Background Info

Question 1

What is Equity?

Answer 1

Equity is a distinct system of English law that was developed and administered separately from common law. Two Main Purposes: Mitigate the rigours of common law - Common law rules sometimes applied universally and inflexibly which could result in injustice. Equity can be called on in such cases to do justice between the parties and may focus on the consciences of the parties. Provide the victim of a wrong with more options for redress - The only remedy available at common law was damages. Equity therefore developed new remedies to protect the innocent party, such as: Injunctions (contract/tort) Specific performance (contract) Rectification Appointment of receivers and managers Actions of account Rescission (contract) The most important invention of equity is the TRUST.

Question 2

Maxims of Equity

Answer 2

Maxims of equity are core principles of equity. The key maxims are: a) “He who comes to equity must come with clean hands” This embodies the fundamental idea of doing justice between parties If the claimant has done something untoward, they may not be granted a remedy in equity Wrongdoers cannot benefit from equity’s remedies b) “Equity will not assist a volunteer” A volunteer is someone who has not provided consideration for the transfer of property (i.e., a beneficiary) This maxim is particularly important in the constitution of trusts (Chapter 2) If a settlor fails to properly constitute a trust, equity will not perfect the gift for the volunteer beneficiary.

Question 3

What is a Trust? - Basic Definition

Answer 3

A trust is a legal arrangement for the management of property. At its simplest, it is an arrangement where a trustee holds property for the benefit of another. Three Essential Components: A duty imposed on trustee(s) To deal with property over which the trustee has control For the benefit of beneficiaries who can enforce the duty Key Point: The trust has no separate legal personality. The trustee themselves is sued if they breach their trustee duties (not the trust itself). Example: Fiona tells nephew Garry, “from now on, I am holding these shares on trust for you.” She has created a trust where she = trustee, Garry = beneficiary.

Question 4

Ownership of Property - Outright vs Split

Answer 4

Outright Ownership: When someone is the outright owner of property, they have BOTH legal AND equitable ownership This means the property is entirely theirs and they can do what they like with it Example: Andrew owns shares absolutely - he has both legal and equitable title Split Ownership (Trust Situation): It is possible for someone to hold the legal interest in property and someone else to hold the equitable interest This is where the concept of the trust arises This becomes significant as both parties will have rights in the property When a trust is created, ownership of the property automatically splits: Legal interest → Trustee Equitable/beneficial title → Beneficiary Example: Charlotte owns shares but wants dividends used for granddaughter Danielle’s education (Danielle aged 12). Charlotte asks solicitor Elliot to hold shares for Danielle’s benefit: Elliot = TRUSTEE (legal owner - appears to outside world as absolute owner) Danielle = BENEFICIARY (equitable/beneficial owner - in equity, owns the property)

Question 5

Legal Title (Trustee’s Position)

Answer 5

The trustee holds the legal title to the property, but importantly, the trustee does not own the property. Characteristics of Legal Title: Looks like the absolute owner As far as the outside world is concerned, the trustee owns the trust property Bank accounts held on trust will be in the trustee’s name (bank sends statements to trustee) Shares in a company will be registered in trustee’s name (company info sent to trustee) This gives the trustee the power to manage trust property Responsible for managing the property The trustee must manage the property for the beneficiary They are merely a manager of the trust property, not the owner Subject to onerous duties To stop the trustee from misusing trust property, equity imposes very onerous duties: Must invest the trust fund with the aim of growing its value for beneficiaries (but avoid unreasonable and speculative investments) Must distribute the trust fund in accordance with the terms set down in the declaration of trust Must make good any loss in value of the trust fund caused by any breach of duty Key Point: While they have legal title, equity law only recognises the beneficiary as the owner. Legal ownership is known as the legal estate.

Question 6

Equitable Title (Beneficiary’s Position)

Answer 6

The beneficiary has an equitable interest in the property. Important: In equity, the beneficiaries own the property. Characteristics of Equitable Title: Carries all of the benefits of the trust property Trust fund ultimately belongs to the beneficiaries They are entitled to all the benefits of the trust without having to worry about the responsibility of managing the trust They have a proprietary (or ownership) right in the trust fund itself They also have a personal right to enforce the trustee’s duties and seek compensation for any breach of trust Can be enforced against 3rd parties As the trust fund belongs to the beneficiaries, they can assert their proprietary rights against 3rd parties Examples: If a trustee goes bankrupt, the trust fund is not shared out amongst the trustee’s creditors but is preserved for the beneficiaries If the trustee wrongly gives trust property to someone who is not a beneficiary, the rightful beneficiaries can recover that property back Can be sold or given away As the beneficiaries have proprietary or ownership rights, they can sell or gift their interests in the trust property In the same way that any property owner can sell or give their property away Important Note: These two types of ownership (legal and equitable) are separate and do not affect each other. The trustee could pass the legal estate and the beneficial interests remain with the beneficiaries unaffected.

