Introduction

As indicated at the end of Chapter 1, the trust concept originated in English law in medieval times, chiefly as a result of the efforts of conveyancers to preserve the landholdings of their clients from certain forms of feudal taxation and to increase the range of dispositions of land which their clients could legally make on death. The emergence of the trust concept at this time is intimately bound up with the assumption of jurisdiction in legal matters by the Lord Chancellor on grounds of ‘equity’. In time, as we will see, that jurisdiction became sufficiently pervasive and ordered so as to justify substituting an upper case ‘E’ in place of the lower case ‘e’. The development of Equity in that manner involves matters that range far beyond those concerning the trust. Since it is the latter that is our prime concern, the roles are reversed here and Equity therefore appears in our story mostly as a member of the supporting cast only.

This chapter seeks to explain the development of major segments of trusts law – specifically, the law governing private express trusts – from these early beginnings until, approximately, the beginning of the twentieth century. It does so with particular reference to trust transactions which served, in various ways, to aggregate and safeguard privately held wealth for the benefit of members of a family and to ensure the smooth transmission of wealth from one generation of a family to the next. Towards the end of the chapter, some general comments are offered on the historical role of private family trusts. The chapter concludes by returning to the broader topic of the relationship between Equity and other areas of the common law, a topic that has of late been attracting close academic and judicial scrutiny.

First, however, a general note of caution needs to be aired about our capacity ‘to explain’. In this chapter, and elsewhere in this book, we are concerned with change over time. But Milsom's words of warning are apposite here (‘“Pollock and Maitland”: A Lawyer's Retrospect’ (1996) 89 Proc Br Acad 243 at 251):

Introduction

As Hubert Monroe lugubriously commented in a Hamlyn Lecture, ‘tax is scarcely a favourite topic’ (Intolerable Inquisition? Reflections on the Law of Tax (1981), p 1). It is not difficult to endorse this sentiment, particularly when applied to the taxation of trusts. In academic contexts the topic conventionally falls into a no-man's land between the separate domains of taxation and trusts. Yet even by the beginning of the twentieth century the incidence of taxation was influencing the development of the private express trust. Indeed, as will be seen later in this book, taxation or, more appropriately, the availability of relief from taxation, has exercised considerable influence on public types of trusts also – for example, pension funds and charities (see online chapter, ‘Occupational Pension Schemes’, and Chapters 16 and 17). With respect to private trusts, however, it may be claimed that this influence has so increased that fiscal considerations now dominate trusts practice even if not directly the formal rules of trusts law. Whether trusts should be created, what types of trust should be adopted and where their administration should be located are all, in reality, decisions taken by property owners only after careful consideration of the fiscal implications.

The claim that these implications predominate will be probed later in this chapter (see p 75), but at the very least the taxpayer is unlikely to be satisfied with a tax lawyer or accountant who merely clarifies the probable size of the tax bill based on existing property arrangements. The taxpayer will also wish to know how to rearrange their affairs so as to reduce that tax liability. It is at this stage that the ‘tricks’ the trust can perform with property interests come into consideration. The tax planner needs a thorough understanding of both tax and trusts law and the interaction between the two, if comprehensive and effective advice is to be given to the client. This chapter has no pretensions to providing the detailed knowledge of those areas that the tax planner needs. Indeed, the attainment of such skills would impose demands of time and space beyond the scope of trust courses or textbooks (see for excellent introductions to tax topics, Tiley and Loutzenhiser, Revenue Law (7th edn, 2012); Lee (ed), Revenue Law: Principles and Practice (32nd edn, 2014)).

