Equity and trusts for holiday cottage and paintings

Part A

In order to advise Tim on what will happen to the shares, the holiday cottage and the paintings, it is necessary to establish whether Julie created a valid trust.

Due to the onerous duties placed upon a trustee, it is necessary that the settlor makes clear that a trust was intended, what property is subject to the trust and who the beneficiaries are in order that the trust can be enforced. Accordingly, Lord Langdale M.R. in Knight v Knight laid down the test that three certainties are required for the creation of a valid trust. These are ‘certainty of intention', ‘certainty of subject matter' and ‘certainty of objects'.

The trust created by Julia in order to be valid, therefore must satisfy the three certainties. Absence of any of these certainties would in turn render the trust void.

Firstly, with regard to the ‘certainty of intention' in an express trust, in order to determine whether the settlor intended to impose the obligations of trusteeship in respect of property for the benefit of the beneficiaries, the courts will consider the words used by the settlor, taking into account all the surrounding circumstances, including the settlor's conduct.

As Megarry J has said in Re Kayford Ltd the question is whether in substance a sufficient intention to create a trust has been manifested. Further, the intention must impose a mandatory obligation on the recipient; a purely moral obligation would not suffice.

Therefore, in this case, the courts as their starting point will endeavour to ascertain Julia's intention, from the words used in the light of such relevant knowledge as…one must have had. In Re Harding the words ‘on trust' were sufficient to create a trust. Here, Julia has left all her shares to her trustees, on ‘trust' for her grandchildren in equal shares. Accordingly, this is sufficient to infer certainty of intention to create a trust.

Secondly there must be certainty of the subject matter. This requirement is to ensure that the trustee can identify the subject matter of the property. If the trustee does not know what property is subject to the trust, then he will not be able to perform the duties which the settlor has imposed on him. The subject matter must therefore be certain with regards to clearly defining the trust property and also the interests of the beneficiaries.

In Palmer v Simmonds although there was a clear intention to create a trust…the bulk of my said residuary estate was not certain for the subject matter to be identified.

Here, the subject matter is all my shares (Julia's). On the face of it, this clause in the will appears to be ambiguous. Problems arise as the words all my shares cannot be applied with certainty. As there is no clear indication as to what property is in fact subject to the trust, the question to ask is whether all Julia's shares include the holiday cottage and the paintings.

When reading a document to discover whether the certainty requirements for a trust have been met, the document must be construed naturally, without straining the meaning of the words used. Therefore when reading Julia's will as a whole, taking into account the other provisions in the will, it is clear that the holiday cottage and paintings are intended for other beneficiaries whilst all the shares for her grandchildren. Therefore, the certainty of subject matter is also present.

The final requirement is certainty of objects. The courts have different rules for certainty of objects dependent on the type of trust in question. In a fixed trust the trustees do not have discretion as to who the beneficiaries are or what share of the trust property each will receive. They simply follow the instructions given by the settlor.

The trust will be rendered void unless each and every beneficiary is ascertainable. This is called the ‘complete list test'. Therefore, it is essential that the trust is clearly defined in order to draw up a fixed list of all the beneficiaries. If there was uncertainty as to the people who stood to benefit from that trust, then the courts would have difficulties in establishing whether the beneficiary had exercised his powers properly. For, this reason, the identity of ‘all' the beneficiaries must be clear to prevent further problems.

The certainty of objects, in our case, may be of an issue. The trust created by Julia is clearly a fixed trust. In her will she has listed who the beneficiaries are and what each shall get. All her shares must be equally distributed among ‘her grandchildren.'

Whilst the objects of the trust, ‘Charlotte, Billy and Christina' are named ‘conceptual' uncertainty arise with regards to which Billy/Billie, Julia is referring to in the will. On the face of it, when looking at the spelling of the name ‘Billy,' this indicates that it is William, (known as ‘Billy)' who is a beneficiary in the trust.

However, it could be said that Julia was identifying the three triplets, thus one might question why Julia would exclude Billie, one of the triplets, in favour of Billy (William). Or is it the case that Julia simply made a spelling mistake? As there is a problem with ascertaining who the beneficiaries are there is no certainty of object thus the trust is invalid. Consequently Tim, as the residuary legatee will benefit from ‘all the shares'.

