner of the property, leaving the trustees holding the property on trust for
them. This solves the problem of the property being left with no one to benefit from it.
A further example might be seen in the case of a charitable gift which has failed because
the charity has ceased to exist before the gift to that charity was completed. In such
circumstances, the doctrine of cy près will be applied, and the property will go to another
charity with similar aims. We will be looking in more detail at the equitable doctrine of
cy près in Chapter 5, on charities.

Equity will not want for a trustee

The court of equity will not allow a trust to fail simply because the person creating the trust
has failed to appoint a trustee or, in the case of a trust created by will, if the trustee has
died before the testator (that is, the person writing the will). The court of equity therefore
has the power to appoint a trustee where there is no valid trustee appointed. It should be

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Chapter 1 Introduction to trusts

noted that in many circumstances statutory provision has been made for the appointment
of trustees and so there will be no need for the court to have to rely on their general power
to appoint. To read more about the appointment of trustees, go to Chapter 9.

Equity imputes an intention to fulfil an obligation

This maxim dictates that, where a person is under an obligation to do one thing but they
do something slightly different instead, their actions may be treated as a close enough
approximation of the required act to have fulfilled that person’s obligation in equity. This
is better explained by way of an example. The case in which the maxim was first set out is
Case that of Sowden v. Sowden (1785) 1 Bro CC 582, which concerned a marriage settlement.
Summary
A marriage settlement is a legally binding agreement made between the parties to the
marriage under which the husband and wife agree to put certain property, including
property acquired after the marriage, into trust for the benefit of themselves and any
children they might have. In Sowden v. Sowden a husband, as part of his marriage
settlement, had promised to pay the trustees under the settlement a total sum of
£2,000 with which they were to buy property to provide an income for his wife in the
event of his death. The money was never paid to the trustees but, shortly after his
marriage, the husband bought a property in Devon called ‘Pound’, for £2,150. The
husband subsequently died and the wife sought to claim the property as part of the
marriage settlement. The court of equity found in her favour, on the basis that the husband
was assumed to have bought the property in the performance of his obligations under
the marriage settlement.
A more modern example of how this maxim might work would be the example of a
person who owed money to a creditor. Say Alec owes £100 to Rani. Alec dies without paying
his debt to Rani, but he leaves Rani a gift in his will of £100. The £100 will be construed
by the court as representing the payment of Alec’s debt and Rani will therefore achieve the
repayment of the debt. Of course, this would also prevent Rani from making a separate
claim for the debt under the rules of the common law.

Where the equities are equal the law prevails

This equitable maxim overlaps with the maxim ‘equity follows the law’ which was mentioned
previously. The meaning of the maxim simply is that the person in possession of the legal
estate will get priority over any prior or subsequent equitable interests. So when both
parties in a dispute are equally entitled to obtain help from courts of equity because their
equitable rights are equal, the party who has the law in his favour will succeed. In essence,
therefore, this maxim provides confirmation of the fact that an equitable interest is not as
strong as a legal interest. Thus, according to the maxim, ‘the law shall prevail’.

Where the equities are equal the first in

time prevails
This final maxim simply states what may seem obvious, which is that in the case of
competing equitable interests the interest which was created first will take precedence

12
 The development of the trust

over the others. The best example of this in practice is in the case of someone who takes
out second and third mortgages over their house. It is only possible for the first mortgage over
a property to be legal; therefore any subsequent mortgage will be an equitable mortgage.
In deciding which equitable mortgage has priority over the others, the one which was
entered into first will take priority. Thus, the ‘first in time prevails’. Further discussion of
mortgages is outside the scope of this book.

The development of the trust

We have so far looked at the development of the court of equity and at some of the equitable
maxims by which the court is guided. Now it is time to turn our attention to one of the
greatest creations of equity: the trust. The development of the trust as a basic concept began
during the time of the Crusades, which were a series of holy wars spanning two centuries
between 1095 and 1291. The wars were waged by much of Christian Europe, including
England, against the Muslim-occupied countries of the near East including the city of
Jerusalem, which the Crusaders had the goal of recapturing and restoring to Christian rule.
The long series of protracted military campaigns overseas meant that English households
were frequently deprived of their male heads for years, and in some cases even decades.
In order to facilitate the management of their land in their absence, knights going away to
battle would frequently transfer the ownership of their property into the hands of a trusted
relative or friend so that they could act in their place, managing the estate until their
return. To do this was a risky business, however. Under the strict rules of the common law
once the knight had transferred the legal ownership of his property to a third party, all his
rights in that property ceased. There was therefore no legal way for the knight to protect
his family from an unscrupulous friend or family member. This left
the knight completely at the mercy of the friend or relative; he had
no other choice than to rely on the honour and good conscience of the
he had to rely on the
person he trusted to do the right thing by his family. Unfortunately, it honour and good
was too often the case that crusaders would return from abroad to find
their wife and family gone and their fortune dissipated. Something
conscience of the
clearly had to be done to protect such persons; what was needed was person he trusted
a new concept.
Equity came to the rescue. In response to the crusaders’ plight, a new concept began to
be formulated. This concept, unique to English law, was the ‘use’. Put in basic terms, the
use was the earliest and most primitive form of what we today call the trust. Its effect was
that one person owned the land under the common law, but a second person had a right
to use the land under the law of equity. Thus, two separate rights in one property could
now exist at the same time. In the case of our knight, let us call him Cyril, this meant that
Cyril would be able to transfer his land ‘to the use’ of a third party, let us call him Balthazar,
for the duration of his absence abroad. Under the terms of the use, Cyril could do this
safe in the knowledge that he had an equitable remedy if Balthazar did not manage the
land in accordance with his wishes. Whilst technically the legal ownership would still be
with Balthazar, under the terms of the use equity would be able to step in and enforce
Cyril’s equitable rights, forcing Balthazar to act in accordance with the terms of his
promise. This ensured that whilst Cyril’s family, for whom his property had been left to
benefit, had no legal claim on his lands once they had been given over into ‘use’, they
nevertheless had the force of equity behind them. In equity’s eyes, Balthazar would be the

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Chapter 1 Introduction to trusts

Figure 1.1 Property ownership under the ‘use’

legal owner of the property in name and nothing more. The right to benefit from the
property belonged to Cyril’s family. Diagramatically, the use might look as shown in
Figure 1.1 above.
To put the use into a modern context, we can look at the example of our soldier, Alec,
from the beginning of the chapter. If you think about the story of Cyril, it is remarkably
similar to the story of Alec going off on his tour of duty in Afghanistan. The only differ-
ence is that, in the original scenario, the soldier in question is a knight and the war he
would have been leaving his family behind for would have been the Crusades. We will be
considering the modern uses of the trust in more detail later in the chapter.
Whilst the use was created very much with equity, or fairness, in mind, by the
sixteenth century a very different application had been found for the concept which
was not nearly so noble. This was as a method of tax avoidance. Under the laws of
the time, by transferring the legal ownership of property to the use of a third party
the original property owner could avoid the payment of feudal dues (or taxes). In
an attempt to quash such practices, Henry VIII enacted the Statute of Uses in 1535.
The Act effectively ignored the legal owner of the property and, for taxation purposes,
recognised only the beneficial owner of the land. However, lawyers soon got around
this by creating the ‘double use’. Land would be given to Harold ‘to the use’ of Jakob ‘to
the use’ of Charlotte. The Statute recognised only the first use, and so the second use
remained untaxed. Over a period of time the terminology shifted so that Harold was
seen to be giving the property ‘to the use’ of Jakob ‘on trust’ for Charlotte, and the modern
trust was born.

