Private Trust Law: Principles, Duties, Types and Case Exampl...

Introduction

Private trusts arrange for one person (the settlor) to place assets with a trustee to hold for the benefit of named beneficiaries. Legal title sits with the trustee, while the beneficiaries hold rights in equity. This split ownership gives rise to strict duties designed to protect beneficiaries.

For a valid private trust, three elements must be clear: intention, subject matter, and objects (the beneficiaries). Unlike charitable trusts, private trusts are set up for specific people, not the public at large. This guide sets out the key rules, typical structures, common problems, and how to apply the law in practice.

What You'll Learn

• The three certainties: intention, subject matter, and objects
• How to create and constitute a trust, including formalities
• The difference between fixed, discretionary, bare, life interest, and protective trusts
• Trustee duties: fiduciary obligations, care and skill, investment, information, and conflicts
• Tests for identifying beneficiaries in fixed and discretionary trusts
• Common disputes (e.g., breach of trust, unclear terms) and how courts approach them
• Compliance: HMRC Trust Registration Service (TRS) and anti‑money laundering duties
• Key cases to cite and how to use them

Core Concepts

The Three Certainties

A private trust only works if these are met (Knight v Knight):

1. Certainty of intention

   • The settlor must intend to impose a binding obligation, not merely express hopes or moral wishes.
   • No special words are required, but “precatory” wording is risky (Re Adams and Kensington Vestry).
   • Intention can be inferred from conduct and context (Paul v Constance [1977] 1 WLR 527).

2. Certainty of subject matter

   • The property placed on trust must be clear and identifiable.
   • Tangible assets must be segregated or identified (Re London Wine; Re Goldcorp).
   • Identical intangible assets (e.g., shares of the same class) can be certain without segregation (Hunter v Moss [1994] 1 WLR 452).
   • The beneficial shares must be workable; if not, a fixed trust can fail (Boyce v Boyce).
   • A gift of a “reasonable income” can be sufficiently certain where the court can fix the standard (Re Golay’s Will Trusts).

3. Certainty of objects (beneficiaries)

   • Fixed trusts require a complete list of all beneficiaries (IRC v Broadway Cottages).
   • Discretionary trusts use the “is or is not” test: it must be possible to say of any person whether they are within the class (McPhail v Doulton [1971] AC 424; Re Baden (No 2) [1973] Ch 9).
   • A class can be wide, but it must be conceptually clear enough to administer.

Tip: If any of the three certainties fails, the arrangement may be construed as a gift, a power, or fail altogether.

Formalities and Constitution

• Methods of creation

  • Self‑declaration: the settlor declares that they hold identified property on trust.
  • Transfer to trustees: legal title passes to a trustee to hold on the terms of the trust.

• Formalities

  • Land: trusts concerning land must be evidenced in signed writing (Law of Property Act 1925, s.53). Transfers of legal title to land require a deed (LPA 1925, s.52) and registration where applicable.
  • Equitable interests: a disposition of a subsisting equitable interest must be in signed writing (LPA 1925, s.53).
  • By will: comply with Wills Act 1837, s.9 (in writing, signed, two witnesses).

• Constitution (getting the property into the trust)

  • Equity will not perfect an imperfect gift (Milroy v Lord).
  • Recognised exceptions:
    • Where the donor has done everything necessary (Re Rose).
    • Where it would be unconscionable to retract (Pennington v Waine).
    • Where the intended donor later becomes executor (Strong v Bird).
    • Fully constituted trusts will be upheld even if not yet communicated to all trustees (Choithram v Pagarani).

• Duration

  • Private trusts must comply with perpetuity rules (Perpetuities and Accumulations Act 2009; default 125‑year period unless otherwise provided).

Trustees’ Duties and Powers

Trustees owe both fiduciary duties and duties of care:

• Fiduciary duties

  • No conflict and no unauthorised profit (Keech v Sandford; Boardman v Phipps [1967] 2 AC 46).
  • Act in good faith for the beneficiaries’ benefit (Bristol and West BS v Mothew [1998] Ch 1).
  • Deal even‑handedly between beneficiaries.

• Duty of care and investment

  • Apply the statutory duty of care (Trustee Act 2000, s.1).
  • Investment powers are wide (TA 2000, s.3) but must be exercised prudently: consider suitability, diversification, and review (TA 2000, s.4). Take proper advice where appropriate (TA 2000, s.5).
  • Traditional guidance emphasised beneficiaries’ financial interests (Cowan v Scargill [1985] Ch 270). Modern practice allows non‑financial factors if consistent with the trust and beneficiaries’ interests.

• Information and accounts

  • Keep accurate records and provide information on request, subject to the court’s control over disclosure (Schmidt v Rosewood [2003] UKPC 26).

• Managing conflicts and delegation

  • Identify and manage conflicts; abstain where necessary.
  • Delegation is permitted in set circumstances, often subject to written policy and oversight (TA 2000, ss.11–15).

• Liability and relief

  • Trustees are personally liable for breach of trust.
  • Exemption clauses may protect trustees, but not against actual fraud or dishonesty (Armitage v Nurse [1998] Ch 241).
  • The court may grant relief if the trustee acted honestly and reasonably (Trustee Act 1925, s.61).

• Powers affecting beneficiaries

  • Maintenance and accumulation (Trustee Act 1925, s.31).
  • Advancement of capital (Trustee Act 1925, s.32).
  • Adult, absolutely entitled beneficiaries can call for the trust to be terminated (Saunders v Vautier).

Common Types of Private Trust

• Fixed trusts

  • Shares or entitlements are set in the trust instrument. The trustee has little or no discretion over amounts or recipients.

