Chapter 3c - Transferring Property to a Trustee

Creating a Fully Constituted Trust

You should now be aware that a settlor can create a fully constituted trust in one of two ways:

(1) The settlor may declare himself to be a trustee of his property.

(2) The settlor may transfer the intended trust property to a third party who is to hold it on trust for the beneficiary.

Where the first method is chosen nothing more is required of the settlor than to make an effective declaration of trust. There is no need for him to transfer the trust property as he retains it himself. It is merely the capacity of his ownership which is transformed by the declaration of trust. Formerly he was the absolute owner, but by virtue of the declaration he becomes a trustee who is required to hold the property in accordance with the terms of the trust.

In contrast, where the settlor intends to create a trust by transferring the property to a third party the trust will only be fully constituted when the property is effectually transferred to the intended trustee. Until such time the trust remains incompletely constituted and the settlor retains his absolute ownership of the property concerned. The beneficiaries enjoy no proprietary interest in the trust property until the trust is completely constituted.

Was a fully constituted trust created?

Consider the following scenario:

Tom owned 50 shares in the Louisiana Bank. He executed a voluntary deed purporting to assign these shares to Sam, to be held upon trust by him for the benefit of Andrew and his wife Eleanor. He later handed Sam the share certificates. Three years later he died.

Do you think that the shares were held by Sam on trust for Andrew and Eleanor?

(a) Yes, the shares were held on trust for Andrew and Eleanor.

(b) No, the shares were not held on trust for Andrew and Eleanor.

Answer: (b) No, the shares were not held on trust for Andrew and Eleanor.

The Court of Appeal reached the same conclusion on these facts in Milroy v Lord (1862) 4 de GF & J 264; 45 ER 1185.

Milroy v Lord(1862) CA

M executed a voluntary deed purporting to assign fifty of his shares in the L Bank to SL, to be held by him upon certain trusts for the benefit of the Plaintiffs.

The shares were transferable only by entry in the books of the bank; but no such transfer was ever made. SL held at the time a .general power of attorney authorizing him to transfer TM 6 shares, and TM, after the execution of the settlement, gave him a further power of attorney authorizing him to receive the dividends on his shares in the bank. TM lived three years after the execution of the deed, during which period the dividends on the shares were received by AL and remitted by him to the Plaintiffs, sometimes directly. and sometimes through TM.

Held, that as it was not the intention of the settlor to constitute himself a trustee of .the shares, but to vest the trust in SL, there was no valid trust of the shares created in the settlor.

Held, further, that no valid trust of the shares was created in SL, for although he held a power of attorney under which he might have vested the shares in himself, he did not do so, and was not bound to do so without directions from the settlor, since he held the power only as agent for the settlor.

Held, therefore, reversing the decree appealed from, that the disposition of the shares failed, as being an imperfect voluntary gift.

Can an imperfect transfer take effect as a declaration of trust?

You have now seen that in Milroy v Lord Thomas Medley had failed to create a fully constituted trust of the shares because he had not done all that was necessary to transfer them to the intended trustee. However it was clear from the terms of his deed that he intended that Andrew and his wife should enjoy the beneficial interest in the shares. Thus the question was raised whether it was possible to construe the deed as a declaration of trust in their favour. If the deed were to have this effect Thomas Medley would have been holding the shares subject to a fully constituted trust in favour of Andrew and his wife.

Which of the following statements best summarises the principle adopted by the Court of Appeal in respect of the question whether Thomas Medley had declared himself trustee of the shares?

(a) An imperfect transfer will never be construed as an effective declaration of trust

(b) An imperfect transfer will always be construed as an effective declaration of trust

(c) An imperfect transfer will sometimes be construed as an effective declaration of trust

Answer: (a) An imperfect transfer will never be construed as an effective declaration of trust

Despite the existence of some earlier authorities which seemed to indicate the contrary, the Court of Appeal held that where a settlor had intended to create a trust by transferring his property to a third party trustee, but had failed to make such a transfer, his expression of intention could not be construed as a declaration of trust. This was explained by Turner LJ.

The trust thus remained unconstituted and could not be enforced by the volunteer beneficiaries.

Equity will not construe an imperfect gift as a declaration of trust

You have now seen that in Milroy v Lord the Court of Appeal held that an imperfect transfer of property to a trustee will not be treated as an effective declaration of trust by the settlor. In some cases, such as Milroy v Lord itself, you might think that this restrictive approach prevents the implementation of the settlor's overriding intention, which was to benefit the beneficiaries of the incompletely constituted trust. However subsequent cases have consistently upheld the principle.

Equity's refusal to treat an ineffective transfer as a declaration of trust has been justified on two main grounds:

(1) To construe a declaration of trust from an imperfect transfer would run counter to the settlor's intentions

Where a settlor has indicated that he will create a trust by transferring his property to a third party trustee it is clear that he did not intend to render himself a trustee. His failure to transfer the property to the intended trustee may have been an accident (for example if he did not know what was required to transfer the property or if he died before he was able to complete a transfer) or it may have been deliberate, for example because he changed his mind and decided not to create a trust but to retain the property for himself. In Milroy v Lord Turner LJ stressed that a settlor's true intentions were to be determined from the mode of creation that he had indicated he would adopt. This is consistent with the authorities regarding declarations of trust, where it has been stressed that an owner must demonstrate that he clearly intents to render himself a trustee.

(2) To construe a declaration of trust would render irrelevant the distinction between voluntary promises and contracts

More significantly, if equity were to construe every present expression of intention to transfer property as a declaration of trust the very important distinction between unenforceable promises and contracts would have been virtually eliminated. In Milroy v Lord Turner LJ highlighted the danger that every imperfect transfer would be effective as a declaration of trust. In Richards v Delbridge (1874) LR 18 Eq 11 Jessel MR expressed the view that it would be unsatisfactory if every expression of present gift was treated as creating a trust.

Summary

It has thus been that, where a settlor intends to create a trust by transferring his property to a trustee, the trust will only be constituted when an effective transfer of that property is completed. If no effective transfer is made the trust remains incompletely constituted and the beneficiaries enjoy no rights to the trust property.

It has also been seen that equity will not treat an imperfect transfer as a declaration of trust.

The precise requirements of an effective transfer will vary depending upon the type of property concerned. The next section of this workbook will therefore examine the requirements for an effective transfer of common types of property.