Learning Outcomes
This article outlines the fundamental concept of a trust in English law. It explains the key roles involved in a trust arrangement and distinguishes between legal and equitable ownership. For the SQE1 assessments, you need a clear understanding of what constitutes a trust, the main participants, and the basic reasons why trusts are created. Your understanding of these foundational principles will enable you to identify and apply relevant legal rules to SQE1-style single best answer MCQs.
In addition, you should be familiar with how express and implied trusts arise, the difference between fixed and discretionary trusts, and the core rules that govern the validity and enforceability of trusts. You should know that most private trusts must satisfy the three certainties (intention, subject matter, and objects), appreciate the basic formality requirements for trusts of land and for dispositions of equitable interests (including the effect of the Law of Property Act 1925), and understand how a trust is constituted and the consequences when it is not. Finally, you should recognise the principal fiduciary obligations of trustees and key beneficiary rights (including the limited circumstances in which beneficiaries can terminate a trust).
SQE1 Syllabus
For SQE1, you are required to understand the basic nature and purpose of trusts. A foundational knowledge of trusts is essential for several areas of legal practice covered in the SQE syllabus, particularly Wills and the Administration of Estates, Land Law, and Property Practice, with a focus on the following syllabus points:
- the core definition of a trust, including the separation of legal and equitable title
- the distinct roles and basic responsibilities of the settlor, trustee, and beneficiary
- the essential purpose and common uses of trusts in practice
- the distinction between different types of ownership interests in trust property
- the basic classifications of trusts (express vs implied; fixed vs discretionary) and what distinguishes them
- the three certainties required for most private trusts (intention, subject matter, objects)
- key formality rules: creation of trusts of land (LPA 1925 s53(1)(b)) and disposal of equitable interests (LPA 1925 s53(1)(c))
- constitution of trusts and the maxim that equity will not assist a volunteer
- beneficiaries’ ability to bring a trust to an end in some cases (the rule in Saunders v Vautier)
- trustee fiduciary duties at a high level, including the statutory duty of care (Trustee Act 2000)
- trust of land arising on co-ownership and its practical effects (TLATA 1996)
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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In a standard trust arrangement, who holds the legal title to the trust property?
- The Settlor
- The Beneficiary
- The Trustee
- The Court
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Which of the following best describes the interest held by a beneficiary in trust property?
- Legal interest
- Equitable interest
- Fiduciary interest
- Absolute interest
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Who is the person responsible for creating a trust?
- Trustee
- Beneficiary
- Settlor
- Executor
Introduction
A trust is a fundamental concept in English law, allowing property to be held by one person for the benefit of another. It is a versatile arrangement used in various contexts, from family wealth management to commercial transactions. Understanding the basic structure and purpose of trusts is essential for prospective solicitors preparing for the SQE1 assessments.
The core idea of a trust involves the separation of ownership. One party holds the formal legal title, while another holds the beneficial or equitable interest. This separation enables sophisticated arrangements for managing and distributing assets according to the wishes of the person who created the trust.
Key Term: Trust
An equitable obligation binding a person (the trustee) to deal with property (the trust property) for the benefit of other persons (the beneficiaries), any one of whom may enforce the obligation.
Trusts arise either because someone expressly intends to create one (an express trust), or by operation of law where equity imposes a trust to achieve a fair result (implied trusts). Within express trusts, many are drafted to give fixed entitlements to beneficiaries, while others confer discretion on trustees over who benefits and in what shares. These classifications affect how trusts are administered and enforced, and what certainty tests apply.
Key Term: Express Trust
A trust intentionally created by a settlor, either during lifetime (inter vivos) or by will, with specified trustees, beneficiaries and trust property.Key Term: Implied Trust
A trust arising by operation of law without an expressed intention, typically as a resulting or constructive trust to ensure an equitable outcome.Key Term: Fixed Trust
A trust where beneficiaries and their shares are determined in advance by the settlor; trustees have no discretion over the amounts or identities.Key Term: Discretionary Trust
A trust in which trustees are given discretion to decide who among a defined class of objects should benefit, and in what amounts and on what terms.
KEY PARTIES AND CONCEPTS
To understand trusts, you must be familiar with the key roles involved and the nature of the property interests created.
The Settlor
The settlor is the individual who creates the trust. They originally own the property absolutely and decide to transfer it into a trust structure, defining its terms and appointing the trustee(s). Once the trust is validly created and the property transferred (constituted), the settlor generally relinquishes control, unless they have also appointed themselves as a trustee or beneficiary.
