Introduction to trusts - Roles of settlor, trustee, and bene...

Learning Outcomes

This article outlines the fundamental roles within a trust structure: the settlor, the trustee, and the beneficiary. It details their respective functions, legal duties, and rights associated with the creation and administration of express trusts. For the SQE1 assessment, you need to understand the distinct legal positions and responsibilities of each party, including the concept of fiduciary duty owed by trustees and the nature of beneficial interests. In addition, you should be confident with core formalities and principles that underpin trust creation and operation, including:

• How a settlor demonstrates certainty of intention, subject matter, and objects (the three certainties), and complies with required formalities (e.g. s.53(1)(b) Law of Property Act 1925 for trusts of land).
• How trustees exercise duties and powers, the standard of care (Trustee Act 2000), the investment framework, appointment/removal mechanisms (Trustee Act 1925, TLATA 1996), and fiduciary restrictions such as the self‑dealing and no‑profit rules.
• How beneficiaries’ equitable interests vary under fixed, discretionary, life and remainder arrangements, their enforcement rights, information rights, and when they can collectively terminate a trust under the rule in Saunders v Vautier.
• How key protective and remedial mechanisms interact with roles (e.g. exoneration clauses, s.61 Trustee Act 1925 relief, and limitations/defences to breach of trust).

Understanding these core principles is essential for applying trust law concepts to SQE1-style multiple-choice questions concerning the validity and operation of trusts.

SQE1 Syllabus

For SQE1, you are required to understand the distinct roles and responsibilities fundamental to a trust relationship, covering the practical implications of these roles in the formation, administration, and potential termination of trusts, with a focus on the following syllabus points:

• The function of the settlor in establishing a trust, including the three certainties and formalities for trusts of land.
• The legal status, duties (especially fiduciary duties), and powers of trustees, including the standard investment criteria and duty to take proper advice.
• The nature of the beneficiary's equitable interest, the spectrum of beneficial entitlements (fixed/discretionary, vested/contingent), and corresponding enforcement and information rights.
• The interaction between these roles within the framework of an express trust, including constitution of trusts, appointment/removal of trustees, and the rule in Saunders v Vautier.

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. Who holds the legal title to property in a trust?
   1. The settlor
   2. The beneficiary
   3. The trustee
   4. The protector
2. Which of the following is a primary fiduciary duty owed by a trustee?
   1. Duty to maximise personal profit from the trust
   2. Duty to favour one beneficiary over others
   3. Duty to act in the best interests of the beneficiaries
   4. Duty to follow the settlor's wishes blindly after creation
3. What type of interest does a beneficiary hold in trust property?
   1. Legal interest
   2. Equitable interest
   3. Fiduciary interest
   4. Contingent interest only
4. Under the rule in Saunders v Vautier, who can potentially terminate a trust early?
   1. The settlor alone
   2. The trustees alone
   3. A single beneficiary with a life interest
   4. All beneficiaries acting together, provided they are sui juris and absolutely entitled

Introduction

A trust is a fundamental concept in English law, creating a relationship where property is managed by one party for the benefit of another. This arrangement involves distinct roles with specific legal implications. Understanding the functions of the settlor (who creates the trust), the trustee (who manages the property), and the beneficiary (who benefits from the property) is essential for applying trust law principles relevant to the SQE1 examination. This article provides an overview of these core roles and their interactions.

Key Term: Settlor
The person who creates a trust by transferring property to a trustee for the benefit of beneficiaries.

Key Term: Trustee
The person or entity holding legal title to trust property and managing it for the beneficiaries according to the trust terms and fiduciary duties.

Key Term: Beneficiary
The person or entity entitled to benefit from the property held in trust.

Key Term: Equitable Interest
The beneficial interest in property held on trust, recognised and protected by equity. It represents the real value and enjoyment of the property.

Key Term: Fiduciary Duty
A legal obligation of utmost loyalty, trust, and good faith owed by one party (the fiduciary, e.g., a trustee) to another (e.g., a beneficiary), requiring the fiduciary to act solely in the other's best interests.