Introduction

Management is a convenient umbrella term under which cluster a diversity of trustee tasks. In the case of those trusts not confined simply to the holding and retaining of legal title to designated property, the task dominating all others is that of protecting and indeed enhancing the value of the trust fund through effective investment. But trustees cannot just behave as individuals might with their own funds to invest. The courts of equity, in refining the obligations of trusteeship, have imposed a range of duties upon trustees, some of which impinge directly on the management of the trust fund. In this chapter we therefore consider, in addition to the duty of investment, the duties to act impartially between beneficiaries and not to delegate the trust. There is a complex interaction between these three topics. For example, on the one hand, the variety of investments available to trustees suggests a need for expert help, and the process of investment–reinvestment itself necessarily involves some delegation of functions to intermediaries such as real estate valuers, stockbrokers, bankers and solicitors. On the other hand, in principle trustees have until recently been required to reserve to themselves the exercise of their discretions over investment decisions, especially with regard to the duty of impartiality. This long-held principle of non-delegation of discretions seemed increasingly to be at odds with a changing economic and social environment. In particular, fundamental changes in the way that investment business was being transacted contributed to a growing perception that there was a need to reform the law on trustees’ powers and duties. Various proposals for reform were advanced from 1982 onwards (see Chapter 8 at pp 421 et seq) and culminated in the TA 2000. With regard to powers of investment and delegation conferred on trustees, the TA 2000 introduced important statutory modifications to the pre-existing common law and statutory framework. These broaden substantially the statutory default powers conferred on trustees to invest trust assets and in addition permit trustees to delegate more extensively the investment management function. These changes and the resulting legal framework are considered in sections 3 and 5 of this chapter. First, however, it is necessary to consider a major fundamental innovation in the TA 2000, the enactment in s 1 of a statutory duty of care applicable to, inter alia, the new default powers of investment and delegation.

Introduction

In the previous two chapters we considered, inter alia, the relationship between trusts law and contemporary trusteeship, including the management of the trust and the powers and duties of trustees associated with that function. One emerging consideration is how far does or should the law seek to intervene to limit the autonomy that settlors might confer on trustees in their management of the trust? In this chapter we focus on the means of controlling trustees, the scope of beneficiaries’ rights and the effectiveness of remedies available to them. The appointment and removal of trustees and the control over the exercise of their discretion, issues central to an assessment of trustee autonomy in managing the trust, are considered in sections 2 and 3, whilst the measure of trustee personal liability for breach of trust forms the subjectmatter of section 4. Beneficiaries are not restricted to a reliance on the personal liability of trustees as a means of securing recompense for some breach of trust. There may be circumstances where beneficiaries wish to take advantage of the proprietary remedies that the law provides where some breach of trust has occurred. In section 5, we briefly introduce the proprietary remedies that may be available to a beneficiary where the personal remedy against trustees proves to be inadequate. The full range of the proprietary remedies that equity makes available in cases of breach of trust or where there is some breach of fiduciary duty are considered in detail in Chapter 12.

The by now familiar starting point for our study is the changing nature of trusts practice. We have previously examined in some detail the responses of settlors and their advisers to twentieth-century commercial and fiscal pressures, and have emphasised the accelerating trend, particularly post-1945, in favour of enlarging trustees’ discretions. This process became apparent in discretions over both the management of property (eg, widely drawn investment clauses) and the allocation of benefit (eg, the discretionary trust). But the willingness of the courts to countenance these developments and to uphold dispositions wherever possible (see, eg, Re Hay's Settlement Trusts [1981] 3 All ER 786) potentially opens a Pandora's Box of questions concerning control of trustees’ behaviour.

Introduction

In the previous chapter we saw how the rule against perpetuities formally limits the time over which a settlor's freedom of disposition can be exercised. But it is implicit that, within that time and subject to the other public policy restraints mentioned in Chapter 6, a settlor is substantially free to dictate in the trust instrument both beneficial entitlement and the mode of trust administration. Plainly there would be little point in this freedom if the settlor's instructions could be ignored or altered at the whim of beneficiaries or trustees. Consequently, a fundamental principle of the law of trusts is that of fidelity to the settlor's intentions: trustees must faithfully implement that intention as identified through the trust instrument. The settlor is the lawmaker, the trustees are the administrators of that law who must not deviate from the terms of the trust. In principle, therefore, the courts will not readily approve any deviation: ‘As a rule, the court has no jurisdiction to give, and will not give, its sanction to the performance by trustees of acts with reference to the trust estate which are not, on the face of the instrument creating the trust, authorised by its terms’ (Re New [1901] 2 Ch 534 at 544, per Romer LJ).

But neither settlors nor their advisers are imbued with the wisdom of Solomon, and they may fail to provide for unexpected developments such as unanticipated changes in investment patterns. A settlor conferring only restricted powers of investment on trustees may leave them ill-equipped to respond to economic change and unable to maintain the trust fund's value. A still more serious encroachment on a settlor's plans affecting beneficial entitlement may come from fiscal changes, such as occurred post-1945 with the sharply increased nominal burdens of income tax and estate duty (see Chapter 3). These latter changes spawned the rapid expansion in the 1950s and 1960s of the use of the discretionary trust, which proved such an elusive moving target for the Inland Revenue. But many trusts, most prominently but not exclusively those containing life interests, were stationary targets. Was it, however, possible for the trustees, beneficiaries or the court to reduce exposure to tax liability by rearranging the line of beneficial interests laid out by the settlor?

