Implied trusts and trusts of the family home - Automatic res...

Learning Outcomes

This article explains the concept of automatic resulting trusts. It details the circumstances in which such trusts arise by operation of law, particularly focusing on the failure of express trusts and the incomplete disposal of beneficial interests. For SQE1, a sound understanding includes recognising when an express trust fails for want of a certainty, breaches the beneficiary principle, offends perpetuity rules, or collapses because required formalities for an express trust of land were not satisfied, and appreciating how equity responds by sending the beneficial interest back to the settlor or their estate.

A solid understanding also involves being able to distinguish automatic resulting trusts from presumed resulting trusts and constructive trusts, and to trace the consequences: who ultimately takes, what duties a trustee of the resulting trust has, and what happens where the settlor has died (including the role of the residuary estate). You should be able to apply these principles to varied scenarios, including surplus funds after a specific purpose has been satisfied, unexercised powers of appointment without a gift in default, failed secret or half-secret trusts, and the interaction with charitable gifts and the cy-près doctrine.

SQE1 Syllabus

For SQE1, you are required to understand the principles governing the creation and operation of implied trusts, specifically automatic resulting trusts, with a focus on the following syllabus points:

• The nature of resulting trusts as arising by operation of law.
• The circumstances leading to an automatic resulting trust, primarily where an express trust fails or does not fully dispose of the beneficial interest.
• The consequences of an automatic resulting trust, namely the reversion of the beneficial interest to the settlor or their estate (often via the residuary estate).
• Distinguishing automatic resulting trusts from presumed resulting trusts and constructive trusts.
• How failures of express trusts occur in practice: uncertainty of subject matter or objects, the beneficiary principle, administrative unworkability, perpetuity rules, and non-compliance with formality requirements for trusts of land.
• How surplus funds are treated where a specific purpose has been fulfilled and the instrument is silent, and when a power of appointment has not been exercised and there is no gift in default.
• The relationship between automatic resulting trusts and charitable gifts, including initial versus subsequent failure and the role of the cy-près doctrine.
• Formalities: recognition that implied trusts fall outside the writing requirements in s 53(1)(b) Law of Property Act 1925 by virtue of s 53(2), while appreciating that non-compliance with formalities for an express trust can itself precipitate a resulting trust.

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. Under what circumstances does an automatic resulting trust typically arise?
   1. When property is transferred for no consideration.
   2. When there is a common intention between parties to share property.
   3. When an express trust fails to dispose of the entire beneficial interest.
   4. When a person acquires property through fraud.
2. If an express trust fails due to uncertainty of objects, who holds the beneficial interest in the trust property under an automatic resulting trust?
   1. The intended beneficiaries equally.
   2. The Crown (bona vacantia).
   3. The trustees absolutely.
   4. The settlor or the settlor's estate.

3. True or false: An automatic resulting trust requires written evidence signed by the settlor to be valid.

4. X transfers property to T on trust for 'such of my friends as T shall select'. The trust fails for uncertainty of objects. What is the outcome?
   1. T holds the property absolutely.
   2. T holds the property on resulting trust for X.
   3. T holds the property on constructive trust for X's next-of-kin.
   4. The property goes to the Crown (bona vacantia).

Introduction

Implied trusts arise by operation of law, rather than through the express intention of a settlor. One important category is the resulting trust. Resulting trusts themselves are typically divided into two types: presumed resulting trusts and automatic resulting trusts. This article focuses specifically on automatic resulting trusts. These trusts arise not from a presumed intention based on contribution or voluntary transfer, but because an attempt to create an express trust has failed in some way, or because the beneficial interest in property has not been fully disposed of. Equity intervenes to ensure the beneficial interest 'results' back to the person who provided the property initially (the settlor or their estate), preventing the property from being ownerless in equity or unjustly enriching the trustee.

Automatic resulting trusts vindicate the equitable maxim that equity abhors a vacuum. Where the settlor has died, the equitable interest ordinarily passes into their estate and will be taken by the residuary beneficiary under the will or under the intestacy rules. The trustee’s role under a resulting trust is usually limited: there are no active management duties beyond safeguarding the property and conveying title back to the person entitled in equity.

Key Term: Implied Trust
A trust that arises by operation of law rather than by the express intention of a settlor. Examples include resulting trusts and constructive trusts.

Key Term: Resulting Trust
A type of implied trust where the beneficial interest in property reverts (results back) to the settlor or their estate. This can be automatic (due to failure of an express trust or incomplete disposal) or presumed (due to voluntary transfer or purchase money contribution).

