SQE1 FLK2 Trusts Sample Questions July 2024

The correct answer is D. Under UK law, when a parent transfers money or assets to a child, there is a legal presumption that this transfer is a gift. This is known as the presumption of advancement. In the absence of evidence to the contrary, the courts will start with the assumption that John intended to gift the money to Lily to support her in starting her business, rather than loaning it to her. The presumption of advancement was discussed in Pettitt v Pettitt [1970] AC 777. In this case, Lord Diplock noted that the presumption of advancement applies in cases where a husband transfers property to his wife or a parent transfers property to their child, implying that the transfer is intended to be a gift unless proven otherwise. The case of Re Roberts [1946] Ch 1 further illustrates the application of the presumption of advancement in the context of financial transfers from a father to his child. The court held that where a father transfers money to his child, the presumption is that it is a gift unless there is clear evidence to the contrary. To rebut this presumption, John would need to provide clear evidence that the transfer was intended as a loan and not a gift. This could include any written agreements, communications indicating the nature of the transfer, or other supporting evidence. Without such evidence, the court is likely to uphold the presumption of advancement, ruling in favour of Lily as the rightful owner of the business assets.

Option A is incorrect because a resulting trust is typically presumed when a person provides funds to purchase property but the property is placed in another person's name. However, in cases involving transfers from a parent to a child, the presumption of advancement (a gift) generally overrides the presumption of a resulting trust unless there is clear evidence to the contrary. The starting point in such familial relationships is that the transfer is a gift, not a loan or an investment expecting a return.

Option B is incorrect as, a constructive trust arises where it would be unconscionable for the holder of the legal title to retain a beneficial interest in the property. This typically requires some form of fraud, wrongdoing, or a breach of an understanding between the parties. Without explicit evidence of such an agreement or understanding that would impose a constructive trust, this option is unlikely. The presumption of advancement would prevail unless John could demonstrate that Lily's retention of the assets is unconscionable.

Option C is incorrect because an express trust requires a clear intention to create a trust, which must generally be evidenced in writing. There must be certainty of intention, subject matter, and objects. Given that there is no written agreement or explicit indication that John and Lily intended to create a trust, this option is not applicable. The presumption of advancement would typically be the court's starting point in the absence of evidence of an express trust.

Option E is incorrect because an equitable charge would require a clear agreement or intention that the property serves as security for a loan or investment. There is no indication in the scenario that John and Lily had any such agreement. Additionally, equitable charges usually require formal documentation. The presumption of advancement applies because the transfer appears to be a gift from a parent to a child unless there is evidence showing it was meant to be a loan or investment.

The correct answer is C. Distributing income evenly between supporting the beneficiary's current needs and reinvesting for future gains aligns with the trustee’s duty to balance immediate financial support with potential long-term investment growth, as required by the Trustee Act 2000. Specifically, Section 4 of the Act requires trustees to consider the suitability and need for diversification of investments. Section 5 mandates that trustees obtain and consider proper advice. Additionally, Section 1 imposes a duty of care on trustees to exercise reasonable care and skill, which involves considering both immediate support and future investment needs of the beneficiary.

Option A is incorrect because allocating all trust income toward current expenses might fail to preserve or grow the trust fund for the beneficiary's future needs, possibly breaching the trustee's duty to invest prudently.

Option B is incorrect as investing a significant portion into high-risk sectors like technology startups without balancing with the beneficiary's current needs could disregard the trustee's duty to diversify investments and consider the beneficiary's total welfare.

Option D is incorrect because it suggests prioritizing one investment type over another, potentially ignoring the need to diversify and the specific situation and interests of the beneficiary, which includes an interest in technology and professional development.

Option E is incorrect because it removes the discretionary power and duty of the trustee to consider and act upon the beneficiary's immediate and future needs directly, potentially undermining the purpose of the trust deed's broad discretion clause.

The correct answer is B. Emily would be entitled to a share of the property, likely reflecting her 40% financial contribution towards the renovation costs. This is based on the principle of resulting trusts, where the court implies a trust to reflect the parties' contributions towards the property, despite the absence of formal legal ownership. This is grounded in the principle established in cases such as Stack v Dowden [2007] UKHL 17 and Jones v Kernott [2011] UKSC 53, where the courts held that financial contributions towards the purchase price or renovation costs can infer a beneficial interest in the property, even if the legal title is held in one party’s name. In this scenario, since Emily contributed 40% of the renovation costs, the court would likely recognize her financial contribution as giving rise to a beneficial interest in the property. Therefore, she would be entitled to a 40% share, reflecting her proportionate contribution to the renovation costs.

Option A is incorrect because Emily's significant financial contribution creates the presumption of a resulting trust, entitling her to a beneficial interest in the property.