What is a trust?
You should already have an idea of how the modern trust is formulated from our look at
its ancestor the use, above. Let us take some time to look at the anatomy of the modern
trust in a little more detail, however. A good place to start might be by defining, in legal
terms, exactly what is meant by a ‘trust’. Lawyers and academics have striven over several
centuries to come up with a clear definition of the legal term ‘trust’, some with rather less
success than others. However, the simple fact of the matter is that it is easier to explain
how a trust works or, one might say, what a trust looks like, than to give it a definitive
explanation. Put in its simplest terms, as with its ancestor the use, a trust is where one

14
 What is a trust?

Figure 1.2 Format of a basic trust

person transfers the legal ownership of property to another to hold that property for
the benefit of somebody else. Historically the property transferred was usually land, but
in the modern trust such property can take the form of money, land, jewellery or other
personal items. So, using cash as an example, in the most basic form of our modern trust
a woman, Anniqa, might give £10,000 to her brother, Blake, to hold for the benefit of her
daughter, Carys.
Diagrammatically, the situation might look as shown in Figure 1.2 above. And so we
have the anatomy of a basic trust: Anniqa transferring property to Blake to hold on trust
for Carys. The effect of this ‘trust’ is that, in legal terms, Blake becomes the owner
of the property: we might say that Blake holds the ‘legal title’ to the property. In the
eyes of the law, Blake has the right to use that property or dispose of it as anyone with
absolute ownership of property could do. However, because in giving the property
to Blake to hold for the benefit of Carys Anniqa has created a trust, whilst Blake is
technically the legal owner it is Carys who is actually entitled to the benefit of that
property: she is the beneficial, or equitable, owner and has the benefit in equity. It is this
separation of the legal or formal ‘paper’ ownership of property, and the beneficial or
equitable ownership of the same which is fundamental to the anatomy of any trust;
without it, trusts could not exist.
But why is there a need for Anniqa to give the property to Blake to hold on behalf of
Carys in the first place? Why does not Anniqa just give the property directly to Carys? Of
course, times have changed dramatically since the eleventh century, and the use of trusts
is far more wide-ranging in a modern context, as we shall see later on in the chapter. But
the concept of the trust as an instrument of equity remains the same. Its function is to
allow a person to give their property over to another for the benefit of a third party and
yet still to protect that third party, the beneficiary of the trust, from abuse by the legal
owner. It is a simple method of protection and control, enabling the person creating the
trust to hand property over for someone else’s benefit, whilst still retaining control of that
property through the medium of the trustees.
You should now have some idea of what trusts are and why they exist, and of the
historical development of equity and its maxims. For the rest of this chapter we will
be taking a look at some of the terminology used in the law of trusts and which we will be
using throughout the remainder of the text; and we will also be looking at the different
types of trusts and exploring some of the other modern uses of the trust. This should
help to deepen your understanding of the concept and crystallise the idea of the trust
in your mind.

15
Chapter 1 Introduction to trusts

The terminology of trusts

First of all, let us think about the terminology of trusts. You can use this part of the chapter
to refer back to until you are completely comfortable with the terms referred to or,
alternatively, you may prefer once you have read this to use the glossary which you will
find at the back of the book as a quick reference guide.
The description was given earlier in the chapter of a trust being created by Anniqa
transferring property to Blake to hold on behalf of Carys. In legal terminology, the process
of creating this trust and all the persons involved in it are given their own labels, and
these are as follows:
The person transferring their property over for the benefit of the third party is
known as the ‘settlor’. The settlor, in our example Anniqa, can be described as ‘settling’
her property on Blake, for the benefit of Carys. She can also be described as ‘giving her
property over into trust’.
The person in receipt of the property, in our scenario Blake, is the person to whom
the settlor, Anniqa, entrusts the property. He is known as the ‘trustee’.
The trustee is the So the trustee (Blake) is the person the settlor (Anniqa) trusts to
look after the property for the benefit of Carys. The trustee is the
legal owner of the legal owner of the property. It is worth noting here that there is
property usually more than one trustee appointed by the settlor for adminis-
trative reasons (for further explanation see Chapter 9 on the appoint-
ment and retirement of trustees).
The person whom the property is to benefit, Carys in our scenario, is known as the
‘beneficiary’. The beneficiary holds the beneficial, or equitable, title to the property. The
beneficiary can be an individual who will be identified by name, as in our example, or by
description: for example ‘my daughter’. Alternatively the beneficiary can be a specified
group of persons, such as ‘children’, ‘nephews’ or ‘relatives’. It might also include the
settlor’s ‘heirs’, meaning anyone who is entitled to inherit on the settlor’s death, or ‘issue’,
meaning any descendants of the settlor. These groups of persons are often referred to as a
‘class of beneficiaries’. The beneficiary (or class of beneficiaries) is commonly described
as the ‘object’ of the trust because he or she is the object of the settlor’s wishes: the person
the settlor intends to benefit.
So if we were to revisit our earlier diagram it will now look as shown in Figure 1.3. The
three parties to the trust will be referred to throughout the remainder of the book as the
settlor, trustees and beneficiaries.

Figure 1.3 Parties to the trust

16
 The terminology of wills

The beneficiary’s interest under the trust can be vested or contingent. A ‘vested interest’
means that the beneficiary has an interest which is either already in the hands of the
beneficiary, or will definitely come to them in the future. If the beneficiary’s interest is
dependent on the happening of a future event, that event must be certain to happen: for
example, the death of another person. The fact that no one can say when the death will
occur is irrelevant. This will be the scenario where someone is the ultimate beneficiary
under a ‘lifetime trust’, where property is put into trust for the benefit of one person for
the duration of their life, and is then given to a third party on their death. If, on the other
hand, the interest of the beneficiary is dependent on an event which is not certain to
occur, the beneficiary’s interest will be a ‘contingent interest’, and not a vested one. Such
a contingent event might be the beneficiary reaching the age of 25 or 30. In this scenario,
the beneficiary might die before reaching the required age and there is therefore no
certainty in them attaining their interest. This is in contrast to the vested interest, which is
dependent on the death of another person: as everyone dies sooner or later, the beneficiary’s
interest in that event is based on a certainty, not a contingency.
The final part of the trust which needs to be considered is the actual content of the
trust; that is the property given over into trust by the settlor. This can be referred to simply
as the ‘trust property’ or, alternatively, as the ‘subject matter’ of the trust. As mentioned
above, the subject matter of the trust is often land or property, but it may also consist of
money, stocks and shares, or any other kind of personal property.

The terminology of wills

It would be sensible as we consider the terminology of trusts also to give some thought
to the terminology of wills. The reason for this is that, as we shall see later on in the text,
many trusts are created by will. The following ‘whistle-stop’ tour of will terminology
should therefore be helpful as you progress through the book:
In a will, the person writing the will, that is the person whose last wishes the will
portrays, is known as the ‘testator’ (masculine) or ‘testatrix’ (feminine). As testators and
testatrixes often create trusts within their wills you will frequently see the settlor referred
to in context as a testator or testatrix. This is particularly the case when the facts of cases
are being described, as many of these came about because of an ambiguity or dispute over
a will. Throughout the course of the text, therefore, when you see reference to a testator
or testatrix you should be aware that this refers not only to the person creating the will,
but also in most cases the settlor as well, settlor and testator/testatrix usually being one
and the same person. So, for example, you may read the following:

A testator gave £100,000 to his trustees to hold on trust for his children until they reach
the age of 18.

It is clear to see that the testator in this instance was also the settlor of the trust.
Another term you will come across relating to wills is ‘executor’ (masculine) or ‘execu-
trix’ (feminine). The executors of a will are the person or persons who are in charge of
carrying out the testator’s wishes. On the death of the testator, they will gather together
his possessions, pay any debts of the testator and be responsible for the division of his assets.
The executors named in a will are often also named as the trustees of any trusts which may
be created under it and so take on a dual role as executors and trustees under the will.