Key Term: Automatic Resulting Trust
A resulting trust that arises because an express trust is void or fails to exhaust the beneficial interest, so that the undisposed equitable interest returns to the settlor or their estate.

Key Term: Settlor
The person who creates an express trust by transferring property to trustees with instructions on how it should be held and for whom.

Key Term: Beneficial Interest
The interest held by the beneficiaries under a trust; the right to benefit from the trust property. Also known as the equitable interest.

Circumstances Giving Rise to Automatic Resulting Trusts

An automatic resulting trust arises independently of the settlor's intention (though it reflects the presumed intention that the settlor did not mean the trustee to benefit absolutely). The key scenarios involve situations where the beneficial ownership of property is not fully dealt with.

Failure of an Express Trust

An express trust may fail for several reasons after the property has been transferred to the intended trustee(s). If the trust fails, the trustee holds the legal title, but the beneficial interest cannot go to the intended beneficiaries. Since the trustee was not intended to benefit personally, the equitable interest automatically results back to the settlor (or their estate if the settlor is deceased).

Typical reasons for failure include the following.

• Lack of certainty. Failure can result from uncertainty of objects (beneficiaries) or subject matter (the property or the beneficiaries' shares). With uncertain objects or indefinable shares, trustees cannot determine who is entitled and in what amounts, so the attempted trust is void.
• Beneficiary principle. A private express trust must be for the benefit of ascertainable human beneficiaries. A non-charitable purpose trust without beneficiaries will fail unless it falls within a narrow, recognised exception (for example, Denley-type trusts which identify persons with standing to enforce, or the limited “honorary” trusts for specific animals or monuments, which must also satisfy the perpetuity rules). On failure, the property results to the settlor.
• Administrative unworkability and capriciousness. A discretionary trust may fail if the class is so wide that the trust cannot sensibly be administered (e.g. a class defined as the inhabitants of a very large area), or if it is capricious. Failure on either ground leaves no valid disposition of the beneficial interest.
• Perpetuity and inalienability. Private trusts must comply with the applicable perpetuity rules. A non-charitable purpose trust must not tie up capital indefinitely (rule against inalienability). A trust that directs only income be applied for a purpose, without provision to end within the perpetuity period or spend capital, is void. On voidness, a resulting trust arises.
• Failure of contingency or condition precedent. Where the trust confers a contingent interest (e.g. “to X if X attains 25”), and the contingency is not satisfied, the beneficial interest fails to vest and results to the settlor or their estate, absent a valid gift over.
• Non-compliance with express trust formalities. An inter vivos express trust of land must be manifested and proved in signed writing by, or on behalf of, the settlor. If the requirement is not met, the attempted trust of land is unenforceable. Equity will not allow trustees to keep the property; instead, they hold it on resulting trust for the settlor.
• Failure of secret or half-secret trusts. Where a supposed secret trust fails (for example, lack of communication or acceptance), the legatee takes subject to equity’s response: for a failed fully secret trust, the donee takes as legatee unless the court imposes a trust to prevent fraud, but where an attempted half-secret trust fails for lack of duly communicated terms, the trustees ordinarily hold on resulting trust for the estate.
• Illegality or public policy. A trust that is void because it requires an illegal act or is contrary to public policy will not be given effect. Equity will not let the trustee retain beneficially; a resulting trust arises for the settlor or their estate.

Key Term: Residuary Estate
The balance of a testator’s estate after payment of debts, tax and specific legacies. Property that results back on failure of a trust will ordinarily pass into the residuary estate.

Worked Example 1.1

Simon transfers £100,000 to trustees, Timothy and Titus, to hold on trust for 'such of my relatives as my trustees shall in their absolute discretion select'. Timothy and Titus are unable to determine with certainty who constitutes a 'relative' according to the trust terms. The express discretionary trust fails for conceptual uncertainty of objects.

What happens to the £100,000?

Answer:
Since the express trust has failed for uncertainty of objects, Timothy and Titus cannot distribute the funds to any potential beneficiaries. They were clearly not intended to benefit personally. Therefore, an automatic resulting trust arises. Timothy and Titus hold the £100,000 on resulting trust for Simon (the settlor).

Failure to Exhaust Beneficial Interest

An automatic resulting trust also arises where the terms of an express trust do not completely dispose of the entire beneficial interest in the trust property. This commonly occurs where an instrument fails to say who takes after a life tenant, where a power of appointment is not exercised and there is no gift in default, or where a specific purpose produces surplus funds and the instrument is silent as to their destination.

