Formalities and Constitution of Express Trusts — SQE1 FLK2 Trusts Law

A man decides to give his daughter his 8,000 shares in a public company. He signs the stock transfer forms in her favour, and sends them with the certificates to the registrars, keeping nothing back. The registrars take six weeks to enter her on the register of members. In the meantime the company declares a dividend and pays it to him, because his name is still there. He says the dividend is his. Is it?

No. It is hers. He had done everything within his own power, so from that moment he held the shares for her. Formalities and Constitution of Express Trusts. Two questions run through the whole topic. What did the settlor have to write down, and did he actually part with the property? Keep the shares in mind.

Here is the route. Formalities first: when writing is required, and what happens when there is none. Then constitution: what it means for a trust to be complete, and the rule that equity will not assist a volunteer. Then the exceptions to that rule, which is where most of the marks are. And last, secret trusts.

Formalities first, and there are only two questions to ask. Is this a declaration of trust, where the owner keeps the legal title and declares that he holds for someone else? Or is it a disposition of an equitable interest that already exists? And second: is the property land, or is it personal property? Those two answers decide everything.

Take declarations first. Section 53(1)(b) of the Law of Property Act 1925 covers declarations of trust respecting land. It must be manifested and proved by some writing, signed by the person able to declare it. Note the words. Manifested and proved. Not made in writing.

That distinction matters more than it looks. The writing is evidential, so it can come later. A woman who tells her brother orally in January that she holds her flat on trust for him, and signs a letter confirming it in June, has a trust. The oral declaration was unenforceable until it was evidenced. It was not void.

And personal property needs nothing at all. Section 53(1)(b) applies to land, and only to land. A woman tells her family over dinner that she holds her collection of vintage watches on trust for her nephew. That is a trust, with no writing anywhere, provided the three certainties are satisfied. Assuming that every trust must be in writing is a standard way to lose a mark.

Now the other subsection. Section 53(1)(c) governs a disposition of a subsisting equitable interest: a beneficiary transferring an interest that already exists. That must be in writing signed by the person disposing of it. And this one applies to every kind of property, not just land.

The leading case is a stamp duty dispute from 1960. A man transferred shares to trustees to hold on bare trust for himself, and then orally directed them to hold instead for his grandchildren. The House of Lords held that an oral direction of that kind is a disposition of a subsisting equitable interest, so it was ineffective for want of writing. If you are moving an interest that already exists, write it down and sign it.

Two exceptions sit in section 53(2). Resulting trusts and constructive trusts arise by operation of law, and the formality requirements do not touch them. So a trust that arises because a specifically enforceable contract has been made can pass an equitable interest without any writing at all.

Constitution now, and it is a different question entirely. Formalities ask what had to be written. Constitution asks whether the property actually moved. A trust is constituted when legal title has been transferred to the trustees, or when the settlor has effectively declared himself trustee. Until then the beneficiaries have nothing they can enforce.

And they usually cannot force the issue, because of the maxim. Equity will not assist a volunteer. A volunteer is someone who has given no consideration, and the beneficiaries of a family trust are almost always volunteers. If the settlor never completes the transfer, they cannot go to court to make him.

The authority is Milroy v Lord, from 1862. A settlor tried to put bank shares into a trust, handing over the certificates, but the transfer was never registered in the company's books, as those shares required. No trust. Equity will not perfect an imperfect gift, and the settlor cannot fall back on a method he did not choose. Pick a method and finish it.

Which sounds harsh, and would be, but for a line of exceptions. The first is the one we started with. Re Rose, from 1952. Once the transferor has done everything within his own power, leaving only an act for somebody else, the transfer takes effect in equity there and then. He holds the legal title as trustee for the transferee until the paperwork catches up.

So the dividend follows the beneficial ownership, and the daughter gets it. The principle reaches land too. A father executes the Land Registry transfer of his house, and hands his daughter the transfer and everything she needs to apply for registration. He cannot change his mind before she lodges it. He has done all that was his to do. The rest belongs to her and to the Registry.

The second exception is subtler. Choithram v Pagarani, from 2001. A man executed a deed setting up a charitable foundation, appointed himself one of several trustees, and said he was giving all his wealth to it. He died before the assets were transferred to the others. The Privy Council held the trust was constituted anyway.

The reasoning is worth remembering. He was himself one of the intended trustees, so legal title was already vested in a trustee, and his conscience was bound from the moment he spoke. Lord Browne-Wilkinson put it in a sentence you can quote. Although equity will not aid a volunteer, it will not strive officiously to defeat a gift.

Third, the rule in Strong v Bird, from 1874. An imperfect lifetime gift is perfected where the donor intended an immediate gift, that intention continued until death, and the donee is appointed executor of the estate. The logic is that the legal title the donor failed to transfer arrives in the donee's hands anyway, by the appointment.

Test it. An aunt tells her niece that her cottage is hers from now on, hands over the keys, and lets her live there rent free. She repeats it every year until she dies. The registered title is never transferred. Her will appoints the niece as sole executor. The niece keeps the cottage, against a charity entitled to the residue.

But the rule is narrow, and two things kill it. A promise to give in the future is not an immediate gift. A car promised as soon as the donor could get it on the road was a future intention, and the rule did not apply. And the donee must be an executor. If the donor dies intestate and the donee is an administrator, the rule does not run.

Fourth, the deathbed gift, donatio mortis causa. Three conditions. It must be made in contemplation of impending death, usually from an identified cause. It must be conditional on death, so it lapses if the donor recovers. And the donor must part with dominion, by delivering the subject matter or the means of controlling it.