Option C is incorrect as the presumption of equal sharing does not apply automatically to business partners or co-investors without express agreements to that effect; contributions are usually the basis for determining shares in implied trust situations.

Option D is incorrect because the court utilises the concept of implied or resulting trusts to determine shares based on actual contributions, rather than arbitrary assessments of fairness.

Option E is incorrect since Emily's entitlement under a resulting trust is not limited to merely recovering her monetary contribution plus interest but extends to a beneficial interest proportional to her investment.

The correct answer is A. By holding Henry personally liable for breach of trust and applying to court for compensation. This approach involves taking legal action to hold Henry personally liable for the financial losses suffered by the trust due to his breach of fiduciary duties. Trustees are expected to act prudently and in the best interests of the beneficiaries, and failing to do so constitutes a breach of trust.Such duties are found in Trustee Act 2000, specifically, section 1 - wich imposes a duty of care on trustees to exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee has or holds himself out as having. Additionally, section 3 - provides trustees with the power to make any kind of investment that they could make if they were absolutely entitled to the assets of the trust.Further section 61 allows the court to relieve a trustee from personal liability for a breach of trust if it appears that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach and for omitting to obtain the direction of the court. Relevant case law include: Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515: This case established that trustees can be held personally liable for losses resulting from imprudent investments. Further, Nestle v National Westminster Bank plc [1993] 1 WLR 1260: Emphasizes that trustees must act with the same care and prudence as an ordinary prudent person managing their own affairs. Therefore the best course of action for the beneficiaries to recover the lost assets from Henry's personal estate is to hold Henry personally liable for breach of trust and apply to court for compensation, as this directly addresses his personal liability and the financial restitution required to make the trust whole.

Option B is incorrect because while reporting Henry may result in regulatory actions or sanctions, it does not directly address the issue of recovering the lost assets for the beneficiaries.

Option C incorrect and is not applicable here as the funds were lost in a failed investment and cannot be traced to specific assets within Henry's estate.

Option D is incorrect because soliciting Henry's resignation and the appointment of a new trustee addresses future management but does not provide a remedy for recovering the lost assets.

Option E is incorrect because negotiating a settlement for a reduced amount might not guarantee full recovery of the lost assets and lacks the enforceability and formal recognition of a court order.

The correct answer is A. The presumption of a resulting trust in favor of Susan, as the provider of the funds, is most likely to determine the nature of the property's ownership given the circumstances. According to UK law, when a person provides the purchase money for property, but the property is registered in another person's name, there is a presumption that the property is held on a resulting trust for the person who provided the money. This principle is well-established in cases such as Dyer v Dyer (1788) 2 Cox Eq Cas 92, where it was held that the person who paid for the property is presumed to be the beneficial owner. While the presumption of a resulting trust is strong, it can be rebutted by evidence showing that the money was intended as a gift. However, in the absence of such evidence or a written agreement specifying the nature of the contribution, the presumption of a resulting trust prevails.

Option B is incorrect because a bare trust requires an express declaration that specifies the beneficiary and the trustee, which is not provided in this scenario.

Option C is incorrect because a constructive trust requires evidence of an agreement or intention to share the property, which is absent in this case.

Option D is incorrect as the presumption of advancement typically applies in parent-child relationships, not between an aunt and a nephew, and there is no information suggesting its applicability here.

Option E is incorrect because a legal title alone does not determine beneficial ownership, especially when there is a significant financial contribution from another party without an express declaration of trust.

The correct answer is D. The principles of tracing in equity allow beneficiaries to follow the value of misappropriated trust assets into investments that appreciate in value. Since the trustee wrongly redirected funds into the startup without proper authorisation, the increased value of these shares can be claimed by the beneficiaries as it originated from the trust's assets. In the landmark case of Foskett v McKeown [2001] 1 AC 102, the House of Lords confirmed that tracing can be used to follow the proceeds of misappropriated trust funds. It established that the beneficiaries have a right to trace and claim the property or its proceeds, even if the property has changed its form. When trust property is wrongfully invested and that investment increases in value, the principle that "any profit derived from a breach of trust belongs to the trust" applies. This means the beneficiaries have the right to claim not only the original misappropriated funds but also any profits or increases in value resulting from the investment. The case of Boardman v Phipps [1967] 2 AC 46 established that profits made from unauthorised use of trust property must be accounted for to the beneficiaries. The trustees in this case were required to account for the profits they made from the trust property, reinforcing the principle that profits arising from a breach of trust belong to the trust.

Option A is incorrect because equity does not leave beneficiaries without remedy when trust assets are misused; the relationship between the original assets and their current form is traceable.

Option B is incorrect because the use of trust assets, even if redirected to investments that subsequently appreciated in value, does not exclude the beneficiaries' right to claim the increase in value.