The Settlor

The settlor is the individual (or entity) who creates the trust. They initiate the process by transferring property to the trustee(s) and defining the terms under which the trust will operate.

The settlor's primary function is to establish the trust framework. This involves satisfying the 'three certainties' for an express trust:

• Certainty of intention: A clear intention to create a trust must be demonstrated through words or conduct. Ambiguous or precatory language (expressing a hope or wish) is generally insufficient. Courts look to substance over form, and can infer intention from behaviour and context where appropriate (e.g. separate accounts labelled as trust funds).
• Certainty of subject matter: The trust property (the trust fund or capital) must be clearly identifiable. Tangible assets often require segregation (e.g. specific bottles from a wine stock), whereas identical intangible assets (e.g. shares of the same class) can be certain without segregation.
• Certainty of objects: Beneficiaries must be clearly identified or ascertainable. The required test depends on whether the trust is fixed (complete list test) or discretionary (given individual ascertainability test).

Key Term: Sham
An arrangement (e.g. a purported trust) intended to mislead third parties and not truly reflecting the parties’ genuine intentions; a sham trust is void.

Once the trust is properly constituted (i.e., the property is vested in the trustees), the settlor typically steps back. Their direct involvement usually ceases unless they have reserved specific powers in the trust instrument (the document outlining the trust terms). These reserved powers might include:

• A power to appoint, remove, or add trustees (sometimes via a named appointor or through statutory routes).
• A revocation power (if expressly reserved; most private trusts are irrevocable unless stated).
• Directions regarding administrative choices (e.g. investment guidance) or a non-binding letter of wishes to guide trustees in discretionary distributions.

It is common in discretionary trusts for the settlor to provide a confidential, non-binding letter of wishes to assist trustees in exercising distributive discretions. Trustees must independently assess and exercise their discretion; a letter of wishes is relevant but not determinative.

Where the trust concerns land, additional formality applies. A declaration of trust “respecting any land or any interest therein” must be manifested and proved by signed writing by a person able to declare such trust (s.53(1)(b) Law of Property Act 1925). An oral declaration followed by signed written confirmation suffices; the later writing evidences the earlier oral creation.

Worked Example 1.1

Scenario: A business owner signs a declaration of trust stating he holds his home on trust for his wife and children to shield the property from creditors, but he continues to treat the home as his own and only produces the declaration when creditors threaten enforcement.

Question: Is the trust valid?

Answer:
Likely not. If the court finds the declaration was never intended to be genuine (e.g. designed purely to defeat creditors while the owner retained full control), it may conclude the arrangement was a sham and treat it as void. Courts examine substance and conduct; if documents are created to mislead, the trust fails.

Worked Example 1.2

Scenario: Sarah, owner of Blackacre, tells her son orally that she will hold Blackacre on trust for him. A week later she sends a signed letter to her solicitor confirming the trust terms.

Question: Does this satisfy the formalities for a trust of land?

Answer:
Yes. The oral declaration is capable of taking effect, and the subsequent signed writing manifests and proves the trust as required by s.53(1)(b) LPA 1925. The letter evidences the earlier oral declaration.

Constitution of the trust and volunteers

Creating a valid trust requires both a valid declaration and constitution. If the settlor appoints themselves as trustee, the trust is constituted upon declaration because legal title already resides with them. If others are appointed, legal title must be transferred to the trustees using the correct method for the asset type (e.g. stock transfer forms and registration for company shares, deed and registration for registered land, delivery or deed for chattels). An incompletely constituted trust is generally not enforceable by volunteer beneficiaries (equity will not assist a volunteer). Limited exceptions exist (e.g. the every‑effort rule where the settlor has done everything necessary and a third party step remains), but these depend on facts and do not affect the basic roles.

The Trustee

The trustee (or trustees) holds the legal title to the trust property. They are entrusted with managing these assets according to the terms set out by the settlor and the general principles of trust law, always acting in the best interests of the beneficiaries.

