5 single best answer questions on Trusts Law, written to the SRA specification. Pick an answer, then open the explanation: the correct option, why each of the others fails, and the authority behind it. No sign-up.
Creating an express trust — the three certainties, constitution and formalities; fixed and discretionary trusts; charitable trusts and non-charitable purpose trusts; resulting trusts; trusts of the family home; the liability of strangers to the trust; fiduciary duties; trustees' powers of investment, maintenance and advancement; liability for breach; and equitable remedies, including tracing.
Most questions describe a settlement or a dealing with trust property and ask whether a trust exists, what a beneficiary is entitled to, or what remedy lies against a trustee or a stranger.
Question 1
Discretionary trustsHarder
Five years ago a settlor executed a deed transferring £900,000 to three trustees, to be held for such of the settlor's children as the trustees should select, in such shares as they thought fit. The deed also empowers the trustees to add any future grandchild of the settlor to the class of beneficiaries. The settlor has three children, aged 24, 27 and 30, and the trustees have in practice distributed the trust income equally between the three children each year. Last month the trustees executed a deed of appointment appointing £50,000 of capital to the youngest child absolutely; the payment has not yet been made. That child now wishes to charge her interest under the trust to a lender.
Which of the following best describes the youngest child's interest in the trust fund?
Show the answer and explanationAnswer D+
D
Correct answer
She has a vested equitable interest in the £50,000 appointed to her, but no interest in the rest of the fund.
An object of a discretionary trust has no proprietary interest until the discretion is exercised; once it is, the appointed sum is hers in equity.
The trustees' deed of appointment gave the youngest child a vested equitable interest in £50,000, which she can charge. In respect of the remaining £850,000 she is still only an object, with a hope of benefit and a right to due consideration.
The deed of appointment exercised the discretion in her favour, so that sum is hers in equity and can be charged; as to the balance she remains a mere object with a hope of benefit.
Gartside v IRC [1968] AC 553 — An object of a discretionary trust has no interest in the fund unless and until the trustees exercise their discretion in their favour.
Saunders v Vautier (1841) 4 Beav 115 — Only ascertained beneficiaries of full capacity who are together absolutely entitled may collapse the trust.
Rule card
Discretionary trust object: spes plus right to be considered; exercise of the discretion converts that into a proprietary equitable interest in the appointed property.
Why the other options fail
A
Adjacent rule
She has an equitable interest in one third of the fund, since the trustees have always distributed the income equally between the children.
A past practice of equal distribution does not convert a discretionary trust into a fixed interest trust; the trustees remain free to select and to vary shares.
McPhail v Doulton [1971] AC 424 — Under a discretionary trust the objects' entitlement depends on the trustees' selection, not on fixed shares.
B
Surface readingClosest alternative
She has no equitable interest in the fund, only a hope of benefit and a right to be considered.
That describes an object before any exercise of discretion. The trustees have already appointed £50,000 to her absolutely, which gives her a proprietary interest in that sum.
Ruled out by: Last month the trustees executed a deed of appointment appointing £50,000 of capital to her absolutely, so she is no longer a mere object as to that sum.
Gartside v IRC [1968] AC 553 — An object of a discretionary trust has no proprietary interest in the fund before the discretion is exercised.
C
Surface reading
She has no equitable interest until the trustees actually pay the appointed sum to her.
The appointment, once validly made by deed, vests the equitable interest in the appointed sum; payment is merely the trustees' subsequent duty.
Gartside v IRC [1968] AC 553 — It is the exercise of the discretion, not payment, that confers an interest on the object.
E
Adjacent rule
She and her adult siblings are together absolutely entitled and may require the trustees to distribute the fund.
The trustees may add future grandchildren to the class, so the objects are not all ascertained and the children cannot collectively bring the trust to an end.
Saunders v Vautier (1841) 4 Beav 115 — Beneficiaries who are all ascertained, of full age and capacity and together absolutely entitled may direct the trustees to transfer the trust property.
Question 2
The rule in Saunders v VautierMedium
Trustees hold a fund of £800,000 on trust to pay the income to a widower for life, and on his death to hold the capital for the settlor's nephew absolutely. The widower is 68 and the nephew is 40; both have capacity. Together they ask the trustees to wind the trust up now, with the widower taking 30% and the nephew 70%. The trustees think this unfair to the widower and suggest putting the matter before a judge.
Are the trustees bound to give effect to the beneficiaries' request?
Show the answer and explanationAnswer A+
A
Correct answer
Yes, because between them the beneficiaries are absolutely entitled to the fund.
