## Question 1 A widowed father decides to support his daughter in starting her own business. He transfers a significant amount of money directly into the daughter's business account, which is used to purchase essential equipment and a small office space. The business is solely registered in the daughter's name. After the business becomes successful, the father requests the return of his investment, arguing it was always intended to be a loan. The daughter, however, claims the money was a gift to help start the business, and she owes nothing back to her father. Given the circumstances and without any written agreement, which presumption is most likely to be the court's starting point in determining the father's interest in the business's assets? - A. The court will presume a resulting trust in favour of the father based on his financial contribution. - B. The court will assume that the daughter holds the business assets on a constructive trust for the father, acknowledging an implied agreement. - C. The court will presume an express trust has been formed due to the nature of the transaction between the father and daughter. - D. The court will apply the presumption of advancement, favouring the daughter as the absolute owner of the business assets. - E. The court will consider this a case of an equitable charge to ensure the father's investment is secured.

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The correct answer is D. Under UK law, when a parent transfers money or assets to a child, there is a legal presumption that this transfer is a gift. This is known as the presumption of advancement. In the absence of evidence to the contrary, the courts will start with the assumption that the father intended to gift the money to the daughter to support her in starting her business, rather than loaning it to her. The presumption of advancement was discussed in Pettitt v Pettitt [1970] AC 777. In this case, Lord Diplock noted that the presumption of advancement applies in cases where a husband transfers property to his wife or a parent transfers property to their child, implying that the transfer is intended to be a gift unless proven otherwise. The case of Re Roberts [1946] Ch 1 further illustrates the application of the presumption of advancement in the context of financial transfers from a father to his child. The court held that where a father transfers money to his child, the presumption is that it is a gift unless there is clear evidence to the contrary. To rebut this presumption, the father would need to provide clear evidence that the transfer was intended as a loan and not a gift. This could include any written agreements, communications indicating the nature of the transfer, or other supporting evidence. Without such evidence, the court is likely to uphold the presumption of advancement, ruling in favour of the daughter as the rightful owner of the business assets. Option A is incorrect because a resulting trust is typically presumed when a person provides funds to purchase property but the property is placed in another person's name. However, in cases involving transfers from a parent to a child, the presumption of advancement (a gift) generally overrides the presumption of a resulting trust unless there is clear evidence to the contrary. The starting point in such familial relationships is that the transfer is a gift, not a loan or an investment expecting a return. Option B is incorrect as a constructive trust arises where it would be unconscionable for the holder of the legal title to retain a beneficial interest in the property. This typically requires some form of fraud, wrongdoing, or a breach of an understanding between the parties. Without explicit evidence of such an agreement or understanding that would impose a constructive trust, this option is unlikely. The presumption of advancement would prevail unless the father could demonstrate that the daughter's retention of the assets is unconscionable. Option C is incorrect because an express trust requires a clear intention to create a trust, which must generally be evidenced in writing. There must be certainty of intention, subject matter, and objects. Given that there is no written agreement or explicit indication that the father and daughter intended to create a trust, this option is not applicable. The presumption of advancement would typically be the court's starting point in the absence of evidence of an express trust. Option E is incorrect because an equitable charge would require a clear agreement or intention that the property serves as security for a loan or investment. There is no indication in the scenario that the father and daughter had any such agreement. Additionally, equitable charges usually require formal documentation. The presumption of advancement applies because the transfer appears to be a gift from a parent to a child unless there is evidence showing it was meant to be a loan or investment.

## Question 2 A trustee oversees a trust fund that includes both rental properties and shares in technology startups for a beneficiary who is an undergraduate student with ambitions of starting their own tech company. The trust deed allows for broad discretion in the support of the beneficiary's professional development and general well-being, but it doesn't specify guidelines for balancing immediate financial support needs against long-term investment growth. Given the trust deed's provision and considering the best interests of the beneficiary's future, what is the most suitable course of action for the trustee? - A. Allocate all trust income towards the beneficiary's current educational expenses and personal maintenance. - B. Invest a significant portion of the trust income into further technology startups, aiming for high long-term returns. - C. Distribute income evenly between supporting the beneficiary's current needs and reinvesting for future gains. - D. Prioritise investments in real estate over tech startups as a safer long-term growth strategy for the trust. - E. Seek guidance from a financial advisor on the exact allocation of funds without considering the beneficiary's immediate needs.

