Chapter 3b - Declaration of trust

Declaration of trust by conduct

In the preceding pages it has been seen that, whilst mere "loose conversation" will not create a trust, it is not necessary to use technical words or language to create a trust. However the question has also arisen whether it is possible for a settlor to declare an express trust by conduct alone, even if he does not use any words approximating to a declaration as such.

Court of Appeal also came to the conclusion that there had been an effective declaration of trust in these circumstances in Re Vandervell's Trusts (No 2) [1994] Ch 269.

However, as we will explain in the following pages, we take the view that this conclusion was incorrect. We prefer the view of Megarry J, who held at first instance that no trust had been declared in favour of the children.

Perhaps you might like to read the case the before proceeding. The full story of the Vandervell Cases is told in much greater detail in the workbook on formalities.

Re Vandervell's Trusts (No 2)

If you have read the case you should now be familiar with the facts of Re Vandervell (No 2). Vandervell Trustees Ltd were holding an option to repurchase shares which Tony Vandervell had previously transferred to the Royal College of Surgeons. The option was held on a resulting trust for Tony Vandervell because it had not been made clear who was to be the beneficiary of the option at the time that the shares were transferred.

In October 1961 Vandervell Trustees Ltd exercised the option and repurchased the shares from the RCS for £5000. The legal title of the shares was transferred to them on October 27. Tony Vandervell intended the shares to be held by the trustees on the terms of the trusts that were already established for his children. The trustees informed the revenue by letter that they had acquired the shares and held them on the trust for his children.

During the period of October 1961- January 1965 dividends were declared on the shares held by the trustees for the children amounting to some £769,580 after tax. These dividends were added to the funds of the trusts for the children and were invested accordingly.

The revenue authorities claimed that Mr Vandervell was liable for surtax on these dividends of some £628, 229, on the grounds that he had failed to divest himself of his interest in the shares during the period 1961-1965 because he had not disposed of his beneficial interest in the shares.

Finally, on January 19 1965, Mr Vandervell executed a deed by which he transferred to the trustees all right, title or interest which he had in the option or the shares or in the dividends and expressly declaring that the trustees were to hold them for the benefit of the children. At this point the revenue accepted that he had fully divested himself of all interest in the shares and that he was not liable to surtax on any dividends declared after that date.

The central question was whether Mr Vandervell had fully divested himself of his interest in the shares acquired by the exercise of the option.

The Court of Appeal held that a declaration of trust could be inferred from the conduct of the trustees, who had acted with the acquiescence of Mr Vandervell. This declaration was inferred from:

(1) The exercise of the option using money from the childrens' trusts.

(2) The payment of subsequent dividends to the childrens' trusts.

(3) The trustees' notification of the revenue authorities that they were holding the shares on trust for the children.

For further details you may want to read the comments of Lord Denning MR and Lawton LJ.

Criticism of Re Vandervell (No 2)

As we have already indicated, we are of the opinion that the decision of the Court of Appeal that a trust had been declared was wrong. None of the alleged acts of the trustees from which a declaration was inferred support the view that Mr Vandervell had divested himself of his beneficial interest in the shares.

(1) The exercise of the option using money from the children's' trusts.

There is no reason why this should deprive Mr Vandervell of his interest in the shares. As Megarry J stated, where an option belongs to X beneficially the mere fact that the option is exercised using the money of Y does not deprive X of his entitlement to the option.

(2) The payment of subsequent dividends to the children's' trusts.

Whilst this indicates the belief of the trustees that they held the shares on trust for the children, it does not in any way affect the true ownership of the shares. Unless some previous act had deprived Mr Vandervell of his interest therein, the mere fact that the trustees held the dividends for the benefit of the children is irrelevant.

(3) The trustees' notification of the revenue authorities that they were holding the shares on trust for the children.

Similarly this action merely demonstrates the belief of the trustees that they held the shares on trust for the children but cannot have affected the beneficial ownership of them.

Re Vandervell's Trusts (No 2) is therefore probably best regarded as an overly generous decision in which the Court of Appeal sought to protect Mr Vandervell's estate from excessive taxation.

Declaring Trusts of Future Property

In Williams v Commissioner of Inland Revenue [1965] NZLR 395 the New Zealand Court of Appeal held that no trust had been created by means of such a declaration.

The court held that the subject matter of the declaration was future property or an expectancy. It was not property which the settlor owned, nor was it property that was certain to come into his possession. Turner J explained that it was thus incapable of being subjected to an immediate trust.