Trusteeship carries significant responsibilities and duties, most notably fiduciary duties. In addition to the core fiduciary obligations, trustees are subject to statutory and equitable standards of care and must exercise powers properly.

Key Term: Self-dealing rule
A fiduciary rule that prohibits a trustee from purchasing trust property; the transaction is voidable at the instance of beneficiaries regardless of fairness.

Key Term: Fair-dealing rule
A fiduciary rule applicable when a trustee purchases a beneficiary’s equitable interest; the transaction stands only if full disclosure is made and the terms are fair.

Key Term: No-profit rule
A fiduciary must not profit from their position unless authorised; unauthorised profits are held on constructive trust for beneficiaries.

Core duties

• Duty of care: Trustees must act with the care and skill that is reasonable in the circumstances (Trustee Act 2000, s.1), taking account of any special knowledge/experience or professional status.
• Duty of loyalty: Trustees must avoid conflicts and must not make unauthorised profits (including restrictions on self-dealing and on using trust opportunities personally). Directors’ fees obtained by virtue of trust shareholdings are normally held for the trust unless authorised.
• Duty to act personally and unanimously: Co-trustees must act together unless the trust instrument provides otherwise. Trustees cannot abdicate decision-making to others (though certain functions can be delegated under statute with safeguards).
• Duty to invest: Trustees exercising the general investment power (TA 2000, s.3) must consider the standard investment criteria (suitability and diversification) and obtain proper advice unless inappropriate (s.4–s.5). Regular reviews are required.
• Duty of impartiality: Trustees must act fairly between beneficiaries with differing interests (e.g. life tenant vs remainderman).
• Duty to keep accounts and provide certain information: Trustees must keep proper accounts and provide beneficiaries with core trust documents (e.g. trust instrument, accounts, schedule of investments). Trustees are not generally required to disclose minutes of deliberations or confidential letters of wishes.

Trustees also possess powers, granted either by the trust instrument or statute (e.g. Trustee Act 1925 and Trustee Act 2000), enabling them to administer the trust effectively. These often include powers of investment, sale, maintenance, and advancement.

Key Term: Maintenance
The use of trust income for the maintenance, education, or benefit of a minor beneficiary (traditionally under s.31 Trustee Act 1925, as amended).

Key Term: Advancement
The application of trust capital for the advancement or benefit of a beneficiary with a vested or presumptive entitlement (traditionally under s.32 Trustee Act 1925, as amended).

Appointment, retirement and removal

Trustee identity can change as trusts endure. Common routes include:

• Appointment and replacement by deed under s.36 Trustee Act 1925 (e.g. where a trustee dies, is unfit, wishes to retire, or is incapable).
• Retirement by deed under s.39 Trustee Act 1925, provided at least two trustees or a trust corporation remain and continuing trustees consent.
• Court appointment/replacement under s.41 Trustee Act 1925 when expedient and otherwise impracticable without court assistance.
• Beneficiary‑driven replacement or direction to retire under s.19 Trusts of Land and Appointment of Trustees Act 1996, if all beneficiaries are of full age and capacity and absolutely entitled jointly.

Liability and protective mechanisms

Trustees can be held personally liable for losses resulting from a breach of trust. Liability between multiple trustees is joint and several. Key protections include:

• Express exoneration/exemption clauses (cannot exclude liability for fraud or dishonesty; e.g. Armitage v Nurse).
• Beneficiary consent or release where fully informed and sui juris (effective against consenting beneficiaries).
• Judicial relief under s.61 Trustee Act 1925 where trustees acted honestly and reasonably and ought fairly to be excused.
• Limitation periods: generally six years from accrual for personal claims, subject to exceptions (e.g. no limitation for fraud or recovery of trust property; time runs for remaindermen when their interest falls into possession).

Worked Example 1.3

Scenario: A trustee, Tom, invests a significant portion of the trust fund in a highly speculative venture recommended by his friend, without seeking independent financial advice. The investment fails, causing a substantial loss to the trust. The trust document is silent on investment restrictions beyond statutory duties.

