In this series of three related articles, we look at a few of the key distinctions pertinent to wills, trusts, and estates for clients domiciled in England and Wales, as compared to those domiciled in Scotland. This article focuses on trusts. You can view our previous article on wills here and the next article on estates here.
A note on terminology
In basic terms, a “private” trust is an arrangement via which a person or organisation (trustees) hold assets for the benefit of others (beneficiaries). The person who creates the trust and transfers the assets to the trustees is known as the “settlor” in England and Wales. In Scotland, they’re often referred to as the “truster”.
Trusts created for the benefit of private individuals under Scots Law are, in theory, capable of continuing forever.
In England and Wales however, strict rules require that the interests of the beneficiaries must “vest” (and the trust therefore comes to an end) within a specific time frame.
This is known as the “perpetuity period” and for new trusts created after 6 April 2010, the prescribed period under legislation is 125 years.
Where a will contains a trust and was executed before 6 April 2010 however (even if the testator died after that date), a shorter perpetuity period will apply to the will trust. The position must therefore be checked carefully as it could affect the long-term functioning and objectives of the trust.
In each jurisdiction, powers are provided by law (we call these “statutory powers”), which are designed to practically assist trustees by giving them certain tools with which to manage the trust fund and replace trustees where necessary.
These statutory provisions will apply automatically to trusts set up under the law of the relevant jurisdiction.
Generally speaking however, the statutory powers are much wider and more helpful to trustees in England & Wales (though reform may be on the horizon in Scotland).
As a result, it’s vital that the document creating any trust in Scotland contains a full raft of “bespoke” trustee powers. In England and Wales, it is more common to see modification of the powers provided for under statute, to specifically tailor these to the needs of each client. The drafting process is still extremely important, but there can be a slightly different emphasis when it comes to the “powers” section of the trust deed.
Equity, implied trusts, and the rights of beneficiaries
In England & Wales, trusts are “implied” by law in specific situations, based on the idea that it is sometimes “equitable” for an asset to be held for the benefit of someone who is not necessarily the legal owner.
A simple example may be where money is contributed to the cost of buying a house by two parties, but only one takes legal title to the property. “Equity” in England & Wales may imply that a trust arises here, whereby the “legal owner” holds a share of the property for the benefit of the contributing party who is not strictly recognised on the title.
There are, of course, all sorts of problems around trying to prove entitlement of the beneficiary in these situations. However, the point is that in England & Wales it is possible for such “resulting” and “constructive” trusts to arise. They can, in fact, be the subject-matter of much litigation south of the border.
Where trusts do arise in England & Wales, the beneficiaries have a “real” right in the trust property, rather than merely a personal right of action against the trustees. This former “real” right is stronger than the latter and can be enforced against third parties.
It is from this principle of “equity” that a key tenet of property law in England & Wales arises, in the split of “legal” and “equitable” title.
Wherever a property is purchased jointly by two or more individuals and they declare they hold the asset as “Tenants in Common”, this constitutes a declaration of trust. The legal owners are essentially confirming that they will hold the property according to the benefit of any individual with an interest in the underlying “equitable” title.
Thus, if a couple contribute unequally to a purchase and agree to hold as Tenants in Common in the ratio 70:30, a trust arises whereby they agree that they will divide the “beneficial” interest in the property strictly into these shares.
In Scotland, the beneficiaries of a trust do not have “real” rights of ownership in the trust property, but can enforce their “personal” rights against the trustees.
In Scottish private trusts, trustees generally have power to make decisions by majority.
In England & Wales, the default rule is that trustees must make decisions unanimously. Whilst this can be ousted by express reference in the trust deed to majority decision-making, it’s quite rare to see that in practice.
The content of these articles provides some indication of just how significantly the legal rules at the heart of estate planning can differ north and south of the England/Scotland border. Yet the practical reality is that a vast number of our clients have connections to each jurisdiction, whether in terms of their own family history, the current whereabouts of their proposed “beneficiaries”, or the location of their property interests. Brodies are uniquely placed to be able to assist with succession matters in each jurisdiction, as well as those that may span the two, given the expertise held by our English and Scottish qualified teams, who are accustomed to working closely together.
Nadine Walton, Senior Associate at Brodies.