Key Term: Beneficial Interest
The interest held by the beneficiaries under a trust; the right to benefit from the trust property. Also known as the equitable interest.

This can happen in various situations:

• Surplus funds. A trust is created for a specific purpose (e.g. to fund a child's education or a particular event). After the purpose is fulfilled, surplus remains. If the trust instrument does not specify what happens to the surplus, it is held on automatic resulting trust for the settlor or their estate, unless the language shows an outright gift with the purpose expressed merely as a motive.
• Incomplete disposal. A trust might dispose of income but not capital, or provide only a life interest without specifying who takes the remainder. On the life tenant’s death, the capital results back to the settlor or their estate, absent any operative gift over.
• Unexercised power of appointment. Where trustees or a donee hold a power to appoint beneficial interests, and there is no express gift in default, any undisposed equitable interest results to the settlor if the power is not exercised within the permitted period.

Worked Example 1.2

Ahmed transfers £50,000 to Trustees to hold on trust to pay for his daughter, Zara's, wedding expenses. The wedding costs £40,000. There is £10,000 left in the fund. The trust document is silent on what should happen to any surplus.

Who is entitled to the remaining £10,000?

Answer:
The specific purpose of the trust (paying for the wedding) has been fulfilled, but the beneficial interest in the entire £50,000 was not exhausted. An automatic resulting trust arises in relation to the surplus £10,000. The Trustees hold this sum on resulting trust for Ahmed (the settlor).

Worked Example 1.3

Bella transfers a share portfolio to trustees “for A for life” and says nothing about who takes the capital after A’s death. A dies.

Who is entitled to the capital?

Answer:
There is no disposition of the remainder interest. On A’s death, the undisposed capital is held on automatic resulting trust for Bella (if living) or for Bella’s estate if she has died. The trustees’ duty is to transfer the capital accordingly.

Worked Example 1.4

Garrett settles £400,000 on discretionary trusts “for the inhabitants of Metropolis”. The population is 2.5 million. The trustees cannot practically survey or rationally select beneficiaries.

Does the trust take effect? If not, what happens to the fund?

Answer:
A discretionary trust for a class so wide that it is administratively unworkable is invalid. No effective disposition of the beneficial interest has been made, so the trustees hold the fund on automatic resulting trust for Garrett or, if he has died, for his estate.

Worked Example 1.5

In her will, Hilda leaves “£5,000 to my Trustees to hold on the trusts which I have communicated to them”, but in fact no communication was made before or at the date of the will. The clause is a half-secret trust that fails.

Who takes the £5,000?

Answer:
The attempted half-secret trust fails for lack of duly communicated terms. The trustees hold the £5,000 on resulting trust for those entitled to the residue of Hilda’s estate.

Worked Example 1.6

Ivan’s will leaves “£50,000 to the St Jude’s Animal Shelter”. The named shelter never existed and there is no broader indication of a general charitable intention.

What is the outcome?

Answer:
With initial failure and no general charitable intention, the gift is not applied cy-près. The sum results to Ivan’s estate to be taken by the residuary beneficiary or on intestacy. Where a general charitable intention can be found, a court may instead apply cy-près.

Key Term: Cy-près Doctrine
A doctrine allowing application of charitable gifts to a purpose as near as possible to the donor’s charitable intention where the original purpose has failed or cannot be carried out.

Key Term: Bona Vacantia
Ownerless property that passes to the Crown. In the context of failed private trusts, equity’s preference is to avoid bona vacantia by imposing a resulting trust for the settlor or their estate.

Worked Example 1.7

Lender D advances £200,000 to Company C on the express understanding it is to be used only to pay overdue wages. Before payment, C goes into liquidation with the money unspent.

Who owns the £200,000 in equity?

Answer:
The money was advanced on a specific purpose trust. On failure of the stated purpose, the equitable interest results to D. D can assert a proprietary claim via the resulting trust ahead of C’s unsecured creditors.

Worked Example 1.8

Nina orally declares that she holds Blackacre (registered land) on trust for her son. No signed writing evidencing the trust is ever produced.

What is the status of the trust, and who has the beneficial interest?

Answer:
A declaration of trust of land must be manifested and proved by signed writing. Without this, the attempted express trust is unenforceable. The equitable interest therefore results back to Nina; the trustee cannot retain it beneficially.

Worked Example 1.9

Oliver settles £300,000 “to be distributed as T may appoint within five years among my nephews and nieces.” The trust contains no gift in default. T fails to appoint within the period.

