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Equity and Trusts/Constitution

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CONSTITUTION OF TRUSTS

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A beneficiary cannot legally enforce a trust until it has been completely constituted, because the beneficiary is treated as a volunteer, and "equity will not assist a volunteer". A trust can only be completely constituted when the legal title to the property has been transferred to the trustee(s) or the settlor has declared themselves a trustee.

Equity will not assist a volunteer

A ‘volunteer’ is someone who has not given consideration for the received property i.e. it was a gift. Equity does not ‘assist’ a volunteer in order to avoid undermining the common law rules about contractual consideration. This ensures that the settlor is serious about creating a trust and prevents casual imposition of obligations on the trustees. There is a general presumption against gifts because they are ‘inherently uneconomical and unfair’; if you are getting something for nothing, it requires actions, not mere intention.

Ways to constitute a trust

There are two mutually exclusive ways to constitute a trust: the trust property must be transferred to the nominated trustees, or the settlor declares themselves to be the trustee. The effect of a declaration that property is now held as trustee is to transfer the beneficial interest to the beneficiary(ies), with the legal title staying with the settlor who is now also trustee. The courts look for clear evidence if there is any dispute. Where the property is not properly transferred to trustees, courts will assume the settlor intended to declare themselves the trustee.

Where property is transferred to trustees, it is possible that equity will enforce the trust even if the transfer is not complete at law. The transferor must show that they have "done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property", i.e. things that are within the settlor’s power. This is not seen as equity assisting the volunteer because the court is not ordering the transferor to do anything.

Bank of Louisiana, New Orleans.

Milroy v Lord (1862)

For the trust to be fully constituted, legal title should be transferred to the trustees. What can equity do if a settlor changes their mind or dies before legal title has been transferred? In Milroy v Lord a voluntary deed was executed purporting to assign 50 shares in Louisiana Bank to Lord, upon trust. The name of the new owner was never registered in the bank’s books. When the settlor died he was still registered as the legal owner of the shares. The dividends had been paid to the beneficiaries, not the legal owner. Had a trust been created?

The decision was that a trust had not been created because, to paraphrase one of the judges:

in order to render a voluntary settlement valid and effectual, 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 transfer the property and render the settlement binding upon him.

—Turner LJ

Effectively this is the maxim that "equity does not perfect an imperfect gift".

Transferring the legal ownership of shares

To apply the test for complete constitution of a trust, you need to know what the requirements are for a gift of the kind of property in question. Shares in public companies must be transferred via the Stock Exchange. If it is a private company, the donor must execute a stock transfer form and deliver it to the donee with the share certificate. It is not enough to lodge the transfer with the donor’s own agent.

Application to Milroy v Lord

The intention was to transfer the shares into the name of the trustee, not for the owner to declare himself trustee. The deed did not effect a transfer. The legal owner had the power to transfer the ownership of the shares by registering the name in the company books, but had not done so. The trust was therefore not completely constituted because the settlor had not done everything in his power to effect the transfer.

“Everything in his power”

In Re Fry (1946) the paperwork had been completed by the settlor but the share transfer required permission from the Treasury, which had not been obtained by the time of death of the testator. It was possible the Treasury would have asked for more information. It might have been possible for the testator to refuse to answer more questions and to pull out of the transaction. As the ‘additional step’ involved the original owner of the shares, the transfer was not complete.

It might be expected that getting permission was outside Fry’s control and therefore he had done everything within his own power that had to be done. However, the court held that there was potentially more for Fry to do because he could answer any Treasury questions. Therefore the trust was not completely constituted.

Re Rose (1952)

The deceased had sought to transfer shares to his wife and another, to be held on trust but there was a delay in registering the change in share ownership. For tax purposes, it was necessary to determine if the transfer was effective to dispose of his legal interest or if it continued until the new ownership was registered. The shares were held in a private company, which had the power to refuse to register someone as a shareholder. The deceased and the transferees were themselves directors of the company, and thus the people with that power.

The transfer was signed by both transferor and transferee and it conformed with the company requirements. The deed of transfer was delivered to the transferee, the trust was completely constituted and therefore Mr Rose was no longer the legal owner of the shares as soon as he signed the transfer deed of transfer. Thus, there was no estate duty payable on the shares.

The only thing left was for the new shareholders to be registered in the company register. Although directors had the power to refuse to register the change of ownership, this case contrasted with Re Fry because Mr Rose was one of the directors and the other directors were the intended recipients of his shares. What if Rose had changed his mind about the transfer? Would there have been any means to force him – as director – to register the change of ownership?