17
Chapter 1 Introduction to trusts

These are the people you will come across when we look at wills. In terms of the subject
matter of the will, this is given its own special label as well, depending on what part of the
testator’s property is being referred to.
The assets of the testator as a whole are collectively referred to as his ‘estate’. So the
testator’s estate will include everything he owns, including money, personal possessions
and land or property.
A gift of a personal possession of the testator or a share in the testator’s estate made to
a specific person in the will is termed a ‘legacy’ or ‘bequest’. Legacies or bequests can be
made either of money or of personal, moveable property, or ‘chattels’. An example of a
legacy or bequest of a chattel might be a gift of a treasured piece of jewellery made by a
testatrix to her favourite niece, or a more substantial gift such as the family home, to be
shared between the testatrix’s children. Gifts of money are known as ‘pecuniary legacies’.
You should note that legacies or bequests need not necessarily be made to individuals; a
charitable donation of £10,000 to a testator’s favoured charity would also come under this
heading.
Once all of the testator’s debts and funeral expenses have been paid by the executors
and any legacies have been given out, whatever is left in the testator’s estate is termed
the ‘residue’ or ‘remainder’. It is usual for the testator to specify to whom he wishes the
residue to be given. This may be to friends or family members or to a named charity. In
many cases the residue is divided into shares and given to a mixture of two or more
persons or charities.
A person who dies without leaving a will is referred to as dying ‘intestate’. The person
who administers the deceased’s estate on intestacy is called the ‘administrator’ (masculine)
or ‘administratrix’ (feminine).
The excerpt in Documenting the law from the will of a very famous testatrix, the late
Diana, Princess of Wales, shows much of this terminology in use. It can be seen from the
terms of the will that the Princess of Wales appointed two executors to administer her
estate: her mother and her personal private secretary, Commander Patrick Jephson. The
main beneficiaries under the will were her two children, the Princes William and Henry
(Prince ‘Harry’). The money comprised in the estate (totalling in excess of £21 million)
was held on trust for them until they inherited at the age of 25.

Documenting the law

Excerpt from the will of Diana, Princess of Wales
I DIANA PRINCESS OF WALES of Kensington Palace London W8 HEREBY REVOKE all former Wills and testa-
mentary dispositions made by me AND DECLARE this to be my last Will which I make this first day of June one
thousand nine hundred and ninety-three

1. I APPOINT my mother THE HONOURABLE MRS FRANCES RUTH SHAND KYDD of . . . and COMMANDER PATRICK
DESMOND CHRISTIAN JEREMY JEPHSON of . . . to be the Executors and Trustees of this my Will

2. I WISH to be buried

3. SHOULD any child of mine be under age at the date of the death of the survivor of myself and my husband
I APPOINT my mother and my brother EARL SPENCER to be the guardians of that child and I express the wish that

18
 Types of trust

should I predecease my husband he will consult with my mother with regard to the upbringing in education
and welfare of our children

4. (a) I GIVE free of inheritance tax all my chattels to my Executors jointly (or if only one of them shall prove
my Will to her or him) (b) I DESIRE them (or if only one shall prove her or him) (i) To give effect as soon as
possible but not later than two years following my death to any written memorandum or notes of wishes of
mine with regard to any of my chattels (ii) Subject to any such wishes to hold my chattels (or the balance
thereof ) in accordance with Clause 5 of this my Will . . .

5. SUBJECT to the payment or discharge of my funeral testamentary and administration expenses and debts
and other liabilities I GIVE all my property and assets of every kind and wherever situate to my Executors and
Trustees upon trust either to retain (if they think fit without being liable for loss) all or any part in the same
state as they are at the time of my death or to sell whatever and wherever they decide with power when they
consider it proper to invest trust monies and to vary investments in accordance with the powers contained in
the Schedule to this my Will and to hold the same UPON TRUST for such of my children PRINCE WILLIAM and
PRINCE HENRY as are living three months after my death and attain the age of twenty five years if more than
one in equal share PROVIDED THAT if either child of mine dies before me or within three months after my death
and issue of the child are living three months after my death and attain the age of twenty one years such issue
shall take by substitution if more than one in equal shares per stirpes* and the share that the deceased child
of mine would have taken had he been living three months after my death but so that no issue shall take
whose parent is then living and so capable of taking

...

IN WITNESS whereof I have hereunto set my hand the day and year first above written

SIGNED by HER ROYAL HIGHNESS in our joint presence and then by us in her presence

[Source: [Link] See also news article [Link]

for further detail.]

*Note: Per stirpes is a Latin legal term meaning that the children of the deceased princes would take the amount representing their father’s
share of the estate between them in equal shares.

Types of trust
There are many different types of trust, all of which you will come across throughout the
course of this book, and which the following section aims briefly to introduce you to. As
with the section above on the terminology of trusts, you may wish to use this section as a
quick reference guide as you navigate your way around the text, or you may prefer instead
to use the glossary at the back of the book, which contains brief definitions of all the
terms described here, as well as many more.

Private and public trusts

We have discussed the scenario of a basic trust whereby a settlor gives money or property
to their trustees to hold on trust for their beneficiaries. This most basic type of trust,

19
Chapter 1 Introduction to trusts

where money is given over into trust for the benefit of one or more named individuals, is
a ‘private trust’. In other words, the trust has been created by the settlor for the benefit of
a private individual or individuals. In such a scenario these private individuals are likely to
be close family members or friends, or people who have some kind of personal relationship
with the settlor.
A ‘public trust’, on the other hand, is a trust in which the settlor has given money or
property over to their trustees to be used for some public use or benefit. All charitable
trusts would therefore come under this heading.

You be the judge

Q: Which of the following are public trusts?

(a) £10,000 towards the education of the nephews and nieces of Mathilda and Edward
Jones.
(b) £10,000 towards the education of the children of employees of Leeds Metropolitan
University.
(c) £10,000 towards the education of children from impoverished backgrounds in the
county of North Yorkshire.

A: Only (c) is a public trust, being directed at a section of the public. The others are all private trusts,
being for the benefit only of a private group of people, albeit a potentially large group in the case of
the university.

Fixed and discretionary trusts

The terms of a trust may be either fixed or discretionary. If the terms of a trust are fixed,
this means that the trustees are given very specific instructions as to how and to whom
the subject matter of the trust is to be distributed; the trustees do not have any power to
vary the amounts given to the different beneficiaries named, or to decide whether or not
to benefit one particular beneficiary over the others. A fixed trust might look as follows:

I give £10,000 to my trustees to divide equally between my children, Jacob and Frances.

You will see here that the trustees have no discretion as to how to divide the £10,000: they
must divide the money equally. Neither are the trustees given any discretion as to whom
the money is to be given. The settlor is clear that the money is to be divided equally
between Jacob and Frances; they are each to be given a half-share of the money and so
will each receive the sum of £5,000. To give a further example of a fixed trust, the following
would also come within this category:

I give £10,000 to my trustees to hold for my children, Jacob and Frances.

Despite the fact that there is no express stipulation as to how the money is to be divided,
the trust will still be fixed. In the absence of a direction as to how the trustees are to divide
the money, the equitable maxim ‘equity is equality’ will apply, and the money will be
divided equally between the two children, as with the first example.

20
 Types of trust

With a discretionary trust, on the other hand, the trustees are given discretion, either to
decide the shares into which the trust fund will be divided, or to decide who will benefit
under the terms of the trust, or sometimes both. A discretionary trust might look like this:

I give £10,000 to my trustees to divide between those of my children they consider most
deserving in their absolute discretion.

In this scenario, the trustees have discretion as to how the money is divided. They also have
discretion as to whom the money is given. The settlor has allowed them to choose which of
the children they consider most deserving and divide the money
between them. No shares are specified and so the trustees are free to trustees are free
decide in what proportions the money is to be divided. Thus, the trustees
could decide to split the money between Jacob and Frances, £7,000 to to decide in what
Jacob and the remaining £3,000 to Frances. Alternatively, if they con- proportions the
sidered Jacob undeserving of a share of the trust fund, they could decide
to benefit Frances with the whole £10,000. Such is the nature of their money is to be
discretion. The Writing and drafting exercise will help you to test your divided
understanding of the nature of fixed and discretionary trusts.