• Discretionary trusts

  • The trustee decides who among a defined class benefits and in what amounts, following any guidance in a letter of wishes. Decisions must be made in good faith, for proper purposes, and not capriciously.

• Bare trusts

  • The trustee holds property for one or more beneficiaries absolutely. Beneficiaries of full age and capacity can call for transfer of legal title.

• Life interest (interest in possession) trusts

  • A life tenant is entitled to income for life; capital passes to remaindermen afterwards.

• Protective trusts

  • Commonly provide a determinable life interest that can be cut short if the beneficiary attempts to assign it or if creditors intervene, after which the fund is held on alternative terms.

Key Examples or Case Studies

• Paul v Constance [1977] 1 WLR 527

  • Context: A man told his partner that money in an account was “as much yours as mine” and used the account for joint purposes.
  • Point: Clear intention can be inferred from words and conduct; no formal wording needed.
  • Use: Evidence intention carefully; segregate funds to avoid disputes.

• Hunter v Moss [1994] 1 WLR 452

  • Context: A trust of 50 out of 950 identical shares without segregation.
  • Point: Certainty of subject matter can be satisfied for indistinguishable, identical intangibles like shares.
  • Use: For shares of the same class, precise segregation may not be required; still document the number.

• McPhail v Doulton [1971] AC 424 and Re Baden (No 2) [1973] Ch 9

  • Context: Discretionary employee benefit scheme with a wide class.
  • Point: The “is or is not” test applies; conceptual certainty is needed but evidential uncertainty will not defeat a discretionary trust.
  • Use: Define classes clearly (e.g., “children,” “employees”) and keep records to support decisions.

• Boardman v Phipps [1967] 2 AC 46

  • Context: A trustee’s agent made profits while improving a company in which the trust held shares.
  • Point: Strict fiduciary obligations apply; profits made in the course of the role must be accounted for, even if the trust benefits.
  • Use: Obtain informed consent before any potentially conflicting activity.

• Armitage v Nurse [1998] Ch 241

  • Context: Effect of trustee exemption clauses.
  • Point: Clauses can protect trustees from negligence but not from fraud or dishonesty; there remains an irreducible duty to act honestly and in good faith.
  • Use: Draft realistic liability and indemnity clauses; do not rely on them to excuse poor standards.

• Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44 (related context)

  • Context: Setting aside transactions for undue influence.
  • Point: Independent advice is essential where influence is suspected; relevant when trustees or related parties are involved in arrangements that benefit themselves.
  • Use: Build in independent advice steps where there is a risk of pressure or dependency.

Practical Applications

• Drafting the trust

  • Use clear, binding language showing intention.
  • Identify the property precisely; avoid vague phrases like “most of my estate.”
  • Define beneficiaries or classes with workable criteria; avoid uncertainty.
  • Include powers (investment, maintenance, advancement), decision‑making processes, appointment/removal of trustees, and conflict rules.
  • Consider perpetuity period and any accumulation powers.
  • If relevant, prepare a non‑binding letter of wishes to guide discretion.

• Meeting formalities and constituting the trust

  • Land: use a deed for legal title and comply with registration; ensure any trust of land is evidenced in writing.
  • Shares: complete stock transfer forms and update the register of members; consider stamp duty where applicable.
  • Chattels: effect delivery or deed.
  • By will: follow Wills Act s.9 and coordinate with executors.
  • Confirm the trust is fully constituted; if not, there is a risk equity will not assist.

• Trustee operations and governance

  • Open a dedicated trust bank account; segregate trust assets.
  • Keep minutes of decisions and reasons (particularly for discretionary distributions).
  • Adopt an investment policy, take expert advice where needed, and review regularly.
  • Record and manage conflicts of interest; recuse where appropriate.
  • Maintain accounts and respond to reasonable beneficiary requests.
  • Arrange appropriate trustee liability insurance.

• Distributions and discretion

  • For discretionary trusts, identify relevant and irrelevant factors; consider needs, tax, and the terms of the deed.
  • Avoid arbitrary or discriminatory decisions; be consistent and fair between beneficiaries.
  • Keep concise records of reasons to defend future challenges.

• Dispute avoidance and resolution

  • Clarify grey areas early; consider varying the trust (Variation of Trusts Act 1958) if terms no longer suit current needs.
  • Use mediation where possible; take court directions on difficult points.
  • Remember adult, absolutely entitled beneficiaries may end the trust (Saunders v Vautier).

• Compliance and reporting

  • Register the trust on the HMRC Trust Registration Service (TRS) where required (including many non‑taxable UK trusts under the Money Laundering Regulations 2017, as amended).
  • Carry out customer due diligence on settlors, trustees and beneficiaries as required by AML rules; keep records up to date.
  • Observe UK GDPR when handling beneficiaries’ personal data.
  • Coordinate tax reporting and payments (income tax, CGT, IHT) with professional advice.

Summary Checklist

• Intention, property, and beneficiaries must be clear (three certainties).
• Choose the right structure: fixed, discretionary, bare, life interest, or protective.
• Meet formalities: LPA 1925 (s.53), Wills Act 1837 (s.9), deeds and registration for land.
• Constitute the trust by effective transfer or self‑declaration; do not rely on equity to fix defects.
• Apply Trustee Act 2000: duty of care, suitable and diversified investments, advice where appropriate.
• Uphold fiduciary standards: no conflict, no unauthorised profit, act even‑handedly.
• Keep proper accounts; manage disclosure requests in line with Schmidt v Rosewood.
• Document decisions, especially under discretionary powers; avoid capricious choices.
• Check perpetuity period and accumulation powers; consider future flexibility and variation routes.
• Register on TRS if required; maintain AML and data protection compliance.

Quick Reference