Equity and Trusts – Gifts

1. Introduction

Gratuitous disposition of property in favour of another = usually an absolute gift. But can sometimes be conditional gift/gift subject to a charge. Conditional – ie gift of a house to A on condition that B live there rent free for life. Subject to charge – gift of house to P, subject to P paying £10,000 to E. Also can make gift on trust ( eg transfer of property ‘to Terry on trust for Ben’. Terry = trustee; Ben = beneficiary. T = legal owner, B the equitable/beneficial owner. Note: not every express trust is created gratuitously – in the example, the settler may have been under a contractual obligation to create trust for Ben.

When settler creates a trust – free to define obligations of the trustees and entitlement of the beneficiaries as he sees fit, subject only to limitations imposed for reasons of public policy. He can provide that trustees should be bound to care for only part of the trust fund. If he intends that trustees should speculate recklessly with the fund with a view of doubling it or losing it all within a 2yr period, he may so provide and ‘no beneficiary can complain if the money is lost’.

This great freedom can lead to uncertainty. Even when disposition made in writing, not always clear that a trust has been created – and even when that is clear, not always clear what the terms are. Sometimes courts are to adjudicate between litigating parties with competing interpretations of terms of a disposition. Other times, trustees merely require guidance in a particular matter, so the court will make an ‘order for directions’.

Where Q to be resolved = a fundamental one – disposition intended to be given effect by way of express trust or absolute gift? – courts hold absolute gift unless its certain from the context and expressions that the person making the disposition intended to create a trust. Usually the very fact that the court has been called upon, shows there is insufficient certainty that a trust will arise. If it is clear that a trust is intended – then secondary question – eg ‘who is entitled to the benefit of this trust and in what proportions?’ – court will try to interpret the words and conduct used as much as possible to give effect to the trust.

Courts apply the rule of construction certum est quod certum redid potest – ‘that is certain which can be made certain’. Lord Langdale MR – about testamentary trust in Knight v Knight: “In the construction and execution of wills, it is undoubtedly the duty of this court to give effect to the intention of the testator whenever it can be ascertained”

The three certainties apply to both gifts and trusts although the concept was first propounded in relation to trusts (in Knight v Knight (1840) 3 Beav 148 – Lord Langdale identified the 3 certainties. These need to be satisfied before a court will acknowledge that a settlor/testator has created a private express trust). The certainty of intention referred to is that of the donor or settlor/testator, the certainty of subject matter refers to the property which is being transferred, and the certainty of object is the person or persons who will benefit from the gift or under the trust.

This seminar focuses on the first two certainties, of intention and of subject matter. Certainty of objects is introduced, and will be examined more closely in seminar 4, as a continuation of the same topic.

3 certainties – The said law must have had intention to create a trust. The trust property must be sufficiently certain. The beneficiaries must be adequately identified.

According to Lord Langdale – there will be no difficulty in applying these to ‘simple cases’ but: “in the infinite variety of expressions which are employed… there is often the greatest difficult in determining, whether the act desired of recommended is an act which the testator intended to be executed as a trust, or which the court ought to deem fit to be, or capable of being enforced as such” 2. Certainty of intention

Requirement there to protect transferors and transferees of property. Protects transferors – ensures property is applied only in accordance with their expressed intentions. Protects transferees by ensuring that they are burdened with trust obligations only when it ought to have been clear to them that they were to take the property as trustees.

The donor’s intention guides the court in distinguishing between gifts andtrusts, and in determining which of the alternative methods of transfer outlined in Milroy v Lord is applicable to the particular disposition being considered.

As noted in Seminar 2, making a gift involves expressing an intention that the property should not be retained ‘in the donor’s own hands for any purpose, fiduciary or otherwise’ (per Jessel MR in Richards v Delbridge (1874) LR 18 Eq 11).

No express trust unless original owner certainly intended to create one, but also no express trust if intention = expressed with insufficient certainty to bind the conscience of the recipient.