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The correct answer is C. Distributing income evenly between supporting the beneficiary's current needs and reinvesting for future gains aligns with the trustee’s duty to balance immediate financial support with potential long-term investment growth, as required by the Trustee Act 2000. Specifically, Section 4 of the Act requires trustees to consider the suitability and need for diversification of investments. Section 5 mandates that trustees obtain and consider proper advice. Additionally, Section 1 imposes a duty of care on trustees to exercise reasonable care and skill, which involves considering both immediate support and future investment needs of the beneficiary. Option A is incorrect because allocating all trust income toward current expenses might fail to preserve or grow the trust fund for the beneficiary's future needs, possibly breaching the trustee's duty to invest prudently. Option B is incorrect as investing a significant portion into high-risk sectors like technology startups without balancing with the beneficiary's current needs could disregard the trustee's duty to diversify investments and consider the beneficiary's total welfare. Option D is incorrect because it suggests prioritizing one investment type over another, potentially ignoring the need to diversify and the specific situation and interests of the beneficiary, which includes an interest in technology and professional development. Option E is incorrect because it removes the discretionary power and duty of the trustee to consider and act upon the beneficiary's immediate and future needs directly, potentially undermining the purpose of the trust deed's broad discretion clause.

## Question 3 Two professional architects collaboratively invested in renovating a derelict warehouse into a modern office space. One architect paid 60% and the other paid 40% of the total renovation costs. The property, however, was purchased and registered in the name of the architect who contributed 60%, without a formal agreement specifying their beneficial interests in the property. After the renovation, the property's value increased significantly. The architect who contributed 40% now wishes to ensure the investment is recognized. In the absence of an express declaration, which statement best describes the likely legal position of the architect who contributed 40%? - A. The contributing architect cannot claim any share of the property because the legal title is in the other architect's name. - B. The contributing architect is entitled to a 40% share of the property, reflecting the proportionate contribution to the renovation costs. - C. The two architects are presumed to share the property equally because they are business partners. - D. The decision on the contributing architect's share will be made based on what the court considers to be equitable, without regard for specific financial contribution. - E. The contributing architect is only entitled to recover renovation expenses with interest but cannot claim a share in the property.

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The correct answer is B. The contributing architect would be entitled to a share of the property, likely reflecting the 40% financial contribution towards the renovation costs. This is based on the principle of resulting trusts, where the court implies a trust to reflect the parties' contributions towards the property, despite the absence of formal legal ownership. This is grounded in the principle established in cases such as Stack v Dowden [2007] UKHL 17 and Jones v Kernott [2011] UKSC 53, where the courts held that financial contributions towards the purchase price or renovation costs can infer a beneficial interest in the property, even if the legal title is held in one party's name. In this scenario, since the architect contributed 40% of the renovation costs, the court would likely recognize the financial contribution as giving rise to a beneficial interest in the property. Therefore, the contributing architect would be entitled to a 40% share, reflecting the proportionate contribution to the renovation costs. Option A is incorrect because the significant financial contribution creates the presumption of a resulting trust, entitling the contributing architect to a beneficial interest in the property. Option C is incorrect as the presumption of equal sharing does not apply automatically to business partners or co-investors without express agreements to that effect; contributions are usually the basis for determining shares in implied trust situations. Option D is incorrect because the court utilises the concept of implied or resulting trusts to determine shares based on actual contributions, rather than arbitrary assessments of fairness. Option E is incorrect since entitlement under a resulting trust is not limited to merely recovering monetary contribution plus interest but extends to a beneficial interest proportional to the investment.

## Question 4 A trustee manages a trust established to support the education and general welfare of a deceased friend's children. Without consulting co-trustees or informing the beneficiaries, the trustee decides to divest from a stable blue-chip investment and reallocates the funds into a trendy new tech company, believing it will yield higher returns. Unfortunately, the tech company fails within months, significantly depleting the trust's assets. What course of action is most appropriate for the beneficiaries to recover the lost assets from the trustee's personal estate? - A. By holding the trustee personally liable for breach of trust and applying to court for compensation. - B. By reporting the trustee to the relevant regulatory authority for investigation and possible sanctions. - C. By instituting a proprietary claim to trace and reclaim the misallocated funds from the trustee's personal estate. - D. Through soliciting the trustee's resignation and appointment of a new trustee to manage the trust assets. - E. By negotiating a settlement with the trustee for a reduced amount of the lost funds.

