Constitution of Express Trusts

1. Constitution of Express Trusts Prof Cameron Stewart

2. Ways to create a trust • 1. by declaration, where a titleholder expresses his or her intention to hold their property on trust for another; • 2. by transfer, where title is transferred to a person with instructions that it be held on trust for another; the transfer can occur either via an inter vivos transaction (which is generally referred to as a ‘settlement’) or post mortem (by will); and • 3. by direction, where the beneficiary of an existing trust directs the trustee to hold his or her interest on trust for another.

3. The three certainties • Intention • Subject matter/Property • Beneficiaries/Objects • Without all three the trust will fail • Knight v Knight (1840) 49 ER 58 at 68; Varma v Varma [2010] NSWSC 786 at [474]; Ying v Song [2010] NSWSC 1500 at [239].

4. Certainty of intention • An express trust will not be valid unless it is clear that the creator has intended to create a trust. • NB: resulting and constructive trusts do not have to satisfy certainty of intention. • The requirement of certainty of intention does not mean that the creator has to be fully aware of the law of trusts before they can be found to have intended to create a trus: Re Armstrong (dec’d) [1960] VR 202

5. Certainty of intention • Because of the focus on the creator’s intention it is possible to create a trust without using the words ‘trust’ or ‘trustee’: Registrar of the Accident Compensation Tribunal (Vic) v Federal Commissioner of Taxation (1993) 178 CLR 145 • The intention to create a trust can also be inferred from conduct

6. Certainty of intention • The burden of proof in cases where the intention of the creator is questioned, lies on the person who alleges that a trust was intended • Inter vivos: oral and written evidence allowed

7. Certainty of intention • Parol evidence rule will not apply in situations where: 1. The disposition of the property that constitutes the trust is not required to be in writing (eg the disposition was of personal property): Boccalatte v Bushelle [1980] Qd R 180; 2. The document was not intended to be a complete expression of the transferor’s intention: Star v Star [1935] SASR 263; or 3. The document is ambiguous, Lutheran Church of Australia v Farmers Cooperative Executors & Trustees Ltd (1970) 121 CLR 628; Boranga v Flintoff (1997) 19 WAR 1, or created in circumstances of fraud, duress or mistake.

8. Certainty of intention • In cases of post mortem trusts, the law restricting extrinsic evidence in the interpretation of a will also applies in addition to the parol evidence rule • If the creator transfers property and expresses a motive, hope or expectation that the property will be used in a particular way, the condition will be viewed as precatory and impose no obligation. A mere intention to create a trust which is not acted upon will not satisfy the requirement of certain intention

9. Commissioner of Stamp Duties v Joliffe (1920) 28 CLR 178 • Bank account opened as trust account • Done to avoid tax • The trust was not valid even though express words of trust were used as there was no intention

10. La Housse v Counsel [2008] WASCA 207 • Deceased had set up two accounts in his daughters’ names, where he expressed himself to be trustee of the accounts. • Later the deceased used the moneys to purchase a house which, in his will, he gifted to his ex-girlfriend. The will named the girlfriend as the executrix of his estate. • The daughters claimed ownership of the house on constructive trust. The executrix denied that the accounts were trust accounts and claimed that the deceased’s actions indicated that he had no intention to create a trust. • The Court of Appeal of Western Australia found that the evidence overwhelmingly showed an intention to create a trust of the moneys. The creation of the accounts and his statements to third parties indicated that he had intended for two trusts to be created. The use of the funds was a breach of trust which could be remedied via the imposition of a constructive trust over the house.

11. Foley v Foley [2006] QSC 347, • Daughter alleged that grandparents had agreed to hold the beneficial title of land on trust for their grandson • .Statements were made by the grandmother which indicated that the grandson would be given a beneficial interest, and the grandfather did not contradict those statements. • After the grandmother’s death, the property was transferred into the grandfather’s sole ownership and the grandfather refused to be bound by any agreement concerning an inter vivostrust. • Mullins J could not find evidence that the grandfather had ever intended to hold the property on trust for his grandson. • The fact that he did not remonstrate with his wife when she made statements about giving the child the property did not prove that the grandfather had agreed to create a beneficial interest for the grandson while the grandfather was still alive.

