Leicester De Montfort Law School

LLB Equity & Trusts

The Creation of Trusts – Formality & Constitution

Learning Outcomes

By the end of this topic you should be able to:-

1. Explain the four requirements for the creation of a valid private trust;
2. Explain the situations when formalities are required in the creation of a
trust;
3. Explain what is meant by the constitution of a trust;
4. Identify the different methods of constituting an inter vivos trust;
5. Explain the rules of transfer in respect of money, chattels, land and
shares;
6. Understand what is meant by a chose in action, be able to identify different
types of chose in action and explain the different methods of transferring
title to a chose in action;
7. Be able to identify property which is not capable of assignment;
8. Identify when a trust is incompletely constituted and explain in what
circumstances equity will step in to constitute the trust.

Introduction
In order to create a valid private trust the following criteria must be satisfied:-

1. Any formalities required by statute must be satisfied (see below)

2. The trust must be fully constituted (see below)
3. The trust must comply with the three certainties (see separate notes)
Certainty of words/intention
Certainty of subject matter
Certainty of objects

4. The trust must not be contrary to public policy or the perpetuity rules.

The rules against perpetuities are designed to prevent a settlement or trust

lasting indefinitely. The laws policy is that a settlor should not be able to
control his property for too long after his death as it prevents the
beneficiaries from having full power over the property. While the trust
exists the trust property remains in the trustees’ hands not the

1
 beneficiaries. The Perpetuities and Accumulations Act 2009 states that all
trusts created after the act came into force have a 125 year perpetuity
period.

Public policy is the same as in the law of contract. A trust cannot be

created for an immoral or illegal purpose.

Formalities
Normally there are no formalities required in creating a trust. All that is required is
an intention to create a trust as “equity looks to substance not form”. Therefore it
is possible to create a trust orally. However, although not the general rule, in
some situations formalities are required by statute. Formalities are required in
order to protect the parties, provide documentary evidence of the transaction in
order to minimise fraud and to provide clarity as to what was intended.

Situations where formality is required:-

1. Trusts made inter vivos

These are trusts that become effective within the life of the settlor. Inter vivos
trusts of pure personalty (eg money and shares) can be created without the need
for any formalities. Trusts of land however, due to its value and technical rules of
transfer do require that certain formalities are satisfied.

S.2 Law of Property (Miscellaneous Provisions) Act 1989

This states that contracts to create a trust of land, must be in writing. If not it is
void.

2. Trusts created by will

S9 Wills Act 1837

No will shall be valid unless it satisfies the requirements of s.9, which include the
will being made in writing and witnessed by two witnesses.

3. Transferring an existing interest under a trust

S.53 (1)(c) Law of Property Act 1925

This requires that “A disposition of an equitable interest or trust subsisting at the
time of the disposition must be in writing signed by the person disposing of the
same or by his agent… or by his will”

Grey v IRC [1960] A.C 1 – Where there is no writing there is no disposition.

2
Vandervell v IRC [1967] 2 A.C 291 – Provides an exception to the rule whereby
if the legal and equitable title are being transferred together there is no need for a
separate disposition of the equitable interest.
The Constitution of Trusts

What is meant by constitution?

The legal title of the trust property must be vested in the trustee. If the trust is not
properly constituted then there can be no trust.

“… the settlor must have done everything which according to the nature of the
property comprised in the settlement was necessary to be done in order to render
the settlement binding upon him…. For there is no equity in this court to perfect
an imperfect gift.” - Turner L.J Milroy v Lord (1862) 4 De GF & J 264

Constitution of trusts created by will

A trust created by will is completely constituted (provided the three certainties are
satisfied) when the personal representatives of the testator vest the intended trust
property in the trustees.

Constitution of trusts made inter vivos

As far as trusts created inter vivos are concerned the leading case is Milroy v
Lord. This states that if an owner of property wants to ensure that someone else
obtains an equitable interest in that property he can do so in three ways:-

1. Transfers his entire ownership (legal and equitable) to the other person.
Eg he makes a complete gift. This does not involve a trust.
2. Transfer the legal title to another person to hold on trust for a
beneficiary.
3. Retain legal ownership but declares the property vested in him
to be held on trust. He changes from absolute owner to trustee.

