Learning Outcomes
This article explains the nature of beneficial entitlement under a trust, focusing on successive interest trusts. It outlines the key distinctions between vested and contingent interests, and life and remainder interests. It also covers the rule in Saunders v Vautier concerning the beneficiaries' power to terminate a trust. For the SQE1 assessments, you need to identify the type of beneficial interest created and understand its consequences for beneficiaries and trustees, particularly in the context of successive interests. This knowledge will enable you to apply the relevant legal principles to SQE1-style single best answer MCQs.
SQE1 Syllabus
For SQE1, you are required to understand the different ways beneficiaries can be entitled to trust property, especially when entitlement is divided over time. Your understanding of vested, contingent, life, and remainder interests is essential for advising on trust administration and beneficiary rights.
As you work through this article, remember to pay particular attention in your revision to:
- The nature of vested interests (in possession and in interest) and contingent interests.
- The distinction between life interests (usually income) and remainder interests (usually capital).
- The basic operation of the rule against perpetuities in relation to vesting.
- The requirements and effect of the rule in Saunders v Vautier.
- The implications of these different interests for beneficiaries and trustees.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following best describes an interest 'vested in possession'?
- A right to future enjoyment of trust property.
- A right to immediate enjoyment of trust property.
- An interest conditional upon a future event.
- An interest that only takes effect upon the trustee's death.
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A trust provides property 'to A for life, remainder to B'. B dies before A. What happens to B's interest upon A's death?
- It fails and reverts to the settlor's estate.
- It passes to A's estate.
- It passes to B's estate.
- The trustees decide who receives it.
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Under the rule in Saunders v Vautier, when can beneficiaries compel trustees to transfer trust property to them, ending the trust?
- When any single beneficiary requests it.
- Only when the trust instrument explicitly allows it.
- When all possible beneficiaries are sui juris and together absolutely entitled to the trust property.
- Only after the perpetuity period has expired.
Introduction
When a trust is created, the legal title to the trust property is held by the trustees, but the right to enjoy or benefit from that property belongs to the beneficiaries. This right is known as the beneficial entitlement or equitable interest. The terms of the trust dictate precisely what each beneficiary is entitled to and when. This article explores different types of beneficial entitlement, focusing on arrangements where interests are enjoyed one after another ('successive interests'), and the rules governing when beneficiaries can collectively end a trust.
Key Term: Beneficial entitlement
The right of a beneficiary to benefit from the trust property held by the trustees. This constitutes the equitable interest in the trust property.
Understanding the nature of a beneficiary's interest is essential for determining their rights and the trustees' duties regarding the administration and distribution of the trust fund. Interests can be absolute or limited, immediate or future, conditional or unconditional.
Vested and Contingent Interests
A fundamental distinction exists between vested and contingent interests. This distinction determines whether a beneficiary's entitlement is certain or depends on a future event.
Vested Interests
A vested interest is an unconditional entitlement to the trust property. The beneficiary's right to the property is certain and cannot be taken away, although their actual enjoyment of it might be postponed.
Key Term: Vested interest
An interest where the beneficiary's entitlement to the trust property is unconditional.
If a beneficiary with a vested interest dies before receiving the property, their interest forms part of their estate and passes according to their will or the intestacy rules. Vested interests can be further divided:
- Vested in possession: The beneficiary has an immediate right to present enjoyment of the property (e.g., the right to receive income now).
- Vested in interest: The beneficiary has a definite right to future enjoyment, but their enjoyment is postponed until a prior interest ends (e.g., receiving the capital after a life tenant dies).
Key Term: Vested in possession
An interest that gives the beneficiary an immediate right to the present enjoyment of the trust property or income.Key Term: Vested in interest
An interest where the beneficiary has an unconditional right to the property, but enjoyment is postponed to a future date (e.g., upon the death of a life tenant).
Worked Example 1.1
A trust provides assets 'to Ben for life, remainder to Chloe absolutely'. Chloe is 30 years old. Ben is currently alive. What type of interest does Chloe have?
Answer: Chloe has a vested interest in remainder (specifically, vested in interest). Her entitlement to the capital is unconditional, but her enjoyment is postponed until Ben's life interest ends upon his death. If Chloe dies before Ben, her vested interest passes to her estate.
Contingent Interests
A contingent interest arises where the beneficiary's entitlement depends on a future event occurring (a condition precedent). If the condition is not met, the interest fails.
Key Term: Contingent interest
An interest that is conditional upon the occurrence of a future event (a contingency). The beneficiary has no entitlement unless and until the condition is satisfied.
Common contingencies include attaining a specific age (e.g., 'to David if he attains 25') or surviving another person (e.g., 'to my children living at my wife's death'). If the beneficiary dies before the contingency occurs, their interest typically fails, and the property may pass under a gift-over clause in the trust or revert to the settlor (or their estate) under a resulting trust.