A settlor may create an inter vivos trust (during life) by declaring themselves trustee of specific property or by transferring property to another as trustee. Alternatively, a settlor may create a testamentary trust in a validly executed will. The settlor must ensure the trust satisfies the three certainties and any applicable formalities. If the trust fails, equity may impose a resulting trust returning the beneficial interest to the settlor (or to the settlor’s estate in the case of a will).
Key Term: Settlor
The person who creates a trust by transferring property to a trustee for the benefit of a beneficiary.
The Trustee
The trustee is the person (or persons, or sometimes a company) who holds the legal title to the trust property. They are responsible for managing the trust assets according to the terms set out by the settlor and the general duties imposed by law. Trustees owe fiduciary duties to the beneficiaries, requiring them to act in the beneficiaries' best interests with loyalty and prudence.
Trustee duties include observing the trust terms, acting impartially between beneficiaries, acting personally and (unless varied) unanimously with co‑trustees, keeping accounts, and taking possession and control of trust property. Trustees must also exercise a duty of care under the Trustee Act 2000, taking proper advice when appropriate (for example, in making investment decisions) and reviewing investments periodically. Trustees must not profit from their position, enter into self‑dealing transactions, or allow conflicts between personal interests and trust duties without proper authority.
For trusts of land, practical constraints apply: while any number of trustees may be appointed under a trust instrument, the legal estate in land can be vested in no more than four trustees, and for overreaching purposes capital money must generally be paid to at least two trustees or a trust corporation.
Key Term: Trustee
The person who holds the legal title to trust property and is under an obligation to manage it for the benefit of the beneficiaries.Key Term: Duty of Care
The obligation on trustees (and personal representatives) to act with reasonable care and skill, taking account of any special knowledge or professional status (Trustee Act 2000, s1).
The Beneficiary
The beneficiary (sometimes referred to as the cestui que trust) is the person for whose benefit the trust property is held. They hold the equitable (or beneficial) interest in the trust property. This means they are entitled to the benefits derived from the property (e.g., income or use) and/or the property itself, as specified by the trust terms. Beneficiaries have the right to enforce the trust against the trustees if they fail to perform their duties.
Beneficiary rights differ depending on the trust type. In a fixed trust, beneficiaries have proprietary rights to their defined share and can compel distribution in accordance with the trust terms. In a discretionary trust, objects have no automatic right to payment, only the right to be considered by trustees in the proper exercise of discretion; once an appointment is made in their favour, they acquire a right in the appointed property. In specific circumstances, adult beneficiaries who are together absolutely entitled to the entire beneficial interest may require trustees to transfer the trust property to them, thereby terminating the trust.
Key Term: Beneficiary
The person who holds the equitable interest in the trust property and for whose benefit the trust is administered.Key Term: Saunders v Vautier
The principle that a sole adult beneficiary absolutely entitled (or a group of adult beneficiaries who together are absolutely entitled) may require trustees to transfer trust property to them, bringing the trust to an end.
Legal and Equitable Title
The defining characteristic of a trust is the split between legal and equitable ownership.
Legal title is the formal ownership recognised by common law. The trustee holds this title, allowing them to deal with the property (e.g., sell, lease, invest) as the legal owner. However, their powers are constrained by the terms of the trust and their duties to the beneficiaries.
Key Term: Legal Title
The formal ownership of property recognised at common law, held by the trustee in a trust arrangement.
Equitable title (or equitable interest / beneficial interest) is the ownership interest recognised by equity. The beneficiary holds this title, which represents the real value and enjoyment of the property. Equity ensures that the trustee uses their legal ownership for the benefit of the beneficiary.
Key Term: Equitable Interest
The beneficial interest in trust property held by the beneficiary, recognised and protected by equity.
The split is especially important in land and co‑ownership. Where land is conveyed to more than one person, a trust of land arises automatically under the Trusts of Land and Appointment of Trustees Act 1996. The co‑owners hold the legal estate (as joint tenants) for themselves and any other persons entitled to the beneficial interest. Beneficial ownership may be held as joint tenants (with survivorship) or as tenants in common in shares. The trust of land framework regulates trustees’ powers, beneficiaries’ rights to occupy, and the resolution of disputes about sale or occupation.
Key Term: Trust of Land
A statutory trust arising where land is held by trustees for beneficiaries (including co‑owners), governed principally by TLATA 1996.Key Term: Three Certainties
The requirements that most private trusts must exhibit: certainty of intention to create a trust, certainty of subject matter (trust property and shares), and certainty of objects (beneficiaries).Key Term: Perpetuity
A rule limiting how long future interests may remain contingent; for trusts created on or after 6 April 2010, the statutory perpetuity period is generally 125 years (Perpetuities and Accumulations Act 2009).