Writing and drafting

You are Nasreen Aqeel, a trainee solicitor at the firm of Irash & Co. Solicitors. You are dealing
with the estate of the late Mrs Elda Myers. The following is a section of her will:
I make the following bequests:
(a) I give my collection of vintage port to be shared between my friends Danyl
Shah and Enid Carlton at the Carleon Amateur Dramatics Association in memory
of all the good times we had together.
(b) I give £10,000 to be divided between the following charities:
(i) St Luke’s Hospice
(ii) Candlelighters, the children’s charity
(iii) Rainbow Days Donkey Sanctuary
in such shares as my trustees shall in their wisdom determine.
(c) I leave the residue of my estate to be divided equally between those of my
grandchildren as my trustees shall consider deserving.
Mrs Myers’s trustees are coming in to see your training principal this afternoon. They
would like advice on what discretion they have (if any) in distributing the various gifts
listed in the will. Your training principal, Mr Irash, is out of the office all morning and
will not have time to look through the file. He has asked you to write him a memo
detailing what the trustees are allowed to do under the terms of the will. Your memo
should be no more than one side of an A4 sheet in length so you will need to be
succinct. You have another appointment in 40 minutes so you have until then to
complete the memo.

 Handy tip: Look at each clause of the will separately. What are the trustees allowed
to do? Are they given discretion as to how to divide the fund or who to give it to? If so,
how wide is that discretion?

21
Chapter 1 Introduction to trusts

Reflective practice
How did you find explaining the difference between fixed and discretionary trusts? When
you read back through what you have written have you explained the difference between
the two clearly? Do you think you would be able to write your own discretionary trusts now?
Is there any way you could improve on what you have written?
Remember that this is a practical exercise as well as an academic one, so the layout of
your memo is important. The training principal will not be impressed if, as a trainee in a
law firm, you hand him a hastily-scribbled answer on a scrap of paper! Did you find out
how to set out a business memorandum before starting this exercise? Would you know
how to write one in the future?


Handy tip: It may be helpful to keep a template business memorandum for your
future use. You can download a free example of a standard office memo on the web
at: [Link]

For a more in-depth look at fixed and discretionary trusts, go to Chapter 3 on

certainties.

Purpose trusts
Purpose trusts are trusts which are set up by the settlor to carry out an abstract pur-
pose, rather than to benefit a specific person. Purpose trusts can be private or public. All
charitable trusts are public purpose trusts, because they are trusts which have been put
into effect for a purpose which benefits the public. An example of a private purpose trust,
on the other hand, would be a trust set up to build a tomb or monument in memory of
the settlor after their death. Subject to a couple of exceptions, private purpose trusts are
not a valid form of trust in English law. We will be looking at the topic of private purpose
trusts in detail in Chapter 4.

Charitable trusts
As outlined above, charitable trusts are public trusts which are set up for charitable
purposes as opposed to purely private purposes. Charitable trusts are the biggest
exception to the ‘no purpose trusts’ rule. Chapter 5 examines the role of charitable trusts
and how they work in detail.

Express trusts
The majority of trusts are express trusts. These are trusts which the settlor has specifically
and purposefully taken steps to create, either by way of a verbal declaration that they wish to
form a trust or, as is the case in most instances, by some form of writing. The formalities
required for the creation of express trusts are discussed in Chapter 2.

22
 Types of trust

Resulting and constructive trusts

Unlike express trusts, resulting and constructive trusts are created without the need for
any express declaration of trust or writing of any kind. They are therefore completely
informal in their creation. A resulting trust will arise in one of two situations:
1. Where the settlor has tried to create a trust but has, for one reason or another, failed to
transfer the beneficial interest in the property effectively. This is an ‘automatic resulting
trust’.
2. Where contributions are made to the purchase price of property by more than one
person but the legal title is held by one of the parties only, in which case the intention
of the settlor is presumed to have been that they intended to create a trust. This is a
‘presumed resulting trust’.
A constructive trust, on the other hand, will be imposed by the court in any situation
where the conduct of one party is so unconscionable, or morally reprehensible, that to
allow any other outcome would be unjust, or inequitable. With a resulting trust there-
fore (regardless of type), the intentions of the parties to the trust are implied. With a
constructive trust, on the other hand, the intentions of the parties to the trust are irrelevant
and the constructive trust is said to be imposed by operation of the law.
The law relating to resulting and constructive trusts is discussed in detail in Chapters 7
and 8.

Statutory trusts
Unlike express trusts, which are created by individuals, statutory trusts are created or implied
under the provisions of a statute. There are many examples of statutory trusts, one of the most
common being the trust which is imposed on any person who purchases property jointly
with another under sections 34(2) and 36 of the Law of Property Act 1925 (as amended
by Schedule 2 of the Trusts of Land and Appointment of Trustees Act 1996). The sections
state that where land is owned by two or more people, it will be held on a trust, each party
holding the beneficial, or equitable, interest in the land on trust for the other. This creates
a rather unusual trust situation because it means that the property owners become both
trustees and beneficiaries of the land. Figure 1.4 may help to explain.
You should note that there is no need to understand the concept of co-ownership any
more fully for the purposes of this book, although you may have already come across this
example of a statutory trust in your study of land law.

Figure 1.4 Division of legal and equitable ownership of

property

23
Chapter 1 Introduction to trusts

Perhaps a rather simpler example is that of the statutory trust imposed under section
46 of the Administration of Estates Act 1925, in respect of intestacy. When a person dies
intestate (you will remember this means without leaving a will) leaving a widow and
children, a statutory trust is imposed on that person’s assets wherever their assets exceed
a fixed sum set by statute (currently £125,000). The widow is entitled to the fixed sum
outright. Half of the remainder of the estate is then held on trust for the widow’s lifetime,
during which the widow receives the income from the trust. After her death this sum
goes to her children, unless they have not yet reached the age of 18, in which case the
money will be held on trust until they do so. The other half of the remainder is held on
trust for the children until they reach the age of 18, or on marriage if that is earlier.

Lifetime trusts
A lifetime trust is a trust created to benefit one person during that person’s lifetime, and
another person or persons after their death. So, for example, Victor might leave in his will
his house at 1 Ingfield Avenue on trust for his wife, Jenny, during her lifetime, and then
to his son, Jonathan, after Jenny’s death. In this scenario, Jenny would be described as
having a ‘life interest’ in 1 Ingfield Avenue and would be termed a ‘life tenant’ of the
property. As we saw earlier in our terminology of trusts, Jonathan would have a vested
interest in the house, because Jenny’s death is a certainty, albeit that we do not know when
she is going to die. He would be termed the ‘remainderman’, because he is entitled to the
remainder of the interest after his mother’s death. The function of such lifetime trusts is
usually to ensure that a spouse is provided for during their lifetime, but that the children
of the marriage are the ultimate beneficiaries of the trust property. Such a provision
would, for example, prevent Jenny cutting Jonathan out of her will in the event of her
remarriage.

Trusts compared with other

concepts
We have taken some time to get to grips with the meaning of trusts and the terminology
which surrounds them. However, there may be situations in which a trust may appear, on
the face of it, to be very similar to another legal concept. As a final consolidation of your
understanding of the meaning of the trust, let us now consider the trust as compared with
a selection of other legal devices.

Trusts and contract

Trusts are often cited as being virtually synonymous with contracts, but the differences
between them are in fact quite marked. If you have studied the law of contract before, you
will know that the fundamental requirement for any contract is that of consideration: put
simply, a bargain must be struck between the parties, one party giving consideration for
something provided by the other. With trusts there is no consideration, and there is no
bargain or agreement. The creation of a trust is a unilateral event, the settlor transferring

24
 Trusts compared with other concepts

property to another for the benefit of a third party and gaining nothing in return. One
could argue that a contract made for the benefit of a third party would have the same
result. This may be so, but the two concepts would still be founded on an entirely different
basis: the trustee having given no consideration for the transfer, whereas in a contract to
provide services for a third party, the contracting party would be given consideration for
their services. An additional difference between the creation of a trust and a contract is that,
with a trust, the settlor has no power to enforce the trust once it has been created. The
beneficiaries will have the power to do so, of course, but not the settlor. With a contract
the person transferring their property under the contract would have a contractual right,
on the basis of the consideration paid by them for the service rendered or goods supplied,
to seek redress if the other party to the contract did not keep to their side of the bargain.
One final, fundamental difference between the two concepts lies in their origin:
whereas a contract is a creation of the common law, the trust is an invention of equity. The
remedies available to the two concepts are therefore different. In the case of a breach of
contract, the injured party will be entitled to the remedy of damages at common law, their
remedy being a personal remedy against the party in breach. If the trustee is bankrupt,
therefore, the party to the contract who is making the claim may end up with nothing.
In the case of a breach of trust, on the other hand, the beneficiaries will be entitled to a
proprietary remedy as against the trustees, meaning that they can claim the return of the
trust property to the trust, in priority over and above any other claim which may exist
against the trustees’ assets. For a more detailed explanation of personal and proprietary
remedies, see Chapter 16 on remedies.