Introduction

An express trust satisfying the requirements of formality, certainty and complete constitution will be valid unless it contravenes certain overriding limitations that, broadly speaking, stem from public policy considerations. These limitations can be grouped for convenience into three categories. One category is concerned with attempts to use the trust format to defeat the claims of the creditors of settlors or beneficiaries, or even the claims of one's spouse or partner when relationships break down. A second category comprises a loose class of prohibitions that cluster under the umbrella of public policy, but are primarily concerned not to undermine accepted notions of morality and family solidarity. Trusts that might tend to interfere with the sanctity of marriage, for example, will be held void. The final category of limitations concerns the plane of time: while the law may place few restraints on the types of interest a settlor can create and the conditions to which they may be subject, restrictions are imposed through rules of perpetuity, accumulations and inalienability on the duration of trusts.

These limitations and their respective policy justifications form the subjectmatter of this chapter.

At first sight, however, it must seem rather odd to devote a chapter to trusts and public policy, when a recurrent theme in the book is to weigh the rules of trusts law against non-legal policy considerations and to assess how the development of those rules has been influenced by such considerations. And in a sense, as the description above implies, this is a chapter of convenience: as a focus of study, it assembles discrete issues about limits to the creation of trusts around an organising theme, namely, the relationship of those issues to aspects of public policy. The term ‘aspects’, however, gives a clue to a further reason for the chapter, extending beyond convenience. Public policy is merely a shorthand term devoid of content unless we identify the particular policy under consideration (eg, ‘freedom of disposition’ or ‘protection of creditors’), the values inherent in it and the interests that any particular policy advances. Indeed, the rules discussed in this chapter do not reflect any one public policy

Introduction

As previous chapters have shown, the trust can be used for many purposes and may be part of sophisticated arrangements entered into by wealthy individuals. This chapter, by contrast, is largely concerned with the role played by implied trusts in resolving disputes over the ownership of the family home when the parties involved had given no thought to their property rights. Since there is no special regime applicable to assets owned by a married couple or civil partners (save when they separate) or to those owned by cohabiting couples and other family members, this is perhaps one of the most significant roles of trusts law in terms of the numbers potentially affected. The situations in which issues of ownership may fall to be determined were succinctly set out by the Law Commission in its discussion paper, Sharing Homes (Law Commission No 278 (2002), paras 1.10–1.12):

Introduction

Charity is a deep-rooted element in human behaviour. To provide emotional, spiritual or material comfort to those in need is an instinctive aspect of social behaviour, and is reinforced by religious and ethical precepts extolling it as one of the most ennobling forms of conduct (see generally Chesterman, Charities, Trusts and Social Welfare (1979), ch 1). In the words of a standard legal text (Tudor on Charities (9th edn, 2003), p 1), elaborating on the words of Sir William Grant MR in Morice v Bishop of Durham (1805)): ‘in its widest sense, the word “charity” denotes “all the good affections that men ought to bear towards each other”’. And at its best, charity invokes a warm response. There is a touching depth of pity and sympathy shown by the following message sent with a donation in 1966 to the Aberfan Disaster Trust Fund: ‘Please use this small amount in any way you wish. I was saving it up for a new coat, O God, I wish I had save [sic] more. Yours sincerely, A Mother’ (Nightingale, Charities (1973), p 178). The Bob Geldof-inspired Band Aid Trust appeared to strike a similar chord when remarkably raising £69m in 1985 in aid of famine relief. And the fund-raising antics displayed on ‘Red Nose Day’ commonly raise in the region of £50m for Comic Relief to be used for a wide range of charitable purposes. Perhaps the most striking of all in recent times was the public response to the Disasters Emergency Committee (DEC) Tsunami Appeal in January 2005, when £392m was raised via some 2.8–3 million telephone, text, online and postal donations (see at: www.dec.org.uk).

But there is another aspect to charity: it has never been wholly free from moral ambiguity. Even among primitive tribes, the act of giving has been found to represent an assertion of power over the recipients, who are obliged, unless they can repay, to show some form of deference or obedience to the giver. This is not merely because they may then be more likely to receive a further gift, but because receipt, if not accompanied by a counter-gift or repayment, in some way acknowledges inferiority (see Mauss, Essai sur le don (trans Cunnison, 1966)).

