Chapter Three

Todd and Watt's Cases and Materials on Equity and Trusts 6e

Chapter Six: Formality, Perpetuity, and Illegality: Trust Creation and Public Policy I

Hypothetical facts

Explain, with reasons, what formalities (if any) must be complied with in order to make the

following actions valid and enforceable in a court of law?

(a) George, the freehold owner of Whitehouse, declares that he henceforth holds the

legal title to Whitehouse on trust for his son, Junior.

(b) Tony, the sole life beneficiary under a trust set up by his father, gives notice to the

trustees that he disclaims his interest in favour of his son, to whom the trustees should

henceforth pay all the income from the trust.

(c) Robin, who died recently, left property to Patrick by his will, having previously

informed Patrick that he should secretly hold the property as trustee for the benefit of

Robin’s mistress.

(d) Berty is the sole beneficial owner of a number of shares held in trust for him by a

trust company wholly owned and controlled by him for the last 20 years. He now decides

to instruct the company to transfer the shares to his wife.

Guidance

(a) George has declared himself to be trustee of freehold land for the benefit of his son.

The declaration of the trust of land may be made orally, but it will not be enforceable in

court unless it is ‘manifested and proved’ in writing signed by George (or by his will (s.

53(1)(b), Law of Property Act 1925).

(b) In contrast with (a) what we have here is not the creation of a new trust, but an inter

vivos (life-time) dealing with an existing trust. The only relevant statutory formality requirement is s. 53(1)(c), Law of Property Act 1925 which provides that: ‘a disposition of

an equitable interest or trust subsisting at the time of the disposition, must be in writing’.

This writing must be signed by Tony, or by an agent authorised by him in writing. In

contrast with (a), where the declaration was valid, but unenforceable until manifested in

writing, the disposition here is not valid at all unless made in writing. The reason for this

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formality requirement is to prevent hidden oral transactions with equitable interests under

trusts.

Lord Radcliffe in Grey v Inland Revenue Commissioners [1960] AC 1 did suggest that ‘there is warrant for saying that a direction to his trustee by the equitable owner of trust

property prescribing new trusts of that property was a declaration of trust’, but even if that

were the case, his Lordship observed that the direction might nevertheless be a

disposition falling within s. 53(1)(c) (and thus in need of written form) if ‘the effect of it was

to determine completely or pro tanto the subsisting equitable interest of the maker of the

direction’.

(c) Secret trusts are a means by which a testator is able to by-pass the formality

requirements laid down in the Wills Act. As Dankwerts J put it in Re Young, ‘the whole

theory of the formation of a secret trust is that the Wills Act has nothing to do with the

matter’. The secret trust in the instant case is said to be a fully secret trust. This is where X

formally leaves property by his will to Y in circumstances where Y is informally made

aware by X during X’s lifetime (and Y expressly or impliedly accepts) that Y is to hold the

property as trustee for the benefit of Z. On the face of the will Y will appear to be the

beneficial owner of the property.

Although fully secret trusts have certain testamentary characteristics they are valid,

despite lack of testamentary formalities, because the trustee accepts the trust during the

settlor’s lifetime. They are essentially inter vivos express trusts and therefore operate independently of the Wills Act 1837. Generally, the declaration of an express trust does

not need to comply with any formality. However, even if the property comprised land, the

secret trustee could not rely upon the lack of formality to defeat the trust. The jurisdiction

to enforce a secret trust is aimed at preventing equitable fraud on the part of the alleged

trustee. His conscience would bind him to carry out the trust, he would, despite the

settlor’s expressed intention to create a trust, become a constructive trustee. The creation

and operation of constructive trusts need not comply with any formality (s. 53(2), Law of

Property Act 1925).

(d) This is a case of a bare trust, where the beneficiary has given a direction to his

trustee to transfer the legal estate to some other person, the intention being that the

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equitable interest should pass simultaneously. This type of transaction was one of the

many matters considered by the House of Lords in Vandervell v IRC [1967] 1 All ER 1.

In 1958, Mr Vandervell, the immensely wealthy controlling director and shareholder of VP

Ltd, decided to give 100,000 of his shares in the company to the Royal College of

Surgeons (RCS) to found a chair in pharmacology. The shares were currently held by his

bank under a bare trust for him. Accordingly, V directed the bank to transfer 100,000

shares to the RCS. It was intended that the RCS should keep the shares for a limited

period only, and should relinquish them after receiving ?150,000 income on the shares by

way of dividends.

As to whether the direction to the bank had been void for lack of written formality, the

House of Lords held that s. 53(1)(c) only applied to cases where the equitable interest in

property had been disposed of independently of the legal interest in that property. The

object of s. 53(1)(c) was to prevent hidden oral transactions in equitable interests which

might defraud other parties (such as the Inland Revenue).

In cases, such as the present, where the equitable owner had directed his bare trustee to

deal with the legal and equitable estates simultaneously, s. 53(1)(c) had no application.

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DOCSFORD

Chapter Three