Worked Example 1.1
Aisha owns shares in a company. She wants her young nephew, Ben, to benefit from the dividends but feels he is too young to manage the shares himself. She transfers the shares to her trusted friend, Chloe, instructing Chloe in a formal document to hold the shares and pay the dividends to Ben until he turns 21, at which point Chloe should transfer the shares to Ben.
Identify the settlor, trustee, beneficiary, legal owner, and equitable owner.
Answer:
Settlor: Aisha (she created the trust) Trustee: Chloe (she holds the property for Ben) Beneficiary: Ben (he benefits from the trust) Legal owner: Chloe (holds the legal title to the shares) Equitable owner: Ben (holds the beneficial interest in the shares)
Worked Example 1.2
Brian and Paula purchase a flat together as their family home. The transfer and registration are in both their names. They contribute equally to the purchase price, and there is no declaration of trust setting out different shares.
What arises and how are legal and beneficial interests held?
Answer:
A statutory trust of land arises automatically. Brian and Paula hold the legal estate jointly as joint tenants. Beneficially, absent contrary evidence, they are presumed to share equally (tenants in common in equal shares or joint tenants in equity depending on intention). The trust of land framework applies to management, sale, and occupation decisions.
PURPOSE OF TRUSTS
Trusts are used for a wide range of purposes, reflecting their flexibility. Some common uses include:
- Managing property for minors: Providing for children or grandchildren who are too young to manage property themselves. The trustees manage the assets until the beneficiary reaches a specified age.
- Provision for vulnerable persons: Ensuring assets are managed for individuals who lack the mental capacity to handle their own affairs.
- Estate planning and succession: Allowing individuals (testators) to control how their assets are distributed after death through trusts created in their wills (will trusts). This can involve providing for a spouse for their lifetime, with the assets then passing to children (a life interest trust).
- Asset protection: Structuring ownership to protect assets from potential future claims or creditors (though trusts cannot typically be used to deliberately defraud existing creditors).
- Tax planning: Utilising trusts to manage and potentially mitigate inheritance tax, capital gains tax, or income tax liabilities, although complex anti-avoidance rules apply.
- Commercial purposes: Trusts are used in pension schemes, employee benefit schemes, investment funds (unit trusts), and certain financing arrangements.
- Charitable purposes: Holding property for charitable objectives rather than specific individuals.
Further illustrations:
- Family home and co‑ownership: Couples, families, or partners often hold property on a trust of land. The trust structure facilitates sale, occupation and dispute resolution (e.g., applications under TLATA 1996 for directions to sell).
- Education and maintenance trusts: Trusts can provide income for maintenance or education until a beneficiary attains a specified age, using statutory powers of maintenance and advancement where applicable.
- Discretionary family trusts: Where future needs are uncertain, settlors may prefer discretionary trusts, enabling trustees to respond to changing circumstances and allocate resources among a class of potential beneficiaries.
- Charitable trusts: If a purpose is charitable and for the public benefit (as recognised by the Charities Act 2011), a trust enjoys distinctive advantages such as potential tax reliefs, immunity from the beneficiary principle, and exemption from the rule against inalienability.
Key Term: Discretionary Trust
A trust in which trustees decide who among a defined class benefits and in what shares, guided by the settlor’s letter of wishes and the trust instrument.
Revision Tip
While the reasons for creating a trust are varied, the core mechanism is always the separation of legal and equitable ownership, managed by a trustee under specific duties for the benefit of a beneficiary. Focus on understanding this fundamental structure.
Key Point Checklist
This article has covered the following key knowledge points:
- A trust involves a trustee holding property for the benefit of a beneficiary.
- The settlor creates the trust.
- The trustee holds legal title and manages the property subject to fiduciary duties and a statutory duty of care.
- The beneficiary holds equitable title and benefits from the property; rights vary between fixed and discretionary trusts.
- Trusts separate legal and equitable ownership.
- A trust of land arises automatically on co‑ownership; legal estate is held jointly, while beneficial interests may be joint or in shares.
- Most private trusts must satisfy the three certainties.
- Basic formalities: trusts of land must be evidenced in signed writing; dispositions of subsisting equitable interests require signed writing.
- Constitution matters: equity will not perfect an imperfect trust for volunteers; property must vest in trustees.
- Beneficiaries who are together absolutely entitled may be able to terminate the trust (the rule in Saunders v Vautier).
- Key purposes include managing assets for minors/vulnerable people, estate planning, asset protection, tax planning, commercial uses, and charitable purposes.
Key Terms and Concepts
- Trust
- Settlor
- Trustee
- Beneficiary
- Legal Title
- Equitable Interest
- Express Trust
- Implied Trust
- Fixed Trust
- Discretionary Trust
- Trust of Land
- Three Certainties
- Perpetuity
- Duty of Care
- Saunders v Vautier