Omar Bennett
A trust is a legal relationship in which the owner of property, or any transferable right, gives it to another to manage and use solely for the benefit of a designated person. A trust is said to be completely constituted when the settlor has done all that is required by law to properly vest title to the trust property in the trustee. However, in the case of an imperfectly constituted trust, the property will not be enforceable by the trustee or the beneficiary as 'Equity will not perfect an imperfect gift'. There are, however, exceptions to this rule, such as where the imperfect gift is made inter vivos to a donee, it may still be perfected if he is subsequently made executor or administrator of the donor’s estate.
| Characteristics | Values |
|---|---|
| Legal title transfer | The legal title of the trust fund must be effectively transferred to the trustee to create a trust. |
| Trustee declaration | If the trustee declares himself as a trustee, the trust is properly constituted upon his declaration. |
| Formalities | If the person making the transfer does not complete the required formalities, the transfer may not be valid. |
| Fiduciary obligations | The donor does not owe any fiduciary obligations to the donee, and the donee does not acquire any rights to the property until the transfer of absolute title takes effect. |
| Court interpretation | Courts generally will not interpret an imperfect gift as a declaration of trust. |
| Beneficiary enforcement | If the trustee enters into an agreement to transfer the trust property to the beneficiary, the beneficiary may enforce the agreement, subject to certain conditions. |
| Inter vivos trusts | The rule regarding the constitution of trusts applies more to inter vivos trusts than to trusts made by will. |
| Incomplete constitution | A trust is incompletely constituted if the settlor has not done all that is required by law to properly vest title to the trust property in the trustee. |
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What You'll Learn
Failure to vest property
A trust is a legal arrangement through which a person, group, or organisation (the trustee) holds the property for the benefit of another (the beneficiary). The vesting of a trust is the date on which the interests in the trust property become fixed and the relevant beneficiaries become absolutely entitled to the property of the trust. This date is typically specified in the trust deed and is known as the 'vesting date' or 'termination date'.
The failure to vest property in a trust properly can have significant legal and tax implications. If the property does not vest properly, it will not be enforceable by either the trustee or the beneficiary, as 'Equity will not perfect an imperfect gift'. This means that the beneficiary will not be able to enforce their right to the gift, and the trustee will not be able to carry out their duties effectively.
In some cases, the trustee may enter into an agreement to transfer the trust property to the beneficiary, known as a covenant to settle. If the trustee dies before fulfilling this agreement, the beneficiary may still be able to enforce it, provided they are a party to the agreement and can furnish consideration. This is because such agreements are considered contracts and are subject to contract law.
The vesting of a trust can also have tax implications, including capital gains tax (CGT) and income tax obligations. Trustees should carefully review the trust deed to understand their duties and obligations, as they may be exposed to punitive consequences if the trust is not administered correctly after the vesting date.
Overall, the failure to vest property in a trust can result in legal and financial complexities, and it is important for all parties involved to understand the terms of the trust and the potential consequences of incomplete or improper vesting.
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Inability to enforce
The inability to enforce an imperfectly constituted trust is a significant issue, and it is essential to understand the conditions under which a trust can be enforced. A trust is a legal relationship where the owner of a property or any transferable right transfers it to another party, the trustee, to manage and use solely for the benefit of a designated person, the beneficiary.
For a trust to be enforceable, it must be properly or completely constituted. This means that the settlor, or the party who entrusts the property, must have done everything required by law to properly vest title to the trust property in the trustee. This includes completing all necessary formalities, such as handing over share certificates and share transfer forms, to achieve a valid transfer of property.
However, there are situations where an imperfectly constituted trust may still be enforceable. One exception is when the transferee can show that there was a representation by the transferor intended to be relied on, and it was relied on to the transferee's detriment. Another exception is under the rule in Strong v Bird, where a testator intends to make a gift but does not complete the gift before their death, and appoints the donee as executor. In this case, equity will assist the donee. Additionally, an incompletely constituted trust can be enforced if it was created in exchange for consideration provided by the beneficiary.
It is important to note that the rules regarding the constitution of trusts apply more to inter vivos trusts, or trusts created during the lifetime of the settlor, than trusts made by will. When a gift is made by will, it is generally enforceable, regardless of the absence of consideration or privity. However, as per the case of Milroy v Lord, an ineffective gift does not constitute a declaration of trust, and an imperfect gift cannot be construed as such.
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Incomplete constitution
An incompletely constituted trust refers to a situation where the legal title of the trust fund or property has not been effectively transferred to the trustee. This could be due to the omission of a step or failure to complete the required formalities by the transferor or settlor. In such cases, the trust is not fully operative and enforceable.
For a trust to become fully operative and capable of being enforced, it must be properly and completely constituted. This means that the settlor must have done everything required by law to properly vest the title to the trust property in the trustee. The trustee must possess the legal title to carry out the trust.
