Creation and kinds of trusts

1. Lawful purpose: section 4

A trust may be created for any lawful purpose. The purpose is lawful unless it is (a) forbidden by law, (b) of such a nature that, if permitted, it would defeat the provisions of any law, (c) fraudulent, (d) involves or implies injury to the person or property of another, or (e) the court regards it as immoral or opposed to public policy. A trust for an unlawful purpose is void, and where a trust is created for two purposes, one lawful and one unlawful, and the two cannot be separated, the whole trust is void. A transfer to defraud creditors is the common example.

2. Formalities: section 5

• Immovable property: no trust is valid unless declared by a non-testamentary instrument in writing, signed by the author of the trust or the trustee and registered, or by the will of the author or of the trustee.
• Movable property: by such an instrument or will, or by the transfer of the ownership of the property to the trustee.

These rules do not apply where they would operate to effectuate a fraud.

3. Creation and the three certainties: section 6

Subject to s.5, a trust is created when the author of the trust indicates with reasonable certainty, by any words or acts:

• (a) an intention on his part to create a trust;
• (b) the purpose of the trust;
• (c) the beneficiary; and
• (d) the trust property;

and (unless the trust is declared by will or the author is himself to be the trustee) transfers the trust property to the trustee.

• Certainty of intention. No particular words are needed, but precatory words expressing a hope or wish (“I desire that my wife will provide for my children”) generally create no trust; the donee takes absolutely.
• Certainty of subject-matter. The property must be identified (“the bulk of my estate” is too vague), and the beneficial shares must be ascertainable.
• Certainty of objects. The beneficiaries must be identified or ascertainable. A private trust for persons who cannot be ascertained fails.

Where any of these fails, the trust does not arise. If the intention to make a trust is clear but the beneficiary or purpose is uncertain, the trustee holds for the author or his legal representative (s.83, a resulting trust).

4. Parties and property: sections 7 to 10

• Who may create a trust, s.7. A trust may be created by every person competent to contract, and, with the permission of a principal civil court of original jurisdiction, by or on behalf of a minor, but subject in each case to the law in force as to the circumstances in which, and the extent to which, the author may dispose of the property.
• Subject of trust, s.8. The subject-matter must be property transferable to the beneficiary. It must not be a merely beneficial interest under a subsisting trust.
• Who may be beneficiary, s.9. Every person capable of holding property may be a beneficiary. A proposed beneficiary may renounce his interest by disclaimer addressed to the trustee, or by setting up, with notice of the trust, a claim inconsistent with it.
• Who may be trustee, s.10. Every person capable of holding property, but where the trust involves the exercise of discretion, he cannot execute it unless competent to contract. No one is bound to accept a trust. Acceptance may be by words or by acts showing it with reasonable certainty. Instead of accepting, a proposed trustee may disclaim within a reasonable time, and disclaimer prevents the property vesting in him.

5. Kinds of trusts

• Private and public. A private trust benefits ascertained individuals or a class of them; a public trust benefits the public or a section of it, for charitable or religious purposes. The Act governs only private trusts (s.1). Public trusts need not satisfy the certainty of objects in the same way and are enforced under s.92 CPC.
• Express trusts are created by the author's words, written or spoken, with intention to create a trust: the trusts dealt with in ss.4 to 79.
• Implied trusts arise from the presumed intention of the parties, gathered from conduct.
• Resulting trusts: where the beneficial interest comes back, or “results”, to the author or his representative, because the express trust fails or does not exhaust the property, or the transferor clearly did not intend to part with the beneficial interest.
• Constructive trusts are imposed by law, regardless of intention, to prevent a person who has obtained property unconscionably from keeping it for himself, typically a fiduciary who gains an advantage from his position.
• Also: executed and executory trusts (whether the terms are fully set out or remain to be worked out in a further instrument), and discretionary trusts (where the trustee chooses among beneficiaries).

6. Obligations in the nature of trusts: sections 80 to 96

Chapter IX deals with cases where no express trust exists but a person holds property under an obligation in the nature of a trust. He is not a trustee in the full sense, but s.95 applies to him the duties, liabilities and disabilities of a trustee so far as may be. The main cases:

• s.83 trust incapable of execution or executed without exhausting the property: resulting trust for the author;
• s.84 transfer for an illegal purpose, where the purpose is not carried into execution or the transferor is not as guilty as the transferee; s.85 bequest for an illegal purpose;
• s.86 transfer under a contract liable to rescission or induced by fraud or mistake;
• s.88 advantage gained by a fiduciary (trustee, executor, partner, agent, director) in his position, to the prejudice of the person he represents;
• s.89 advantage gained by undue influence; s.90 advantage gained by a qualified owner (co-owner, mortgagee, limited owner);
• s.91 property acquired with notice of an existing contract which could be specifically enforced: the acquirer holds for the contracting party;
• s.92 purchase by a person contracting to buy, for the benefit of another; s.93 advantage secretly gained by one of several compounding creditors;
• s.96 protects bona fide purchasers for value without notice.

Sections 81, 82 and 94, which covered the transferor not intending to pass the beneficial interest, the benami purchase in another's name, and the general residuary constructive trust, were repealed by the Benami Transactions (Prohibition) Act, 1988.

7. Problem

A, by a registered deed, transfers his house to B “in the hope that he will look after my daughters.” After A's death the daughters claim B is a trustee for them.

Law. Sections 5 and 6; certainty of intention.

Application. The deed satisfies s.5. But the words are precatory; they express a hope, not an obligation, and identify neither the share of each daughter nor what “look after” requires.

Conclusion. No trust is created for want of certain intention, and B takes the house absolutely. Had the deed said “to hold for my daughters in equal shares”, a valid express trust would arise.

How this is examined

Ten marks: “How is a private trust created? Explain the essentials” (s.4 to s.10, built around s.6 and the three certainties) or “Explain the kinds of trusts.” Short notes: lawful purpose; who may be a trustee; constructive trust; obligations in the nature of trusts; public and private trusts distinguished.