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Justin Santiago, BAppSc (Hons), MBA, LLB (Hons) comes from a journalism, market research, intellectual property and strategic communications consulting background. Now based in Melbourne he spends his time advising businesses on how to communicate to their customers as well as writing on various subjects of interest in this blog.

Tuesday, March 3, 2009

Constitution of a Trust

Every inter vivos gift must comply with the complete and perfect requirement. - Justin Santiago

The complete and perfect requirement refers to constituting a trust which is vesting of the rights which form the subject matter of the trust in the intended trustee. Once it is constituted the beneficiaries of the trust can enforce it against the trustee. A gift will fail if the giver can not, or does not, take the appropriate steps to divest himself of the legal title.

How is a trust constituted?

a. Title to land which is unregistered – execution of deed – S52LPA1925, S2LP(MP) 1989
b. Title to land which is registered – trustee will be registered as the proprietor
c. Chattels - conveyed by either deed or delivery
d. Shares - executed an instrument of transfer of shares in the form required by the company’s articles and registered with the company SS182, S183 Companies Act 1985 and Stock Transfer Act 1963
e. Chose in action – S136 LPA 1925
f. Equitable interests – S53(1)(c) LPA 1925

The general rule about constituting a gift is found in Milroy v Lord - equity will not assist a volunteer to perfect an imperfect gift consistent with the inability to enforce gratuitous promises promises not supported by consideration under common law.

Historically there have been only two ways to create a trust. Either:
(1) the intending settlor declared the trusts and actually transferred the assets to the trustees (or did everything in his power, according to the nature of the property, to transfer the property to the trustees); or
(2) he constitutes the trust with himself as the trustee of the property.

Milroy v Lord holds that an imperfect attempt to create a trust using a third party as trustee will not be interpreted as a declaration by the settlor himself as trustee. The argument here is that there must be an expression of intention to become a trustee which is different from an intention to give over property to another : Richards v Delbridge.

Courts have frequently been called upon to exercise their equitable discretion, and rescue a gift that has failed for some reason or other and will not intervene to create one for him except in the following situations which would result in a constructive trust :-

Exceptions to the rule in Milroy v Lord

1. Detrimental Reliance – if it can be shown that there was a representation, reliance, detriment then proprietary estoppel will step in to order the perfection of the imperfect gift/trust from the moment the assurance is given : Dillwyn v Llewelyn, Pascoe v Turner.

The purported transferor will hold the promised right on constructive trust for the intended donee. However it could be argued that in the alternative the donor could be compelled to make good the donee’s loss (compensation) or to give up his own gain (restitution).

2. Re Rose - there was a defect in the share transfer process –everything has been done to transfer the legal title and this is a question of fact. If so then the gift is effective despite the lack of a valid transfer of title. The legal sleight-of-hand that makes the Re Rose principle work is that, once the donor is committed to transfer the legal title, he is deemed to hold the legal title on constructive trust for the recipient. However for a constructive trust to apply there must be a requirement of ‘unconscionability’. In Pennington v Waine where the donor had manifested an immediate and irrevocable intention to donate shares to another and had instructed her agent to execute the transfer, the donor was not be permitted to deny the interest acquired by the donee even though there was no unconscionability on the part of the donor but the courts felt it would be unconscionable on the part of the donee to be denied his interest as argued by Abigail Dogget in her article "Explaining Re Rose : The Search Goes On". This is a worrying trend since it would complicate the maxim that equity will not assist a volunteer and turn it into equity will not assist a volunteer only if it was not unconscionable.

3. Donatio Mortis Causa or Death Must Cure- conditions for the operation of the rule found in Cain v Moon although not complying with the Wills Act 1837 :-

a. Gifts must be in contemplation of the owner’s death “settled, hopeless, expectation”' of (relatively imminent) death, even if there has not been an adequate transfer of legal title : Re Craven’s Estate.
b. Donor must intend for gift to go back to him if death does not occur – similar to a bare trust situation
c. The gift has to be physically passed on

4. The rule in Strong v Bird - when a testator makes his debtor the executor the debt is automatically released although not made by deed and was merely a bare promise not to sue however this is balanced by the intention to relieve the debt and the intention continued until the testatrix death

5. The rule in Re Ralli’s WT- unperformed promise by deed to give had not been performed during the lifetime of the promisor – enough to constitute the covenanted for trust by virtue of being appointed executor of the promisor’s will

6. The rule in Choithram v Pagarani

Choithram v Pagarani set up a foundation and transferred the legal title to the foundation which is different from vesting the trustees with the legal title.

- it was argued that the foundation does not exist in English law and and that the legal title was not transferred and therefore the trust failed
- however the counter argument were the words “ I give to the foundation” could only mean “I give to the trustees of the foundation trust deed to be held by them”
- however the settlor himself being a trustee and the settlor vesting the legal title in himself puts the situation squarely in the middle of the two historical methods of creating a trust which is for the settlor to declare himself as trustee or to vest the legal title to a trustee


Abigail Dogget Explaining Re Rose : The Search Goes On
Judith Morris When is an invalid gift valid?

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