Implied trusts and trusts of the family home - Automatic resulting trusts

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 the SQE1 assessment, you will need to identify situations where an automatic resulting trust arises and understand its consequences for the beneficial ownership of property. Your understanding will enable you to apply these principles to SQE1-style single best answer multiple-choice questions.

SQE1 Syllabus

For SQE1, you are required to understand the principles governing the creation and operation of implied trusts, specifically automatic resulting trusts. This includes recognising the scenarios where equity imposes such a trust. Your knowledge should cover:

• 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.
• Distinguishing automatic resulting trusts from presumed resulting trusts and constructive trusts.

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.

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).

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).

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.

Common reasons for the failure of an express trust include:

• Lack of Certainty: While the settlor may have intended a trust, it might fail for uncertainty of objects (beneficiaries) or subject matter (the property or the beneficiaries' shares). If the objects are uncertain, the trustees cannot know for whom they hold the property.
• Failure of Contingency: A trust might be contingent on an event that does not occur, or a beneficiary might fail to meet a condition precedent (e.g., attaining a certain age).
• Invalidity: The trust might be void for reasons such as offending the rule against perpetuities or being for an illegal purpose.
• Disclaimer by Beneficiary: If the sole beneficiary disclaims their interest and there is no provision for who takes the interest in default.

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.

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 university education). After the purpose is fulfilled, there are surplus funds remaining in the trust. 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.
• Incomplete Disposal: A trust might dispose of the income but not the capital, or only provide for a life interest without specifying who takes the remainder interest. For example, a trust 'for A for life' makes no provision for what happens after A's death. On A's death, the capital results back to the settlor or their estate.

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).

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 the settlor's intention based on the circumstances of the transfer.
• 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 a contrary intention (e.g., evidence of a gift) or by the counter-presumption of advancement.

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.

Key Point Checklist

This article has covered the following key knowledge points:

• Automatic resulting trusts arise by operation of law, not express intention.
• They typically occur when an express trust fails (e.g., due to uncertainty, failure of contingency) or does not fully dispose of the beneficial interest (e.g., surplus funds).
• The effect is that the beneficial interest results back to the settlor or their estate.
• They are distinct from presumed resulting trusts, which arise from voluntary transfers or purchase money contributions and are based on a rebuttable presumption of intention.
• Automatic resulting trusts are exempt from the formality requirements of s 53(1)(b) LPA 1925.

Key Terms and Concepts

• Implied Trust
• Resulting Trust
• Settlor
• Beneficial Interest