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The correct answer is A. By holding the trustee personally liable for breach of trust and applying to court for compensation. This approach involves taking legal action to hold the trustee personally liable for the financial losses suffered by the trust due to the breach of fiduciary duties. Trustees are expected to act prudently and in the best interests of the beneficiaries, and failing to do so constitutes a breach of trust.Such duties are found in Trustee Act 2000, specifically, section 1 - wich imposes a duty of care on trustees to exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee has or holds himself out as having. Additionally, section 3 - provides trustees with the power to make any kind of investment that they could make if they were absolutely entitled to the assets of the trust.Further section 61 allows the court to relieve a trustee from personal liability for a breach of trust if it appears that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach and for omitting to obtain the direction of the court. Relevant case law include: Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515: This case established that trustees can be held personally liable for losses resulting from imprudent investments. Further, Nestle v National Westminster Bank plc [1993] 1 WLR 1260: Emphasizes that trustees must act with the same care and prudence as an ordinary prudent person managing their own affairs. Therefore the best course of action for the beneficiaries to recover the lost assets from the trustee's personal estate is to hold the trustee personally liable for breach of trust and apply to court for compensation, as this directly addresses the personal liability and the financial restitution required to make the trust whole. Option B is incorrect because while reporting the trustee may result in regulatory actions or sanctions, it does not directly address the issue of recovering the lost assets for the beneficiaries. Option C incorrect and is not applicable here as the funds were lost in a failed investment and cannot be traced to specific assets within the trustee's estate. Option D is incorrect because soliciting the trustee's resignation and the appointment of a new trustee addresses future management but does not provide a remedy for recovering the lost assets. Option E is incorrect because negotiating a settlement for a reduced amount might not guarantee full recovery of the lost assets and lacks the enforceability and formal recognition of a court order.

## Question 5 An aunt decides to financially assist her nephew in purchasing his first home by providing the majority of the funds required for the purchase. The legal title is registered solely in the nephew's name, without any express declaration of trust being made at the time. Following several years, a disagreement arises between the aunt and nephew regarding the ownership of the property, with the aunt claiming she only intended to lend the money, expecting it to be repaid, while the nephew argues that the property was a gift. Given the circumstances and in the absence of further evidence, which legal principle most likely determines the nature of the property's ownership? - A. The presumption of a resulting trust in favour of the aunt, as the provider of the funds. - B. The presumption of a bare trust, designating the nephew as the sole beneficiary. - C. The presumption of a constructive trust based on the aunt's intention. - D. The presumption of advancement in favour of the nephew, due to their familial relationship. - E. None; legal title in the nephew's name means he is the absolute owner.

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The correct answer is A. The presumption of a resulting trust in favor of the aunt, as the provider of the funds, is most likely to determine the nature of the property's ownership given the circumstances. According to UK law, when a person provides the purchase money for property, but the property is registered in another person's name, there is a presumption that the property is held on a resulting trust for the person who provided the money. This principle is well-established in cases such as Dyer v Dyer (1788) 2 Cox Eq Cas 92, where it was held that the person who paid for the property is presumed to be the beneficial owner. While the presumption of a resulting trust is strong, it can be rebutted by evidence showing that the money was intended as a gift. However, in the absence of such evidence or a written agreement specifying the nature of the contribution, the presumption of a resulting trust prevails. Option B is incorrect because a bare trust requires an express declaration that specifies the beneficiary and the trustee, which is not provided in this scenario. Option C is incorrect because a constructive trust requires evidence of an agreement or intention to share the property, which is absent in this case. Option D is incorrect as the presumption of advancement typically applies in parent-child relationships, not between an aunt and a nephew, and there is no information suggesting its applicability here. Option E is incorrect because a legal title alone does not determine beneficial ownership, especially when there is a significant financial contribution from another party without an express declaration of trust.

## Question 6 A trusts lawyer is reviewing the accounts of an estate where the deceased was a beneficiary of a large family trust. It appears that a trustee had redirected some of the trust's investments into a tech startup the trustee personally favoured, without proper consent from the other trustees or beneficiaries. This startup has since experienced significant growth, and its shares have greatly increased in value. In light of the principles of tracing in equity and breach of trust, what is the most accurate advice regarding the beneficiaries' rights to the increased value of the startup shares? - A. The value increase is unrelated to the estate's interests since the redirection of investments was unauthorized. - B. Beneficiaries have no claim to the share value increase as it is the result of the trustee's personal decision. - C. As the startup investment was not initially part of the trust's portfolio, the increase in share value remains with the trustee. - D. The beneficiaries can claim the increase in share value, as the funds were originally part of the trust's assets. - E. Only the original amount invested into the startup is recoverable; any profit made belongs to the trustee.