In the case of incomplete constitution, the trust property may not be enforceable by either the trustee or the beneficiary. The principle cited is that 'equity will not perfect an imperfect gift'. However, there are exceptions to this rule, and there are instances where an incompletely constituted trust may still be enforceable. For example, if the transferee can show that there was a representation by the transferor intended to be relied on, which was relied on to the transferee's detriment.
Another exception is the rule in Strong v Bird, where if a testator intends to make a gift but does not complete the gift before their death and appoints the donee as executor, equity will assist in the transfer. Additionally, an incompletely constituted trust can be enforced if it was created pursuant to a promise to create a trust to a person who has provided consideration.
In certain cases, the court's decision may uphold the beneficiary's right to the gift, despite an incomplete constitution. For example, in Dillwyn v Llewelyn (1862), a father asked his son to occupy a piece of land, and the son spent large sums of money to build on it. After the father's death, the court upheld the son's claim to the conveyance of the property, despite the absence of any executed documents in favour of the son.
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No fiduciary obligations
The donor does not owe any fiduciary obligations to the donee under normal circumstances. The donee does not acquire any rights to the property until the transfer of absolute title takes effect. If a gift fails, the court will not transfer it into a trust. For example, in Milroy v Lord (1862), an ineffective gift did not constitute a declaration of trust.
In the case of incomplete gifts, certain maxims apply. If a person attempts to make a gift but does not comply with the formalities, equity will not usually step in to aid the beneficiary. An exception to this rule is where the transferee can show a representation by the transferor that was intended to be relied on and was relied on to the transferee's detriment. This is known as the rule in Strong v Bird.
Another exception is where an imperfect gift is made inter vivos to a donee, and the donee is subsequently made executor or administrator of the donor's estate. In such cases, the gift may still be perfected. For example, in Dillwyn v Llewelyn (1862), a father asked his son to occupy a piece of land, and the son spent large sums of money to build on the land. After the father died without executing any document in favour of the son, the court upheld the son's claim to the conveyance of the property.
It is important to note that the constitution of trusts applies more to inter vivos declarations than to creations by will. When a trust is created during the lifetime of a settlor, the rules regarding the complete and incomplete constitution of trusts will apply. A trust is completely constituted when the settlor has done all that is required by law to properly vest title to the trust property in the trustee. This includes possessing the legal title to carry out the trust.
In summary, while the donor does not typically owe fiduciary obligations to the donee, there are exceptions where equity may step in or where an imperfect gift is made inter vivos and the donee becomes the executor or administrator of the donor's estate.
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Transferor's death
The death of the transferor or settlor of a trust can have significant implications, especially if the trust is imperfectly constituted. In the event of the transferor's death, the legal title to their property typically passes to their personal representative, who is responsible for administering the estate.
If the transferor intended to make an inter vivos gift to the beneficiary but failed to complete the transfer before their death, the beneficiary may still be able to enforce the agreement under certain conditions. For instance, in the case of Dillwyn v Llewelyn (1862), a son's claim to a piece of land was upheld, despite his father not executing any documents before his death. This is an example of the doctrine of estoppel, which prevents the owner of property who has made an imperfect gift from denying the beneficiary's right to the gift.
In the case of Milroy v Lord, it was established that 'there is no equity to perfect an imperfect gift nor will equity construe an imperfect gift as a declaration of a trust'. However, there are exceptions to this rule. One exception is fortuitous vesting, which occurs when the intended beneficiary of an imperfect gift is also the personal representative of the transferor's estate. In such cases, the beneficiary may obtain legal title to the gift in their capacity as executor, thereby perfecting the gift. This principle was established in Strong v Bird (1874) and later extended in Re Stewart [1908] to include situations where the intended recipient is one of several executors.
Another exception to the rule in Milroy v Lord is the principle of donatio mortis causa, which considers the circumstances under which certain gifts made in contemplation of death may be perfected upon the death of the transferor. This exception allows for the fulfilment of the transferor's intention to make a gift or declare a trust, even if the constitution of the trust was incomplete at the time of their death.
It is important to note that the rules and exceptions surrounding imperfectly constituted trusts and the death of the transferor can be complex and subject to interpretation. Each case may depend on specific circumstances, and the applicable laws and precedents.
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Frequently asked questions
An imperfectly constituted trust is one where the settlor has not done everything necessary to transfer the property to the trustee. In this case, the trust is not enforceable by the trustee or the beneficiary, as "equity will not perfect an imperfect gift".
For a trust to be enforceable, the legal title of the trust fund must be effectively transferred to the trustee. This means that all required formalities must be completed.
If the person making the transfer does not complete the required formalities, the transfer may not be valid. In this case, the property may become part of the transferor's estate and be disposed of according to their will.
Yes, there are exceptions. For example, if the transferee can show that the transferor made a representation that was relied on to their detriment, the transfer may still be enforceable.
A gift is a transfer of property without any conditions, while a trust is a legal relationship in which the owner of the property gives it to another to manage and use solely for the benefit of a designated person.