Question: Is Tom likely to be in breach of his duties?

Answer:
Yes, Tom is likely in breach of his duty of care. Trustees must invest prudently and are generally required to seek proper advice (Trustee Act 2000, s. 5). Investing heavily in a speculative venture without advice, especially if it contradicts the need for diversification or suitability (Trustee Act 2000, s. 4), falls below the required standard of care. He may be personally liable to compensate the trust for the loss.

Worked Example 1.4

Scenario: A trustee purchases a painting from the trust’s art portfolio in an open auction at a fair price.

Question: Is the purchase valid?

Answer:
The transaction is caught by the self‑dealing rule and is voidable at the instance of any interested beneficiary, regardless of fairness. Unless authorised by the trust instrument, by unanimous informed beneficiary consent (all sui juris), or by the court, trustees must not purchase trust property themselves.

Worked Example 1.5

Scenario: A trustee buys a beneficiary’s life interest for a lump sum after full disclosure of valuation and tax advice.

Question: Is the transaction valid?

Answer:
This engages the fair‑dealing rule. The purchase can stand if the trustee shows full disclosure, no exploitation of position, and fairness of price and terms. If those elements are missing, the beneficiary can set the transaction aside.

Worked Example 1.6

Scenario: All adult beneficiaries who are absolutely entitled jointly to the trust fund have lost confidence in a trustee and serve a written direction under TLATA 1996 s.19 requiring that trustee to retire and appoint a replacement.

Question: Must the trustee retire?

Answer:
If the statutory conditions are met (all beneficiaries of full age and capacity; taken together absolutely entitled; reasonable arrangements to protect the outgoing trustee’s rights; at least two trustees or a trust corporation remain; appropriate appointment/consent documentation), the trustee must retire by deed and the replacement may be appointed.

The Beneficiary

The beneficiaries are the individuals or entities for whose benefit the trust property is held and managed. They hold the equitable interest in the trust property.

The nature of a beneficiary's interest depends on the trust terms:

• Fixed interest: The beneficiary’s entitlement is determined by the settlor (e.g., “£10,000 to A” or “income to B for life, remainder to C”). Fixed trusts give proprietary rights enforceable in equity according to set shares or terms.
• Discretionary interest: Beneficiaries are part of a class, and the trustees have discretion over who receives benefits and how much. Objects of a discretionary trust have a right to be considered and for trustees to exercise their discretion properly, but no automatic right to payment.
• Vested interest: An unconditional interest that may be vested in possession (a present right to present enjoyment) or vested in interest (a present right to future enjoyment, e.g. remainder).
• Contingent interest: An interest conditional upon a future event (e.g., “to D if she attains the age of 25”). Until the contingency is met, there is no entitlement.

Beneficiaries possess key rights to ensure the trust is managed correctly:

• Right to enforce the trust: Beneficiaries can compel trustees to perform duties or seek compensation for breaches of trust. Remedies include personal claims and, where available, proprietary tracing remedies to recover property or its substitutes.
• Right to information: Beneficiaries are entitled to see core trust documents (trust instrument, accounts, schedules of investments). Trustees are generally not obliged to disclose deliberations or confidential letters of wishes, though the court can order disclosure if necessary for proper administration.
• Right to apply for equitable remedies: For example, injunctions restraining breaches or an account of profits for unauthorised profits.
• Right to income/capital under statutory powers: Minors may benefit from income under maintenance powers; trustees may apply capital under advancement powers (subject to conditions and any express variation in the trust instrument).

Key Term: Vested in possession
A present right to present enjoyment of trust property (e.g. a life tenant’s right to income).

Key Term: Vested in interest
A present right to future enjoyment (e.g. a remainderman’s right to capital after the life tenant’s death).

Key Term: Contingent interest
An interest dependent on a condition; no entitlement arises unless and until the condition is satisfied.

