SQE1 · FLK2 · Free samples
Trusts — free SQE1 sample questions
73 free, worked single-best-answer questions for Trusts, shown in the official SRA SBAQ format with the correct answer and a cited rationale. Drill the full bank in timed practice once you’ve worked through these.
Question 1
A trustee holds shares in a private company on trust. The company makes a rights issue, offering existing shareholders the right to subscribe for additional shares at a discounted price. The trustee uses trust funds to exercise the rights and acquires the new shares. She then registers those shares in her own name and sells them, making a net profit of £15,000, which she retains. Which remedy is most appropriate for the beneficiaries?
- A.An account of profits, requiring the trustee to pay £15,000 to the trust, because she made an unauthorised profit by exploiting an opportunity that arose from trust property.✓ correct
- B.Equitable compensation of £15,000, because the trust has suffered a loss equal to the profit the trustee retained.
- C.Rescission of the share subscription transaction and recovery of the trust funds used to subscribe for the shares.
- D.A proprietary claim to trace the £15,000 proceeds into any asset into which the trustee has mixed or converted them, enforceable in priority to the trustee's unsecured creditors.
- E.No remedy, because the rights issue opportunity arose from the trustee's own pre-existing shareholding rather than from the trust.
Why A is correct
**Correct answer: A — Account of profits** **The applicable rule.** A trustee who makes an unauthorised profit by exploiting trust property or an opportunity arising from a fiduciary position must account for that profit to the trust. This is the core principle affirmed in *Boardman v Phipps* [1967] 2 AC 46 (HL), where fiduciaries who used information and opportunities acquired in a fiduciary capacity were required to account for profits even though they had acted honestly and the trust itself could not have exploited the opportunity unaided. The rule is strict: it is not necessary to show that the trust suffered loss. On these facts the trustee: (i) held the original shares *on trust*, so the rights issue opportunity arose from trust property; and (ii) used *trust funds* to subscribe — making her liability even clearer. She is therefore obliged to account for the full £15,000 profit. **Why the other options are wrong.** - **B (Equitable compensation):** Equitable compensation is the remedy for *loss* caused to the trust by a breach of fiduciary duty or breach of trust (*Target Holdings v Redferns* [1996] AC 421; *AIB Group (UK) plc v Mark Redler & Co* [2014] UKSC 58). Here the trust has not suffered a measurable loss — it spent trust funds but those funds could, in principle, be recovered separately. The *profit* is addressed by account of profits, not equitable compensation. Option B misidentifies the remedy. - **C (Rescission):** Rescission would unwind the subscription transaction. That might be available in addition, but it is not the *primary* or *most appropriate* remedy where the transaction has been completed and the shares sold on. The beneficiaries' primary interest is in the profit, not in unwinding a completed sale. - **D (Proprietary tracing claim):** A proprietary claim via tracing (*Foskett v McKeown* [2001] 1 AC 102) is available where trust money can be followed into identifiable assets. It gives priority on insolvency and may attach to any asset representing the trust funds. However, the question asks for the *most appropriate* remedy on these straightforward facts where the trustee is solvent and the profit is quantified. A personal account of profits is the direct and simpler remedy; the proprietary route is most valuable where solvency is in doubt. Moreover, option D as drafted incorrectly limits the proprietary claim to the proceeds rather than to whatever asset the money has been converted into — but more fundamentally it is not the *best* answer here. - **E (No remedy):** This is incorrect. The rights issue opportunity arose from the *trust's* shareholding (not merely the trustee's separate personal shareholding), and trust funds were used to exercise it. Even if the opportunity had arisen from the trustee's own shares, the use of trust funds to exploit it would still engage fiduciary liability. *Boardman v Phipps* confirms there is no 'honest fiduciary' defence to account of profits. **Key authority:** *Boardman v Phipps* [1967] 2 AC 46; *Regal (Hastings) Ltd v Gulliver* [1967] 2 AC 134 (HL) (fiduciaries must account for profits made by virtue of their position, regardless of good faith).