A life tenant and remainderman, both adult and of capacity, are between them absolutely entitled and may end the trust on terms of their own choosing.
Their two interests exhaust the beneficial ownership of the £800,000. Since both are in existence, ascertained, 18 or over, capable and in agreement, the trustees must comply, even with a split that differs from the deed.
The life tenant and the remainderman together exhaust the beneficial interest; both are adults with capacity and agree, so they may direct the trustees and choose the division.
Saunders v Vautier (1841) 4 Beav 115 — Beneficiaries absolutely entitled between them control the destination of the trust property.
Rule card
Extended Saunders v Vautier: all beneficiaries, between them absolutely entitled, adult, capable and unanimous, can direct a transfer and rewrite the division.
Why the other options fail
B
Right outcome, wrong reason
No, because the trustees consider the split unfair to the life tenant and owe him a duty.
Fairness between beneficiaries is not for the trustees to police where the beneficiaries are absolutely entitled and unanimous; the property belongs to them.
Saunders v Vautier (1841) 4 Beav 115 — Where beneficiaries absolutely entitled agree, the trustees must comply with their choice.
C
Surface reading
No, because the life tenant's interest is limited to income and gives him no say over the capital.
A life interest is a beneficial interest; combined with the remainder it exhausts the beneficial ownership, so the life tenant's agreement counts.
Saunders v Vautier (1841) 4 Beav 115 — A life tenant and remainderman are between them absolutely entitled to the trust fund.
D
Adjacent ruleClosest alternative
No, because the proposed shares depart from the division of interests set out in the trust deed.
Beneficiaries who are between them absolutely entitled may agree any division they wish; the deed's terms do not constrain them.
Ruled out by: The 30/70 split departs from the deed, but the beneficiaries' collective absolute entitlement lets them override the settlor's terms.
Saunders v Vautier (1841) 4 Beav 115 — Beneficiaries absolutely entitled between them may effectively override the terms of the original trust.
E
Adjacent rule
No, because the terms of a trust may only be departed from with the approval of the court.
No application is needed where all the beneficiaries are adults with capacity and are between them absolutely entitled; court approval is required where some beneficiary cannot consent.
Saunders v Vautier (1841) 4 Beav 115 — Adult, capable beneficiaries absolutely entitled between them may end the trust without recourse to the court.
Question 3
The distinction between charitable trusts and non-charitable purpose trustsHarder
A deed executed two years ago transferred £1 million to three trustees. The deed directs them to apply the income 'for the relief of poverty among residents of the town, and for such other purposes beneficial to the inhabitants of the town as the trustees may from time to time select'. Under the deed the trustees are to apply the income for purposes, not to distribute the fund among named persons. The town has a population of 40,000, of whom several thousand live on very low incomes. So far the trustees have spent every penny of the income on food parcels, fuel vouchers and grants to a night shelter. On two occasions they have written to local Members of Parliament supporting a bill to increase housing benefit, at negligible cost and taking very little of their time; they regard this as incidental to their relief work. None of the beneficiaries is related to the settlor or connected with any business of his. The trustees have applied to the Charity Commission for registration, which has told them that the trust as drafted cannot be registered.
Which of the following best explains why the trust cannot be registered as a charity?
Show the answer and explanationAnswer D+
D
Correct answer
The trust's purposes are not exclusively charitable.
The second limb allows application to any purpose the trustees think beneficial to the inhabitants, which is wider than charity, so the trust is not exclusively charitable.
Registration requires a charitable purpose, public benefit and that the purposes be exclusively charitable. Relief of poverty in a town satisfies the first two, but a discretion to apply income to 'such other purposes beneficial to the inhabitants' embraces non-charitable purposes, and the trustees' actual spending cannot cure a defect in the drafting.
The second limb permits the income to be applied to any purpose the trustees consider beneficial to the inhabitants, which includes purposes that are not charitable, so the trust is not exclusively charitable however the trustees have in fact spent the money.
Chichester Diocesan Fund and Board of Finance v Simpson [1944] AC 341 — A gift for 'charitable or benevolent' or otherwise wider beneficial purposes is not exclusively charitable and fails.
Charities Act 2011, s.3(1)(a) — The prevention or relief of poverty is a charitable purpose.
Rule card
Charity requires all three: charitable purpose, sufficient public benefit, and exclusively charitable purposes. A limb permitting wider 'beneficial' purposes destroys the third.