Option C is incorrect as it ignores the principle that the misappropriation of trust assets for unauthorized investments results in the beneficiaries having a claim over the investments' increased value.

Option E is incorrect because all profits resulting from the original trust assets, including any increase in investment value, are considered part of the trust and are thus reclaimable by the beneficiaries.

The correct answer is C. A balanced investment strategy across blue-chip stocks, government bonds, and a reserve cash fund ensures a diversified portfolio that mitigates risks while seeking to generate sustainable income for the trust's objectives, in line with the duties under the Trustee Act 2000, by ensuring diversification of investments (Section 4), suitability of the investments for the trust's needs, and prudent management of the trust's assets (Section 1).

Option A is incorrect because the high volatility of cryptocurrency investments may not meet the trustee's obligation to invest prudently and safeguard trust assets.

Option B is incorrect as investing solely in the trust's own programs without consideration for return does not take into account the trustee's duty to ensure the trust's assets are productive.

Option D is incorrect because property development schemes, while potentially high-return, entail significant risk not consistent with the duty of care required in trust investment decisions.

Option E is incorrect due to the speculative nature of investments in unproven technology companies, which may not align with the trustee's responsibility to manage risks effectively.

The correct answer is C. Appointing a financial advisor based solely on a recommendation from a friend without undertaking any further due diligence risks the trust's investments and can be seen as a failure in the trustees' duty to act prudently, which could result in mismanagement and potential harm to the beneficiaries’ interests. Further, under the Trustee Act 2000, trustees are required to exercise such care and skill as is reasonable in the circumstances, having regard in particular to any special knowledge or experience that they have or hold themselves out as having, and if they act as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession (Section 1). In this context, due diligence in the selection of a financial advisor is critical. Trustees must take reasonable steps to satisfy themselves of the advisor's competence, reliability, and suitability for managing the trust's investments. Simply appointing a financial advisor based on a recommendation without further investigation would likely constitute a breach of this duty of care, as it does not meet the standards set by the Trustee Act 2000

Option A is incorrect because arranging periodic meetings with the financial advisor for review is part of fulfilling the trustees' duty of oversight.

Option B is incorrect because requiring detailed reports ensures the investment strategy remains aligned with the trust's objectives, demonstrating responsible stewardship of the trust's assets.

Option D is incorrect because ensuring the financial advisor understands the trust's goals and beneficiary needs is essential for formulating a suitable investment strategy.

Option E is incorrect because incorporating a performance-aligned fee structure can motivate the advisor to act in the best interest of the trust, aligning their incentives with the trust's success.

The correct answer is B. Bob, as a trustee, has breached his fiduciary duty by misappropriating the trust funds. Under trust law, when a trustee misuses trust property, the beneficiary can impose a constructive trust on the misappropriated property or its traceable proceeds. This would hold Bob personally liable to restore the value of the trust property. The case of Foskett v McKeown [2001] 1 AC 102 supports the principle that where a trustee misappropriates trust funds, the beneficiaries can trace the funds and impose a constructive trust on the misappropriated property or its traceable proceeds. The court held that beneficiaries were entitled to a proportionate share of the proceeds from a life insurance policy that had been partially paid for with misappropriated trust funds. Further, the case of Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 established that a constructive trust can arise where there is a breach of fiduciary duty, and the trustee is required to hold the misappropriated property (or its traceable proceeds) for the benefit of the beneficiaries.

Option A is incorrect because direct recovery from GreenTech Innovations Ltd. without establishing their wrongful receipt of the funds would not typically be successful under trust law principles.

Option C is incorrect because seeking an account of profits from Bob focuses on personal remedies against him, bypassing the mechanism of recovering funds from the third party that holds them.

Option D is incorrect. However it could be a secondary step if necessary. Initially, imposing a constructive trust on Bob is more direct and efficient, particularly if GreenTech Innovations Ltd. was not aware of the misappropriation.

Option E is incorrect since, although criminal proceedings are possible for Bob's actions, this path does not directly facilitate recovery of the trust funds for the intended conservation project.

The correct answer is D. The trustee has a duty to consult with co-trustees and ideally seek professional investment advice before making significant investment decisions with trust funds. This is to ensure that investments are made prudently and in line with the trust's objectives while considering the need for diversification and risk management.

Option A is incorrect because aligning with the trust’s goals does not exempt the trustee from the procedural due diligence and the duty to consult with co-trustees.

Option B is incorrect as the environmental benefits, although valuable, do not justify bypassing the legal responsibility of consultation and seeking advice.

Option C is incorrect because support for environmental causes does not alleviate the trustee of the duty to consult with co-trustees and seek investment advice, ensuring that all actions are in the best interest of the trust.

Option E is incorrect as the promise of high returns does not negate the trustee’s duties to consult with co-trustees and to act based on informed advice.