Nevertheless, if Billy could prove that he fell within the class of beneficiaries, then the courts may well find that sufficient. Further, if the whereabouts of Charlotte and Christina cannot be found, then the courts can order that the share of the missing beneficiaries to be distributed under a Benjamin Order. In any case, the final decision would be at the courts discretion.

Part B

Moving on, in her will Julia left the holiday cottage to Arthur, to be used to provide for her daughter, Emily. It would appear that this provision under the will calls attention to the laws surrounding the creation of secret trusts.

A secret trust is a trust binding on property passed under a will, but which does not comply with the formalities required under the wills act.

There are two types of secret trust; a fully secret trust and a half secret trust. In a fully secret trust no indication of a trust or its terms is discernible from the will itself, it looks like an absolute gift. In a half secret trust, however, the existence of the trust is clear but the object is not disclosed, thus the identity of the beneficiary remains a secret.

Historically, the concept of secret trusts was developed to allow testators to make provisions for beneficiaries, (illegitimate children or mistresses) whose identities and existence, were preferred to have been kept hidden.

In this case it is quiet clear that we are dealing with a half secret trust since there is no possibility of Arthur taking the property beneficially. Arthur will either hold the property on trust for Emily, if a half secret trust can be established, or if not, for Julia's residuary legatee, who in this case, as we know, is Tim.

The necessary elements for a valid half secret trust were set out in Blackwell v Blackwell by Lord Sumner, who held that there must be intention, communication and acquiescence between settlor and trustee. In addition, the subject matter and object of the trust must also be present.

Thus, the first question to ask in this case would be whether, on the proper construction of the words used, Julie has shown an intention to create the trust. There can be no secret trust unless it was the intention of the testator to subject the primary donee to an obligation in favour of the secondary done. This requirement for intention is no different from ‘certainty of intention' in express trusts as discussed above.

In the will Julie states I leave my holiday cottage in Wales to Arthur, who knows what I want him to do with it. The existence of a trust is clear from the will by virtue of the words used by Julie. Julia has instructed Arthur, who is to act as trustee and hold the property on trust for Emily, the beneficiary. In doing so, Julia has imposed a mandatory obligation upon Arthur. This is sufficient to satisfy the intention requirement. The subject matter clearly is the holiday cottage, located in Wales and the object of the trust is Emily.

Further, the requirement of communication provides that the settlor inform the trustee of the existence and terms of the trust before or at the time of the execution of the will. Lord Sumner held in Blackwell that a testator cannot reserve to himself a power of making future unwitnessed dispositions by merely naming a trustee and leaving the purposes of the trust to be supplied afterwards. This dictum was also accepted in Re Bateman's Will Trusts. The purpose for this rule is to ensure that the trustee is aware of terms of the trust and is entitled to deny the obligations of the trusteeship if he wishes to do so.

In Re Keen a half secret trust failed as the words used by the testator ‘to be notified by me' pointed towards future communication. As the communication preceded the execution of the will, this was therefore inconsistent with the terms of the will.

The rule for communication in a half secret trust has been subject to much criticism. This is due to the fact that in a fully secret trust, where the trustee appears to take beneficially on the face of the will, communication can take place at any time before the testator's death. There is no logical reason why this rule should not be the same for half secret trusts.

Finally, there needs to be acceptance or acquiescence of the terms by the trustee before the execution of the will. In Moss v Cooper, Wood VC referred to acquiescence either by words of consent or silence.

Whilst it could be said that Arthur's acknowledgment of the trust constitutes ‘acquiescence' this would be irrelevant as the trust will fail on communication requirements. Here, Julie executed her will a year ago but only communicated the existence and terms of the trust to Arthur two weeks prior to her death.

Consequently, Arthur will be prevented from keeping the property beneficially, as it is apparent on the face of the will that he intended to take it only as a trustee. Accordingly, the property will return to Tim, who is entitled to Julia's residuary estate.

Part C

Lisa will be able to take the paintings if she can establish a valid donatio mortis causa (a gift made in contemplation of death). This is yet another method which is binding without the need for compliance with the formalities of the Wills Acts.

The doctrine of donatio mortis causa is often citied as an exception to the maxim ‘equity will not assist a volunteer' to perfect an imperfect gift. This concept was formulated by Lord Russell of Killowen CJ in Cain v Moon. Thus, for an effective donatio mortis causa three things must be satisfied.