The intention necessary to create a trust must include the settlor’s (or testator’s, as applicable) intention to transfer to the beneficiary the equitable title to the property. In the case of self-declaration of trust, it must be clear that the settlor retains only the legal title; in the case where the legal title to the trust property is to be transferred to trustee(s), that intention must be made clear. Intention is particularly important in trusts, as trustees have onerous fiduciary duties. On the intention necessary to create a trust, Lord Langdale MR said in Knight v Knight that: ‘It is undoubtedly the duty of this court to give effect to the intention of the testator whenever it can be ascertained.

But it is not every wish or expectation which a testator may express, nor every act which he may wish his successors to do, that can or ought to be executed as a trust in this Court’. ( eg Jones v Lock. If outright gift has failed, can we say that there is a trust – that’s where language of father became important. Court said no, there’s nothing there that suggests that a trust has been created. Another perspective on substance not form. Courts will look at substance as generously as possible but cannot be too generous – need to be satisfied that there was an intention to create the trust.

Intention is a question of substance – no need for technical legal language ie without use of words such as “trust” or “confidence” etc. BUT if the settlor omits to using the word ‘trust’: “he must do something which is equivalent to it, and use expressions which have that meaning for, however anxious the court may be to carry out a man’s intentions, it is not at liberty to construe words otherwise than according to their proper meaning” (Richards v Delbridge). Also, even if ‘trust’ has been used – may be possible (unlikely) that he doesn’t intend to create a justiciable private trust. Might not wish to impose obligations of any sort on the recipient – eg Grandad gives money to grandchild “I trust you will get yourself a nice jumper”.

Knight v Knight – where the 3 certainties come from. They apply to express trusts – an express trust cannot exist unless the 3 certainties are present. In context of intention – the court wants to be satisfied that the settler wanted to create a trust – any doubt – usually means intention is not in place. Strict because the creation of trust comes with obligations that are placed upon the trustees. So courts want to be satisfied that trust was intended – reluctant to impose these onerous obligations on the trustees. Also self interest – if trustees are not on the document, then the court will be called upon to administer the trust – court has to do the job.

Also useful in context of purpose trusts (beneficiary principle) and implied trusts (where aspects are dispensed with).

How do courts decided that intention has been satisfied? ‘It is well settled that a trust can be created without using the words “trust” or “confidence” or the like: the question is whether in substance a sufficient intention to to create a trust has been manifested’ – Megarry J, Re Kayford Ltd [1975] 1 WLR 279

Question of substance over form – not particular phrase to look for Certain amount of discretion here that will apply to work out if trust or not.

Function of intention test:• Imposition of a trust has far-reaching effect:– Owner loses interest in it;– Enforceable rights created for a beneficiary;

– Onerous obligations imposed on a trustee;• Courts, therefore, must be sure that creation of a trust was truly intended; • As a consequence, courts are not usually indulgent in finding the test is met;

Objective or subjective:• Substance rather than form: what did settlor intend? – Tito v Waddell (No 2) – use of word ‘trust’ not definitive – Midland Bank v Wyatt – must be genuine• Paul v Constance– Words and/or conduct– Borderline case• Objective approach – Twinsectra Ltd v Yardley– Justifiable? (who is court protecting?)– Consistent? (sham cases)

Courts have approached this area as an objective test. Would a reasonable man say there is intention? But litigation impact that seem to be created for the avoidance of tax liabilities. So courts want to guard against that. If test was entirely subjective, they may say they’re trying to create a trust – but actually just trying to avoid liabilities.

Also will look at conduct – Paul v Constance – Mr C splits from wife and begins relationship with Miss P. At the start, Mr C has a cheque for £950 – damages from a personal injury case. Miss P had no entitlement to the sum. Then they both open a joint account – because P + C aren’t married, they can’t open the account in both their names – just in Mr C’s name. The £950 goes in. Mr C ensures Miss P that the money is just as much hers as it is his.

Then go to bingo – bingo winnings go into the account. From the account, they then withdraw £150, divide equally. Mr C dies. Mrs C reappears to claim money in the account. Q for a court – was a trust created here? Answer: Yes, a valid trust had been created through words (the money is just as much yours as it is mine) and through contact (Mr C treated money in and out as both Mr C’s and Miss P’s). Court emphasised they will look to words and conduct to decide whether a trust has been created.

