Describe how a trust may be constituted and discuss whether there are any exceptions to the rules of constitution

A trust may be constituted formally by execution of a trust deed or informally through conduct. In either event, certain conditions must be satisfied. There are said to be exceptions to this requirement but these may be distinguished by arguing that they are not so much exceptions as further formal ways in which a trust can come into being.

In order for a valid trust to be constituted, legal title in the trust property must be transferred to trustees. Once this has been done, the arrangement is irreversible by the settler (unless there has been a specific reservation of a power to revoke). The trust confers enforceable rights upon the beneficiaries whether or not (usually the latter) they have provided any consideration - in this respect the rights arising under a trust are to be distinguished from those arising under a contract in which case consideration is an indispensable element. The beneficiaries acquire an equitable interest in the subject matter of the trust. This is essential since in the majority of cases it will only be the beneficiaries who can enforce the trust. The settler retains no interest.

There must be an unequivocal intention on the part of the settler to create a trust. The most obvious instance in which disputes can arise in this regard is where there is a challenge to the assertion that there was an intention to create a trust. For example, the "recipients" might argue that the transfer of property was an outright gift. The trust property must be vested in trustees who hold on behalf of the beneficiaries. The obvious distinction between these two parties is that legal ownership of the property remains vested in the trustees while the beneficiaries are the owners in equity. An example of the importance of this distinction can be obtained from a case (unreported) which is currently the subject of litigation: a father wished certain shop premises not to be formally held by him as legal owner in order to avoid the tax implications thereof. Consequently they were transferred into the names of his two daughters. The purchase of the premises was entirely funded by the father. Following a family dispute, one of the daughters asserted that she was (jointly with the other) the owner of the property because "her name was on the deeds". Despite the fact that at the time of transfer there had been no express agreement as to the basis thereof (trust, gift etc.), father is now forced to assert that by virtue of his contributions to the acquisition of the property and the tacit intentions of the parties, the daughters hold the property on trust for his benefit. The assertion of equitable interests of this type is also frequently seen in property disputes between unmarried couples where the court lacks the jurisdiction that would be available to a spouse under the Matrimonial Causes Act 1973 to transfer property to a party that is not the legal owner.

It was established in Milroy v Lord that there must be an effective transfer of property. The settlor had executed a voluntary deed purporting to transfer shares on trust for the plaintiffs. In fact such a deed was ineffective to secure such a transfer. The court held that a trust had not been properly constituted and that despite the manifest intentions of the settler "equity will not perfect an imperfect gift." Conversely, it can be seen from the leading case of Re Rose that the courts will regard the point of constitution of the trust as the "last act" of a settler who has done all in his power to confer legal ownership. That case turned upon a situation in which the transfer of shares was ineffective not due to any default on the part of the settler but as a result of the directors of the company retaining a right of veto over the transfer. Milroy was distinguished on the basis that the settler there had not done "all in his power" to perfect the gift.

Where the settler declares himself as trustee, a formal transfer of legal ownership is not required. In Jones v Lock a father handed a cheque to an infant with a statement making it clear that he wished the sum represented by it to be the property of the child. He died without making the necessary endorsement to allow the child to cash the cheque but it was nonetheless held that his actions amounted to a declaration of trust and with that the father became a trustee and the child the beneficiary.

Further, trusts can be created by beneficiaries out of existing trust situations. The equitable owner under a trust may create interests in favour of other persons out of that equitable interest. In Timpson's Executors v Yerbury , Romer LJ summarised the four ways in which this might occur:

  • Assignment to a third party directly;
  • A direction to the trustees to hold on trust for a third party;
  • A contract (for consideration) to assign the trust to him;
  • A declaration that he (the beneficiary) will henceforth hold his interest or part of it for the benefit of the third party.

The importance of the requirement that a trust be validly constituted can be seen from those cases in which the principle is summarised by way of the maxim "equity will not assist a volunteer". In Re Plumptre's Marriage Settlement there was a marriage settlement where (because the marriage was without issue) the next of kin of the wife were the intended beneficiaries. The husband purported to make a further gift of stock to the wife which was held invalid because it was outside the terms of the settlement. Eve J held that the next of kin could not enforce the gift because they were "volunteers". (This is to be contrasted with a situation in which any children would have been able to enforce on the basis that they were the intended subject of the marriage settlement and thus not "volunteers".)

Commentators are fond of describing two particular exceptions to the above principles as "exceptions to the principle that equity will not assist a volunteer. However, Todd & Wilson argue that "they are not genuine exceptions but rather additional methods by which a trust can be fully constituted". In any event, they operate as if they were exceptions to the general rule. The first is donatio mortis causa (gift by reason of death). This is where a gift is made by reason of the anticipation of death but is conditional upon that death. Thus the property does not vest in the intended beneficiary until death and the disposition can be revoked at any time until decease. A frequent example of this is where a man wishes his mistress to benefit upon his death but does not wish to disclose her existence until then either by making a will in her favour or by transferring property while still alive. Equity will recognise such a disposition but imposes a number of strict conditions which are contained in Re Craven's Estate :

  • The transfer must be with the intention of property ultimately passing (for example, the handover of goods for safekeeping would not qualify);
  • The property must be handed over in contemplation of the real possibility of death, e.g. terminal illness or a hazardous venture which goes beyond the normal risks of life;
  • The donor must hand over control of the asset as in Woodward v Woodward where the keys to a vehicle were handed over with a statement indicating the donor's intention not to drive again.

The other exception is frequently described as "The Rule in Strong v Bird" . Where an incomplete gift is made during the donor's lifetime and the donee is the executor under a will or the administrator in the case of an intestacy, the vesting of the property in the donee in either capacity can be treated as the completion of the gift and will override the claims of the beneficiaries of the estate. Similarly, whereas at common law, the appointment of a debtor as executor released the debt, in equity the debtor would still have to account to the estate unless there was a provable intention to release on the part of the donor formed during his lifetime and continuing until death. Thus in Strong v Bird, a sole executor had borrowed a sum of money from his stepmother intending that it should be repaid by an adjustment of rent payable. At the time of death, some £900 remained owing and the next of kin claimed the balance of the debt. However, since the beneficiary had been appointed executor, it was held that the debt had been released at that point. There must be certainty. The donor must intend to make an immediate lifetime gift (or release a liability). Thus it was held in Re Stewart that a mere intention to make a testamentary gift would not suffice. Similarly, there must be certainty as to subject-matter: the intention must relate to specific property and cannot consist of a general desire to make provision for the donee.