First, the gift must have been in contemplation, though not necessarily in expectation of death. In this case Julia was suffering from a ‘short illness' thus her death was reasonably foreseeable. With this in mind she told Lisa that upon her death she could have the paintings. This appears to satisfy the first requirement for a valid donatio mortis causa to occur.

Secondly, the gift must be made under circumstances as to show that the thing is to revert to the donor in case he should recover. Thus, the gift should be conditional. Here, we have been told that Julia has made a gift of the paintings to Lisa on the condition that she did not ‘make it.' Consequently, the second requirement is also fulfilled. The gift of the paintings was to be held only in the event of death; hence if Julia was ‘to make it' she would be entitled to resume complete dominion over the paintings.

Finally, there must have been delivery to the donee of the subject matter of the gift. Words alone are not sufficient for these purposes.

Delivery of the only key to a locked receptacle containing the subject matter, to the intended donee, is considered to be adequate, even if the subject matter is not physically handed over. However, it has been held that there will be no sufficient parting with dominion if the donor retains a duplicate key.

The fact that Julia gave Lisa ‘a key' to the house may imply that this was not the only key to the house. Whilst it could be said that Lisa may have retained a duplicate key this would be overlooked since she was also given the security code for the burglar alarm in the room where the paintings were kept. Therefore, even though the paintings were not physically handed over to Lisa, Julia by giving her a key along with the security code suffices and infers intention of releasing dominion over the paintings. Thus it would appear that a valid donatio mortis causa has been made.

Part 2

The Law and Property Act 1925 (LPA 1925) s. 205 (1) (x) defines ‘equitable interests' as interests and charges in or over land or in the proceeds of sale thereof. As trusts are enforced by equity and not the common law, it said that a beneficiary under the trust has an ‘equitable interest' in the property.

Although there are few formalities for the initial creation of a trust, there are formal rules should a beneficiary choose to dispose of their interest to someone else. Accordingly s.53 (1) (c) of the LPA 1925 states that a disposition of an equitable interest…subsisting at the time of deposition must be in signed writing. Consequently, the disposition will only take effect if the person making it has done so in signed writing. Any failure to conform to this requirement will render the purported disposition void.

It is important to note that, despite the definition of an equitable interest under s.205 (1) (x) of the act, the rule in writing applies to both personal and real property. The formality requirements, however, do not apply to the creation or operation of resulting, implied or constructive trusts under s.53 (2) of the act.

In Grey v IRC the House of Lords held that disposition was to be given its natural meaning, such as it would enjoy in everyday use. As such, the term ‘disposition' is a wide one which incorporates a range of methods for transferring an equitable interest some of which includes gifts and sales.

S.53 (1) (c) has essentially operated in relation to cases on stamp duty. Stamp duty is a tax which is imposed on documents which effect transfers of certain types of property between persons. In many cases beneficiaries have attempted to evade the requirement of writing, in order to avoid stamp duty. Most attempts to so, however, have failed.

Grey v IRC demonstrates what will happen if the actions of beneficiaries are not structured properly. In this case, a taxpayer attempted to transfer shares to his grandchildren but with the intention to avoid tax regulations in that he orally communicated the transfer. The question to ask was whether the oral instructions of transferring the shares were satisfactory. Lord Simonds held that this did not comply with the provisions of s.53 (1) (c). As the tax payer was disposing of his equitable interest, it needed to be put in writing. Accordingly, stamp duty was payable.

In Vandervell v IRC the position was somewhat different. Here, S.53 (1) (c) was held not to have applied where the whole interest in the property, including both the legal and equitable title, was transferred together. Thus, it is submitted that the most efficient means of avoiding the problem in Grey is to transfer both legal and equitable title at once and therefore remove the need for signed writing.

Saunders v Vautier provides another means of avoiding S.53 (1) (c) The case observed that the beneficiary is not obliged to comply with s.53 (1) (c) in a situation where he terminates the trust by instructing the trustees to transfer the legal title to the beneficiary. This is because the beneficiary would then become the absolute owner of the property and would have the discretion to declare new trusts. This seems to work as a declaration of a new trust is something different from a mere disposition of the equitable interest by itself.