Trusts and agency

Again, the trust relationship is often described as being indistinguishable from that of
agency. However, this is far from being the case. Although there are similarities between
the two concepts, they act very differently from one another on a practical, as well as a legal
level. In thinking about the concept of agency, it may be helpful to bear in mind the role
of an estate agent. The respective roles of the estate agent and the trustee are similar in that
both carry with them a fiduciary duty: in other words, they require the trustee or agent to
act in good faith in the best interests either of the beneficiaries, in the case of a trustee or,
in the case of an agent, of their principal. But here already we can see a difference between
the two because, whereas an agent acts on behalf of their principal as the person who
instructed them, a trustee acts on behalf of the beneficiaries and not on behalf of the
settlor who sets up the trust. The basis of the relationship between principal and agent
and settlor and trustee is also different. If you think about our estate agent, he will be
instructed to act on behalf of the seller of a property, the principal, and the two will enter
into a contract for the agent’s services, in return for an agency fee. As we have already
seen, a settlor receives nothing in return for their transfer of the property to the trustees,
not even a right to enforce the terms of the trust.
One final difference between agency and trusteeship is in the ownership of the property
concerned. In an agency agreement, whilst the agent may have physical control of the
property they are dealing with they do not have legal ownership of it: this remains at all
times with the principal. All the agent is doing is brokering, or dealing with, the property
on their principal’s behalf. A trustee, on the other hand, will always be the legal owner of
the property, the transfer of the legal title to the property into the trustees’ hands being
fundamental to the creation of the trust.

25
Chapter 1 Introduction to trusts

Trusts and bailment

Bailment is an agreement under which the legal owner of the property (the ‘bailor’), usually
under contract and for the payment of a fee, places property under the physical control
(and usually possession) of another, in return for which the holder of the property (‘bailee’)
assumes responsibility for the property’s safe keeping and return. Examples of bailment
are safety deposit boxes and storage facilities (but not ‘lock ups’, as the goods must be
under the actual physical control of the bailee, not the bailor), automobile garaging
services and animal boarding kennels. There are instances of bailment in which there is
no contract or payment involved, such as when a person finds a diamond ring in the
street and takes it to the local police station for their safe keeping, pending finding the
real owner. This is perhaps what causes difficulty in distinguishing between the concepts
of bailment and trusts. But there always remains a fundamental difference between the
two, which is the issue of legal ownership. Whilst a bailee will be in physical control of the
subject matter of the bailment for a limited period of time, and may even take physical
possession of it, they never take legal ownership of the goods. As we know with a trust,
on the other hand, the trustees will always be the legal owners of the trust property.

Trusts and powers

A power is a form of official authority, given by the owner of property, or ‘donor’, to a
second person, or ‘donee’, to deal with property, usually on behalf of a third person. As
such, the power is the concept which most closely resembles that of the trust and it is
therefore the distinction between trusts and powers which is perhaps the most difficult to
make. There are two types of power: those which give the donee power to dispose of
property, which are known as powers of appointment, and those which give the donee a
more limited power to deal with property. You will most often come across the power to
deal with property in the context of trusts, trustees being given powers to invest trust
property, or the power of maintenance and advancement. For a further insight into what
these powers entail, go to Chapters 11 and 12 of this book.
However, there are instances of powers to deal with property outside of the trust arena,
such as a power of attorney, which gives the donee power to sell the donor’s property, sign
legal papers on the donor’s behalf or otherwise carry out their affairs whilst the donor is
perhaps out of the country, or during a period of illness.
It is powers of appointment, however, that bear the greatest resemblance to the trust.
To make matters more complicated, powers of appointment will often be found mixed in
with trusts created under the same document or will. Take a look at the following clauses
from a will:

1. I give £200,000 to my niece Ursula on trust for life with remainder to whomsoever she
shall appoint.
2. I give £200,000 to my niece Ursula on trust for life with remainder to my grandson
Eric.
3. I give £200,000 to my niece Ursula on trust for life with remainder to her children in
such shares as my trustees shall in their discretion decide.

How do you tell the difference between the clauses? Which are trusts and which are
powers? It would seem on the face of it to be impossible, but in actual fact there is a

26
 Trusts compared with other concepts

fundamental difference between a power and a trust which clearly distinguishes them,
and this is the element of choice. Whereas a power gives the donee of the power discre-
tion as to whether or not they use the power they are given, a trustee has no choice in
carrying out their duties. The trustee may be given a choice as to how they are to carry out
their duties as trustees (for a reminder of this, see fixed and discretionary trusts, above),
but they have no discretion as to whether or not they wish to carry out those duties. The
creation of a trust carries with it an imperative element: the trustees are required by the
settlor to carry out their duties as trustees; they are not given a choice as to whether to do
so or not. The only way in which a trustee could refrain from carrying out their duties
would be by retiring from the trust, thereby ending their trusteeship. A donee under a
power, on the other hand, could simply choose to do nothing with their power and they
would not be accountable to the donor for their lack of action.
Taking another look at the three will clauses above, then, we can see that clause 1 is a
power, whereas the other two are trusts. In clause 1, there is a life interest in favour of
Ursula with a power given to her to give the remainder to ‘whomsoever she shall appoint’.
Ursula is therefore under no duty to transfer the property to a specific person: rather she
has the power to appoint any person of her choosing to receive the property in the event
of her death. Clauses 2 and 3 are trusts because, in both cases, the trustees are instructed
to distribute the trust property to a specific beneficiary, or class of beneficiaries, on
Ursula’s death. The fact that the trustees are given discretion in clause 3 as to how the
money is to be divided is irrelevant: their discretion relates only to the division of the
money; their obligation to distribute is absolute. To give another slightly different example
of a trust and a power of appointment together, take a look at the following:

4. I give £5,000 to my good friend Sadiq to distribute between his children as he shall
decide.
5. I give £5,000 to my good friend Sadiq to distribute between his children if he shall
decide.

Clauses 4 and 5 are almost identical, save for one small word, but the word makes all the
difference. In clause 4, Sadiq is given money to distribute between his children ‘as he shall
decide’. This is a trust, because the discretion is as to the method of distribution: the
instruction to distribute itself is imperative. In the case of clause 5, however, the wording
is that Sadiq should distribute the money between his children ‘if he shall decide’. There is
therefore no imperative here: Sadiq can choose whether he wishes to distribute the money
between his children or not. This is clearly a power of appointment. It can be seen, then,
that the difference between powers of appointment and trusts can rest on a simple matter
of construction. The difference, however, is quite significant.
One last point to mention about powers of appointment is that they can be put into
three sub-categories. These are:
 general powers;
 special powers; and
 hybrid powers.
With a general power, the donee is not subject to any restrictions as to who they exercise
their power in favour of. An example of a general power would be clause 1, above. Here,
Ursula is given the power to appoint to whomsoever she chooses, including herself
theoretically (although in this particular instance this would be pointless as the money
would simply go into Ursula’s estate on her death). In a different example, this would

27
Chapter 1 Introduction to trusts

result in the donor having made, to all intents and purposes, an outright gift to the donee:
it would be like saying ‘I am giving you my CD collection; do with it whatever you want.’
A special power is more restrictive in that it limits the donee to distributing the subject
matter of the power between a specified class of persons. An example of a special power
would be clause 5, above, where Sadiq is given the power to distribute amongst any of his
children.
A hybrid power is similar to a special power, except that it works exclusively, meaning
that, using our example of Sadiq above, he would be able to distribute the money amongst
anyone except for a specified class of beneficiaries: in this case, say, his children.