Objective approach – criticised? Why not subjective? Who is the court trying to protect? Yes might have situation where someone is fraudulently create a trust but aside from that most times they aren’t fraudulent.

2.1 Trusts: Issues of construction

The court must endeavour to ascertain and give effect to the settlor’s or testator’s intention. Note that there is no need for express words of trust to be used; conversely, use of the term ‘trust’ does not necessarily create a trust (Tito v Waddell (No. 2) [1977] Ch 106. Even if the document clearly purports to create an express trust, the intention to create a trust must be genuine rather than entered into as a sham, to deceive or to defraud (Midland Bank v Wyatt [1995] 1 FLR 696).

In most cases there will be a written document, e.g. a will, although in some cases there is no documentary evidence to assist the court, for example in Paul v Constance ([1977] 1 WLR 54 and in Gold v Hill [1999] 1 FLR 54.

The approach to construing written documents was fundamentally altered by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1988] 1 WLR 896, HL, in which it was said that interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. Shows court approach – when courts are construing the documents – they want to be satisfied that the interpretation of the meaning of the document that it would be the decision of a reasonable person with the background knowledge (matrix of facts).

This relevant background knowledge is sometimes called the ‘matrix of fact’. Courts will construe meaning of all the words available. Discretion – court look to substance, not form but also court take strict approach as well. Courts recognise that expression generally can be very vague – can look like they’re trying to settle the trust but they are in fact not. In Staden v Jones [2008] EWCA Civ 936, the Court of Appeal adopted this approach. An inter vivos document, a Memorandum of Agreement made between a husband and wife in the course of a divorce, did not expressly establish a trust but was accompanied by a lengthier solicitors’ letter which the court decided it would be artificial to exclude.

Together the two documents were construed as establishing a trust of which the beneficiary was the daughter of the parties to the Memorandum.

In interpreting written wills, extrinsic evidence, including evidence of the testator’s intention, may be admitted if the language used is meaningless or ambiguous: s. 21 Administration of Justice Act 1982. Note that in the commercial context, establishing an intention to create a trust may protect mail-order customers when a company becomes insolvent (see Re Kayford Ltd (in liquidation) [1975] 1 WLR 279; cf. Re Farepak Food and Gifts Ltd (in administration) [2006] EWHC 3272 Ch).

2.2 Trusts: The use of imperative or precatory word

No trust if the donor appeals to the donee to apply the property in a particular way instead of obliging the done to do so. “hope”/”feel confident”/”desire” etc. Used to be allowed but counsel in Knight v Knight acknowledged this was disapproved of.

Looking at language ie precatory words – ie I hope my wife will see my money to do this etc… Courts have said these words are not sufficient ( see slide (precatory words): • Implication, hope, petition not enough;

– Lambe v Eames ‘in any way she thinks best’• Courts insist upon imperative: obligation instead of appeal • However courts adopt holistic approach – Comiskey v Bowring-Hanbury (1905)

Holistic approach – mere fact of use of precatory words – doesn’t mean intention isn’t satisfied – might be able to satisfy later on. Comiskey – testator gives wife his estate – “gives to nieces as she thinks fit” – clearly a precatory word. If this was all document said, intention wouldn’thave been satisfied. But then will stated “I hereby direct that all estate given to wife, shall be equally divided to all surviving said nieces” ( imperative. Later presence of imperative words superseded the earlier precatory words.

In Knight v Knight, Lord Langdale MR said there will be a trust ‘if the words are so used, that upon the whole, they ought to be construed as imperative’. Imperative language is authoritative and commanding, and unambiguously places an obligation on the trustee. Precatory language, on the other hand, is entreating or merely hopeful. A disposition couched in precatory words would once have been accepted by the Court of Chancery as creating a trust, but the tide turned in the cases of Lambe v Eames (1870-71) LR 6 Ch App 597 (‘in any way she may think best’) and Re Adams and Kensington Vestry (1884) 27 Ch D 394 (‘in full confidence that she will do what is right’).