A woman is facing a heart operation the next morning. She unfastens her bracelet, puts it into her niece's hands, and says she wants her to have it if she does not come round. All three are met. The operation supplies the contemplation. The words supply the condition. Putting it into her hands supplies the delivery.

And it can extend to land, which surprises people. Sen v Headley, from 1991. A dying man told the woman caring for him that he wanted her to have his house. He handed her the only key to the steel box holding the title deeds. The Court of Appeal upheld the gift. Handing over the key to the deeds was parting with dominion over the house.

Fifth and last of the exceptions, proprietary estoppel. A clear promise or assurance, reasonable reliance on it, and detriment suffered as a result. The court then grants whatever remedy satisfies the minimum equity to do justice, which may or may not be the thing that was promised. Unlike the others, this one does not perfect the gift. It gives the court a discretion.

Last section. Secret trusts, and they exist to stop a particular fraud. Leave property by will to somebody who has promised to hold it for another, and without the doctrine that person could simply keep it. So evidence of the promise is admitted, even though the Wills Act 1837 requires a will to be in writing, signed, and witnessed by two witnesses.

Two species, and the difference is on the face of the will. A fully secret trust is where the will looks like an absolute gift, and says nothing about any trust. A half-secret trust is where the will says the property is held on trust but does not say on what terms. The terms live outside the document in both cases.

Three requirements for either. Intention to create a binding trust, not a moral wish. Communication of the terms to the intended trustee. And acceptance by that trustee, express or by conduct, during the testator's lifetime. Get those three and the trust bites.

Now the point the exam turns on, which is timing, and it is different for the two species. For a fully secret trust, communication may come at any time during the testator's lifetime, before or after the will is made. For a half-secret trust it must come at or before the execution of the will. Communicate the terms of a half-secret trust afterwards and it fails.

And communication really does mean communication. Suppose a legatee first learns of the intended trust from a letter found in the testator's desk after the funeral. There has been no communication, and no acceptance, in the testator's lifetime. There is also no fraud, because he never promised anything. He keeps the money. That is Wallgrave v Tebbs, from 1855.

Two more points on secret trusts. The communication must be certain enough for the trustee to know what to do, so terms too vague to identify the property or the beneficiaries will fail. And a mere wish or hope is not a trust. Asking a legatee to see everyone is all right imposes a moral obligation, and nothing more.

Finally, why any of this is allowed at all, given the Wills Act. The fraud theory says the doctrine stops the legatee profiting from his own promise. The dehors the will theory says the trust is created during the testator's lifetime and merely takes effect on death. It is not testamentary, so the Act never applied to it. Modern commentators prefer the second.

A word on how SQE1 tests this. You will not be asked to name a case or quote a subsection. You get a scenario, five answers, and one instruction: pick the best one. So learn the rules, and how they decide facts. The names in this episode are memory pegs, nothing more.

If you keep only three. Milroy v Lord, for the rule that equity will not perfect an imperfect gift. Re Rose, for the exception that swallows most of it, once the transferor has done all that was his to do. And Choithram v Pagarani, for the sentence that tells you which way equity leans when a gift is nearly complete.

Four traps the examiners set. One: not every trust needs writing. A declaration of trust of shares, money or chattels can be made out loud. Writing is needed for a declaration of trust of land, and for a disposition of an equitable interest in anything at all.

Two: for land, the writing is evidence, not the act. Section 53(1)(b) says manifested and proved, so a signed note supplied months later cures an oral declaration. An answer that calls the earlier declaration void is wrong. Unenforceable until evidenced is the position.

Three: the timing rule runs the opposite way to instinct. The fully secret trust, the one the will says nothing about, is the flexible one: communicate any time before death. The half-secret trust, which the will admits exists, must be communicated at or before execution.

Four: read the words for a binding obligation. A testator who hopes, or wishes, or is confident that the legatee will do the right thing has created a moral duty, not a trust. And a promise to give in the future is not an imperfect immediate gift, so Strong v Bird has nothing to work on.

Quick check. A woman's will leaves her whole estate to her friend, with no mention of any trust. Two years after signing the will she tells the friend that half the estate is to go to her niece, and the friend says she will see to it. The woman dies a year later without changing the will. The friend now says she is not bound, because nothing was said until long after the will was signed.

Is the friend bound to hold half the estate for the niece? Three candidate answers. One: no, the terms had to be communicated at or before the will was signed. Two: no, the will gives the estate to the friend absolutely and says nothing about a trust. Three: yes, a trust of this kind may be communicated at any time before the testator dies. Pause here if you want a moment.

The answer is three. The will gives the friend the estate absolutely, with nothing on its face to suggest a trust. That makes it a fully secret trust, and for that species the terms may be communicated and accepted at any point in the testator's lifetime. She communicated, the friend accepted, and the will was never altered.

Why the others fail. One states the half-secret rule and applies it to a fully secret trust, which is the trap. Two describes the very thing that makes it fully secret, and treats it as an answer. If the will disclosing nothing defeated the trust, there could never be a fully secret trust at all.

Five things to take away. One: ask whether it is a declaration or a disposition, and whether the property is land. A declaration of trust of land needs signed writing, which is evidential and can arrive later. A disposition of an equitable interest needs signed writing whatever the property.

Two: a trust of personal property needs no writing at all. Three: a trust is constituted when title moves, equity will not assist a volunteer, and the settlor must finish the method he chose. Four: the exceptions are Re Rose, Choithram, Strong v Bird, the deathbed gift and proprietary estoppel, and they are where the marks are.

Five: secret trusts need intention, communication and acceptance, and the fully secret one can be communicated any time before death. And our 8,000 shares? The father held them for his daughter from the moment he posted the forms, and the dividend went with them. Next time, Beneficial Entitlement and Trust Types.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.