Creation and requirements of express trusts - Formalities for creating express inter vivos trusts

Learning Outcomes

This article explains the formal requirements necessary for the valid creation of express trusts established during a settlor's lifetime (inter vivos trusts). It differentiates between the formalities required for trusts of land and those for trusts of personalty. You will learn about the statutory requirements under the Law of Property Act 1925, specifically sections 53(1)(b) and 53(1)(c), and the consequences of failing to meet these requirements. This understanding is essential for advising clients correctly and for answering SQE1-style multiple-choice questions accurately.

SQE1 Syllabus

For SQE1, understanding the formalities for creating trusts is essential, particularly the distinction between trusts of land and personalty. You need to understand the practical implications of these rules, including when writing is required and the effect of non-compliance. Key areas for revision include:

• The general principle that trusts of personalty require no specific formalities.
• The requirement under s 53(1)(b) LPA 1925 that declarations of trusts respecting land must be manifested and proved by signed writing.
• The consequences of failing to comply with s 53(1)(b) – the trust is unenforceable, not void.
• The requirement under s 53(1)(c) LPA 1925 that dispositions of subsisting equitable interests must be in writing signed by the disponor or their agent.
• The consequences of failing to comply with s 53(1)(c) – the disposition is void.
• The exceptions to these formality requirements, such as for resulting, implied or constructive trusts (s 53(2) LPA 1925) and where equity prevents statute being used as an instrument of fraud.

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.

1. A settlor orally declares they hold their shares in a private company on trust for their adult child. Is this declaration valid?
   1. Yes, because trusts of shares require no specific formalities.
   2. Yes, but only if the settlor later confirms it in writing.
   3. No, because all declarations of trust must be in writing.
   4. No, because shares are considered land for formality purposes.
2. Which section of the Law of Property Act 1925 requires a declaration of trust respecting land to be evidenced by signed writing?
   1. s 52(1)
   2. s 53(1)(a)
   3. s 53(1)(b)
   4. s 53(1)(c)
3. What is the legal consequence if a declaration of trust respecting land is made orally and never evidenced in writing?
   1. The trust is void.
   2. The trust is valid but unenforceable.
   3. The trust is valid and enforceable due to equity.
   4. The legal title automatically reverts to the settlor.
4. A beneficiary under a trust wishes to transfer their existing equitable interest to another person. What formality is required under s 53(1)(c) LPA 1925?
   1. The disposition must be made by deed.
   2. The disposition must be evidenced by signed writing.
   3. The disposition must be in writing, signed by the disponor or their agent.
   4. No formality is required if the trust property is personalty.

Introduction

For an express trust created during the settlor's lifetime (an inter vivos trust) to be valid and enforceable, certain requirements must be met. This article focuses on the additional requirement of legal formalities. While many trusts can be created informally, specific statutory rules apply, particularly when the trust involves land or the disposition of an existing equitable interest. Understanding these formalities is important for ensuring a trust is properly established and its terms can be enforced.

Key Term: inter vivos trust

A trust created by a settlor during their lifetime, as opposed to a testamentary trust created by a will upon death.

Key Term: settlor

The person who creates a trust by transferring property to trustees for the benefit of beneficiaries, or by declaring themselves a trustee of their own property.

Key Term: express trust

A trust created by the express intention of the settlor, usually documented in a trust deed or will, or declared orally or by conduct.

Formalities for Declaring an Express Inter Vivos Trust

The general principle is that a settlor can declare a trust with minimal formality. However, the type of property involved dictates whether specific statutory requirements must be met.

Trusts of Personalty

Trusts involving personal property generally do not require any specific formalities for their creation.

Key Term: personalty

Any property that is not land (realty). This includes assets such as money, shares in companies, chattels (e.g., jewellery, furniture), and intellectual property rights.

A settlor can create a valid trust of personalty (such as shares or money) simply by clearly expressing their intention to do so, provided the three certainties are met. This declaration can be oral, written, or even inferred from conduct.

Worked Example 1.1

Ahmed tells his friend Chloe that he is holding his collection of vintage vinyl records on trust for his niece, Maya. He makes a list of the records involved but doesn't sign anything. Is this a valid declaration of trust? Answer: Yes, potentially. Vinyl records are personalty (chattels). Provided Ahmed's words clearly show an intention to create a trust, the subject matter (the specific records) is certain, and the object (Maya) is certain, no writing is required. The oral declaration is sufficient to create the trust.

Trusts of Land (Realty)

Declarations of trust involving land, or any interest in land, are subject to specific statutory requirements.

Key Term: realty

Real property; land and anything attached to the land, such as buildings.

Section 53(1)(b) of the Law of Property Act 1925 (LPA 1925) states:

"a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will"

Key Term: declaration of trust

The statement or action by which a settlor expresses their intention to create a trust, specifying the property, beneficiaries, and terms.

Key points regarding s 53(1)(b):

• Evidenced in Writing: The declaration itself does not have to be in writing at the moment it is made. An oral declaration is permissible initially, but it cannot be enforced unless and until it is evidenced by some form of writing.
• Signed by Settlor: The written evidence must be signed by the person able to declare the trust – the settlor (the person who owned the beneficial interest before the trust was declared). Signature by an agent is not sufficient for s 53(1)(b).
• Content: The writing must contain all the material terms of the trust (ie, the property, the beneficiaries, and the nature of the beneficial interests).
• Consequence of Non-Compliance: Failure to comply with s 53(1)(b) does not make the trust void, but merely unenforceable. The trust exists but cannot be enforced by the beneficiaries against the trustee through court action.

Worked Example 1.2

Sarah orally declares to her brother, Ben, that she holds her freehold house, 'The Willows', on trust for her nephew, Leo. A week later, she sends Ben a signed letter confirming the details of the trust declaration she made. Is the trust enforceable?