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The correct answer is D. The principles of tracing in equity allow beneficiaries to follow the value of misappropriated trust assets into investments that appreciate in value. Since the trustee wrongly redirected funds into the startup without proper authorisation, the increased value of these shares can be claimed by the beneficiaries as it originated from the trust's assets. In the landmark case of Foskett v McKeown [2001] 1 AC 102, the House of Lords confirmed that tracing can be used to follow the proceeds of misappropriated trust funds. It established that the beneficiaries have a right to trace and claim the property or its proceeds, even if the property has changed its form. When trust property is wrongfully invested and that investment increases in value, the principle that "any profit derived from a breach of trust belongs to the trust" applies. This means the beneficiaries have the right to claim not only the original misappropriated funds but also any profits or increases in value resulting from the investment. The case of Boardman v Phipps [1967] 2 AC 46 established that profits made from unauthorised use of trust property must be accounted for to the beneficiaries. The trustees in this case were required to account for the profits they made from the trust property, reinforcing the principle that profits arising from a breach of trust belong to the trust. Option A is incorrect because equity does not leave beneficiaries without remedy when trust assets are misused; the relationship between the original assets and their current form is traceable. Option B is incorrect because the use of trust assets, even if redirected to investments that subsequently appreciated in value, does not exclude the beneficiaries' right to claim the increase in value. Option C is incorrect as it ignores the principle that the misappropriation of trust assets for unauthorized investments results in the beneficiaries having a claim over the investments' increased value. Option E is incorrect because all profits resulting from the original trust assets, including any increase in investment value, are considered part of the trust and are thus reclaimable by the beneficiaries.

## Question 7 A trustee manages a charitable trust dedicated to advancing education among underprivileged children. The trust has recently received a considerable donation, and the trustee is exploring investment options to ensure the trust's sustainability and ability to fund projects in the long term. The trustee is aware of the need to adhere to the principles outlined in the Trustee Act 2000 regarding investment responsibilities. What investment approach should the trustee adopt to fulfil the fiduciary duties to the trust? - A. Placing the entire donation into high-stakes cryptocurrency investments to maximize potential returns. - B. Investing solely in the trust's own educational programs, regardless of their lack of financial return. - C. Splitting the investment between blue-chip stocks, government bonds, and a reserve cash fund. - D. Investing in property development schemes promising high returns in areas known for educational disadvantage. - E. Allocating all funds into experimental educational technology companies with unproven market potential.

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The correct answer is C. A balanced investment strategy across blue-chip stocks, government bonds, and a reserve cash fund ensures a diversified portfolio that mitigates risks while seeking to generate sustainable income for the trust's objectives, in line with the duties under the Trustee Act 2000, by ensuring diversification of investments (Section 4), suitability of the investments for the trust's needs, and prudent management of the trust's assets (Section 1). Option A is incorrect because the high volatility of cryptocurrency investments may not meet the trustee's obligation to invest prudently and safeguard trust assets. Option B is incorrect as investing solely in the trust's own programs without consideration for return does not take into account the trustee's duty to ensure the trust's assets are productive. Option D is incorrect because property development schemes, while potentially high-return, entail significant risk not consistent with the duty of care required in trust investment decisions. Option E is incorrect due to the speculative nature of investments in unproven technology companies, which may not align with the trustee's responsibility to manage risks effectively.

## Question 8 Two trustees manage a charitable trust aimed at providing educational scholarships. Acknowledging their lack of expertise in financial management, they plan to employ a financial advisor to guide their investment decisions. Both understand that their responsibilities towards the trust's assets and its beneficiaries are paramount. Which of the following actions would likely constitute a breach of their duties as trustees in this context? - A. Arranging periodic meetings with the financial advisor to discuss and review the trust's investment performance. - B. Requiring the financial advisor to submit detailed quarterly reports on the trust's investment strategy and its alignment with the trust's objectives. - C. Appointing a financial advisor based solely on a recommendation from a friend without undertaking any further due diligence. - D. Ensuring that the financial advisor is briefed on the trust's goals, the needs of the beneficiaries, and any constraints on investments. - E. Incorporating a clause in the contract with the financial advisor that aligns their fee structure with the performance of the trust's investments.

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The correct answer is C. Appointing a financial advisor based solely on a recommendation from a friend without undertaking any further due diligence risks the trust's investments and can be seen as a failure in the trustees' duty to act prudently, which could result in mismanagement and potential harm to the beneficiaries’ interests. Further, under the Trustee Act 2000, trustees are required to exercise such care and skill as is reasonable in the circumstances, having regard in particular to any special knowledge or experience that they have or hold themselves out as having, and if they act as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession (Section 1). In this context, due diligence in the selection of a financial advisor is critical. Trustees must take reasonable steps to satisfy themselves of the advisor's competence, reliability, and suitability for managing the trust's investments. Simply appointing a financial advisor based on a recommendation without further investigation would likely constitute a breach of this duty of care, as it does not meet the standards set by the Trustee Act 2000 Option A is incorrect because arranging periodic meetings with the financial advisor for review is part of fulfilling the trustees' duty of oversight. Option B is incorrect because requiring detailed reports ensures the investment strategy remains aligned with the trust's objectives, demonstrating responsible stewardship of the trust's assets. Option D is incorrect because ensuring the financial advisor understands the trust's goals and beneficiary needs is essential for formulating a suitable investment strategy. Option E is incorrect because incorporating a performance-aligned fee structure can motivate the advisor to act in the best interest of the trust, aligning their incentives with the trust's success.

