SQE1 - Solicitors Qualifying Examination Part 1 The Law of Trusts Questions and Answers — Questions and Answers
Question 1: A testator's will contains the following clause: 'I give £200,000 to my trustees to distribute in their absolute discretion amongst my old friends'. Which of the three certainties required to form a valid express trust is most likely to fail in this disposition?
- Certainty of objects, because the term 'old friends' is conceptually uncertain. (Correct answer)
- Certainty of subject matter, because the amount of £200,000 is not segregated from the rest of the estate.
- Certainty of intention, because the use of 'distribute in their absolute discretion' is precatory language.
- Certainty of objects, because it is impossible to draw up a complete list of all the testator's 'old friends'.
Correct answer: Certainty of objects, because the term 'old friends' is conceptually uncertain.
For a discretionary trust to be valid, the test for certainty of objects is the 'is or is not' test established in *McPhail v Doulton*. This requires that it can be said with certainty whether any given individual is or is not a member of the class of beneficiaries. The term 'old friends' is considered conceptually uncertain because it is a subjective term with no objective definition, making it impossible for trustees to determine who would fall into the class. The other options are incorrect: the subject matter (£200,000) is certain; the language used shows a clear intention to create a trust, not just a moral obligation; and the 'complete list' test applies to fixed trusts, not discretionary trusts.
Question 2: A settlor wishes to create a trust over 500 shares in a private company for her nephew. She completes and signs a share transfer form and gives it to her solicitor, telling the solicitor to 'deal with the transfer'. The solicitor places the form in a file but takes no further action. The settlor dies a month later. What is the most likely legal status of the shares?
- The trust is incompletely constituted because the settlor has not done everything in her power to transfer the shares.
- The trust is completely constituted under the rule in *Re Rose* because the settlor has done everything necessary for her to do.
- An effective trust has been created under the rule in *Pennington v Waine* because it would be unconscionable for the gift to fail. (Correct answer)
- The trust is completely constituted because handing the form to a solicitor is equivalent to delivery to the company.
Correct answer: An effective trust has been created under the rule in *Pennington v Waine* because it would be unconscionable for the gift to fail.
While the strict rule in *Milroy v Lord* holds that equity will not perfect an imperfect gift, exceptions have developed. The rule in *Re Rose* requires the transferor to have done everything in their power, which is not met here as the form was not delivered to the company. However, the principle from *Pennington v Waine* allows a court to find a trust is constituted where it would be unconscionable for the donor to resile from the gift. Here, the settlor's clear intention, instructing her agent (the solicitor), and the fact she did nothing to retract the gift before her death makes it arguably unconscionable for her personal representatives to deny the trust. Therefore, a constructive trust is likely to arise.
Question 3: A trustee is a chartered accountant managing a family trust. When exercising the general power of investment, what is the standard of care the trustee must exercise according to the Trustee Act 2000?
- The care an ordinary prudent man of business would take when managing his own affairs.
- Such care and skill as is reasonable in the circumstances, having regard to his professional knowledge as an accountant. (Correct answer)
- The highest possible standard of care as he is a professional acting for a family.
- The same standard of care as a lay trustee, as the Act does not distinguish between professional and non-professional trustees.
Correct answer: Such care and skill as is reasonable in the circumstances, having regard to his professional knowledge as an accountant.
Section 1 of the Trustee Act 2000 sets out the statutory duty of care. It requires a trustee to exercise 'such care and skill as is reasonable in the circumstances'. Crucially, it has both an objective and a subjective element. Regard must be had to (a) any special knowledge or experience the trustee has or holds themselves out as having, and (b) if acting in the course of a business or profession, any special knowledge or experience it is reasonable to expect of a person in that profession. As a chartered accountant, the trustee will be held to a higher standard reflecting that professional status.
Question 4: A mother provides the full £300,000 purchase price for a house, but for administrative convenience, the legal title is registered in the sole name of her adult son. There is no mention of a loan or gift. A decade later, the mother and son fall out, and the son claims the house is his absolutely. In the absence of any other evidence, what type of trust is most likely to have arisen?
- An express trust, as the mother expressed her intention through the payment.
- A constructive trust, because it would be unconscionable for the son to deny his mother's interest.
- A statutory trust under the Trusts of Land and Appointment of Trustees Act 1996.
- A presumed resulting trust, with the son holding the property on trust for his mother. (Correct answer)
Correct answer: A presumed resulting trust, with the son holding the property on trust for his mother.
Where a person provides the purchase money for a property which is then placed in the name of another, equity presumes that the person holding the legal title holds it on a resulting trust for the person who provided the funds (*Dyer v Dyer*). This presumption can be rebutted by evidence of a gift or loan, or by the presumption of advancement (e.g., from father to child), but the presumption of advancement is weaker from mother to child and can be rebutted by evidence showing an intention to retain an interest. Given the facts, a presumed resulting trust is the most likely outcome.
Question 5: A trustee, in breach of trust, makes an unauthorised and speculative investment of £50,000 from the trust fund. The investment subsequently fails, and the entire £50,000 is lost. The beneficiaries discover the breach. Which remedy are the beneficiaries most likely to seek against the trustee personally?
- An account of profits, to claim any gains the trustee made.
- A tracing order to follow the money into the failed investment.
- Equitable compensation to restore the trust fund to the position it would have been in but-for the breach. (Correct answer)
- Rescission of the investment contract to recover the money from the investment company.
Correct answer: Equitable compensation to restore the trust fund to the position it would have been in but-for the breach.
The primary personal remedy against a trustee for a breach of trust that causes a loss is equitable compensation. The aim is to restore the trust fund to the position it would have been in had the breach not occurred. In this case, the trustee must personally pay £50,000 back into the trust fund to make good the loss. An account of profits is used when the trustee makes an unauthorised gain. Tracing is a process to identify assets, not a remedy against the trustee personally. Rescission would be a remedy against the third-party investment company, not the trustee.
Question 6: A trust is established for the 'relief of poverty amongst the employees and former employees of X Ltd'. The class of beneficiaries is limited to several hundred people connected by their employment. Under the Charities Act 2011, why is this trust likely to be considered charitable?
- Because any trust for the relief of poverty is automatically charitable, regardless of the beneficiaries.
- Because the number of potential beneficiaries is sufficiently large to constitute a section of the public.
- Because the 'personal nexus' test, which would normally prevent a trust for a limited group from being public, does not apply to trusts for the relief of poverty. (Correct answer)
- Because a trust for employees is always considered to be for the public benefit.
Correct answer: Because the 'personal nexus' test, which would normally prevent a trust for a limited group from being public, does not apply to trusts for the relief of poverty.
For a trust to be charitable, it must be for a charitable purpose and be for the public benefit. Generally, a trust for a group of people linked by a 'personal nexus' (like common employment) is not considered to be for the public benefit (*Oppenheim v Tobacco Securities Trust*). However, there is a well-established exception for trusts whose purpose is the relief of poverty. In such cases, the personal nexus rule does not apply, and a trust for 'poor relations' or poor employees can be charitable.
SQE1 - Solicitors Qualifying Examination Part 1 The Law of Trusts Questions and Answers
A testator's will contains the following clause: 'I give £200,000 to my trustees to distribute in their absolute discretion amongst my old friends'.
Which of the three certainties required to form a valid express trust is most likely to fail in this disposition?