Question 2
A woman declares herself trustee of her house for her adult son. She executes a signed written declaration of trust dated 1 March but continues to live in the property and pay all bills. On 15 March she tells her son about the trust by telephone. The son acknowledges this but takes no further action. The property remains registered in the woman's sole name at HM Land Registry. Has a valid express trust of the house been created?
- A.Yes, because the declaration satisfies section 53(1)(b) of the Law of Property Act 1925 and no transfer of legal title is required where the settlor declares herself trustee of property she already owns.✓ correct
- B.No, because the son did not provide valuable consideration for the creation of the trust.
- C.No, because the beneficial interest under the trust has not been registered at HM Land Registry and therefore cannot bind anyone.
- D.No, because section 53(1)(b) of the Law of Property Act 1925 requires the declaration to be signed by the beneficiary as well as the settlor.
- E.No, because the woman must execute a separate transfer of the legal title into her name as trustee before the trust can take effect.
Why A is correct
**Correct answer: A** **The statutory requirement – s 53(1)(b) LPA 1925** Section 53(1)(b) of the Law of Property Act 1925 provides that *'a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust, or by his will.'* The woman has executed a signed written declaration dated 1 March. She is plainly 'able to declare' the trust because she is the registered proprietor. The three certainties (intention, subject matter, objects) are satisfied on the facts. The formality requirement is therefore met. **No transfer of legal title is required for a self-declaration** Where the legal owner *declares herself* trustee rather than transferring property to a third-party trustee, no conveyance or transfer is needed: legal title is already vested in the declarant. The trust is constituted at the moment of declaration. This is the orthodox position confirmed in *Paul v Constance* [1977] 1 WLR 527 (CA) and is consistent with the analysis in *T Choithram International SA v Pagarani* [2001] 1 WLR 1 (PC), which emphasised that equity will not allow a settlor who has done everything necessary to create a trust to resile from it. Option E is therefore wrong. **Why the other options are wrong** - **B** – Consideration is not required for the constitution of an express trust. The rule that equity will not assist a volunteer applies to *incompletely constituted* trusts (i.e. where the transfer to the trustee is incomplete): *Milroy v Lord* (1862) 4 De GF & J 264. A self-declaration that complies with s 53(1)(b) is immediately effective regardless of consideration. - **C** – Registration at HM Land Registry governs the transfer and priority of *legal* estates and registered charges. A beneficiary's equitable interest under a trust of land is an overriding or overreachable interest; it does not need to be substantively registered in order to exist. The Land Registration Act 2002 does not require registration of the beneficial interest itself for the trust to be valid as between settlor and beneficiary. - **D** – Section 53(1)(b) requires the declaration to be signed by the person *able to declare the trust*, i.e. the settlor/legal owner. There is no requirement that the beneficiary sign anything. Option D misstates the statute. - **E** – As explained above, a self-declaration requires no separate transfer; legal title is already in the woman. Requiring a further 'transfer to herself as trustee' would be legally otiose and is not a requirement of English law.
Question 3
A trustee holds a portfolio of investments on trust for two adult beneficiaries in equal shares. One beneficiary urgently needs money and asks the trustee to sell certain shares immediately. The trustee believes waiting three months would achieve a significantly better price based on market forecasts. The beneficiary insists on an immediate sale. What is the trustee's duty in these circumstances?
- A.The trustee must comply with the beneficiary's instruction because beneficiaries can direct trustees regarding trust assets.
- B.The trustee must exercise her own judgement in the best financial interests of the trust, even if this means refusing the beneficiary's request.✓ correct
- C.The trustee must obtain the consent of both beneficiaries before making any sale of trust investments.
- D.The trustee must apply to court for directions before acting because the beneficiaries' interests conflict.
- E.The trustee must sell immediately because she owes a duty to accommodate reasonable beneficiary requests.
Why B is correct
Trustees must exercise their discretion independently and cannot blindly follow beneficiary instructions unless the beneficiaries are all adult, of sound mind, and acting unanimously under the principle in *Saunders v Vautier* (1841) 4 Beav 115. Here only one of two beneficiaries is requesting the sale. The trustee owes a statutory duty of care under s.1 Trustee Act 2000 to act prudently and in the trust's best interests. Option A is the strongest distractor but fails because not all beneficiaries are acting together, so *Saunders v Vautier* does not apply.