## Question 9 A wildlife photographer has entrusted £75,000 to a trusted friend, who is to keep this sum in a special savings account earmarked for the photographer's daughter's conservation research project. Instead of adhering to the photographer's wishes, the friend experiences a moment of weakness and decides to invest the money in a relative's start-up technology company, without conducting any background check on the source of the funds. The photographer is now considering legal options for recovering the invested funds. What would be the most effective course of action for the photographer to recover the funds, given the principles of trust law? - A. Directly recover the £75,000 from the start-up company, stating the investment was intended for the photographer's daughter. - B. Institute a constructive trust against the friend for breach of fiduciary duties. - C. Seek an account of profits from the friend for diverting the trust funds. - D. Trace the £75,000 into the start-up company and claim an equitable lien based on recipient liability. - E. Initiate criminal proceedings against the friend for misappropriation of the trust funds.

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The correct answer is B. The friend, as a trustee, has breached the fiduciary duty by misappropriating the trust funds. Under trust law, when a trustee misuses trust property, the beneficiary can impose a constructive trust on the misappropriated property or its traceable proceeds. This would hold the friend personally liable to restore the value of the trust property. The case of Foskett v McKeown [2001] 1 AC 102 supports the principle that where a trustee misappropriates trust funds, the beneficiaries can trace the funds and impose a constructive trust on the misappropriated property or its traceable proceeds. The court held that beneficiaries were entitled to a proportionate share of the proceeds from a life insurance policy that had been partially paid for with misappropriated trust funds. Further, the case of Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 established that a constructive trust can arise where there is a breach of fiduciary duty, and the trustee is required to hold the misappropriated property (or its traceable proceeds) for the benefit of the beneficiaries. Option A is incorrect because direct recovery from the start-up company without establishing their wrongful receipt of the funds would not typically be successful under trust law principles. Option C is incorrect because seeking an account of profits from the friend focuses on personal remedies against the friend, bypassing the mechanism of recovering funds from the third party that holds them. Option D is incorrect. However it could be a secondary step if necessary. Initially, imposing a constructive trust on the friend is more direct and efficient, particularly if the start-up company was not aware of the misappropriation. Option E is incorrect since, although criminal proceedings are possible for the friend's actions, this path does not directly facilitate recovery of the trust funds for the intended conservation project.

## Question 10 During the annual review of a charitable trust dedicated to environmental conservation, you discover that a trustee has made a significant investment in a newly established wind farm project without prior consultation with co-trustees or without obtaining advice from a financial advisor. This investment represents a large portion of the trust's funds. The trustee justified the decision by highlighting the project's alignment with the trust's environmental goals and its potential for substantial returns. What would be the most appropriate evaluation of the trustee's conduct? - A. The trustee’s sole decision was justified, given the investment aligns with the trust’s goals. - B. The potential environmental benefits validate the trustee's decision to invest without consultation. - C. The decision can be seen as an initiative to support environmental causes, avoiding the need for broader consultation. - D. The trustee's actions represent a breach of their duty by not consulting other trustees or seeking investment advice. - E. Since the investment promises high returns, the lack of consultation and advice can be overlooked.

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The correct answer is D. The trustee has a duty to consult with co-trustees and ideally seek professional investment advice before making significant investment decisions with trust funds. This is to ensure that investments are made prudently and in line with the trust's objectives while considering the need for diversification and risk management. Option A is incorrect because aligning with the trust’s goals does not exempt the trustee from the procedural due diligence and the duty to consult with co-trustees. Option B is incorrect as the environmental benefits, although valuable, do not justify bypassing the legal responsibility of consultation and seeking advice. Option C is incorrect because support for environmental causes does not alleviate the trustee of the duty to consult with co-trustees and seek investment advice, ensuring that all actions are in the best interest of the trust. Option E is incorrect as the promise of high returns does not negate the trustee’s duties to consult with co-trustees and to act based on informed advice.

SQE1 FLK2 Trusts Sample Questions July 2024