1. Understanding Trust Law
The trust is a creature of equity. It allows the ownership of property to be split between the legal owner (the trustee), who administers the property, and the beneficial owner (the beneficiary), who enjoys its value. This section defines the trust, identifies its three essential parties, and sets out the principal classifications of trust that every SQE1 candidate must be able to recognise from a client scenario.
1.1.1 Definition
In practical terms, a trust is created when a person (the settlor) transfers assets to another person (the trustee) to hold and manage for the benefit of a third party (the beneficiary). Ownership is thereby split: the trustee becomes the legal owner with the powers of management, while the beneficiary holds the equitable interest and is entitled to the benefit of the property.
1.1.2 Types of Trust
There are many different types of trust. The most important distinction is between express and implied trusts. Express trusts are intentionally and expressly created by a settlor. Implied trusts arise by operation of law; the two main types are resulting and constructive trusts.
A further distinction is drawn between an inter vivos trust and a testamentary trust. An inter vivos (or 'lifetime') trust is established during the settlor's lifetime. A testamentary trust is created by will and takes effect on the settlor's death.
1.1.2.1 Express Trusts
Express trusts are deliberately created by the settlor, often in a written document (for example a trust deed or a will). They may be classified according to the nature of the beneficial interest they create — private or charitable.
Fixed trust — the interest of each beneficiary is fixed and defined by the settlor (for example, 'to A for life, remainder to B'). The trustee has no discretion over who benefits or in what shares.
Discretionary trust — the trustee is given a discretion as to how (and sometimes whether) to distribute the trust property among an identifiable class of potential beneficiaries (the 'objects'). No individual object has a fixed entitlement; each merely has a hope of benefiting until the discretion is exercised.
Purpose trust — a trust set up to carry out a purpose rather than to benefit ascertainable people. A private (non-charitable) purpose trust without defined beneficiaries will generally fail for want of a beneficiary to enforce it, although there are limited recognised exceptions.
1.1.2.2 Implied Trusts
Where the intention of the settlor is not expressly stated, but a trust is presumed or imposed by the law to achieve an equitable result, the trust is described as an implied trust. The two main forms are resulting and constructive trusts.
| Aspect | Resulting Trust | Constructive Trust |
|---|---|---|
| How it arises | By operation of law (presumed intention / failure of an express trust) | Imposed by the court to prevent unconscionable conduct |
| Where the interest goes | Results back to the settlor / transferor / estate | To the person whom conscience requires should benefit |
| Typical trigger | Express trust fails or does not exhaust the beneficial interest; voluntary transfer or purchase in another's name | Breach of fiduciary duty, fraud, undue influence, or other unconscionable behaviour |
| Function | Filling a gap in beneficial ownership | An equitable remedy / institution preventing unjust enrichment |
| Category | Sub-type | Key feature |
|---|---|---|
| Express | Private — Fixed | Beneficial interests defined by the settlor; no trustee discretion |
| Express | Private — Discretionary | Trustee chooses distribution among a class of objects |
| Express | Private — Purpose | For a purpose, not persons; generally fails unless an exception applies |
| Express | Charitable | Valid purpose trust for the public benefit (Charities Act 2011) |
| Implied | Resulting | Beneficial interest results back to the settlor / estate |
| Implied | Constructive | Imposed by the court to prevent unconscionable conduct |
| By timing | Inter vivos / Testamentary | Created in the settlor's lifetime / by will on death |
2. Historical Development of Trust Law
The trust did not appear fully formed. It evolved over many centuries from the medieval 'use', shaped by the practical needs of landowners and by the intervention of the courts of equity. A basic awareness of this history helps explain why trust law looks as it does today.
Legal evolution. Over the centuries trust law has developed through both common law (equitable) principles and statutory enactment, continually adapting to changing social and economic conditions.
| Source | Significance |
|---|---|
| Statute of Uses 1535 | Addressed issues of ownership and control of land, attempting to 'execute' the use by vesting legal title in the beneficiary. |
| Trustee Act 1925 | A foundational modern statute consolidating and modernising trustees' powers and duties. |
| Trustee Act 2000 | Further modernised trustees' powers, introducing (among other things) the statutory duty of care and wider powers of investment and delegation. |
3. Importance of Trust Law in Modern Society
Far from being a historical curiosity, the trust is central to modern legal practice. It underpins family wealth planning, pensions, investment structures and charitable giving. This section surveys why trust law matters today.
4. The SQE Exam and Assessment Objectives
Before turning to the substantive law, it is essential to understand what the SRA expects of you in the Trusts element of SQE1 FLK2. This section sets out the official assessment objectives and how best to prepare.
1.4.1 Assessment Objectives (from the SRA)
Candidates are required to apply relevant core legal principles and rules appropriately and effectively, at the level of a competent newly qualified solicitor in practice, to realistic client-based and ethical problems and situations in the following areas of trust law:
Express and implied trusts.
The fiduciary relationship.
Trustees' duties, powers and liability.
Equitable remedies.
Candidates must also demonstrate their ability to act honestly and with integrity and in accordance with the SRA Statement of Solicitor Competence (SoSC), the SRA Principles and the Code of Conduct.
1.4.2 Preparation Strategies
Comprehensive study of trust law principles and their application.
Practice with case studies and application-based (single best answer) questions.
Familiarisation with recent legal developments and case law in trust law.