Question 7

Who is Involved in a Trust?

Answer 7

1. SETTLOR (or testator if it is a will trust) The person who creates the trust Transfers the legal title of the property to the trustees to hold for the benefit of the beneficiary Can declare themselves as trustee and hold the property on trust for the beneficiary (in these situations, the settlor is no longer involved in the trust as a settlor) Determines how assets in the trust will be held and sets out the terms in a trust deed (or will if a will trust) Once the settlor has set out the terms of the trust, they must ensure that the trustee gets legal title to the trust property 2. TRUSTEE(S) Person or people chosen to hold the trust property for the benefit of the beneficiaries MUST follow the terms of the trust laid down by the settlor Manage trust property until such time as the beneficiaries become entitled to it Note: You can have one trustee but it is recommended that for a will trust you have at least 2 trustees Important: If it is a trust over land, there cannot be more than 4 trustees 3. BENEFICIARIES People who benefit from the trust and the property being managed by the trustee Can enforce the trustee’s duties You can have as many beneficiaries as you like Property: Any property can be held under trust (i.e., land, shares, chattels, money, etc.)

Question 8

Why Use a Trust Rather Than a Gift?

Answer 8

GIFTS: Property completely belongs to recipient Donor has no control after giving “All-or-nothing” nature TRUSTS: More versatile and sophisticated Property controlled and managed by trustee Decisions made in best interests of beneficiaries When Trusts Are Better Than Gifts: Beneficiaries are too young, immature, vulnerable, or unwell to manage property Want to drip-feed money to beneficiaries as needed rather than giving a lump sum Want to delay entitlement or impose conditions on receiving the property Example: Harry wants to give £50,000 for nephew Ian’s education (Ian aged 10). Harry creates a trust: Ian only entitled at age 25 (contingent on reaching that age) BUT trustees can use funds before age 25 for Ian’s education This ensures money is used appropriately rather than given as a lump sum Common Uses of Trusts: Private client - estate planning Land - houses owned by more than 1 person are owned in a trust arrangement Charities - many charities are organised as trusts Pensions - pension schemes are often established using trusts Investments - unit trusts, pooled investments.

Question 9

Classification of Trusts - Express vs Implied

Answer 9

EXPRESS TRUSTS: Deliberately set up by the settlor either by words (written in a will or oral) or conduct Must comply with three certainties Two Types of Express Trusts: Private Trusts - Set up for the benefit of individuals Can also be for private purposes (private purpose trust) Examples: Bare trust, Contingent interest, Life interest, Discretionary trusts Charitable Trusts - Set up for the public good/benefit No need to comply with 3 certainties IMPLIED TRUSTS: Implied by law (not made expressly by any settlor) No formalities apply These trusts do not need to comply with three certainties Can be made by conduct Three Kinds of Implied Trusts: Resulting Trusts - Implied in situations where it is presumed that the settlor would have intended such a trust, if they had thought about it. The equitable ownership in the property ‘results’ or jumps back to the settlor. Constructive Trusts - Arise by operation of law (imposed by the courts to achieve justice) Statutory Trusts - Trusts Parliament has set up by acts of parliament.

Question 10

When Can Trusts Be Created?

Answer 10

A trust can be created to take effect either: a) During the settlor’s lifetime - (lifetime trust / inter vivos trusts) b) On their death in their will - (will trust) LIFETIME TRUSTS (INTER VIVOS TRUSTS): A settlor can create a trust to take effect during their lifetime. To create a valid lifetime trust, the settlor must: Make a valid declaration of trust Ensure that property is put into trust If the settlor has appointed themselves as a trustee, once a valid declaration of trust is made there are no further steps Once both steps are complete - the trust has been ‘constituted.’ WILL TRUSTS: A person can create a trust to take effect on their death (called a testator/testatrix) To create a valid will trust, the testator/testatrix must: Make a valid declaration of trust in a will that complies with the provisions of the Wills Act 1837 Direct (in a valid will) that title to the trust property will be put in the hands of the trustee.