Modern uses for trusts

We looked earlier in the chapter at the historical reasons for the creation of the trust by
the court of equity. However, the use of the trust in modern times has expanded far
beyond protecting the families of absentee landowners, and the modern trust now covers
a whole range of different situations. The following is intended to give you a flavour of just
some of the uses of the modern-day trust. By way of introduction, take a look at what
solicitor Duncan Milwain has to say, in the People in the law feature, about how he uses
trusts on a day-to-day basis.

People in the law

Name and position: Duncan Milwain, Director
and Head of Trusts, Wills & Probate Department,
Lupton Fawcett, Leeds.

What is your role? To advise clients on estate

planning matters including on wills, inheritance tax
and planning through the use of trusts.

How long have you been working as

a wills and probate lawyer ? I started my
articles [or what would now be termed ‘training
contract’] in March 1993, qualified in mid-1995 and
have been practising since then.

What made you choose this area of the

Source: Duncan Milwain, Lupton Fawcett Solicitors
law ? I would like to say that I always had a keen (text and photo)
desire to be a private client lawyer from an early age.
This would, however, be untrue. I was fortunate to
obtain a training contract at one of the Magic Circle How much do trusts feature in your
firms in London and was even more fortunate that work on a day-to-day basis? Trusts in all
they, unusually, continued to do private client work. their guises form a central part of the work which I
My seat in that department was sufficient for me to carry out. This may be advising on the establishment
realise this was what I most enjoyed. of new trusts or the administration of pre-existing

28
 Modern uses for trusts

trusts. The latter may be trusts either created during Would you be able to do your job without
a person’s lifetime or established under a will. them? In short, probably no. However, the law and
lawyers are nothing if not inventive and alternative
How important are trusts to your work structures to trusts have been proposed over the last
as a lawyer? Trusts are a fundamental part of few years, most notably the use of limited partnerships
the work of a private client lawyer. They are a time- for family assets. Whilst these have gained some small
proven effective means of protecting and pre- degree of popularity the associated costs are for the
serving assets over several generations. There are most part prohibitive. More importantly, partnerships
nuances to trusts over time, primarily as tax legis- do not have the natural fit that trusts have with asset
lation changes, but the underlying theme of asset preservation. Ultimately, notwithstanding the recent
preservation remains unchanged. attack on them, trusts will continue to survive and
flourish. [A limited partnership is a special kind of
What are the most common uses of partnership in which the partners’ liability extends only
trusts in your business? There has been a to the amount of their original investment to the part-
concerted attack on the use of trusts by the former nership. For more information about limited liability
Labour administration over recent years. This has partnerships go to: [Link]
undermined the ability of families to use trusts as a uk/infoAndGuide/faq/[Link].]
means of preserving wealth. This attack has arisen
based on a mistaken assumption that trusts are solely What is the most unusual or interesting
the preserve of the rich and used only for tax avoidance. trust you have ever come across? There
Neither of these assumptions is correct and it is to be are at least three different ways of looking at this: to the
hoped that some of the recent legislative changes are interesting and unusual technical aspects of trusts,
repealed or amended in due course. to the assets held by the trust and to the people who
Many of my clients are the owners of family busi- have settled or are trustees of the trust. I am fortunate
nesses. A common and increasingly used purpose to have noteworthy representatives of each. Some of
for trusts is for business assets (usually company the most interesting deals which I have been involved
shares) to be transferred to a trust. Such business with have included a transfer of a large country estate
assets should attract inheritance tax relief so that down to the next generation of the family, and dealing
the transfer into trust can be achieved without with the trust aspects of a re-categorisation of shares
triggering inheritance tax charges. The assets are in a business held by a series of family trusts. From one
then in a trust environment where they can be used extreme to the other: I have on two occasions been
to provide for the following generation or generations. involved with establishing trusts to make provision
This is a classic use of trusts. for a family pet!

Trusts for the family

As we saw from Duncan Milwain’s interview in the People in the law feature, a large pro-
portion of trusts are still dedicated to the protection of the family and its assets. A prime
example is where a settlor wishes to ensure that both their spouse and their children are
adequately provided for in the event of their death. In such a scenario, the settlor might
create a lifetime trust, giving their spouse the right to live out their days in the family home
and thus ensuring a roof over their head for the remainder of their lifetime, whilst at the
same time ensuring that the house will go to their children on the death of the spouse. In
doing this, the settlor would prevent the spouse from cutting the children out of their will,
say, in the event of their remarriage, and thus depriving the children of their inheritance.
This use of a trust to restrict the spouse’s use of the property is not something which the
testator would be able to do if the house was made to the spouse as an outright gift.

29
Chapter 1 Introduction to trusts

Another family situation in which a trust might be used is where a parent or guardian
wishes to set up a trust to provide for the specific needs of one or more of their children.
Such needs might include the children’s education or perhaps the maintenance of a child
with disabilities. Alternatively, a settlor may wish, in the event of their death, to put inher-
itance money into the hands of trustees to prevent an immature or irresponsible child
from needlessly dissipating the fund. The Law in action feature gives an interesting insight
into some of the problems child trust funds can be used to solve.

Law in action Child actors: protected by their

trust funds?
Many people envy the glamorous life of the child actor:
travelling the world and working with famous actors;
and then, of course, there is the money. But is it as
good as it sounds? There have been many stories told
over the years, of the fortunes of child actors being
squandered by unscrupulous parents and guardians.
So what can be done to protect them?
The status of child actors has led to a whole raft of
recent controversy over the protection of the children
who starred in British director Danny Boyle’s Oscar-
winning movie, Slumdog Millionaire. The controversy
stems from the alleged underpayment of the child stars,
Rubina Ali and Azharuddin Ismail, who were taken
from the slums of Mumbai in India in order to lend
authenticity to the film, which was set in the area. Source: Photodisc/Photolink

The children initially received under £2,500 between

them for a whole year’s work. Despite claims by the film-
makers that the children were well paid for their roles been put into trust until the children turn 18. ‘It would
in the film, earning three times the average annual have been pointless giving them the flats outright,’
salary for their work, the public outcry forced them to said Boyle, ‘because their families would have sold
re-evaluate the plight of the slum actors. However, them.’ This way the children will have better homes
film director Boyle soon realised that further cash to live in, with electricity and running water, whilst
payments would not be the best way to serve the still remaining within their own community, close to
children’s interests in the long term. Boyle therefore friends and extended family.
set up trust funds for the children’s education, with a Reportedly, the film’s investors and distributors have
lump sum payable on completion of their studies. also set up a fund for the slum and street children of
This still did not relieve the children from the imme- Mumbai, setting an initial £500,000 aside for the task.
diate poverty they faced living in their makeshift homes Have the film-makers done enough for the stars of a
in the slums of Mumbai though. Amid further criticism film that has grossed over £70 million worldwide?
of the film-makers, stemming from the publication of That is a question which remains to be answered.
photographs showing the continuation of the children’s For a more detailed look at the story of the Mumbai
squalid existence, Boyle has vowed to take further action, child actors, go to: [Link]
this time providing better housing for the children’s tvshowbiz/article-1154667/Boyle-takes-Slumdog-
families. Each child has been bought a flat on the children-film-bosses-pledge-buy-poverty-stricken-
outskirts of the area in which they live, which has [Link].

30
 Modern uses for trusts

Another way in which the vehicle of a trust was used until recently within a family
setting was in inheritance tax planning. By putting certain assets of the family into trust,
parents were able to save their children from a large proportion of their inheritance tax
bill in the event of their death. In brief, the idea behind a basic inheritance tax-saving
scheme was as follows: one parent acting as settlor put a sum of money, say £100,000, into
trust. The trust was a discretionary trust, allowing the trustees to pay some or all of the
fund to one or more of the settlor’s spouse or children. The trustees were given complete
discretion as to who was to be paid out of the trust fund. The theory was that, because the
trust was discretionary, the spouse contained in the list of beneficiaries had no actual
right to the fund (they would have no entitlement until they were actually chosen by the
trustees to become a beneficiary of it). This meant that the fund could not be classed as an
asset of the spouse’s estate when they died and as a consequence of this the money held in
trust would not be included in any inheritance tax calculation, thus significantly reducing
or even negating the children’s inheritance tax bill, which would usually be payable at 40
per cent over and above assets amounting to £325,000. Since October 2007, however, the
surviving spouse can now carry forward the deceased spouse’s unused nil rate band and
hence the discretionary trust does not have the same inheritance tax-saving effect that it
used to have. The Key stats feature provides a useful overview of the current inheritance
tax position in the UK.