12. Harpur v Levy (2007) 16 VR 587 • An intention to create a trust at a later time not an intention

13. Re Armstrong (dec’d) • Two investment accounts had been deposited by the settlor in a bank for two years. • The bank manager was instructed to give the principal sums to the settlor’s sons when the investments matured. Interest was to be paid to the creator. • The court found that there was an intention to create a trust for the sons over the capital amounts, even though those beneficial rights were postponed until the investments matured.

14. Shortall v White [2007] NSWCA 372 • Handley JA found that the subjective test of intention should only be applied when the trust is claimed to have been created unilaterally, without consideration and without the beneficiaries being informed. • In cases where the trust is created as part of a contract with consideration, the appropriate test is the objective test of intention and the purported trustee will not be able to later disclaim the trust by alleging that he or she never intended to create one if there is objective evidence that a trust was intended.

15. Byrnes v Kendle (2009) 243 CLR 253 • This case concerned a house in Murray Bridge, South Australia. The house was registered under the Torrens system to Clifford Kendle. • Clifford was married to Joan Byrnes. In 1997 Clifford signed an ‘acknowledgment of trust’ which declared that he held one undivided half interest in the property as tenant in common for Joan. • The couple separated in 2007. Later in that year Joan assigned her interest under the trust to her son Martin. Clifford argued that he did not have a real intention to create a trust and that he could bring evidence to show his true intention. • The High Court disagreed and found that there was an intention to create a trust and that intention could be proven by the objective evidence contained in the acknowledgment.

16. Heydon and Crennan JJ • [T]he ‘intention’ [to create a trust] is an intention to be extracted from the words used, not a subjective intention which may have existed but which cannot be extracted from those words. This is as true of unilateral declarations of alleged trust as it is of bilateral covenants to create an alleged trust. It is as true of alleged trusts which are not wholly in writing as it is of alleged trusts which are wholly in writing. In relation to alleged trusts which are not wholly in writing, the need to draw inferences from circumstances in construing the terms of conversations may in practice widen the extent of the inquiry, but it does not alter its nature … [S]ubjective intention is irrelevant both to the question of whether a trust exists and to the question of what its terms are.

17. French CJ • Given its statutory and factual setting, Jolliffe should not be taken as authority for the general proposition that where there has been an explicit written declaration of trust, unaffected by vitiating factors, evidence is admissibleto contradict the intention to create a trust manifested by the declaration … What Isaacs J said in Jolliffewas entirely consistent with the principle that a trust cannot be created unless the person creating it intends to do so

18. Gummow and Hayne JJ • Jolliffe should not be regarded as retaining any authority it otherwise may have had for the proposition that where the creation of an express trust is in issue, regard may be had to all the relevant circumstances not merely to show the intention manifested by the words and actions comprising those circumstances, but to show what the relevant actor meant to convey as a matter of ‘real intention’.

19. Owens v Lofthouse [2007] FCA 1968 • Shams? • Bankrupt failed to prove that she had declared a trust of four properties prior to her bankruptcy as the trust document did not appear to be genuine and the bankrupt had previously claimed outright ownership of the titles, which raised sufficient questions over her real intentions.

20. Chang v Tjiong [2009] NSWSC 122 • Dad put flat into son’s name • Wrote letters: • My ways have offended and upset Mum. Look after her after I am gone. It is better that she live with a child. Use the money from the home unit for her. If there is any left over after she is gone, use it for Roy if he still needs it. There are also others in the family who need the money for their studies. • Precatory or intention?

21. Chang v Tjiong [2009] NSWSC 122 • Palmer J found that the letters evidenced an intention to create a trust that was not precatory. The letters showed it was the father’s intention to create a trust for himself, with a life estate to his wife, with a remainder to be held in a discretionary trust for the remaining family members, including the illegitimate son.