Answer: Yes. The trust concerns land (realty). Although the initial declaration was oral, Sarah later provided written evidence of the trust's terms in a signed letter. This satisfies the requirement of s 53(1)(b) LPA 1925. The trust is valid and enforceable from the date of the original oral declaration.

Exceptions to Formality Requirements for Trusts of Land

While s 53(1)(b) mandates written evidence for trusts of land, equity may intervene in certain situations.

Fraud Principle

Equity will not permit a statute to be used as an instrument of fraud. If a trustee relies on the lack of written evidence required by s 53(1)(b) to deny the trust and claim the property beneficially for themselves, the court may enforce the trust despite the lack of formality. This principle was established in Rochefoucauld v Boustead [1897] 1 Ch 196.

Resulting, Implied or Constructive Trusts

Section 53(2) LPA 1925 explicitly states that the requirements of s 53(1) do not affect the creation or operation of resulting, implied, or constructive trusts. These trusts arise by operation of law rather than the express intention of a settlor and are therefore exempt from the need for written evidence, even if they involve land.

Key Term: resulting trust

An implied trust where the beneficial interest in property returns (results back) to the settlor or their estate, often arising from a failure to dispose of the entire beneficial interest or from contributions to the purchase price of property held in another's name.

Key Term: constructive trust

An implied trust imposed by equity in circumstances where it would be unconscionable for the legal owner of property to deny the beneficial interest of another. Often arises in disputes over family homes or where fiduciaries make unauthorised profits.

Formalities for Disposing of Equitable Interests

Once a trust is created, the beneficiaries hold equitable interests in the trust property. If a beneficiary wishes to transfer their existing equitable interest to another person, specific formalities must be observed, regardless of whether the trust property is land or personalty.

Section 53(1)(c) LPA 1925 states:

"a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will"

Key Term: disposition of equitable interest

The transfer or assignment by a beneficiary of their existing beneficial interest under a trust to another person.

Key Term: subsisting equitable interest

A beneficial interest under a trust that already exists and is separate from the legal title at the time the disposition is made.

Key points regarding s 53(1)(c):

• Applies to Existing Interests: This section applies only to dispositions of equitable interests that already exist (subsisting interests), not to the initial creation of equitable interests when a trust is first declared.
• Applies to Land and Personalty: Unlike s 53(1)(b), this requirement applies to dispositions of equitable interests in all types of property, including land, shares, money, etc.
• Must Be In Writing: The disposition itself must be made in writing. An oral disposition followed by written evidence is not sufficient.
• Signed by Disponor or Authorised Agent: The writing must be signed either by the person disposing of the interest (the beneficiary) or by their agent, provided the agent has written authorisation to sign on their behalf.
• Consequence of Non-Compliance: Failure to comply with s 53(1)(c) renders the purported disposition void. The equitable interest remains with the original beneficiary.

Situations Caught by s 53(1)(c)

The courts have interpreted 'disposition' broadly. Situations requiring compliance with s 53(1)(c) include:

1. Direct assignment: A beneficiary directly assigns their equitable interest to a third party (e.g., Beneficiary A assigns their interest under the trust to Person C).
2. Direction to trustees: A beneficiary under a bare trust directs the trustees to hold their equitable interest on trust for a third party (Grey v IRC [1960] AC 1).
3. Contract for valuable consideration: A contract to assign an equitable interest for value must comply (Oughtred v IRC [1960] AC 206). Although a specifically enforceable contract may create a constructive trust (exempt from formalities under s 53(2)), the disposition itself is still generally caught by s 53(1)(c).

Situations Not Caught by s 53(1)(c)

• Direction by beneficiary to transfer legal title: Where a beneficiary under a bare trust directs the trustee to transfer the legal title to a third party, with the intention that the equitable interest also passes, s 53(1)(c) does not apply. The equitable interest passes automatically with the legal title (Vandervell v IRC [1967] 2 AC 291).
• Declaration of sub-trust: Where a beneficiary declares themselves trustee of their equitable interest for another (creating a sub-trust), s 53(1)(c) does not apply if the original beneficiary retains active duties as trustee of the sub-trust. If they have no active duties (becoming a bare trustee), they effectively drop out, and it is treated as a disposition requiring compliance with s 53(1)(c).
• Disclaimer: A beneficiary refusing to accept an equitable interest (disclaiming it) is not a disposition and requires no writing.

Revision Tip

A key distinction: s 53(1)(b) relates to the creation of a trust of land and requires evidence in writing (making non-compliant trusts unenforceable). Section 53(1)(c) relates to the disposition of an existing equitable interest (in any property) and requires the disposition itself to be in writing (making non-compliant dispositions void).

Key Point Checklist

This article has covered the following key knowledge points:

• Express inter vivos trusts of personalty generally require no formalities, only the three certainties.
• Declarations of trust respecting land must be manifested and proved by signed writing (s 53(1)(b) LPA 1925) to be enforceable.
• Failure to comply with s 53(1)(b) renders the trust unenforceable, not void.
• Dispositions of subsisting equitable interests (in any property) must be in writing signed by the disponor or their agent (s 53(1)(c) LPA 1925).
• Failure to comply with s 53(1)(c) renders the disposition void.
• Resulting, implied and constructive trusts are exempt from these formality requirements (s 53(2) LPA 1925).
• Equity may not allow s 53(1)(b) to be used to perpetrate fraud.

Key Terms and Concepts

• inter vivos trust
• settlor
• express trust
• personalty
• realty
• declaration of trust
• resulting trust
• constructive trust
• disposition of equitable interest
• subsisting equitable interest