What happens to the £300,000?

Answer:
With no exercise of the power and no gift in default, the beneficial interest has not been disposed of. The fund is held on automatic resulting trust for Oliver (or his estate).

Worked Example 1.10

Priya transfers property to T on trust for a sole beneficiary, Ben, absolutely. Ben disclaims his interest, and the instrument contains no destination on disclaimer.

Who takes the beneficial interest?

Answer:
Ben’s disclaimer leaves a gap in the beneficial ownership. In the absence of a gift over or default clause, the equitable interest results to Priya (or her estate).

Distinguishing from Presumed Resulting Trusts

It is important not to confuse automatic resulting trusts with presumed resulting trusts.

• Automatic Resulting Trusts. Arise because the beneficial interest has not been effectively disposed of (failure of express trust, incomplete disposal). They do not depend on presuming an intention from the circumstances; rather, they respond to the absence of any valid disposition of beneficial title. Typical examples include failure of a contingent interest, uncertainty of objects, administrative unworkability, inalienability, or silent surplus after a specific purpose is fulfilled.
• Presumed Resulting Trusts. Arise where property is transferred voluntarily (without consideration) or where someone contributes to the purchase price of property held in another's name. Equity presumes an intention that the provider did not intend to make a gift, leading to a resulting trust. This presumption is rebuttable by evidence of contrary intention or by the counter-presumption of advancement (not yet abolished by statute).

Note also that express statutory provisions may affect the operation of presumed resulting trusts in the land context (for example, the effect of s 60(3) Law of Property Act 1925 on voluntary conveyances of land), but those nuances are not engaged by automatic resulting trusts, which arise to fill a failure in disposing of beneficial title.

Revision Tip

For SQE1, focus on identifying the trigger for the resulting trust. If it's a failed express trust or an unallocated beneficial interest, it's likely an automatic resulting trust. If it's triggered by a voluntary transfer or purchase money contribution without clear donative intent, it's likely a presumed resulting trust.

Formalities

Resulting trusts arise by operation of law. Consequently, they are exempt from the formality requirements that apply to the creation of express trusts of land (Law of Property Act 1925, s 53(2)). This means a resulting trust over land can arise without needing to be evidenced in writing signed by the settlor.

However, the non-compliance of an express trust of land with s 53(1)(b) (no signed writing evidencing the declaration) often precipitates an automatic resulting trust. In such a case the attempted express trust is unenforceable; the trustees cannot retain beneficially, so they hold on resulting trust for the settlor or their estate. The same outcome follows where an attempted express trust fails for uncertainty or other grounds: the equitable interest reverts as a matter of law.

Trustees of a resulting trust generally have no active management functions: their principal duty is to preserve the property and transfer it to the person entitled in equity. If the settlor is alive and absolutely entitled, they can call for transfer under the rule in Saunders v Vautier. If the settlor has died, the personal representatives stand in their place, with the property passing to the residuary beneficiary or on intestacy.

Key Point Checklist

This article has covered the following key knowledge points:

• Automatic resulting trusts arise by operation of law, not express intention, to avoid a vacuum in the beneficial ownership of property.
• They typically occur when an express trust fails (e.g. due to uncertainty, administrative unworkability, breach of the beneficiary principle, inalienability, failure of a contingency, or non-compliance with required formalities) or does not fully dispose of the beneficial interest (e.g. surplus funds after fulfilling a specific purpose, omission of a remainder, or failure to exercise a power without a gift in default).
• The effect is that the beneficial interest results back to the settlor or their estate; if the settlor is deceased, the property ordinarily falls into the residuary estate.
• Failed secret and half-secret trusts can trigger resulting trusts, particularly where a half-secret trust fails for want of communication or consistency with the will.
• In the charitable context, an initial failure without a general charitable intention leads to a resulting trust, whereas subsequent failure or initial failure with general charitable intention typically engages cy-près.
• Trustees under a resulting trust have minimal duties: to safeguard and convey the property to the person entitled in equity.
• Automatic resulting trusts are distinct from presumed resulting trusts and from constructive trusts; identify the correct category by the trigger event.
• Implied trusts (including resulting trusts) are exempt from s 53(1)(b) LPA 1925 writing requirements by virtue of s 53(2). An express trust of land that is not properly evidenced can itself give rise to a resulting trust.

Key Terms and Concepts

• Implied Trust
• Resulting Trust
• Automatic Resulting Trust
• Settlor
• Beneficial Interest
• Residuary Estate
• Cy-près Doctrine
• Bona Vacantia