22. Quistclose trusts • Trusts and debt • Mutual intention of settlor and trustee? • Barclays Bank Ltd v Quistclose Investments Ltd[1970] AC 567; [1968] 3 All ER 651 • The mutual intention of the parties can be discerned from the language employed by the parties, the nature of the transaction and the rele­vant circumstances attending the relationship between them

23. Quistclose trusts • Sole intention of trusee? • Re Kayford Ltd(in liq) [1975] 1 All ER 604 • Stephens Travel Service International Pty Ltd (receivers and managers appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331

24. Minassian v Minassian [2010] NSWSC 708 • Trust document destroyed • Ball J found that s 48 of the Evidence Act 1995 (NSW) allows a party to prove the contents of a document (like a trust) by adducing evidence of an admission made by another party to the proceeding as to the contents of the document (s 48(1)(a)) or, in cases where the document in question is not available, by ‘adducing from a witness evidence of the contents of the document in question’ (s 48(4)).

25. Certainty of subject matter • An express trust cannot exist without trust property. The trust property must therefore be reasonably identifiable or ascertainable at the time the trust is created. This requirement of identifiability is known as ‘certainty of subject matter’

26. Certainty of subject matter • One of the equitable maxims that is used here is ‘that which is not certain is capable of being rendered certain’. As long as it is possible to piece together the clues to determine the identity and quantum of the prop­erty it will be sufficiently certain

27. Re Golay’s Will Trusts [1965] 2 All ER 660 • “I direct my executors to let Tossy — Mrs. F. Bridgewater — to enjoy one of my flats during her lifetime and to receive a reasonable income from my other properties; she is, if she so wish, to wear any of my jewellery, car, etc., until her death. Nothing to be distracted, given or loaned to any of her relations or friends, money or goods.”

28. Ungoed-Thomas J • In this case, however, the yardstick indicated by the testator is not what he or some other specified person subjectively considers to be reasonable but what he identifies objectively as “reasonable income.” The court is constantly involved in making such objective assessments of what is reasonable and it is not to be deterred from doing so because subjective influences can never be wholly excluded. In my view the testator intended by “reasonable income” the yardstick which the court could and would apply in quantifying the amount so that the direction in the will is not in my view defeated by uncertainty

29. Estate of Chau (dec’d) [2008] QSC 156 • ‘A trust over any money that I may have including any bank accounts’ • Did this include a wealth management account which contained units in a unit trust with a bank? • Yes because the testatrix referred to it as a bank account

30. Certainty of subject matter • Problems can occur when the trust property is part of a number of identical items, for example, ‘5% of 950 shares’. If the subject matter has not been specifically identified the trust is uncertain • Future property cannot be held on trust.

31. Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271, • Mr and MrsHerdegen held all the shares in Onedin Investments Pty Ltd. • MrHerdegen was the registered holder of 59 shares and MrsHerdegen was the registered holder of 41 shares. • The shares were numbered. • After selling the shares they were assessed as subject to taxation but they claimed they were exempt as ‘bare trustees’. • The trust allegedly arose when MrHerdegen promised that either he or his wife would hold 37 shares on behalf of Mr Boyden and 38 shares for Mr Allen. The rest was to be held between Mr and MrsHerdegen, but the evidence was unsatisfactory and confused

32. Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271, • Gummow J found that an express trust had not been created because it was not certain whether a trust had really been intended. It was unclear which bundle of shares was to be used to create the trusts and it was also unclear who was intended to be the beneficiaries of which bundle.

33. Hunter v Moss [1994] 3 All ER 215 • A gift of 50 of 950 shares which were all of the same class • The Court of Appeal of England and Wales upheld a disposition of this sort in circumstances where the shares all came from the same company

34. White v Shortall [2006] NSWSC 1379 • This case concerned a declaration of trust over a total of 1.5 million shares of which 222,000 shares were to be held for the plaintiff with the remaining shares being held for the defendant. • The defendant had promised in writing to hold the shares on trust but he later refused to recognise the disposition. • It was argued by the defendant that the declaration of trust was ineffective because the declaration offended the rule of certainty of subject matter. • Importantly, the company’s shares were not numbered so it was not possible to directly identify each share being transferred by reference to a number.

