Imperfect Gift

Business, Legal & Accounting Glossary

Definition: Imperfect Gift

Full Definition of Imperfect Gift

A gift is the transfer of legal title to some property — land, money, chattels, whatever — that is made without Consideration and is, therefore, by definition, not subject to a Contract. Because there is no contract, a gift will fail if the giver can not, or does not, take the appropriate steps to divest himself of the legal title. If the gift fails, it reverts to the giver or, if the gift is testamentary, his estate. In most cases, the transfer of legal title is accomplished by handing over the physical object that constitutes the gift, making it clear that it is intended as a gift. Problems arise where there is no physical object (the gift is a chose in action, for example), or if the legal title cannot be divested without certain formalities.

Courts have frequently been called upon to exercise their equitable discretion, and rescue a gift that has failed for some reason or other. The courts are reluctant to do this — there is a motto: equity will not perfect an imperfect gift — but there are some circumstances in which they will. This article outlines those circumstances.

Whether equity will perfect an imperfect gift is not a matter for academic debate only. Since a gift is a transfer of legal title without consideration and so, in most cases, is the constitution of a trust (see the constitution of trusts), it is generally believed that courts will apply the case-law on imperfect gifts in deciding whether to rescue an improperly-constituted trust. Since many trusts are improperly constituted, for whatever reason, the issue is of great practical significance. To be fair, the number of reported cases where the courts actually have applied equitable principles relating to imperfect gifts to unconstituted trusts can be counted on the fingers of one hand (some would say on the fingers of one foot). Nevertheless, trust lawyers generally accept that courts would decide this way, should they be so-called on.

The Milroy v Lord Principle

In Milroy v lord (1862), Turner LJ set out the (only) three processes that equity would recognize as establishing a valid gift. These were:

  1. An outright transfer of the legal title to the beneficiary
  2. An outright transfer to trustees to hold on trust for the beneficiary
  3. A self-declaration of trust

The important issue is that these three categories are exclusive — the courts will not rescue an imperfect gift by treating it as a trust, nor vice versa.

The case of Re Rose (1952) established the principle that, if the donor has done everything that can be expected of him to transfer the legal title, but the effective transfer is delayed by the routine operation of law, the gift is effective despite the lack of a valid transfer of title. Re Rose applied to shares but, in principle, can apply to any transfer where legal formalities take time to complete. It is routinely applied to land transfers, which are invariably deemed to be effective in equity from the moment contracts are exchanged, despite the lack of transfer of legal title.

The legal sleight-of-hand that makes the Re Rose principle work is that, once the donor is committed to transfer the legal title, he is deemed to hold the legal title on Constructive Trust for the recipient. Where the transfer is to constitute a trust — suppose A contracts to transfer land to B to hold on express trust for C — then from the moment contracts are exchanged, A hols legal title on Constructive Trust for B, who holds the equitable title under this Constructive Trust on express sub-trust for the C. Confused? I hope so — it took me two years to get my head around this. Anyway, this prestidigitation is necessary to allow the transfer to take effect despite lack of compliance with s.53(1)b of the LPA (1925).

The Rule In Strong v Bird

Like the Re Rose principle, the rule in Strong v Bird (1874) is often interpreted as allowing a gift to be perfected by the exercise of equitable discretion. Unlike Re Rose,this interpretation may well be wrong. In Strong v Bird the legal title did, in fact, pass to the recipient of the gift, albeit accidentally, so the gift was ‘less imperfect’ than the one in Re Rose, where title had not transferred at all, even accidentally. In fact, the rule is simply an example of equity standing aside to let FortuitousVesting succeed.

The rule in Strong v Bird makes little logical sense. The fact that A appoints B to be his executor says nothing at all about how A views a debt he is owed by B. It is merely good fortune that B gets his debt relieved while C, who may also owe money to A, gets nothing because he is not an executor. The various extensions to Strong v Bird, such as Re Stewart_ (outright gift, rather than relief of debt, perfected by the appointment of the executor) and Re James (relief of debt on being appointed administrator in intestacy) are even less justifiable.

Donatio Mortis Causa

A gift made in the expectation of death. Equity will enforce a gift made by a person who has a settled, hopeless, expectation of (relatively imminent) death, even if there has not been an adequate transfer of legal title. It is sufficient if sufficient indicia of title are handed over (the keys to a car, for example).

Proprietary Estoppel

Arguably proprietary estoppel amounts to the perfection of an imperfect gift. It arises where person A assures person B that he believes that he or she (person A) will be given some interest in land belonging to A, and B relies on that assurance to his or her detriment. In equity, the transfer of the interest to B is effective, if it is effective at all, from the moment the assurance is given

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Definition Sources

Definitions for Imperfect Gift are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th April, 2020 | 641 Views.