Question 4
A woman's will leaves her residuary estate 'to my trustees to distribute among such of my grandchildren as they see fit'. She has four grandchildren aged between 8 and 16. The will appoints two trustees and satisfies all testamentary formalities. The woman dies and probate is granted. What type of trust, if any, has been created?
- A.A fixed trust because the grandchildren are all identifiable.
- B.A discretionary trust because the trustees may select among the class of beneficiaries.✓ correct
- C.A power of appointment coupled with a resulting trust in favour of the estate.
- D.No valid trust because there is insufficient certainty of objects.
- E.No valid trust because there is insufficient certainty of subject matter.
Why B is correct
The use of 'such of' language creates a discretionary trust, giving trustees power to select beneficiaries and determine quantum (*McPhail v Doulton* [1971] AC 424). The class of grandchildren satisfies the 'is or is not' test for discretionary trusts. Option C is the strongest distractor; however, the imperative language ('to distribute') creates a trust obligation, not a mere power. A trust obligation carries a duty to distribute, whereas a power does not. The trustees must exercise their discretion, distinguishing this from a bare power.
Question 5
A father purchases a registered flat in his adult son's sole name. The son is 22 years old and financially independent. The father pays the entire purchase price of £300,000 from his own savings. There is no evidence of any discussion about the beneficial ownership, and no declaration of trust is executed. The son is registered as sole legal owner. Who holds the beneficial interest in the flat?
- A.The son holds the entire beneficial interest solely because he is the registered legal owner.
- B.The father holds the entire beneficial interest under a resulting trust, because he provided the entire purchase price.
- C.The father and son hold the beneficial interest in equal shares under a common intention constructive trust.
- D.The son holds the entire beneficial interest because the presumption of advancement applies to a voluntary transfer from father to child, treating the transaction as a gift in the absence of contrary evidence.✓ correct
- E.The father retains the entire beneficial interest under an automatic resulting trust because the son provided no consideration.
Why D is correct
**Correct answer: D** **Resulting trust vs presumption of advancement** Where a person voluntarily pays the purchase price for property that is placed in another's name, equity raises a *presumption of resulting trust* in favour of the payer: *Dyer v Dyer* (1788) 2 Cox Eq Cas 92. Standing alone, the father's payment of £300,000 would ordinarily mean he retains the beneficial interest. However, where the payer is a **father** and the recipient is his **child**, equity historically raises the countervailing **presumption of advancement**, treating the transfer as an outright gift to the child. This presumption applies to father-to-child transfers regardless of the child's age: *Shephard v Cartwright* [1955] AC 431 (HL); *McGrath v Wallis* [1995] 2 FLR 114 (CA). On the facts, no evidence rebuts the presumption, so the son holds the entire beneficial interest as an outright gift. **Why the other options are wrong** - **A** is wrong because registration as legal owner does not, of itself, determine the beneficial interest; equity looks behind the register. - **B** is wrong because, although a resulting trust would arise between strangers on these facts, the presumption of advancement displaces the resulting trust presumption in father-to-child transfers: *Shephard v Cartwright* [1955] AC 431. - **C** is wrong because a common intention constructive trust requires evidence of a common intention and detriment (*Lloyds Bank plc v Rosset* [1991] 1 AC 107); neither is present here. - **E** misdescribes the law: a resulting trust arising from the provider's payment is a *purchase-money resulting trust*, not an 'automatic resulting trust' (that category, identified by Megarry J in *Re Vandervell's Trusts (No 2)* [1974] Ch 269, concerns surplus beneficial interests after a trust purpose fails). More fundamentally, the presumption of advancement overrides any resulting trust on these facts. **Note on s 199 Equality Act 2010**: Section 199, which would have abolished the presumption of advancement, was never brought into force and remains dormant. The presumption therefore continues to apply in English law.