Learning Outcomes
This article explains the concept of constitution in the context of express inter vivos trusts. It outlines the different methods by which a trust can be constituted and the formalities required for transferring various types of property. It also details the exceptions to the rule that equity will not assist a volunteer. Your understanding of these principles is essential for advising on the validity and enforceability of lifetime trusts in SQE1 assessments.
SQE1 Syllabus
For SQE1, you are required to understand the rules concerning the constitution of express inter vivos trusts. This involves applying the principles relating to the transfer of legal title for different types of property and recognising situations where equity may intervene to perfect an imperfect transfer. Your revision should focus on:
- The meaning and importance of constitution for express lifetime trusts.
- The two methods of constituting a trust: self-declaration by the settlor as trustee and transfer of property to third-party trustees.
- The specific formalities required to transfer legal title for different types of property (land, shares, chattels, money).
- The equitable maxim that 'equity will not assist a volunteer' and its effect on incompletely constituted trusts.
- The main exceptions to this maxim, including the rule in Re Rose, the rule in Strong v Bird, donationes mortis causa, and proprietary estoppel.
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.
- What are the two main ways an express inter vivos trust can be constituted?
- True or false: To transfer legal title to registered land, executing a deed of transfer (Form TR1) is sufficient.
- Which equitable maxim generally prevents beneficiaries from enforcing an incompletely constituted trust if they have not provided consideration?
- Which exception might allow a trust to be constituted if the settlor has done everything within their power to transfer the property, but the transfer requires a third party (like a company registrar) to complete it?
Introduction
For an express trust created during the settlor's lifetime (inter vivos) to be valid and enforceable by the beneficiaries, it must be completely constituted. Constitution refers to the process of vesting the legal title to the trust property in the trustees. Without constitution, the trust is incomplete and generally unenforceable, particularly if the beneficiaries are volunteers (i.e., they have not provided consideration). This article examines the methods of constitution and the exceptions where equity might enforce an incompletely constituted trust.
Constituting a Trust
There are two primary methods by which a settlor can constitute an express inter vivos trust:
- Self-declaration as trustee: The settlor declares that they now hold specific property, which they already own, on trust for the beneficiaries.
- Transfer to trustees: The settlor appoints one or more third parties as trustees and transfers the legal title to the trust property to them.
Self-Declaration as Trustee
If a settlor declares themselves trustee of property they already legally own, the trust is constituted automatically upon a valid declaration (assuming the three certainties are present and any relevant formalities for the declaration itself are met). The legal title already resides with the settlor (now trustee), and the declaration itself separates the equitable interest, vesting it in the beneficiaries. No further transfer of property is required.
Transfer to Trustees
If the settlor appoints third parties as trustees, the trust is only constituted once the legal title to the trust property is effectively transferred from the settlor to the trustees. The method of transfer depends entirely on the nature of the property involved.
Key Term: Constitution The vesting of legal title to the trust property in the appointed trustee(s), making the trust enforceable.
Formalities for Transferring Property
The specific steps required to transfer legal title vary:
- Registered Land: Requires a deed of transfer (e.g., Form TR1 for whole title, TP1 for part) executed by the settlor, followed by registration of the trustees as the new proprietors at HM Land Registry. Legal title only passes upon registration.
- Shares in a Private Company: Requires the settlor to execute a stock transfer form in favour of the trustees and deliver it, along with the relevant share certificate(s), to the company. Legal title passes only when the trustees are registered as the new members (shareholders) in the company's register of members.
- Chattels (Tangible Personal Property): Requires either physical delivery of the items with clear intention to transfer ownership, or the execution of a deed of gift transferring ownership.
- Money (Cash/Bank Account Balance): Transfer of cash occurs upon delivery. Transfer of money in a bank account occurs when the funds are credited to the trustees' account following the settlor's instructions to their bank. A cheque requires clearing before title passes.
Until these specific formalities are completed, the trust remains incompletely constituted.
Equity Will Not Assist a Volunteer
The general rule, often expressed through the maxim 'equity will not assist a volunteer' or 'equity will not perfect an imperfect gift', is that if a settlor intends to constitute a trust by transferring property to trustees but fails to correctly transfer the legal title according to the required formalities, equity will not step in to complete the transfer.
Key Term: Volunteer A person who has not provided valuable consideration (money or money's worth) for a promise or transfer. Beneficiaries under a trust are typically volunteers.
Consequently, if a trust is incompletely constituted because the settlor failed to properly transfer the property, the beneficiaries (as volunteers) usually cannot compel the settlor (or their personal representatives after death) to complete the transfer. The intended trust fails, and the property remains with the settlor or forms part of their estate upon death.
Exceptions to the Maxim
Despite the general rule, equity has developed exceptions where an intended trust may be enforced even if incompletely constituted.