Therefore, based on Milroy v Lord there are two ways of constituting an inter
vivos trust:-

1. Transfer
2. Declaration

These two methods are mutually exclusive. If the settlor attempts to do one thing
and fails there is no trust. The courts will not interpret a failed transfer to mean
that the settlor actually intended to make a declaration as “ equity will not
perfect an imperfect gift”.

3
Jones v Lock (1865) LR 1 Ch App 25
In this case a father who was reprimanded for not bringing his baby a gift wrote a
cheque payable to himself and said “I give this to baby..”. He gave it to the baby
but when he tried to rip it up the father put the cheque in a safe. The father then
died before the cheque was cashed. The court held that this was an imperfect gift
as the cheque had not been endorsed. The father had intended to make
provision for the child but he hadn’t intended to declare himself as trustee. The
gift was proof of this. Therefore the gift failed and the child got nothing.

1. Trusts constituted by declaration

The rule here is that the settlor must make an irrevocable declaration of trust.
There is no possibility of returning to absolute ownership. The intention MUST be
in writing if the trust property is land as per s53(1)(b) but otherwise may be oral.
Informal expressions of intent will suffice eg “I undertake to hold this property for
you” The property is clearly in the hands of the trustee provided he has declared
himself as such.

2. Trusts constituted by transfer

Here it is up to the settlor to ensure that legal title to the trust property is
transferred. How that is done depends on the rules of transfer which apply to
different types of property.

We will now look at rules of transfer for different types of property.

A. Money

There are three criteria that must be satisfied in order to transfer legal title to
money and these are:

Intention
Identify the property
Some act to show intend legal title to pass to the trustee eg by giving the trustee
the cash or a cheque.

B. Chattels

Legal title to chattels can be transferred in one of two ways:

1. Physical delivery coupled with intention

2. Formally executed deed of gift.

In order for a chattel to be delivered words alone are insufficient - Re Cole (1964)
Ch 175. However there can be an oral transfer, provided the means of acquiring

4
physical possession is given. See also Jaffa v Taylor Gallery Ltd (1990) The
Times 21st March

C. Land

The actual transfer to the trustee must take the form of a deed - Law of Property
Act 1925 s.52

Additionally, if the land is registered then the name of the trustee must be
registered on the title at the Land Registry.

Mascall v Mascall (1984) 50 P & CR 119

Here a father executed a transfer of a house to a son. The transfer was sent to
the land registry but the father sought a declaration that the transfer was
ineffective as he had a disagreement with his son. The Court held that the gift
was complete. The settlor had done everything required.

D. Shares

In order to validly transfer legal ownership of shares the settlor must sign the
stock transfer form and send the share certificate to the company. The shares are
not deemed to be transferred until the company enters the new name (the name
of the trustee in the case of a trust) on its register of members. Only by fulfilling
this requirement would the settler have done “everything necessary” in
accordance with Milroy v Lord.

Re Rose [1952] 1 All ER 1217 amended the principle laid down in Milroy v Lord
by interpreting L.J Turners judgement as meaning

“… the settlor must have done everything within his power which according to
the nature of the property comprised in the settlement was necessary to be done
in order to render the settlement binding upon him…””

Therefore, according to Re Rose even if everything necessary hasn’t been done

the trust may still be deemed to be fully constituted if the settlor has done
everything within his power to divest himself of ownership of the property and
the only thing left to be done are acts of a third party. This is known as the Re
Rose principle.

Re Rose [1952] 1 All ER 1217

The deceased had executed a share transfer form and gave it, together with his
share certificate to the trustee. The registration of the shares did not take place
until two months later after the deceased had died and the issue arose as to
when the transfer had become effective as this would have made a difference
regarding estate duty. The COA held that the shares had been transferred on the
date the deceased gave the transfer form to the trustee. At that point the
deceased had done everything in his power to divest himself of ownership.

5
Re Fry [1946] 2 All ER 106
In this case the donor who lived in America wanted to transfer shares in a British
company. In order to transfer ownership, in addition to signing the share transfer
form, permission of the treasury was also required. The donor signed the form
and sent it to the treasury for permission but died before consent was granted.
The Court held that it was up to the donor not only to apply for permission but
also to acquire permission. The transfer was not valid.

See also Re Paradise Motor Co Ltd [1968] 1 WLR 1125 where the transferor
was deemed to have done all that was necessary even though the transfer
document was not signed.

