Estate Planning: “Amateur” Trust Fails the Test in Re Lauer; Corby v Lyttleton

Trusts are used by lawyers in a variety of different ways. Solicitors will include a trust in a Will where, for example, parents want someone to look after their money for the benefit of their children after their deaths. There are, in fact, several types of trust but the most common are express trusts which include fixed and discretionary trusts. A fixed trust is where the trustees have no choice as to who the beneficiaries are or how much they receive. In a discretionary trust they distribute the trust property as they see fit. However, they must distribute it as they cannot keep it for themselves. For an express trust to be valid there have to be certain formalities adhered to (the ‘three certainties’), the purpose of which is to ensure the trust is properly controlled and enforced.

A key difference between a Will and a trust is that a Will takes effect on death whereas a trust takes effect when created. A Will deals with all property in your name whereas a trust covers only property that has been transferred to the trust. A trust is a way of managing assets. They can be set up for various reasons including passing on assets while you are still alive, when you die (a “Will trust”), when someone is too young to handle their affairs, or when someone cannot handle their affairs because they are incapacitated.

Put simply, a trust is a binding obligation placed (by the settlor) on one person (the trustee) to look after property for the benefit of another (the beneficiary). It will be noted that there is an obligation placed on the trustee which can be enforced by the beneficiary. A trust allows the separation of control and enjoyment of property. The trustee has management and control of the property subject to the trust but the beneficiary is the “real” owner, in the sense of enjoyment of the benefits of the property.

Having gone to the trouble of creating what is intended to be a valid trust you do not want it to fail for lack of formality but that is precisely what happened in the recent Victoria Supreme Court case of Re Lauer; Corby v Lyttleton [2017].

The judge declared a trust referred to in a Will had failed. Executors of the $250,000 estate sought administration advice about the Will of the late Ms Elizabeth Lauer, who died without issue aged 88 in 2011. The defendant, Mr Nagy, was a long-time friend who asserted he was a trustee having “amateurishly” drawn up a trust deed in about 2002, which had been signed by Ms Lauer and witnessed by others now deceased. Mr Nagy thereafter operated bank accounts as a trustee before closure in mid-2008 by which time Ms Lauer had dementia.

The court held that the trust was not properly established because the settlor had not executed the trust deed; there was no evidence of the settled sum having been given to the alleged trustee; and the beneficiaries were not sufficiently defined notwithstanding a bank account had been opened in the name of the trust. Because the discretionary trust had not been properly established, the gift of the deceased’s Will to the trust passed under the rules of intestacy to the deceased’s sole surviving nephew. As the judge stated:

“Whilst this outcome is inconsistent with the deceased’s intentions as expressed in her will and as such, is not entirely satisfactory, the conclusions of the Court are drawn upon significantly limited evidence. These circumstances serve as a reminder that the need for contemporaneous objective evidence cannot be overstated on the issue of the creation of a trust”.

Key issues

A valid trust can only exist if the settlor intends to create a trust and defines the relevant property and beneficiaries clearly. This statement translates into the three certainties, originally stated by Lord Langdale in the English case Knight v Knight (1840):

1. certainty of intention (also known as certainty of words) which is an intention on the part of the settlor to create a trust;

1. certainty of subject matter, which expresses the need for a clear description of the trust property and the respective interests of the beneficiaries;

1. certainty of objects, which requires sufficient identification of the beneficiaries (or “objects” as they are sometimes known).

There is no point in the settlor trying to create a trust over “some of my best paintings”, for example. It would be impossible for the trustee(s) to identify which paintings were intended. Similarly, you cannot create a trust for “my best mates” because it is not possible to identify the beneficiaries. The declaration of trust must satisfy the three certainties. If a trust is declared in a document, the court will look at the words used to ascertain whether the three certainties are satisfied. Outside evidence (extrinsic evidence) is only admissible in limited circumstances.

What does it mean?

It is crucial the formalities are followed to the letter or the trust can fail. Having decided to set up a trust, you do not want it to fail or have unintended consequences so it is important to obtain experienced legal guidance. Szabo & Associates, Solicitors can assist you to ensure that your intentions are carried out as you wish. The trust document (or “deed”) needs to be properly drafted and comprehensive, containing all the necessary trust formalities, and be easy to follow. It should be signed by the settlor and trustee and appropriately witnessed. Also, the settlement sum should be deposited into the trust’s bank account once it is established.

Contact our Wills and Estates Solicitors in Surry Hills, Sydney

At Szabo & Associates, Solicitors, we can offer advice on a wide range of legal matters including those concerning trusts, making and contesting wills and estate planning. Please call George Szabo on (02) 9281-5088 or fill in our online contact form.