A present declaration of a trust of future property can at best be construed as an agreement to impress that property with a trust when it comes into the hands of the donor. However such an agreement cannot be enforced by a volunteer beneficiary who has not provided consideration.

The case is consistent with the leading English authorities which were cited by the court, including Re Ellenborough [1903]1 Ch 697.

Declaration of a sub-trust

In the majority of the examples you have considered so far the settlor who has purported to declare a trust has owned the legal title to the property in question. However this will not always be the case. Consider the following situation:

Tim holds 1000 shares on trust for Sarah. She is the sole beneficiary and is of age and legally competent. Last month she orally declared that she held her interest in the shares on trust for her infant son Robert. Since then she has lost her job and needs money to keep paying the mortgage on her flat. She demands that Tim transfer the legal title to the shares to her.

Do you think that Sarah has declared a valid trust in favour of Robert?

(a) Yes, Sarah has declared a valid trust in favour of Robert.

(b) No, Sarah has not declared a trust in favour of Robert.

Answer: (b) No, Sarah has not declared a trust in favour of Robert.

A trust has not been declared in favour of Robert. You should read on to discover why no valid trust was declared.

Although Sarah only enjoys an equitable interest in the shares under the trust of which she is a beneficiary, she is perfectly capable of creating a further trust of her beneficial interest. Such a trust is described as a sub-trust. Since the subject matter of the trust is not land (and thus s53(1)(b) Law of Property Act 1925 does not apply) Sarah can declare a sub-trust orally without the need for further formality.

Whilst there is no theoretical objection to the creation of a sub-trust, equity has taken the view that in some circumstances what appears to be a declaration of a sub-trust is in substance to be characterised as a "disposition of a subsisting equitable interest." Where the sub-trustee would have no active duties to perform which are any different form the duties of the head trustee, the sub-trustee is said to "drop out of the picture," so that the head trustee holds the trust property directly on trust for the sub-beneficiary. This approach has been adopted and approved in the following cases: Onslow v Wallis (1849) 1 Mac & G 506; Re Lashmar [1891] 1 Ch 258; Grainge v Wilberforce (1889) 5 TLR 436. The principle was also accepted by Upjohn J in Grey v IRC [1958] Ch 375.

In our scenario Sarah appears to declare a sub-trust of her beneficial interest in favour of Robert. Since the terms of the sub-trust are identical to those of the head trust she would have no active duties to perform, and Tim would therefore hold the shares on trust for Robert directly. In substance Sarah has transferred her equitable interest in the shares to Robert.

Where such a declaration of a sub-trust is characterised as a transfer of an equitable interest a problem of formalities arises, as s53(1)(c) Law of Property Act 1925 provides that a disposition of a subsisting equitable interest must be made in writing. In consequence, Sarah's oral declaration is void and ineffective to transfer her beneficial interest in the shares to Robert, and Tim continues to hold them on trust for her. As she is a legally competent adult she is entitled to demand that Tim transfer the legal title to her under the rule in Saunders v Vautier.

Issues connected with the declaration of sub-trusts are examined in greater detail in the Formalities workbook. Here it is sufficient to be aware that if a sub-trust is validly declared by a beneficiary there is no need for any further act to constitute the trust. It is fully constituted already.

Summary

In the preceding pages we have examined the requirements of a declaration of trust. Where an owner of property makes an effective declaration a fully constituted trust is immediately created. The settlor no longer enjoys the absolute ownership of his property but holds it under the terms of the trust he has declared. The settlor cannot change his mind after the trust has been declared, and from that time the beneficiaries are the equitable owners of the trust property.

The beneficiaries' equitable interest in the trust property is capable of enjoying priority over the interests that third parties might subsequently gain in the trust property. For example, if the settlor declares a trust of his property and then purports to give it away to a friend, the beneficiaries will still be able to enforce their equitable interests against the friend. Similarly, if the settlor becomes insolvent after having declared a trust, the equitable rights of the beneficiaries' will enjoy priority over the rights of the settlor's general creditors, and the trust property will not form part of the assets to be distributed amongst them.

Because the trust is fully constituted from the moment that the declaration is made the beneficiaries can enforce it by requiring the trustee to carry out his duties. It makes no difference whether the beneficiaries of the trust were volunteers. The trust is enforceable by them even if they did not provide any consideration in return for the declaration of trust.

If the trustee fails to carry out his duties he will be liable to he beneficiaries for breach of trust.