Worked Example 1.2
A will leaves £50,000 on trust 'for my granddaughter, Freya, if she qualifies as a solicitor'. Freya is currently studying law. What is the nature of Freya's interest?
Answer: Freya has a contingent interest. Her entitlement depends on her qualifying as a solicitor. If she qualifies, her interest vests. If she never qualifies (e.g., she changes career or dies beforehand), her interest fails.
The Rule Against Perpetuities
Trusts cannot tie up property indefinitely. The rule against perpetuities requires that interests must vest (become unconditional) within a certain period. For most trusts created on or after 6 April 2010, the perpetuity period is 125 years (Perpetuities and Accumulations Act 2009). If an interest might vest only after this period, it is generally void from the outset.
Successive Interests: Life and Remainder Interests
Trusts often create successive interests, where the beneficial entitlement is split over time. A common example involves a life interest followed by a remainder interest.
Key Term: Successive interests
Beneficial interests under a trust that are arranged to take effect one after the other over time.
Life Interests
A life interest typically entitles the beneficiary (the 'life tenant') to the income generated by the trust fund for the duration of their life. Alternatively, if the trust property is, for example, a house, the life tenant may have the right to occupy it rent-free. The life tenant's interest is usually vested in possession.
Key Term: Life interest
An interest entitling a beneficiary (the life tenant) to benefit from the trust property (usually income or occupation) for their lifetime.
Remainder Interests
The remainder interest refers to the entitlement to the trust capital after the life interest ends. The beneficiary entitled to the remainder is the 'remainderman'. Their interest can be vested (in interest) or contingent.
Key Term: Remainder interest
An interest in the capital of the trust fund that takes effect in possession after a prior life interest has ended.
Worked Example 1.3
A trust provides: 'Income to my wife Wendy for life, and after her death, the capital to my son Sam if he attains 21'. Wendy is alive. Sam is 19. Describe their interests.
Answer: Wendy has a vested life interest in possession (entitled to income now). Sam has a contingent remainder interest. His entitlement to the capital depends on him reaching 21. If he reaches 21, his interest becomes vested (in interest) but his enjoyment is postponed until Wendy dies. If Sam dies before reaching 21, his interest fails.
Trustees' Duty of Impartiality
Where successive interests exist, trustees owe a duty to act impartially between the different classes of beneficiaries. They must balance the life tenant's need for income with the remainderman's interest in preserving and growing the capital value of the trust fund. Investment decisions must reflect this balance.
Revision Tip
Understanding the distinction between capital and income is essential when dealing with successive interest trusts. Life tenants benefit from income (rent, dividends, interest), while remaindermen are entitled to the capital (the principal property, shares, fund).
Termination of Trusts: The Rule in Saunders v Vautier
Beneficiaries can sometimes collectively decide to end a trust before its intended term expires and require the trustees to transfer the legal title of the trust property to them. This principle derives from the case of Saunders v Vautier (1841).
Key Term: Rule in Saunders v Vautier
The rule allowing beneficiaries to terminate a trust if they are all sui juris (of full age and sound mind) and between them absolutely entitled to the entire beneficial interest under the trust.
Requirements for the Rule
For the rule in Saunders v Vautier to apply:
- All beneficiaries (including potential beneficiaries under a gift-over or resulting trust) must agree.
- All beneficiaries must be sui juris (18 or over and of sound mind).
- Together, the beneficiaries must be absolutely entitled to the whole beneficial interest (meaning there are no other persons, present or future, who could possibly become entitled).
Application
The rule applies to both fixed and discretionary trusts, although it is harder to apply to discretionary trusts with a large or open class of potential objects. If the conditions are met, the beneficiaries can direct the trustees to transfer the trust property to them (or their nominees), thereby terminating the trust. This overrides the settlor's original intentions regarding the trust's duration or conditions.
Exam Warning
Ensure all conditions for Saunders v Vautier are met. If even one potential beneficiary is a minor, lacks capacity, cannot be ascertained, or does not consent, the rule cannot be applied to terminate the trust prematurely.
Key Point Checklist
This article has covered the following key knowledge points:
- Beneficial entitlement is the equitable interest beneficiaries hold in trust property.
- Interests can be vested (unconditional) or contingent (conditional).
- Vested interests can be in possession (immediate enjoyment) or in interest (future enjoyment).
- Successive interest trusts divide entitlement over time, typically via life interests (income) and remainder interests (capital).
- Trustees must act impartially between life tenants and remaindermen.
- The rule against perpetuities limits how long property can be tied up in trust before interests must vest (125 years for most new trusts).
- Under Saunders v Vautier, beneficiaries who are sui juris and together absolutely entitled can terminate the trust.
Key Terms and Concepts
- Beneficial entitlement
- Vested interest
- Vested in possession
- Vested in interest
- Contingent interest
- Life interest
- Remainder interest
- Successive interests
- Rule in Saunders v Vautier
