ESSENTIAL REQUIREMENTS FOR THE CREATION OF A TRUST; THE THREE CERTAINTIES
There are several types of trust and the most common is an express trust. Within this category of trusts are both fixed trusts and discretionary trusts.
ESSENTIAL REQUIREMENTS FOR THE CREATION OF A TRUST; THE THREE CERTAINTIES
There are several types of trust and the most common is an express trust. Within this category of trusts are both fixed trusts and discretionary trusts. A fixed trust is where the trustees have no choice as to who the beneficiaries are or how much they receive. With a discretionary trust, they distribute the trust property as they see fit however, they must distribute it as they cannot keep it for themselves.
For an express trust to be valid there has to be three certainties. These are certainty of intention, certainty of subject matter, and certainty of objects. Without these certainties, an express trust will not be valid. The purpose of these certainties is to ensure the trust is properly controlled and enforced.
CERTAINTY OF INTENTION
The key test established whether the requisite intention is present is to consider whether the creator of the trust wanted someone to be under a duty to hold property for the benefit of another person. The use of the word ‘trust’ need not be present to show certainty of intention. However, when it is used, it may not show certainty of intention depending on the context. The court will look at the substance of the creator’s intent to see if they wanted to impose an obligation or request the trustees do something. If it is merely a request, precatory words will be evident, for example ‘wishes’, ‘requests’, ‘confident’. The question of intention is assessed objectively, having regards to the opinion of the reasonable person.
In Re Gulbenkian [1970] AC 508, Lord Upjohn said that in cases of ambiguity the court must use ‘innate common sense and desire to make sense of the settlor’s… expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language’. Certainty of intention is a problem in situations where there is a self-declaration of trust. In Jones v Lock [1865] 1 Ch App 25, a father received a cheque for £900 and said he would ‘put it away for’ his son. This was held not to show sufficient intent to create an express trust. Lord Cranworth noted that it would be dangerous ‘if loose conversations of this sort’ declared a trust. In relation to commercial matters, there is a reluctance of the courts to find a trust arising from a commercial relationship. However, if the necessary intention is present, a trust will be found.
If there is an absence of certainty of intent to create a trust, there will be no valid declaration of a trust. If the creator of the purported trust transferred property to someone else, the trustees, they may take the property beneficially. However, if the creator intended a self-declaration of trust, this is of no legal effect at all.
CERTAINTY OF SUBJECT MATTER
Trusts can be declared over all kinds of property, including intangible property such as covenants or debts. However, the subject matter must be clearly defined in the trust instrument. This is a question of fact. If the creator has described the property as the ‘bulk’ of something, Palmer v Simmonds [1854] 2 Drew 221 said this was not sufficient to constitute a certain subject matter. This is because ‘bulk’ cannot be defined. However, according to the decision in Re Last [1958] P 137, ‘anything that is left’ of the testator’s estate was held to be sufficiently clear.
As well as the property being defined, the property must be able to be identified; if it cannot be identified the trust will be void for uncertainty. The leading case on this area is Hunter v Moss [1994] which provides a distinction between tangible and intangible property. This is distinguished from Re London Wine Co (Shippers) Ltd [1986] PCC 121, because Hunter v Moss was concerned with intangible property (shares in a company), and Re London Wine was concerned with the appropriation of chattels and the passing of the legal title. However, the principle in Hunter v Moss can be practically difficult as it is not possible to identify the rationale behind how the trust works in practice.
If there is an absence of certainty of subject matter, the consequences will depend on the kind of uncertainty. If the identity of the trust property is not certain, the trust cannot be attached to any property. Therefore if part of a property is to be held on trust for a beneficiary, and the identity is uncertain, the trustee will obtain the property absolutely. However, if it fails for uncertainty in the way the property is divided up between the beneficiaries, a resulting trust will occur as it is evident that the creator of the trust did not want to give the property to the trustee outright.
CERTAINTY OF OBJECTS
The objects of a trust will depend on the type of express trust in question. This is quite a complicated area so I will just explain the different tests used to ascertain certainty of objects. For fixed trusts, it must be possible to identify exactly who all of the beneficiaries are in order for the trustees to distribute the property correctly. This is known as the ‘complete list test’. What this means is that a full list of all the beneficiaries must be able to be drawn up when the property is to be distributed, it is not necessary to draw up a complete list when the trust is created.
For fixed trusts subject to a condition, the test of certainty will vary depending on whether it is a condition subsequent or a condition precedent. For a condition subsequent, that is a condition which if it is satisfied, the beneficiary is no longer entitled to the trust property, there must be certainty as to the condition from the outset of the trust. For a condition precedent, that is a condition which must be satisfied before the property is distributed, it will be valid if it can be said that just one person satisfies the condition.
For discretionary trusts, it is important to have certainty of objects so the trustees know who to consider when deciding how to distribute the trust property. Originally the test for discretionary trusts was the same as that for fixed trusts – the ‘complete list test’. However, this caused many problems for discretionary trusts as there are usually more potential beneficiaries for discretionary trusts compared with fixed trusts. This led to the creation of, as some call it, the ‘is or is not’ test. This means that the potential beneficiary will have to show that they fit within the description of the objects. This is easier than the complete list test because if one person cannot prove they are a potential beneficiary the trust does not fail for uncertainty, it is just the individual who did not satisfy the requisite criteria is not entitled to be considered to receive the trust property.
If no certainty of objects can be ascertained, the trustee will hold the property on trust for the settlor – this is a resulting trust. This means the settlor can demand the legal title back from the trustee and then create another, this time valid, trust. If the trust is testamentary, the trustee will hold the property on trust for the benefit of those entitled to the residuary estate of the deceased.
NB: This article is not a legal advice, and under no circumstance should you take it as such. All information provided are for general purpose only. For information, please contact chamanlawfirm@gmail.com
WRITTEN BY CHAMAN LAW FIRM TEAM
EMAIL: chamanlawfirm@gmail.com
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