Contents

Chapter 2
Core principles
of trust law

Finding that no trust exists

Proposal
P2 New legislation should provide that a purported trust that does not satisfy one or more of the three certainties (mentioned in P1(2)(a) above) is not a trust for the purposes of this Act or for any purpose, and is void. The provision would state that it does not limit the court’s ability to find that a trust is invalid on any other basis recognised at law.
Please give us your views on this proposal.

Current law

2.19It is open to the courts to find that a trust was not validly established and therefore that it does not exist. In order for a valid express trust to exist, in addition to any necessary formalities, such as the requirements under the Wills Act 2007 for the valid creation of a will and the requirements under the Property Law Act for trusts including land as trust property,64 the “three certainties” as mentioned in P1(2)(a) above must be met. These are the certainty of intention, the certainty of subject matter and the certainty of objects.65
2.20If the certainty of intention to create a trust is not present, the court may find, depending on the circumstances in which the purported trust was established, that instead of a trust a valid outright gift has been made, or that the gift is imperfect and the property remains with the original owner.66
2.21The certainty of subject matter requires certainty of the property that is to be subject to the trust and the extent of the beneficial interest of each beneficiary. Uncertainty of subject matter means that the trust does not exist and either the property will remain with the alleged settlor (or his or her estate) or, if there was a gift to an intended trustee, the intended trustee will be the absolute owner of the property.67
2.22The certainty of objects means that the beneficiaries (or charitable or other permitted purpose) of a trust must be identifiable. If it is not possible to ascertain the object of the trust, although the other certainties are satisfied, a court will find that the trustees hold the property on a resulting trust for the settlor or the testator’s estate.68

Issues

2.23There is a concern that the law lacks a means of addressing arrangements purporting to be trusts but lacking fundamental elements of a trust, such as the intention to create a trust, the duties on a trustee and any separation of beneficial and legal ownership. The law needs to ensure that people who gain the protection and benefits of not being considered the legal owners of property, but who have or will have a beneficial entitlement to the property, are subject to the full legal consequences of the property being in trust, that is the management by the trustees subject to the duties of trustees for the benefit of the beneficiaries (or purpose). The property is no longer at the settlor’s beck and call, even if the settlor is a beneficiary.

Options for reform

2.24One option that we have explored for addressing this type of concern is to include a statutory provision setting out factors that indicate when a “trust” is a sham. We have decided not to pursue this option, which is discussed in detail below. An alternative, more moderate option is for the legislation to confirm that the court must find that there is no trust if the elements required for the establishment of a trust are not present. In making such a finding, the court would also determine the legal consequences depending on the circumstances of the case. For instance, the court may find that the legal owner of the property is also the beneficial owner or that he or she holds the property on a resulting trust for the settlor.

Discussion

2.25The corollary of having principles of law about what is required for an express trust to be established is that the courts must be able to find that a trust does not exist if those requirements are not satisfied. We propose that a legislative provision should remove any doubt that this is an option open to the courts for addressing problem “trusts”. This approach still allows significant court discretion. It would not constrain the court’s ability to assess the situation and make orders responding appropriately, and to find that a trust does not exist on any other basis. We want to make it clear that a finding that no trust exists does not apply solely for the purposes of the new legislation, but for any purpose.

2.26The Commission has considered proposals for legislative interventions to expand and clarify sham trusts, to restrict the purposes for which trusts can be used, to include a general look-through provision whereby trusts can be set aside or trust property considered to belong to the settlor, and to limit settlor control.69 We have decided against each of these approaches because they would have the effect of undermining the concept of the trust and subverting trust principles when they come up against competing public policy considerations. We have concluded that the purpose of this review is to improve the clarity and functioning of trust law and not to alter the concept of a trust, which has been developed over hundreds of years. The courts will be able to continue to develop the sham doctrine relating to trusts separately to the legislation.

2.27Yet we are cognisant that at a time when trusts are at times receiving bad press for being used for purposes some consider unethical and for overriding policies of other legislation, it is essential that the trust concept is seen to have integrity. In other words, if a trust is validly created then all the legal consequences of a trust must flow from that. If a trust is not validly created then the legal consequences from which a settlor or beneficiary may receive an advantage, including the protection of trust assets from creditors and ostensibly lower levels of personal assets and income, cannot apply. This is the case under the current law. If the three certainties were not present when a purported trust is established the court must find that there is no trust. The consequences of a finding that any of the certainties were not fulfilled would be those available to the court under the current law.

2.28While there have been several recent cases in which the validity of a trust has been in question, arguments and judgments have focused on considering whether a trust was a sham or whether despite the existence of a trust, a settlor or discretionary beneficiary has property rights in trust property. We consider that it is worthwhile giving more prominence to the power of the courts to find that a purported trust was never properly established in accordance with the core principles of trust law. A legislative provision is the best way to achieve this. The courts would be able to find that no trust has been created when, for instance, a settlor has failed to identify which of several bank accounts is intended to be trust property,70 or a settlor tries to leave “the bulk of my residual estate” on trust for a beneficiary.71

2.29This approach is preferred because it does not alter the law but confirms the existing law. It does not relate to an aspect of the law about which there is contention, such as sham trusts or the bundle of rights, but relies on settled trust law principles. This option does not alter the balance of how trusts interact with other policy areas, but leaves these matters to the particular statutes governing these areas.

64Wills Act 2007, s 7; Property Law Act 2007, s 25. 
65Andrew S Butler “Creation of an Express Trust” in Butler (ed) Equity and Trusts, above n 61, 69 at 73.
66At 77.
67At 80.
68At 84.
69See below [2.30]−[2.50], and ch 16.
70Wilkerson v McClary 647 SW 2d 79 (Texas Ct App 1983).
71Palmer v Simmonds (1854) 2 Drew 221; 61 ER 704.