35. Campbell J • A trust of this kind is not analogous to a simple trust, where a single and discrete item of property is held on a bare trust for a single beneficiary. Rather, it is a trust of a fund (the entire shareholding of 1.5 million shares) for two different beneficiaries (the plaintiff and the defendant himself), where powers of management are necessarily involved in the trust (to sell or encumber, within limits that such dealings do not impinge on the plaintiff’s rights), and where duties on the trustee would arise as a matter of law (eg to deal with any dividends and capital distributions by distributing them in the appropriate proportions). It is because the trust is construed as being of the entire shareholding that it is not necessary for the plaintiff to be able to point to some particular share and be able to say ‘That share is mine’. It is because of this feature of the trust that the defendant declared that an attempt to draw an analogy with cases concerning whether property passes in items of goods when the goods are not appropriated to the contract … fails — because in those cases, identification of the individual items in which property has passed is essential if the property in them is to pass. The construction that is needed … does not require there to be identification of particular shares in which the beneficiary has the beneficial interest. Given the nature of shares in a company, it is perfectly sensible to talk about an individual having a beneficial interest in 222,000 shares out of a parcel of 1.5 million, even if it is not possible to identify individual shares that are held on trust.

36. Upheld in Shortall v White [2007] NSWCA 372 • Approved in Pearson v Lehman Brothers Finance SA [2011] EWCA Civ 1544 at [71]

37. The notion of ‘trust property’ • The subject matter must be property in either legal or equitable form for it to be held on trust. Therefore, the concept of ‘trust property’ includes real property in tangible and intangible forms, choses in action and choses in possession (goods)

38. St Vincent de Paul Society Qld v Ozcare Ltd [2011] 1 Qd R 47 • St Vincent de Paul Society created a company. • It was alleged that land had been transferred to the company in breach of trust and it was argued that the members of the company held their membership in the company on trust for St Vincent de Paul. • The trial judge had struck out this pleading on the basis that it was not possible for the members to hold their rights on trust as they were not property. • The trial judge found that because members had to accept the philosophy of the society or the Catholic ethos meant that membership was personal and not proprietorial. • The Court of Appeal disagreed. The rights of members were choses in action. They were substantial and there was no prohibition on assignment of members’ rights in the articles of association. The fact that members had to ascribe to the values of the society or Catholicism left membership open to millions of people in Australia and was not any more restrictive than the personal membership requirements of many proprietary companies.

39. Trustee Act 1925 (NSW) s 5 • Property includes real and personal property, and any estate or interest in any property, real or personal, and any debt, and any thing in action, and any claim or demand, and any other right or interest, whether in possession or not.

40. Certainty of objects • A trust will fail if the beneficiaries are not identified with sufficient certainty.This is sometimes known as ‘the beneficiary principle’ • There are two exceptions to this rule. The first exception is charitable trusts. The second exception is a particular anomalous group of trusts for animals • The level of certainty required by the beneficiary principle changes subject to whether the trust is a fixed trust or a discretionary trust

41. Morice v Bishop of Durham (1804) 32 ER 656 • Sir William Grant MR said: • There can be no trust over the exercise of which this court will not assume a control; for an uncontrollable power of disposition would be ownership, and not trust. If there be a clear trust, but for uncertain objects, the property, that is the subject of the trust, is undisposed of, and the benefit of such trust must result in those, to whom the law gives ownership in default of disposition by the former owner. But this doctrine does not hold good with respect to trusts for charity. Every other trust must have a definite object. There must be somebody, in whose favour the court can decree performance.