Collective termination of trusts (Saunders v Vautier)

Under the rule in Saunders v Vautier, a sole adult beneficiary who is absolutely entitled to the entire beneficial interest can require the trustees to transfer legal title and bring the trust to an end. The principle extends to groups: if all beneficiaries are adults, under no disability, in agreement, and together absolutely entitled to the whole beneficial interest, they can collectively terminate the trust. This can apply to discretionary trusts where the entire beneficial fund must ultimately be distributed among a class and all members of that class are identified, adult, and together comprise absolute entitlement.

Worked Example 1.7

Scenario: A trust provides income to Ben for life, with the capital to be distributed to Chloe upon Ben's death. Chloe is 25 and has full mental capacity. Ben is 60. Both Ben and Chloe want the trust to end now so they can split the capital between them.

Question: Can Ben and Chloe compel the trustees to terminate the trust under the rule in Saunders v Vautier?

Answer:
Yes, potentially. Ben (life tenant) and Chloe (remainderman) together hold the entire beneficial interest. Provided they are both adults (sui juris) and have mental capacity, and they both agree, they can collectively direct the trustees to transfer the trust property to them (or their nominees), thereby terminating the trust. The trustees would be obliged to comply.

Dispositions of equitable interests

Beneficiaries can transfer (dispose of) their equitable interests in various ways. A disposition of a subsisting equitable interest must generally be in writing signed by the person disposing (s.53(1)(c) LPA 1925), or by duly authorised agent in writing, or by will. There are important distinctions:

• A direction by a beneficiary to trustees to hold for another is a disposition and must be in signed writing.
• A transfer by a bare trustee of the legal title to a new absolute owner (with equitable interest moving automatically) is not a separate disposition by the beneficiary.
• A genuine sub‑trust, where the beneficiary declares themselves trustee and remains active, may not engage s.53(1)(c) because the original equitable interest is retained and held on sub‑trust for the sub‑beneficiary.
• A disclaimer by a beneficiary is not a disposition and need not be in writing; it operates by avoidance, not transfer.

Trustees must record any change in beneficial interests appropriately and ensure they continue to administer the trust in line with the updated beneficial entitlements.

Worked Example 1.8

Scenario: A beneficiary orally instructs trustees to start paying income to her friend from next quarter.

Question: Is this effective?

Answer:
No. A direction moving a subsisting equitable interest to another is a disposition that must be in signed writing (s.53(1)(c) LPA 1925). Without signed written instruction, the disposition is void and the equitable interest remains with the original beneficiary.

Summary

The structure of a trust relies on the distinct roles of the settlor, trustee, and beneficiary.

Understanding these roles and their associated legal principles is fundamental to comprehending trust law for the SQE1 assessment.

Key Point Checklist

This article has covered the following key knowledge points:

• A trust separates legal title (held by the trustee) from equitable interest (held by the beneficiary).
• The settlor creates the trust and defines its terms; a valid trust must satisfy the three certainties and any required formalities (e.g. s.53(1)(b) for trusts of land).
• Trustees manage the trust assets subject to fiduciary duties and the statutory duty of care; they must invest prudently, take advice, and act impartially.
• Fiduciary restrictions include the no‑profit rule, self‑dealing rule, and fair‑dealing requirements; unauthorised profits are held for the trust.
• Trustees can be appointed, retire or be removed under statute or trust instrument; beneficiaries with absolute entitlement can direct retirements under TLATA 1996 s.19.
• Beneficiaries hold equitable interests, can enforce the trust, access core information, and in appropriate circumstances terminate under Saunders v Vautier.
• Dispositions of subsisting equitable interests generally require signed writing (s.53(1)(c) LPA 1925); disclaimers are not dispositions.
• Trustee liability for breach is personal and can be joint and several; protections include exoneration clauses (not excluding fraud), s.61 relief, and beneficiary consent; limitation rules apply.

Key Terms and Concepts

• Settlor
• Trustee
• Beneficiary
• Equitable Interest
• Fiduciary Duty
• Sham
• Self-dealing rule
• Fair-dealing rule
• No-profit rule
• Maintenance
• Advancement
• Vested in possession
• Vested in interest
• Contingent interest