Key stats Increases in inheritance tax liability

set to continue
The payment of inheritance tax by homeowners is on the increase and a move by the government to freeze the
inheritance threshold until 2014 is estimated to raise in excess of £254 billion for the Treasury over the next
four years. But exactly how can a freeze on the tax threshold amount to such a huge source of additional
revenue for the government? It all comes down to inflation. Take a look at the figures.
Inheritance tax is calculated at 40 per cent on the value of a person’s total assets, including their family home,
after the deduction of a tax-free allowance which is currently set at £325,000. This means that on an estate
totalling £425,000 the tax liability would be £40,000: that is 40 per cent of the taxable £100,000.
The inheritance tax threshold usually rises in line with inflation, meaning that at current inflation rates,
which stand at over 3 per cent, the £325,000 threshold should have been increased to about £350,000
by 2014.
But even if a rise in line with inflation were instigated, this still goes nowhere near the level of increase
in house prices in the UK, which has seen the cost of property rising by an incredible 89 per cent in the
last decade. Keeping the inheritance tax threshold in line with the increase in house prices would mean
that the threshold should actually now stand at over £500,000: significantly more than the current tax
threshold.
According to a recent Office of National Statistics report called Wealth in Great Britain, because of the rise
in house prices around one in five households in the UK now has a net worth of over £325,000, making their
owners liable to inheritance tax.
The effect is that more than 4 million people in the UK face having to pay an extra £10,000 in death taxes,
making the total potential liability under the tax in excess of £250 billion.
During the 2010 electoral campaign the Conservatives pledged to scrap the levy for anyone leaving less
than £1 million, but in the emergency budget of 22 June 2010, no further changes to the inheritance tax

31
Chapter 1 Introduction to trusts

threshold were unveiled. It would appear that trust lawyers countrywide are going to be kept busy drafting and
implementing tax avoidance schemes for some while to come.
To see the Office of National Statistics report in full, go to: [Link]
theme_economy/wealth-assets-2006-2008/Wealth_in_GB_2006_2008.pdf. A full copy of the 2010 Budget
can be viewed at: [Link]

A more detailed discussion of inheritance tax is outside the scope of this book.

Trusts for the protection of creditors

We have seen trusts used to protect vulnerable children or family members either from
others or from themselves. Another common use of the trust as a scheme for the protection
of the more vulnerable can be seen in its use as a vehicle for the protection of people to
whom money is owed: in particular customers of an ailing business. When an individual
is made bankrupt or a company goes into liquidation a trustee in bankruptcy (or, in the
case of a company, an administrator) is appointed. (The trustee in bankruptcy should not
be confused with the trustees we have come across so far in the context of an ordinary
trust. The trustee in bankruptcy is simply the name given to the person who is appointed
by the court to administer the bankrupt’s assets. They are in no way similar to trustees of
an ordinary trust as we would understand them in the context of this book.)
The trustee in bankruptcy then takes over the management of the bankrupt’s affairs,
using the remaining assets of the bankrupt to pay off the creditors in order of priority.
Priority will depend on a number of factors, including the age of the debt, and whether
Case the debt was secured against any property of the debtor. In such circumstances, if the
Summary
debtor is aware that they are in financial difficulty before their bankruptcy is declared,
they can set up a trust account into which customer money is placed pending their orders
being dispatched. In this way, the customers’ money is protected from being claimed by
the trustee in bankruptcy in the event of the debtor being declared bankrupt before the
customers’ orders have been processed. This was what happened in the case of Re Kayford
Ltd [1975] 1 WLR 279, the full facts of which appear in Chapter 3 on certainties. The
process of creating a trust account to protect customers of an ailing business in this
manner is known as ‘ring-fencing’ assets.
Another similar, but subtly different, method of using trusts to protect the assets of
creditors is by the creation of what is known as a ‘Quistclose trust’. This type of trust takes
Case its name from the leading case in the area, Barclays Bank Ltd v. Quistclose Investments Ltd
Summary
[1970] AC 567 HL. In this case, a company in trouble, Rolls-Razor, approached a loan
company, Quistclose Investments, for money to make payments to its shareholders. Aware
that the company was in trouble, Quistclose gave Rolls-Razor the money, but on specific
instructions that the money was only to be used for the purpose of paying the shareholders.
The money was placed in a designated bank account and separated from the general funds
of the company. Rolls-Razor subsequently went into liquidation and the court held that
Quistclose, in directing the money be used only for a specific purpose, had successfully
created a trust, with the ailing company as trustee, and the shareholders as its beneficiaries.
When Rolls-Razor went under, the purpose of the trust had been frustrated and so the
monies were returned to the settlor (Quistclose) on a resulting trust. The issue of resulting
trusts is dealt with in detail at Chapter 7. The subtle difference between a Quistclose trust
and a Re Kayford type trust is that, in Re Kayford, the monies were received from customers

32
 Modern uses for trusts

and subsequently set aside by the company in an attempt to protect them from creditors,
whereas in Quistclose, the trust was created, not by the struggling company but by the
creditor prior to the money being handed over. In Quistclose, therefore, the company
was never the legal owner of the property – it was only ever the trustee of the money.
Conversely in Re Kayford, it was the company who acted as settlor, setting money aside
in trust for its creditors.
There is an interesting article showing the practical implications of using trusts to
protect creditors in the Law in action feature in Chapter 3.

Trusts as property-holding vehicles

Whilst trusts can be used as a method of keeping property safe from a spendthrift bene-
ficiary or even from the trustee in bankruptcy, they can also be used as a method of holding
property on behalf of those who, through no fault of their own, do not have the required
capacity to hold property by themselves. Obvious examples of this might be children under
the age of 18, who do not have the legal capacity to own land and therefore would need to
do so under the protection of a trust, and those who do not have the required mental
capacity to hold property. We will be exploring the issue of capacity further in Chapter 2.
There are other equally common situations in which the use of a trust is necessary in
the holding of property. Whilst a company which has been formally incorporated has its
own legal identity and is therefore able to hold company funds and land in its own right,
unincorporated bodies which are not organised and maintained as a legal corporation, such
as clubs, societies and political parties, do not share the same privilege and are therefore
unable to hold property of any kind in their own name. In order to get around this, these
unincorporated bodies have to nominate trustees who will safeguard their funds and
property on their behalf. This scenario would also apply to unincorporated business
partnerships, such as solicitors’ practices or accountancy firms. It should be noted that
the holding of property on behalf of unincorporated associations can raise particular
difficulties. This will form the subject of further discussion in Chapter 4.

Trusts to carry out a purpose

As has already been described in the section of this chapter concerning the terminology
of trusts, it is possible for trusts to be used for the carrying out of a particular purpose as
opposed to for the benefit of a person. Examples of this might be a trust set up to ensure
a pet was looked after in the event of the owner’s death, or a trust set up to carry out some
abstract purpose such as to help the employees of a company suffering financial hard-
ship or to provide scholarships or financial assistance towards tuition fees at a school or
university. As previously mentioned, there are difficulties incumbent with trust funds set
up for private purposes such as these (as opposed to trusts for public purposes, such as
charitable trusts). These will be explored in further detail in Chapter 4.

Pension schemes and investment trusts

The final example of uses to which a trust can be put is that of money held on trust as part
of an investment or savings strategy. With both pension schemes and investment trusts,

33
Chapter 1 Introduction to trusts

money is paid into a fund which is then managed by trustees on behalf of the investor or
persons nominated by them with a view to achieving an increase in value in the fund that
is to be paid out to the beneficiaries at some future point in time. The responsibility of
trustees to invest such funds responsibly and, in particular, not to lose that money, is a
notable point of interest and one which will be discussed in further detail in Chapter 12
on trustee powers of investment.