The rule in Re Rose has been interpreted very widely in two more recent cases.

Pennington v Waine [2002] 1 WLR 2075– Expanded Re Rose.

In this case the donor informed a partner in the company’s auditors that she
wished to immediately transfer some shares to her nephew. She executed a
share transfer form in favour of her nephew, who needed to own shares in order
to become a director of the company and delivered it to the partner at the
company’s auditors (agent of the donor). The donor indicated to her nephew that
she wanted to give him some shares and that she wanted him to become a
director of the company. The auditor later wrote to the nephew stating that the
donor had instructed him to arrange the share transfer and that this required no
action by the nephew. The nephew then signed the consent form to act as a
director and was appointment as a director. The donor died before the transfer
was registered. The transfer was held to be valid. The Court held that a donor
doesn’t have to have done everything. All that was required was that the donor
executed the transfer form with intention for it to have immediate effect and it had
reached a point where it would be unconscionable to go back on the transfer.
In this case it would have been unconscionable because the nephew had acted
to his detriment by applying to become a director.

T Choithram International v Pagarani [2001] 1 WLR 1

In this case a wealthy man executed a deed establishing a charitable foundation.
He then stated that “I now give all my wealth to the foundation” and told his
accountant to transfer his assets. He died before the transfer was completed. The
Court held that the settlor was a co trustee of the foundation and therefore his
statement was a declaration of trust.

However, Zeital v Kaye [2010] WTLR 913 seems to indicate a return to the Re
Rose approach.

E. Choses in action

What is a chose in action?

All personal rights of property that can only be enforced by taking action NOT by
possession. They are rights of an intangible nature which are recognised in Law
and equity as being property.

6
Examples of choses in action are:
Debts
Shares
Beneficiaries interests under a trust
The right to take action to enforce a contract. (Note that the benefit of a contract
can be held upon trust even if the contract itself is unassignable - Don King
Production Inc v Warren [2000] Ch 291)

As explained above, statute has provided specific methods of transfer for many
types of chose in action (eg shares, beneficiaries’ interests). The rules below
apply to all other chose in action.

Types of chose:

There are two types of chose in action:-

1. Legal Chose – debts, rights under a contract

2. Equitable Chose – beneficiaries interest under a trust

Transferring (assigning) the legal title to a chose:

There are two ways of transferring the legal title to a chose in action:

1. Legal assignment
2. Equitable assignment

1. Legal (statutory) assignment:

In order for there to be a legal assignment the criteria laid down in

LPA 1925 s 136 must be satisfied.

The assignment must be:-

- Absolute – Entire interest must be transferred

- In writing
- Notice in wrting given to debtor (person with the obligation) – Not clear who has
to give this or when! Warner Bros v Rollgreen seems to suggest that later
notice given by the assignee would be sufficient.
- Must be a debt or other legal thing in action. (Note however that this has
been interpreted to include equitable chose in action)

If the above circumstances are not satisfied the assignment may still be valid as
an equitable assignment.

2. Equitable assignment:

The requirements for an equitable assignment were summarised in Phelps v

Spon-Smith and Co (May 2000)

7
 1. Intention to assign
2. Assignment must sufficiently identify the chose
3. Some act by the assignor showing the transfer to the assignee. This
should be something which clearly establishes the nature of the
transaction being effected. A broad approach is taken here but in order to
prevent problems in proving this element, the assignment will often be in
writing.

In comparison to the requirements for a legal assignment an equitable

assignment:-

- Doesn’t need to be in writing provided there is intention to transfer;

- The assignment doesn’t have to be absolute if it is a debt provided all
parties are joined in any action to enforce the debt - Deposit Protection
Board v Dalia [1994] 1 ALL ER 539;
- No notice is required although it is desirable.

F. Non assignable property:

Certain rights are not assignable either in equity or by statute. This is very
important as, arguably such rights are not chose in action and are thus not pieces
of property.

Rights incapable of assignment are:-

a.Contracts specifically declared to be non assignable.

b. Contracts of a personal nature. This is where the debtor owes duties to a

particular creditor alone. All contracts to provide personal services (eg paint a
portrait) are non assignable as are contracts of employment. Normally contracts
for the sale of goods are assignable.

c. Mere rights of litigation. Eg Once there has been a breach of contract.

d. Expectancies. Eg the hope of inheriting some property by will. Future rights

and the hope rather than the certainty of receiving property are not pieces of
property and are not capable of being assigned unless there is consideration to
support the transfer.

e. Public policy makes certain rights unassignable, eg salaries of public officials

and maintenance payments.