The wording of these dispositions was held to be precatory rather than imperative, and thus took the form of gifts rather than trusts. Subsequent decisions, for example in Re Diggles (1888) 39 Ch D 253 (‘it is my desire’) and Re Johnson [1939] 2 All ER 458 (‘I request’), confirmed that imperative, not merely precatory, words are required to create a trust. Re Diggles – typical of the modern approach to precatory words.

Testatrix left all her real and personal property to her daughter, expressing her “desire” that her daughter should pay an annuity of £25 to a named relative and “allow” that relative to use whatever household furniture her daughter didn’t need. For several years, annuity was paid but eventually discontinued. The annuitant applied to court claiming that the daughter became a trustee – COA held otherwise – no trust – expression of “desire” = precatory and construing the will as a whole, it couldn’t be said that she intended to create a trust of the annuity.

Daughter had a mere ‘moral duty to pay reasonable attention to the wishes of the testatrix” However, note that in exceptional circumstances a trust may still be found from precatory words if, on a proper construction, such was the intention of the testator. In Comiskey v Bowring Hanbury [1905] AC 84, a testator’s complex directions were held to create a trust when read as a whole, despite the inclusion of precatory words. In the unusual case of Re Steele’s WT [1948] Ch 603 precatory wording had been copied from a 1868 precedent (which pre-dated Lambe v Eaves), yet was heldto create a trust eighty years later, as this is what the testatrix had intended.

Formal dispositions:If using a formal document ie will – court tries to ascertain intention ‘from the words he has used … in light of such knowledge of relevant facts as … he must have had’ – looks to natural meaning according to the context – surrounding circumstances. Extraneous evidence as to the meanings ie from barristers opinions = not accepted. And court also won’t look at similar transactions previously carried out by the same testator or settlor as evidence of his intention in the instant case. Courts are even reluctant to take into account the construction that other courts have placed on similar words in the past (Lambe v Eaves).

BUT – If a disposition is made in terms reproducing exactly the peculiar wording of a disposition considered in a previously reported case – court may infer that the person making the present disposition intended to achieve the same result achieved in the earlier case – Re Steele’s Will Trusts – testatrix left heirloom to her soon to be held by him for his eldest son and so on ‘as far as the rules of law and equity will permit’ and with the request that the son should ‘do all in his power by his will or otherwise to effect to this my wish’ – exact phrasing from an earlier precedent – held: testatrix made clear her intention to achieve the same outcome of the earlier case, namely a trust.

Without exact precedent – construction of formal dispositions = case by case basis. Hard to determine whether a gift or trust was intended.

Lambe v Eames – testator left entire estate to his widow “to be at her disposal in any way she may think best, for the benefit of herself and her family” – held: these words hadn’t created trust in favour of her family. Re Williams – no trust when testator provided by his will that all his real and personal property should pass to his wife ‘in full confidence that she would do what was right’ as to the disposal between his children, either in her lifetime or by will after her death. Lack of detailed directions in both cases = uncertainty ( indicated neither testator had intended to subject his widow to a binding trust.

Contrasting case – Comiskey v Bowring-Hanbury – testator’s very detailed directions where held to demonstrate a clear intention to create an express trust. Initial part ‘absolutely in full confidence’ may have created an absolute gift had it appeared on its own. NB: word ‘confidence’ likely to create uncertainty – could create 2 quite opposite states of putting faith in others and having faith in oneself. But the direction – that in any event, the nieces should acquire an interest – showed that testator intended to create binding trust on widow.

Pragmatic approach to construction of intention2 contrasting cases, first instance, only a few years apart: – Re The Trusts of the Abbott Fund – doc collected £500 from many people for the ‘maintenance and support’ of two elderly deaf sisters. But – they died, left surplus of £367 on the fund. Q – was there an absolute gift or was it subject to a trust for no other purpose other than their maintenance and support? – Re Andrew’s Trust – fund set up to finance education of certain children.