Out and about

You have been given many examples of trusts in practice. But how many different types of
trusts can you find which affect the daily life of you or your family? You may not be lucky
enough to have your own trust fund, but what other trusts do you come across as part of
your daily life? Take some time to think about it. Consider all of the daily activities of you
and your family. You will be surprised to find how many trusts you come across.
You should take no longer than 40 minutes on this task.

 Handy tip: Are you a member of a college or university? What trusts can you find
there?

Summary
 The Court of Chancery developed equity as an
alternative form of justice to the harsh unbending
rules of the common law.
 The trustees are the legal owners of the trust
property. The beneficial, or equitable, interest
belongs to the beneficiaries.

 The administration of equity and the common

law was fused together in the Judicature Acts of
the 1870s.
 When trusts are created by will, the person writing
the will is called the testator or testatrix, and the
people who administer the will are known as the
executors. The executors are often also named

 The Court of Chancery developed a series of

equitable maxims, which served as a set of
as the trustees of any trust created by the will.

guidelines or standards in deciding cases

which came before them.  There are many different types of trust. Trusts can
be created expressly, or implied by law or statute;
they can be fixed in nature, so that the trustees

 The trust derives from the ‘use’, which

allowed two separate rights in one property
to exist at the same time, one in law and one
have no say as to how the trust fund is administered,
or discretionary, giving the trustees the ability to
decide who to benefit and in what amounts.
in equity.

 A trust is where one person (the settlor) gives

property to another (the trustee) to look after
 Trusts share similarities with other concepts,
including contract, agency and bailment.
However, they are fundamentally different from
for a third person (the beneficiary). all of them in nature.

34
 Question and answer

 Trusts and powers can be seen as sharing the

most in common, a power being an authority
given by the owner of property to a second
landowners. However, their use has been
expanded to cover a wide variety of
situations.
person to deal with property on behalf of a third.
However, whereas a trust carries with it an
imperative element, the use of a power is  Examples of uses for modern-day trusts include
provision for the family, tax planning, the
protection of creditors, as a vehicle to hold
discretionary.
property on behalf of charities, clubs, societies

 Trusts were originally created by the court of

equity to protect the families of absentee
and partnerships, and in pension schemes and
investment trusts.

Question and answer 

Problem: Take a look at the following scenarios. In each case, say which equitable maxim or
maxims you think would apply, giving reasons for your answer:
1. Jude transfers his house into the name of his brother, Xavier, in order fraudulently to gain Xavier access to the
country under immigration law. Jude then seeks to evict Xavier on the basis that Jude has bought and paid for
the house, but Xavier claims legal ownership of the property.
2. Lola and Zidi buy a house together in their joint names. They both pay equal amounts towards the purchase
of the property, but Lola uses an inheritance to build a substantial extension to the property, doubling its
value. Lola’s money also pays for the house to be rewired and a new central heating system to be put in.
When the couple later separate and the house is sold, Zidi claims that the proceeds of sale of the house
should be split equally between them, but Lola does not agree. Lola and Zidi are not married.
3. Hayley wins a hot air balloon flight across the Yorkshire Dales in a crossword competition. Unfortunately, on
the day the flight is due to take place, the weather conditions are not favourable and they are unable to take
off. Hayley demands that the balloon company take her on another day instead.
4. Chester is the beneficiary under a large trust fund to which he will become entitled when he is 30. For the last
10 years one of the trustees has been ‘borrowing’ money from the trust fund. Chester was aware of this, but
chose to do nothing about it as the sums were small and ‘he could spare the money anyway’. However, after
a furious row with the trustee, Chester is now threatening to take the trustee to court to demand the return of
the money to the fund.
You should allow yourself no more than 40 minutes to complete this task.

Essay: If we were asked what is the greatest and most distinctive achievement performed by
Englishmen in the field of jurisprudence I cannot think that we should have any better answer
to give than this, namely the development from century to century of the trust idea.
(F.W. Maitland, Selected Essays (Cambridge University Press, 1936), p. 129.)

Discuss the use of trusts today with reference to this statement.

This question should be answered in 40 minutes.

 Answer guidance is provided at the end of the chapter.

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Chapter 1 Introduction to trusts

Further reading
Baker, J.H. (2002) An Introduction to English Leech, T. (2001) ‘The use of trusts and
Legal History, 3rd edn, London: Butterworths. constructive trusts in lawyers’ claims’,
Whilst the present book has, for the sake of 20 October, [Link]
conciseness, skipped over much of the more com/articles.
detailed historical background relating to the This is an excellent article written by a barrister
development of the trust, those of you who are specialising in trust law, which talks through
interested in the historical development of the the various different uses for trusts by lawyers.
law in this area should find a wealth of information Brilliantly practical and really puts the area of
on both the development of equity (including trusts) trust law into context.
and the courts of equity in any good textbook on
Martin, J.E. (1994) ‘Fusion, fallacy and
legal history. Baker’s is one such book although, of
confusion: a comparative study’, Conv 13.
course, there are others.
This article provides an intelligent and in-depth
Groves, C. and Tee, C. (2009) ‘Where there’s analysis of the modern effects of the fusion of the
a will’, Legal Week 11(2), 32, 34. courts of law and equity in England, in contrast
A useful article discussing the use of trusts for with other Commonwealth systems.
inheritance tax planning, dealing with funds held on
Pettit, P.H. (1990) ‘He who comes to equity
trust for children, lifetime trusts and discretionary
must come with clean hands’, Conv 416.
trusts.
This article provides an interesting discussion on
Hayton, D. (2006) ‘Pension trusts and the continued relevance of the maxim in the modern
traditional trusts: dramatically different law of equity.
species of trusts’, Conv 229.
Yeo, T.M. and Tjio, H. (2003) ‘The Quistclose
This article gives a thorough and in-depth analysis of
trust’, 119 LQR 8–13.
the practical workings of a pension trust in contrast
A short article which gives a thorough analysis and
to ordinary trusts and gives arguments for reform of
explanation of the working of the Quistclose trust, in
the law in this area.
the light of Lord Millett’s judgment in the House of
Lords case of Twinsectra v. Yardley [2002] 2 AC 164.

Question and answer guidance

Problem:
1. ‘He who comes to equity must come with clean hands.’ Jude has transferred the property into his brother’s
name to allow him to enter the country illegally. He should not therefore expect the court to recognise his
beneficial interest in the property under the rules of equity.
2. ‘Equity will not permit a statute to be used as an instrument of fraud.’ Lola has no entitlement to be compen-
sated for the work she has carried out at the property under the Matrimonial Homes Act 1970 because the
couple were not married. However, she should be entitled to make a claim under the rules of constructive
trusts, based on the size of her contribution.

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 Question and answer guidance

3. ‘Equity will not assist a volunteer.’ Hayley won the balloon flight in a competition and did not therefore pay
for it. She is not in a position to demand a second flight when the first is unsuccessful.
4. ‘Delay defeats equity.’ Chester has had 10 years to take action against the rogue trustee, but has chosen not
to do so. He is therefore unlikely to be allowed to bring a claim in equity for the lost money.

Essay: A good answer to this question would introduce the reader to the concept of the trust, perhaps
with a little historical context, and then take them briefly through all the modern uses of
trusts today, with comment on the adaptability of the trust to modern uses over the course of the centuries, in
accordance with the quotation. Modern uses would include:
 trusts for the protection of family assets;
 trusts to make provision for family members and other dependants;
 trusts for inheritance tax-planning purposes;
 trusts for the protection of creditors;
 trusts as a method of holding property;
 private and public purpose trusts;
 trusts for pensions and investments.

Reference could be made to Duncan Milwain’s article which gives some really useful comment on the use of
trusts in day-to-day practice and would give the essay currency.
Your conclusion should agree or disagree with the quotation, summarising the usefulness of the trust in the
modern context and confirming its necessity in legal practice today.

Visit [Link]/warner-reed to access study support

resources including practice exam questions with guidance, interactive
‘You be the judge’ multiple choice questions, annotated weblinks,
glossary and key case flashcards and audio legal updates all linked to
the Pearson eText version of Equity and Trusts which you can search,
highlight and personalise with your own notes and bookmarks.

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