Trust law is a dynamic and essential area of legal study, deeply embedded in both historical tradition and modern legal practice. Its importance in asset management, estate planning and commercial activity makes it a vital area of expertise for legal professionals, particularly those preparing for the SQE. Understanding its principles, history and current applications is fundamental for any practitioner in the field.
5. MCQ Practice — Five SQE-Style Questions
Each of the following five questions mirrors the style, length and difficulty of the SQE1 FLK2 single best answer questions. Attempt each question closed-book, write down your answer, then turn to the answer key. The answer key explains why each option is correct or incorrect — read every explanation in full.
A. An outright gift of the shares to the friend, who may keep the shares and any income for themselves.
B. A contract under which the friend agrees, for consideration, to manage the shares on the client's behalf.
C. A fiduciary relationship in which the friend holds the legal title to the shares for the benefit of the children, who hold the equitable interest.
D. An agency under which the friend manages the shares as the client's agent and must account to the client alone.
E. A charitable trust, because the arrangement benefits children and is therefore for the public benefit.
Answer & explanation
C is correct — a trust is a fiduciary relationship in which the trustee (the friend) holds the legal title to property for the benefit of beneficiaries (the children), who hold the equitable interest. Ownership is split between legal and equitable title.
A is incorrect — the friend does not take beneficially; this is not an outright gift.
B is incorrect — a trust does not require consideration and is not a contract.
D is incorrect — under a trust the trustee owes duties to the beneficiaries, not merely to the client as principal; a trust is distinct from agency.
E is incorrect — a gift for the settlor's own children benefits ascertainable private individuals; it lacks the public benefit required of a charitable trust. (See Section 1.1.1.)
A. A discretionary trust, because the trustees decide when each nephew receives his share.
B. A fixed trust, because the beneficial interests are defined by the settlor and the trustees have no discretion over the shares.
C. A charitable trust, because it benefits members of the settlor's family.
D. A resulting trust, because the property may return to the settlor.
E. A constructive trust, because it is imposed to prevent unconscionable conduct.
Answer & explanation
B is correct — the beneficial interests are fixed and defined by the settlor (equal shares to three named nephews) and the trustees have no discretion over who benefits or in what proportions. That is the hallmark of a fixed trust.
A is incorrect — a power merely to apply property as each nephew turns 25 is not a discretion over entitlement; the shares themselves are fixed, so it is not a discretionary trust.
C is incorrect — benefiting named relatives is for ascertainable private individuals, not the public, so it is not charitable.
D is incorrect — the trust validly disposes of the interest to the nephews, so no resulting trust arises.
E is incorrect — this is an express trust created intentionally, not a constructive trust imposed by the court. (See Section 1.1.2.1.)
A. Each employee has a fixed and immediate entitlement to an equal share of the fund.
B. Each employee is a trustee of the fund and owes fiduciary duties to the others.
C. No employee has a fixed entitlement; each merely has a hope of benefiting unless and until the trustees exercise their discretion in that employee's favour.
D. The trust is void because a trust can never give trustees a discretion over distribution.
E. The fund automatically results back to the settlor because the beneficiaries are uncertain.
Answer & explanation
C is correct — this is a discretionary trust: the trustees choose how to distribute among a class of objects, so no individual object has a fixed interest. Each merely has a hope of benefiting until the discretion is exercised in their favour.
A is incorrect — there is no fixed entitlement under a discretionary trust.
B is incorrect — the employees are the objects (potential beneficiaries), not the trustees.
D is incorrect — trustees may validly be given a discretion over distribution; discretionary trusts are perfectly valid.
E is incorrect — a clearly defined class such as 'employees and former employees' is conceptually certain, so the trust does not automatically fail back to the settlor. (See Section 1.1.2.1.)
A. The trustees may keep the undisposed-of interest for themselves beneficially.
B. The undisposed-of beneficial interest is held on a resulting trust for the settlor (or the settlor's estate).
C. The undisposed-of interest passes automatically to the Crown as bona vacantia in every case.
D. The court will impose a constructive trust to punish the settlor for failing to dispose of the whole interest.
E. The trust is wholly void, and the property must be returned to the person who transferred it as an outright gift.
Answer & explanation
B is correct — where an express trust fails to exhaust the whole beneficial interest, the undisposed-of interest results back to the settlor (or the settlor's estate) on a resulting trust.
A is incorrect — trustees hold the legal title only and may not take the beneficial interest for themselves.
C is incorrect — the interest reverts to the settlor under a resulting trust; bona vacantia to the Crown arises only in limited circumstances, not 'in every case'.
D is incorrect — a constructive trust responds to unconscionable conduct and is not used to 'punish' a settlor; the correct mechanism here is a resulting trust.
E is incorrect — the trust is not wholly void; only the undisposed-of interest results back, and the disposed-of interests remain valid. (See Section 1.1.2.2.)
A. Express and implied trusts.
B. The fiduciary relationship.
C. Trustees' duties, powers and liability.
D. Knowledge relating to foreign assets, foreign law and foreign taxes.
E. Equitable remedies.
Answer & explanation
D is correct as the answer — candidates are expressly NOT required to demonstrate knowledge relating to foreign assets, foreign law or foreign taxes, so this is not within the assessment objectives.
A, B, C and E are incorrect as answers because each IS one of the SRA's stated assessment objectives for Trusts: express and implied trusts; the fiduciary relationship; trustees' duties, powers and liability; and equitable remedies. (See Section 1.4.1.)