Why the other options fail
A
Right outcome, wrong reason
The trustees have a discretion to select purposes, which makes the declaration of trust uncertain as to objects.
A discretion to choose among purposes is not objectionable in itself; charitable trusts routinely confer one. The problem is that the purposes the trustees may choose are not all charitable.
Chichester Diocesan Fund and Board of Finance v Simpson [1944] AC 341 — A gift permitting application to purposes wider than charity fails as a charitable gift.
B
Adjacent rule
The class of potential beneficiaries is defined by residence in a single town, which is too narrow to be a section of the public.
A geographical class such as the residents of a town is a recognised section of the public; the defect is a personal nexus, which is absent here.
Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297 — The public element fails where the class is linked by a personal nexus, not where it is defined geographically.
C
Adjacent rule
The trust offends the beneficiary principle, because the income is applied for purposes rather than to individuals.
Charitable trusts are exempt from the beneficiary principle; and if the trust were exclusively charitable, applying income to purposes would be unobjectionable.
Morice v Bishop of Durham (1805) 10 Ves 522 — The beneficiary principle governs private trusts; charitable trusts are enforceable without beneficiaries.
E
Adjacent ruleClosest alternative
The trustees' correspondence with Members of Parliament is a political purpose which cannot be charitable.
Political activity is permissible if ancillary. Two letters at negligible cost, incidental to substantial relief work, would not by itself prevent registration; and registration depends on the deed's purposes, not on past activity.
Ruled out by: The letters to Members of Parliament cost negligible sums and took very little time, being incidental to substantial poverty relief, so the political element is ancillary only.
McGovern v Attorney General [1982] Ch 321 — Political purposes are not charitable, but political activity may be ancillary to a charitable purpose.
Question 4
Knowing receiptMedium
A trustee of a family trust asked his personal assistant to help him with a purchase. He told her that £60,000 would arrive in her personal current account and that she should forward it to a car dealer. The money duly arrived. Her bank statement showed the payment as coming from 'the Ashwood Trust — client account', and she recognised the name of the trust for which her employer acted as trustee. She thought it odd, but asked no questions. Two days later she transferred the whole £60,000 to the dealer, who delivered a car registered in the trustee's own name. She kept none of the money and she received nothing for her trouble beyond her ordinary monthly salary. The trustee has now moved abroad and cannot be traced. The trust deed contained no power to apply trust money for a trustee's personal use. The beneficiaries are the trustee's two nieces, both minors, represented by their mother. They wish to recover the £60,000.
Which of the following best describes whether the assistant is liable to the beneficiaries in knowing receipt?
Show the answer and explanationAnswer A+
A
Correct answer
She is not liable, because she received the money as the trustee's agent and not for her own benefit.
Knowing receipt requires beneficial receipt: an agent who takes the money and passes it straight on as directed is not a knowing recipient.
The assistant's account was simply a conduit: she forwarded the entire £60,000 to the dealer and kept nothing, the car being registered in the trustee's name. Her suspicions are irrelevant because the beneficial receipt element fails; any claim against her lies in dishonest assistance.
Beneficial receipt is an essential element; a stranger who receives ministerially and pays the money on as directed is outside the claim, though accessory liability may arise.
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221 — Recipient liability requires beneficial receipt of trust property plus knowledge making retention or dealing unconscionable.
Agip (Africa) Ltd v Jackson [1990] Ch 265 — Receipt as agent, followed by payment on, is ministerial and not beneficial receipt.
Rule card
Knowing receipt: (i) property received in breach of trust; (ii) received for the recipient's own benefit; (iii) knowledge, while in receipt, making it unconscionable to retain or deal with it. Ministerial receipt by an agent does not satisfy (ii).
Why the other options fail
B
Right outcome, wrong reason
She is not liable, because she no longer holds the money and cannot restore it.
Right outcome, wrong reason: knowing receipt is a personal claim for value, so parting with the money is not in itself an answer where the recipient knew while holding it.
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221 — Knowing receipt imposes personal liability for the value received; it does not depend on the recipient still holding the property.
C
Right outcome, wrong reasonClosest alternative
She is liable, because she recognised the trust's name, suspected the payment was wrong and deliberately asked no questions.
Her state of knowledge would satisfy the unconscionability element, but the claim also requires receipt for her own benefit, which is absent.
Ruled out by: She kept none of the money and the car was registered in the trustee's own name, so however culpable her silence, she never received the funds for her own benefit.
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221 — Knowledge making retention unconscionable is one element only; beneficial receipt must also be established.