They grew up and surplus of monies left. Same Q as above. – Facts of both = similar, hard to see that donors to the 2 funds differed very much in intentions of making their donations. But – held in 1st case: surplus should be held on a resulting trust for the donors to the fund in proportion to their contribution. But then in 2nd case held: surplus should be divided equally between the children. – Hard to see justification for difference in decisions apart from the pragmatic one. First case – donees had died; second case – donees still alive – that is why they were distinguished – Re Osoba – judge stated both cases may have been right on their facts. Re Osoba = somewhat a factual hybrid of the two.

Testator made a bequest to his widow for her ‘maintenance’ and to his daughter for her ‘training… up to University grade’. Shortly after widow’s death, daughter completed university education. Testator’s son claimed for a share of the surplus that hadn’t been used for the daughter’s education – failed. Held: gift = absolute gift to wife and daughter equally, the expression of the purposes for which the gift was to be used was merely an indication of the testator’s move for making it. NB: use of ‘up to University grade’ – may be nothing more than helpful guidance to trustees as to timing of the final disposition of capital.

Oddie v Brown: ‘words which in other cases might import condition or contingency may be used merely for the purpose of conveying the necessary directions to the trustees”. Letter of wishes outside the will = less formal, therefore more appropriate, means of communicating such guidance

Informal dealingsWhen not using formal document – extra significance is placed on the surrounding context. Jones v Lock: 1863 – Jones, an iron monger, returned home from Wales after business in Birmingham. Was in kitchen with wife, baby son, baby’s nurse. Nurse remarked he hadn’t returned with a present for his son. Jones responded saying he gave him a pair of boots and “now I will give him a handsome present” – produced £900 cheque, payable to himself – “Look you here, I give to this baby; it is for himself” – placed cheque in baby’s hand. Wife said “don’t let him tear it”.

Jones’s response: “doesn’t matter, its his own, can do what he likes” and then took the cheque saying he was going to put it away for him. Jones died 6 days later, cheque found amongst possessions. 1st instance: valid declaration of trust by father for baby

COA: no valid gift no valid declaration of trust in favour of the infant. Too loose of a conversation – dangerous if allowed. Fact that Mr J met with solicitor to discuss intention to settle the money on the baby changed nothing.

Dangers alluded though didn’t deter COA in Paul v Constance from holding that trust had been declared of money in a bank account on the basis of equally casual statements. See earlier for facts. Looked at conduct too. Fact that deceased expressed his intentions on more than one occasion = essential to establishing the seriousness of his desire to create a trust. One off statement may have been judged to be a loose conversation as in Jones case. Court’s decision here was pragmatic – if had dismissed the claim, Mrs P would have been left with nothing and estranged wife of Mr C would have received a windfall at Mrs P’s expense.

Commercial contexts

Risk of insolvency – virtual certainty that there will be insufficient funds to fully satisfy the legitimate claims of creditors against personal estate of the insolvent party. Follows – Cs in commercial contexts may be anxious to establish they have proprietary rights under trusts, especially where D is already insolvent.

Re Kayford Ltd (in liquidation) – Cs were successful. They were customers of a mail-order company – each paid the full price or deposit prior to receipt of goods. Company – financial trouble – accountants advised it to set up a ‘customers trust deposit account’ – to hold customers monies until delivery of their goods – to protect customers from insolvency of company. Company accepted advice but continued to pay customers monies into existing, dormant accounts for several months before eventually renaming the account to what was advised. Then company went into voluntary liquidation and liquidator asked court whether balance of monies in the special account belonged to the customers or the company’s general creditors.

Held: customers entitled to money in account – intention to create trust = manifestly clear, despite the failure to use a separate nominated ‘trust’ account from the outset. Megarry J held: when concerning public, proper and honourable for company to do what it did – to pay money into trust account if unable to deliver goods/provide services. [also made reference that similar could occur to beneficiaries who aren’t drawn from the general public]

Result ( would appear to make sense to, when payment is made in advance of delivery or the rendering of services, to make payments expressly ‘on trust’ for provision of those goods or services. Although doubtful that even equity lawyers do this in practice. Megarry J suggested different principles may apply to an attempt by trade creditors to establish trusts in insolvency but since – even trade creditors have had some notable successes.