Another possible exception to the rule in writing can be found under the doctrine introduced in Walsh v Lonsdale. This case provided that on the creation of a contract for the transfer of property, the equitable interest in that property would pass on as soon as the contract was completed. The underlying principle for this is that under the doctrine of specific performance the transferor can be forced to transfer the property. With regards to dispositions of equitable interests, therefore, this opens up the possibility that the equitable interest could be passed from one person to another without complying with s.53 (1) (c).

Thus, In Oughtred v IRC, a mother and son sought to transfer the equitable interest in two parcels of shares which was held on trust for each of them. This was an oral agreement, as to have executed such a share in writing would have subjected them to stamp duty. Documents recording the transfers were signed at a later date. The Inland Revenue claimed stamp duty on the document.

The mother, however argued that no stamp duty was payable because the equitable interest had already been transferred through the previous oral agreement, and so the interest was protected under a constructive trust. The disposition of the equitable interest, therefore, fell within the exception of s.53 (2), hence writing was not required.

Whilst the House of Lords accepted that the earlier transaction could be enforced using an order for specific performance, it was always contemplated that the contract would be put in writing and so stamp duty was payable.

The courts, in Neville v Wilson, have appeared to have decisively rejected the view, in Oughtred, that s.53 (2) did not do away with the requirement of writing under s.53 (1) (c) as in the former an oral agreement was held to have created a constructive trust. Accordingly, the requirement of writing was dispensed by means of s.53 (2).

It is therefore clear that the courts take a dim view of over-enthusiastic tax avoidance, and the lack of precision of the term ‘disposition' has allowed them to give effect to that view. Not only are they reluctant in allowing a person to avoid the stamp duty charge but they have also been reluctant to give the words enacted in s.53 (2) any effect.

The rule in writing was designed to ensure that the location of the equitable interest is clear and manifest, not only to provide certainty per se, but also to prevent fraud on the part of the trustee. The section has therefore taken up the mantle of the old Statute of Frauds. In Vandervell v IRC, Lord Upjohn upheld this rationale.

Nevertheless, whilst, it is said that the purpose of s.53 (1) (c) is to promote certainty with regards to when a disposition came into effect, it has clearly failed in doing so. This is clearly due to the cases in which beneficiaries have attempted to avoid stamp duty. According to Hudson, the implicit assumption with regards to the manner in which taxing authorities have used s.53 (1) (c), is that the disposition must have been made in writing and that it is a written document which carries out the disposition, rather than the document merely providing evidence of the disposition.

The apparent problem with the formality requirements under the act is largely due to the fact that a trustee may accept an obligation to hold property on trust and then renege. In light of this, equity has developed an important exception with regards to the rule in writing. Hence, it recognised that ‘equity will not permit a statute to be used as an instrument of fraud and so a person cannot avoid their obligations and defraud another by pleading lack of formality. Evidence in writing will not be needed, in such circumstances; oral evidence of the trust in that case will suffice.

In conclusion, whilst it may provide clarity in respect of preventing fraud, it is often said that s.53 (1) (c) has given rise to a great deal of difficulty and the question to ask is how the assertion upon the need for writing by means of s.53 (1) (c) is justified in some cases but not others. It would appear that the courts are more concerned with interpreting the legislation than producing a coherent structure to the requirement in writing.

Bibliography

Books

Haley, M (2007) Equity & Trusts. 7th ed. Thomson: Sweet & Maxwell

Hudson, A (2008) Understanding Equity & Trusts. 3rd ed. Routledge. Cavendish

Ramjohn, M (2008) Text, Cases and Materials and Materials on Equity and Trusts. 4th ed. Routledge. Cavendish

Smith, R.J (2009) Property Law. 6th ed. Pearson Education

Oakley, A.J. (2008) Parker and Mellows: The Modern Law of Trusts 9th Ed. London: Sweet & Maxwell

Watt, G (2008) Equity and Trusts Law: Directions. Oxford: Oxford University Press

Online Resources

Santiago, J (2009) Declaration and Dispositions : Available from:

http://justin-santiago.blogspot.com/2009/03/declaration-and-disposition.html [accessed: 05/01/10 at 11:03:40]

Journals

Green, B. (1984) Grey, Oughtred and Vandervell-A Contextual Reappraisal. Modern Law Review. No 47, pp 385-422