D
Adjacent rule
She is liable, because she gave no consideration for the £60,000 she received.
Absence of consideration does not convert a ministerial receipt into a beneficial one; she took nothing for herself.
Agip (Africa) Ltd v Jackson [1990] Ch 265 — An agent who receives and pays on trust money does not receive it for his own benefit, whether or not he gives value.
E
Surface reading
She is liable, because the whole of the £60,000 passed through a bank account held in her own name.
Receipt into her own account is not receipt for her own benefit; the beneficial element is missing because she held and paid on as directed.
Agip (Africa) Ltd v Jackson [1990] Ch 265 — Receipt in a ministerial capacity, even into the agent's own account, does not amount to beneficial receipt.
Question 5
The nature of equitable remedies and the availability of tracing in equityEasier
A trustee holds £60,000 on trust for two children. He withdraws £40,000 of that money and pays it into his personal current account, which already held £10,000 of his own savings. He then buys shares for £12,000 from that account and loses the remaining £38,000 at a casino, leaving the account empty.
What is the best advice to the beneficiaries as to a claim in respect of the shares?
Show the answer and explanationAnswer B+
B
Correct answer
The beneficiaries may assert a proprietary claim to the shares, because the trustee cannot say that the surviving asset was bought with his own money when the rest of the account has been dissipated.
A trustee bought shares from an account mixing trust and personal money and dissipated the rest; the beneficiaries can trace into the shares.
On Re Oatway, a trustee who spends part of a mixed fund on an identifiable asset and dissipates the balance cannot claim the asset as his own; the beneficiaries may trace into the shares and may select the tracing rule most favourable to them.
Where a trustee buys an asset from a mixed account and dissipates the remainder, equity allows the beneficiaries to trace into the surviving asset; the beneficiaries may choose whichever tracing rule produces the best result for them.
Re Oatway [1903] 2 Ch 356 — Beneficiaries may trace into an asset purchased from a mixed account where the balance has been dissipated.
Re Hallett's Estate (1880) 13 Ch D 696 — The presumption that a trustee spends his own money first operates against the trustee.
Rule card
Mixed account (trust + trustee): the beneficiaries may cherry-pick between the Hallett presumption (own money spent first) and Re Oatway (charge on the surviving asset), whichever gives the better result.
Why the other options fail
A
Adjacent rule
The trustee's own £10,000 was spent first, so only £2,000 of the shares is trust property.
First-in-first-out is a rule for allocating between competing innocent contributors to an account, not between a trust and the wrongdoing trustee.
Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572 — In an active current account, withdrawals may be attributed to payments in on a first-in-first-out basis as between innocent claimants.
C
Adjacent ruleClosest alternative
The shares belong to the trustee, who is presumed to have spent his own money on the purchase first.
The Hallett presumption that a trustee spends his own money first cannot be used to defeat the beneficiaries where the balance has been dissipated; the presumption operates against the trustee, not in his favour.
Ruled out by: The remainder of the account was lost at the casino, leaving nothing; the presumption that the trustee spent his own money first cannot be used to give him the surviving shares.
Re Hallett's Estate (1880) 13 Ch D 696 — A trustee who mixes trust money with his own is presumed to spend his own money first, a presumption applied against the wrongdoing trustee.
D
Adjacent rule
The claim is limited to the lowest balance in the account, which is nil.
The lowest intermediate balance rule caps a claim against the surviving balance of an account; it does not defeat a claim to an asset already purchased out of the account.
Roscoe (James) (Bolton) Ltd v Winder [1915] 1 Ch 62 — A claim against a mixed account is limited to the lowest intermediate balance reached.
E
Surface reading
No proprietary claim lies, because mixing the trust money with the trustee's own money destroyed the equitable interest.
Mixing does not defeat the equitable interest; equity's tracing rules exist precisely to identify trust value in and out of mixed funds.
Foskett v McKeown [2001] 1 AC 102 — Equitable tracing permits beneficiaries to identify trust value in substitute assets, including where trust money has been mixed.
Where candidates lose marks in Trusts Law
The object of a discretionary trust has only a hope of being chosen, not an interest in the fund, until the trustees exercise their discretion.
Knowing receipt asks whether the recipient's knowledge made it unconscionable to keep the property (BCCI v Akindele); dishonest assistance asks whether the helper was dishonest. Different defendants, different tests.
For trusts created on or after 1 October 2014, the statutory power of advancement reaches the whole of a beneficiary's presumptive share, not half (Trustee Act 1925, s 32, as amended).