Re Lewis’s of Leicester Ltd – insolvent company traded as a department store. Floor space = licensed to concessionaires on a ‘shop within a shop’ basis. Traders sold own goods on Lewis’s premises but paid takings into Lewis’stills – some of which were paid into a separate bank account in Lewis’s name. Key Q – whether monies in the separate bank account had been held on trust for the concessionaires or whether concessionaires should be treated as normal trade creditors. Held: concessionaires entitled to recover monies under a trust, but that Lewis’s (and therefore Lewis’s general creditors) = entitled to assert own beneficial claim to the fund to extent of its entitlement to commission on gross till receipts. Observed that trusts = very versatile, can be used for a wide variety of commercial arrangements.

2.3 Effect of failure of certainty of intention

In the case of gifts, intention is a component of delivery at common law, so uncertainty of intention means the property is not transferred and hence the gift is invalidated.

See consequence of no certainty of intention slide: • Purported self-declaration of trust invalid — would-be trustee remains absolute owner of the property (as in Jones v Lock) • Where valid transfer of the legal title in the purported trust property to trustee(s), no trust will arise and the trustee(s) will take the property as an absolute gift (as in Lambe v Eames)

A purported self-declaration of trust will be invalid if no certainty of intention can be found, so the would-be trustee remains absolute owner of the property (as in Jones v Lock).

If there is uncertainty about the intention to create a trust but there has been a valid transfer of the legal title in the purported trust property to trustee(s), no trust will arise and the trustee(s) will take the property as an absolute gift. (as in Lambe v Eames)

3. Certainty of subject matter

As long as the subject matter of a trust is capable of being located – mere evidential uncertainty as to its location will not cause the trust to fail – following from principle certum est quod certum reddi potest (that is certain which can be made certain). But trust may fail if evidential difficulties in identifying the subject matter. Ie “my special cufflinks” – will fail if no evidence adduced to identify the particular set the settlor had in mind.

The property which is to be the subject of the gift or trust must be specified with reasonable certainty, in objective rather than subjective terms. For example, in Re Kolb’s Will Trusts [1962] Ch 531 the term ‘blue chip securities’ was held uncertain and therefore invalid. Note that testamentary gifts or trusts specifically of the residue of the deceased’s estate are perfectly valid because ‘residue’ is a technical term which satisfies the test of certainty of subject matter.

3.1 There are two possible ways in which subject matter may be uncertain:

3.1.1 Failure to define the actual property

• Property must be identifiable:– Palmer v Simmonds – ‘bulk’ of residuary estate – too uncertain – Re Kolb’s Will Trust – ‘blue chip’ securities – Re London Wine Co — bottles of wine– Strict approach to issue.• ‘I cannot see how, for instance, a farmer who declares himself a trustee of two sheep (without identifying them) can be said to have created a perfect and complete trust… And it would seem to me to be immaterial that at the time he has a flock of sheep out of which he could satisfy the interest’ per Oliver J, Re London Wine Co.

A number of cases where a trust or gift failed for lack of certainty of subject matter illustrate the need for precision in drafting. For example, in Palmer v Simmonds [1854] 2 Drew 221, the term ‘the bulk of my estate’ was considered uncertain – may fail on grounds of ‘conceptual’ or ‘linguistic’ uncertainty; and in in re Jones [1942] 1 Ch 328 the words ‘such parts of my estate as she shall not have sold’ were held to be insufficiently certain to create a trust. In Anthony v Donges [1998] 2 FLR 775 a provision for ‘such minimal part of the estate as she might be entitled to under English law for maintenance purposes’ failed.

However, see Re Golay’s Will Trusts [1965] 1 WLR 969 for a more generous (and much criticised) approach which allowed the beneficiary ‘to enjoy one of my flats during her lifetime and to receive a reasonable income from my other properties’. – was allowed because the court is constantly involved in making objective assessments of what is ‘reasonable’.

Some more problematic cases concern gifts which have purportedly been made subject to a trust to take effect at a later date, where the subject matter of the trust is part of the same property that formed the subject matter of the gift.