Introduction

In Chapter 16 we noted that the Charitable Trusts Acts 1853–1860 established, for the first time, a central permanent Charity Commission empowered to supervise the management of charitable trusts and to remodel their purposes when they proved impracticable or impossible. But its role was severely constrained in three particular respects: (1) its jurisdiction, which extended to certain charitable endowments only and not to ‘collecting’ charities; (2) its freedom to act of its own motion, which was limited by the degree of autonomy preserved for trustees; and (3) the circumstances in which the Charity Commissioners (or the court) could make cy-près schemes.

Since then two trends in the legal and administrative framework regulating charity have become apparent. On the one hand, charities have been favoured more, notably in financial respects. On the other hand, an attempt has been made to extract a higher price from charities in return for these favours by extending and strengthening the supervisory framework, initially via the CA 1960. This statute enacted most of the recommendations for reform contained in the Nathan Report (Committee on the Law and Practice Relating to Charitable Trusts (Cmd 8710, 1952)). Notwithstanding these changes, concern about the efficiency of charities and the effectiveness of supervision over them grew apace, culminating in a series of critical reports in the late 1980s (see An Efficiency Scrutiny of the Supervision of Charities, Woodfield Report (1987); National Audit Office (NAO), Monitoring and Control of Charities in England and Wales, HC Paper No 380 (1986–87) and HC Paper No 13 (1990–91); Public Accounts Committee, HC Paper No 116 (1987–88) and HC Paper No 85 (1991)). In particular it was evident both that there was a widespread lack of compliance with the obligation to submit accounts to the Commission and that additional statutory powers of enforcement were necessary. Subsequently, the supervisory framework was strengthened both legally by the CA 1992 and administratively by the allocation of more resources to the Commission. Most of the 1992 Act (other than Pts II and III, principally concerned with fund-raising) was then consolidated along with earlier legislation into the CA 1993.

Introduction

We have seen in Chapters 10 and 12 how the determination of the courts to protect the interest of the beneficiaries in the event of trustee insolvency or misconduct was manifested in two ways in particular: (1) the separation of trust property from the insolvent's own assets; and (2) the provision of the process of equitable tracing. Thus, property held by an insolvent or bankrupt person or company in trust for another is, with one exception, not available to the liquidator or trustee in bankruptcy to meet the claims of creditors. The exception is where an insolvent trustee has outlaid its own moneys in satisfaction of the trust's liabilities. A right of indemnity arises against trust assets for such liabilities satisfied on the trust's behalf (eg, in running a business of the trust). This gives the trustee a proprietary interest in the trust assets, which may pass to a trustee in bankruptcy or liquidator for the benefit of creditors (see generally Hayton and Mitchell, pp 693–703). In certain rare circumstances it has been held that property held on trust may be available to the liquidator to cover its costs if the insolvent's other assets are insufficient (see Chapter 12, p 689). The reasoning behind the fundamental principle that the insolvent's property does not include trust property is clear enough: trust property is beneficially owned not by the insolvent or bankrupt trustee, but by the beneficiaries. Furthermore, the principle – described as ‘the cornerstone of the English law of trusts’ (Waters (1983) 21 Alta LR 395 at 402) – is not confined to express trusts, but extends also to cases of imputed trusts. The effects of this principle and its close companion, equitable tracing, are graphically summarised in the following extract from the Cork Report.

Introduction

(a) The centrality of intention

When deciding how to give away property the owner of assets has a choice between outright gift or a gift in trust. Stripped to its essence, the private trust, to reiterate a point made earlier, is a gift projected on the plane of time. However, the limited functional similarity of these two forms of gift, the absolute gift and the gift in trust, must not disguise the fact that they are conceptually distinct.

In practice also there will usually be no difficulty in distinguishing the two forms since trusts are commonly created in writing, usually by deed, wherein the donor designates another person or group of persons as trustee(s). But neither writing nor the appointment of others as trustees is essential. There is a third method of making a gift: people can unilaterally and orally declare themselves to be trustees of property for the benefit of others. The absence of written evidence in such circumstances can lead to difficulty of interpretation in this area, particularly that of separating general intention from particular intention. By general intention is meant the intention on the part of the owner of the assets to be a benefactor of some other person(s). Although both specific modes of giving, the outright gift and the declaration of oneself as trustee, do have as a common core that generalised intention to be a benefactor, the legal system discriminates between them. It purports to ignore the common generalised intention and concentrates instead on the particular intention, whether, for instance, to be a donor of an absolute gift or to be a trustee.