The 'Every Effort' Test (Rule in Re Rose)
If the settlor has done everything necessary for them to do to transfer the property and has put it beyond their control, equity may regard the transfer as complete, even if some further action by a third party (like registration by the Land Registry or a company) is required.
Worked Example 1.1
Sarah decides to put her shares in Tech Innovate Ltd (a private company) on trust for her nephew, Ben. She appoints Tom as the trustee. Sarah completes and signs the stock transfer form and hands it, along with her share certificate, to Tom, instructing him to arrange registration with the company. Before Tom sends the documents to the company, Sarah unexpectedly dies. Her will leaves everything to charity. Is the trust for Ben valid?
Answer: Yes, likely. Sarah did everything in her power to transfer the shares. She executed the correct form and delivered it with the certificate to the trustee, putting the transfer beyond her control. The only remaining step was registration by the company (a third party). Applying the rule in Re Rose, equity may perfect the gift, and the trust for Ben is likely constituted in equity. The shares would not pass to the charity under her will.
Worked Example 1.2
Assume the same facts as Worked Example 1.1, except Sarah completed the stock transfer form but kept it and the share certificate in her desk drawer, intending to give it to Tom next week. She dies before doing so. Is the trust valid?
Answer: No. Sarah had not done everything in her power to transfer the shares. The documents remained within her control. The 'every effort' test is not satisfied. The trust is incompletely constituted and fails. The shares pass to the charity under her will.
The Rule in Strong v Bird
If a donor intends to make an immediate lifetime gift of property to a donee (or intends to release a debt owed by the donee), but the gift is imperfect because the property is not properly transferred (or the debt formally released), the gift may be perfected if:
- The donor's intention to make the immediate gift/release continued unchanged until the donor's death.
- The intended donee becomes the donor's executor or administrator.
The vesting of the property in the donee in their capacity as personal representative can perfect the intended gift/release. This rule has also been applied where an intended trustee becomes the settlor's personal representative (Re Ralli's Will Trusts).
Key Term: Personal Representative A general term for an executor (appointed by will) or an administrator (appointed by the court where there is no valid will or no executor willing/able to act) who administers a deceased person's estate.
Worked Example 1.3
David owes his aunt, Mary, £5,000. Mary tells David, "Don't worry about the £5,000, I forgive the debt", and consistently treats the debt as forgiven until her death. Mary's will appoints David as her sole executor. Can David rely on the rule in Strong v Bird?
Answer: Yes. Mary showed a clear intention to make an immediate release of the debt, and this intention continued until her death. David becoming her executor vests the legal right to sue for the debt in him, which perfects the release. The debt is discharged.
Donatio Mortis Causa (DMC)
A DMC is a gift made during the donor's lifetime, in contemplation of imminent death, intended to take effect only upon the donor's death. It is automatically revoked if the donor recovers.
Key Term: Donatio Mortis Causa A gift made by a living person in contemplation of their impending death, delivered to the donee, and intended to take effect only upon the donor's death.
Three requirements must be met:
- The gift must be made in contemplation (though not necessarily expectation) of impending death from a known cause.
- The gift must be conditional on death (i.e., it is revocable if the donor recovers).
- There must be delivery of the subject matter to the donee, or the means of controlling it (e.g., keys to a car, passbook for a savings account), or essential evidence of title (e.g., title deeds for unregistered land).
Proprietary Estoppel
Proprietary estoppel may arise where a property owner encourages another person (the claimant) to believe they have or will acquire an interest in the property, and the claimant acts to their detriment in reasonable reliance on that assurance. If it would be unconscionable for the owner to deny the claimant's interest, equity may intervene.
Key Term: Proprietary Estoppel An equitable doctrine preventing a property owner from denying rights to another person whom they have encouraged to believe they have an interest in the property, and who has acted detrimentally in reliance on that belief.
The court has discretion in awarding a remedy, aiming to satisfy the equity raised by the claimant's detrimental reliance, which might range from financial compensation to the transfer of the property itself.
Key Point Checklist
This article has covered the following key knowledge points:
- Constitution is essential for the validity of an express inter vivos trust; it involves vesting legal title in the trustees.
- Trusts can be constituted by the settlor declaring themselves trustee or by transferring the property to third-party trustees.
- Transferring legal title requires specific formalities depending on the type of property (land, shares, chattels, money).
- Equity generally will not enforce an incompletely constituted trust in favour of a volunteer beneficiary ('equity will not assist a volunteer').
- Exceptions exist where equity may perfect an imperfect transfer: the 'every effort' test (Re Rose), the rule in Strong v Bird, donationes mortis causa (DMCs), and proprietary estoppel.
- Understanding these rules is essential for advising on the enforceability of trusts.
Key Terms and Concepts
- Constitution
- Volunteer
- Personal Representative
- Donatio Mortis Causa
- Proprietary Estoppel