8
Incompletely Constituted Trusts
This refers to the position where there has been a failure to transfer legal title in
the purported trust property to the trustees. In this case, is there anything that
can assist the beneficiaries to give them an enforceable right which they would
otherwise not have due to the failure to constitute?

The Rule in Strong v Bird

Generally “equity will not perfect and imperfect gift”. However there are
situations where equity will provide assistance to complete a trust that has not
been properly constituted. This is known as the Rule in Strong v Bird.

Strong v Bird (1874) 18 Eq 315

In this case there was an intention to release X from a debt. On the death of the
T, X became executor of T’s will and by operation of law the legal title to T’s
estate vested in him. The debt was released.
This case provided that if a person (T) intends to give property to someone
(donee) during their lifetime but fails to make the transfer, normally the gift would
fail. However under this rule if T then appoints the donee as executor of his will,
ownership of the property falls into the donees hands as executor and can be
used to complete the gift to the donee. This is known as fortuitous vesting.

In order for this to work two requirements must be met:-

1. The intention to make the gift to the donee must have continued until the
T’s death
2. The donee must be appointed as executor

Re Stewart [1908] 2 Ch 251 extended this principle to apply to all imperfect inter
vivos gifts, not just debts as covered in Strong v Bird.

The rule in Strong v Bird has arguably been extended by the case of Re Ralli’s
[1964] 1 Ch 288. This case provided that where legal title comes into the hands
of the trustee by whatever means, the trust will be constituted. However, this
case has never been followed and there is doubt over whether it is good law.

Consideration

Most beneficiaries are volunteers as they have not given consideration. Therefore
if the trust is not constituted they have no enforceable rights as “equity will not
assist a volunteer”. This is often a problem where a settlor has promised to put
property on trust but fails to do so.

9
Re Ellenborough [1903] 1 Ch 697
In this case an individual executed a voluntary settlement (where none of the
intended beneficiaries gave consideration) by deed that she would transfer
property she expected to inherit. When she inherited the property she did not
transfer the property. The Court would not enforce a voluntary covenant.

If a beneficiary has given consideration for the promise they can rely on a
contractual remedy and additionally equity can specifically perform the contract
and constitute the trust. This also applies to promises to settle future property (eg
legacies)

Consideration has a different meaning with regard to marriage settlements.

Marriage settlements

This is a settlement made in consideration of marriage made before the marriage,

with the marriage or subsequent to the marriage pursuant to an agreement made
before the marriage.

Settlors, spouses, children and grandchildren are all within marriage

consideration and can all therefore enforce the promise in equity.

Re Plumtre’s Marriage Settlement [1910] 1 Ch 609

Here the only surviving relative covered by the marriage settlement had not given
consideration so could not enforce the covenant.

Pullan v Koe [1913] 1 Ch 9

Here a marriage settlement settled property on the husband and wife and their
children. The wife also agreed to settle on trust any property she might
subsequently acquire. The wife received property but did not transfer it to the
trust. When the wife died the children claimed the proceeds of that property. The
court held that they could obtain specific performance as they were within the
marriage consideration.

Re Pryce [1917] 1 Ch 234

Here there was a marriage settlement with a voluntary contract to settle after
acquired property. There were no children so the only remaining beneficiaries
were more distant relations. The Court held that the trustees could not sue on the
beneficiaries’ behalf as they were volunteers.

SEMINARS 3,4 & 5

In Seminars 3,4 & 5 we will aim to develop your:

1. Understanding of what is meant by the constitution of a trust, the

rules on transfer for different types of property and your ability to
apply those rules to a practical scenario;

10
 2. Understanding of when a trust is incompletely constituted
and in what circumstances equity will step in and
constitute the trust;
3. Problem solving skills;
4. Presentation skills.

REMEMBER:
Seminars provide you with the ability to discuss answers to the
questions set, consider the law in greater depth and apply the law
to a practical scenario. They will help you to clarify any
misunderstanding you may have of a topic area and give you the
opportunity to receive feedback on your understanding.

11