42. Fixed trusts and certainty • In a fixed trust the beneficiaries must be identifiable in such a way as to allow the court to draw up a complete list of the beneficiaries at the time their ben­eficial interests come into effect • Problems can occur when the list of possible beneficiaries is extremely long and the job of discerning the identity of the beneficiaries can­not be completed at the time the trust comes into effect

43. Re Gulbenkian’s Settlement Trusts [1970] AC 508 • Lord Upjohn said: • That class must be as defined as the individual; the court cannot guess at it. Suppose the donor directs that a fund be divided equally between ‘my old friends’, then unless there is some admissible evidence that the donor has given some special ‘dictionary’ meaning to that phrase which enables the trustees to identify the class with sufficient certainty, it is plainly bad as being too uncertain. Suppose that there appeared before the trustees (or the court) two or three individuals who plainly satisfied the test of being among ‘my old friends’, the trustees could not consistently with the donor’s intentions accept them as claiming the whole or any defined part of the fund. They cannot claim the whole fund for they can show no title to it unless they prove they are the only members of the class, which of course they cannot do, and so, too, by parity of reasoning they cannot claim any defined part of the fund and there is no authority in the trustees or the court to make any distribution among a smaller class than that pointed out by the donor. The principle is, in my opinion, that the donor must make his intentions sufficiently plain as to the objects of his trust and the court cannot give effect to it by misinterpreting his intentions by dividing the fund merely among those present. Secondly, and perhaps it is the most hallowed principle, the Court of Chancery, which acts in default of trustees, must know with sufficient certainty the objects of the beneficence of the donor so as to execute the trust.

44. Lempens v Reid [2009] SASC 179 • A gift to ‘such of them my friends who resided with me from overseas’ failed as the deceased had not provided any information as to who these people were and all attempts at finding them had failed.

45. Prosper v Wojtowicz [2005] QSC 177 • The testator made a gift on trust to ‘persons who attend my funeral and who are not (and were not) at any time related to me’. Unfortunately, a complete and accurate list of attendees had not been kept at the funeral. Wilson J, at [31], said: • In the present case, when the testator died the class was sufficiently defined to be ascertainable at the date of distribution: it would have been possible to have a complete list of funeral attendees compiled. That such a complete list was not in fact compiled does not invalidate the trust (although it does give rise to administrative problems for the applicant).

46. West v Weston (1998) 44 NSWLR 657 • Testator had created a trust for ‘the living issue at the time of my death of my four grandparents … as attain 21 years’. • The executrix had made every effort to discern the identities of the beneficiaries, which numbered over 1600 people. • However, the executrix was unable to be certain as to the identity of any further beneficiaries. If the trust failed the entire estate would go to the Crown as bona vacantia.

47. Young J • The rule will be satisfied if, within a reasonable time after the gift comes into effect, the court can be satisfied on the balance of probabilities that the substantial majority of beneficiaries have been ascertained and that no reasonable inquiries could be made which would improve the situation.

48. West v Weston (1998) 44 NSWLR 657 • In Prosper v Wojtowicz [2005] QSC 177, Wilson J distinguished Weston and declined to comment on its force. • However, in Re Meyerstein (dec’d) [2009] VSC 564 at [22], Ross J applied the West v Weston formulation to an intestate estate where it had been difficult to discern who were the next of kin.

49. Fixed trusts and certainty • Once the identity of the beneficiaries has been ascertained the fact that it is difficult to find the whereabouts or continued existence of the beneficiaries does not affect the certainty of the disposition. Trustees can always apply to the court for directions or pay the missing beneficiary’s share into court

50. Re Benjamin; Neville v Benjamin [1902] 1 Ch 723 • The court found that once the criteria was found to be certain, an order could be made to distribute the estate to those members of the class which have been ascertained. • If a person entitled to a portion of the estate appeared later, the executor would be protected against the claims of a newly discovered beneficiary. • The beneficiary retains a right to pursue a claim against the beneficiaries who had been paid incorrectly, but he or she cannot pursue the trustee. • Such a court order is now referred to as a ‘Benjamin order.’