Equity Introduction
Equity is a body of law historically administered by the Court of Chancery. It was intended to
fill gaps left by the rigid system of common law. As claims in the common law courts were
possible only if the legal problems fit precisely into a previously recognised cause of action,
equity tried to resolve this issue. Hence, equity grew alongside the common law and
supplemented common law when it was required. ‘Conscience’ played a key role in the
development of equity largely due to the inputs of Chancellors who were ecclesiastics.
What is a Trust?
According to Keeting and Sheridan, a trust is a relationship which arises whenever a person
called trustee is compelled in equity to hold the property for the benefit of some persons (of
whom he may be one, and who are termed as beneficiaries or some objects permitted by
law, in such a way that the real benefit of the property accrues, not to the trustee, but to
the beneficiaries or other objects of the trust.
Thus, there is a binding obligation on the trustee which beneficiary can enforce. A trust
allows for the separation of control and enjoyment of the property. The trustee has the
management and the control of the property subject to the trust, but the beneficiary is the
real owner of the property.
Settlor – a Person who sets up the trust
Trustee - a person who looks after the management of the trust property
Beneficiary – a person who enjoys the benefit of the trust property.
Express Trust – where a trust is set up intentionally by a settlor. The trusts are usually
written in a document called ‘trust instrument’.
Legal and Equitable interests
Legal interest
Trustees hold the legal title of the trust property and are considered as owners for the
outside world. In contrast to an outright owner the trustees are obliged to hold the property
for the benefit of the beneficiaries.
Equitable interest
Equitable interest gives beneficiaries two rights: personal and proprietary.
Personal right to enforce the trustees’ duties and to seek compensation for any breaches
against the trustees personally.
Proprietary right, ie, an ownership interest in the trust property itself. The significance of
proprietary right is that:
a) it can be enforced not only against the trustees but also against successors in title
(ie people who subsequently get legal title to the property)
b) The proprietary nature of the beneficiary’s interest means that it is itself an item
property ( like shares in a company or money in a bank) which can be sold or given
away.
As trust involves the separation of legal and equitable interests, a sole trustee cannot
hold the trust for himself alone, for in that situation there is no trust – the trustee is the
outright owner.
Type of Trusts
Fixed Trusts
In fixed trusts, the terms of the trusts define the share of the trust property which the
beneficiary will receive. Eg. On trust for X for life and remainder to Y
Bare Trust
In this type oftrust the trustees hold the trust for the sole adult beneficiary possessing full
mental capacity absolutely.
Bare trusts can be created expressly for example a trust created to manage the investment
portfolio where the investment manager holds the portfolio in trust for the benefit of the
investor.
Bare trusts also arise when a beneficiary becomes solely and absolutely entitled to the trust
property.
Discretionary Trusts
Here the trust gives the trustees a discretion as to the amounts any beneficiary may receive
and/or whether a particular beneficiary receives anything at all. It allows the trustees to
respond to changes in circumstances when the time comes for the distribution of the trust
property.
No individual has any equitable interest under the discretionary trust until the trustees
exercise their discretion in his favour. In the meantime, each individual merely has a hope
that the trustees will choose him.
Understanding beneficial interests
Terminology
Nature of the beneficial interest depends on the terms of the trust. It is important to
understand the beneficial interest in order to be able to advise:
a) Whether the beneficiary’s interest is unconditional or conditional and liable to fail if
the condition is not satisfied.
b) When will he get it; and
c) To what extent or amount he is entitled to
Conditional/ conditional? If vested it is unconditional. If it is
contingent then conditional
When will I benefit? If it is in possession benefits immediately. If
it is in remainder then wait until the other
beneficiary’s right to enjoy expires.
To what extent will I benefit? Absolutely if you get the capital and limited
interest if income only.
Vested Interests – a beneficiary has vested interests if the beneficiary exists and does not
have to satisfy any conditions imposed by the terms of the trust before becoming entitled to
the trust property.
Contingent interests- if it is conditional upon happening of an event which may not happen
(death is certain and hence not contingent) or if the beneficiary is still not in existence.
Interest in possession – if the beneficiary can enjoy the interest immediately.
In remainder – Different from contingent or limited. Doesn’t have to satisfy any conditions
and hence the interest is vested and in remainder.
Absolute interest – the capital
Limited interest – income only
Rule in Saunders v Vautier
If a beneficiary’s interest is absolute ie. Vested and in possession and not limited in
enjoyment, the beneficiary may bring the trust to an end by requesting the trustees to
transfer the property to him or the other trustees if the following conditions are met:
a) The beneficiary/ beneficiaries are in existence and ascertained
b) Are 18 years or older and of sound mind; and
c) They all agree.
Creation of Trusts
Express Trusts
Creation of trusts in settlor’s lifetime
A settlor may create express trusts in two ways:
a) Settlor declares self a trustee and holds the property for the benefit of someone
else.
b) Settlor transfers property to trustees on trust who hold it for the designated
beneficiary. The beneficiary could the trustee himself.
Creation of trusts by will
Settlor creating a trust by will is called a testator or a testatrix. They do not come ot effect
until the death of the testator/testatrix.
Implied Trusts
Resulting Trusts
Under the resulting trust the trustees hold the trust for the settlor. Resulting trusts are
implied in certain defined situations such as where there is a gap in the beneficial
ownership. Settlor creates a trust for X until he attains 21 but does not say what is to
happen if X dies before 21. Then the trustees will hold the trust property on a resulting trust
for the settlor.
Constructive trusts
Arise when it would be unconscionable for the legal owner to deny the claimant an
equitable interest.
Law of Succession on a Person’s Death