1.1

Question 1

Westdeutsche Landesbank v Islington

Answer 1

Once a trust is established, a beneficiary has, in equity, a proprietary interest in the trust property enforceable against anyone other than a purchaser for value of the legal interest without notice.

Question 2

Burrough v Philcox

Answer 2

settlor directed that certain property should be held on trust for his two children for life and that, in the events which happened, the survivor of the two children “shall have power to dispose of [the property] amongst [the settlor’s] nephews and nieces or their children, either all to one of as many of them. The Court inferred a general intention on the part of the settlor to benefit the class of potential beneficiaries as a whole and held that the disposition in favour of the nephews and nieces created a discretionary trust, and that, since the surviving child, as trustee of that discretionary trust, had failed to carry out the trust, it was for the court to do so. In deciding how to execute the trust, the court attached again, significance to the general intention of the settlor: the trustee had been directed to distribute to one or some or all members of the class; and in default of selection by the trustee it was appropriate to order that the trust property be divided equally among all members of the class.

It has been argued that the courts are likely to adopt this first approach to unexecuted discretionary trusts where the class of beneficiaries is small in number, and even more so where the class comprises members of the settlor’s family.

Question 3

McPhail v Doulton

Answer 3

The settlor transferred property to trustees, to “apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex -officers or ex-employees of the company or to any relatives or dependants off any such persons”. In the situation of a discretionary trust.

Lord Wilberforce -

“Equal division is surely the last thing the settlor ever intended”

Thus, if the trustees failed to carry out their duty of selection and distribution, the court would normally infer an intention on the part of the settlor that the trustees should distribute to one or some but not all members of the class. Therefore, the court would adopt some other means to ensure a more appropriate distribution of the trust property that would accord with the settlor’s intention.

Question 4

Re Gulbenkian’s Settlements

Answer 4

Lord Reid - with a mere power

“no duty to excerise it or even to consider whether he should exercise it”.

But with a fiduciary power

“the situation must be different”.

Question 5

Re Baden (No1)

Answer 5

Lord Wilberforce

A [fiduiciary] power, the trustee is not bound to exercise it, and the court will not compel him, but he

“must from time to time consider whether or not to exercise the power”.

“He must ‘make such a survey of the range of objects or possible beneficiaries’ as will enable him to carry out his fiduciary duty…He must find out ‘the permissible area of selection and then consider responsibly”

Question 6

Re Baden (No(1)

Answer 6

Lord Wilberforce -

“There is no need to compile a complete list of the objects, or even to make an accurate assessment of the number of them: what is needed is an appreciation of the width of the field”

Question 7

Turner v Turner

Answer 7

Court will intervene where fiduciary power is exercised without due consideration.

Held: They had failed to understand that they had a discretion to refuse to go along with the directions of the settlor.

Facts: donees of a power blindly followed the directions of the settlor. Someone on the side-lines gave directions to the donee of power. Court found that the donees of the power didn’t grasp or understand that they had a discretion. Court said that the donees didn’t understand that they could decide not to exercise the power, and therefore they had misunderstood the terms of their role and discretion only consider exercising the power rather than blindly follow. Breach of terms of the power. Useful case for seeing the consequences of donees of power not grasping the nature of their role.

Mervyn-Davies -

“T]he trustees exercising a power come under a duty to consider”

Question 8

What obligation are trustees under?

Answer 8

Trustees under a duty to select beneficiaries and distribute trust property according to the terms of the trust. Trustees must act fairly, bona fides and reasonably. Failure to distribute will amount to a breach of trust.

Question 9

Re Locker’s Settlement

Answer 9

The court itself can execute such a discretionary trust as is here in question, if the trustees fail to do so.

Facts: The trustees of a discretionary trust were required to apply the income for charitable purposes or among the class of beneficiaries as the trustees ‘shall in their absolute discretion determine’. In response to the expressed wishes of the settlor, the trustees failed to make any distributions of income from 1965 to 1968; rather that undistributed income was accumulated. In 1975, the question arose what should be done with that income, and in particular whether the trustees’ discretion had expired.

Held: The Court said in no uncertain terms that trustees had not followed their obligations, not fulfilled their duties, and could exercise the discretionary trust if trustees fail to do so.

Question 10

Breadner

Answer 10

The court held that sometimes the distinction between discretionary trustes and fiduciary powers does not matter. But the important difference between the two is if the trustee does not excerise the discretion.

If there is a trust power and, although the trustees are required to exercise it within a reasonable time, they do not do so, the discretion still exists. If the trustees are willing to exercise it, albeit later than they should have done, the court will permit them to do so. That is what happened in In re Locker’s Settlement. Alternatively the court will exercise the discretion itself.

But if the discretion to distribute is a [fiduciary] power, and the trustees do not exercise it within a reasonable time of the receipt of an item of income, the discretion no longer exists.

Question 11

McPhail v Doulton (Re Baden (No 1)

Answer 11

‘9(a) The trustees shall apply the net income of the Fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers and ex-employees of the Company or any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit …

(b) The trustees shall not be bound to exhaust the income of any year’

This case sets out how unsatisfactory the line is between powers and trusts. Lord Wilberforce’s objection between the two, as he says it is “striking” and “artificial” the distinction.

Question 12

What is a Burrough-type discretionary trust?

Answer 12

unexecuted discretionary trusts where the class of potential beneficiaries is limited, often family trusts.

Here the maxim ‘equality is equity’ holds sway – the court is minded to order equal division of trust fund among all members of the class;

Question 13

What is a Baden type discretionary trust?

Answer 13

unexecuted discretionary trusts where the class of potential beneficiaries is very large, often company benefit trusts/funds.

Here equal division is wholly inappropriate and unlikely to align with settlor’s intentions. Court minded to order unequal division of trust fund.

Question 14

Why is there a distinction between Burrough and Baden type iscretionary trusts?

Answer 14

Will it divide the fund equally among all members of the class of potential beneficiaries or in an unequal manner? The Burrough/Baden classification offers an insight into which approach the court may take.

Question 15

Burrough v Philcox

Answer 15

Facts:

A settlor directed that certain property should be held on trust for his two children to life and that, in the events which happened, the survivor of the two children “shall have power to dispose of [the proprety] amongst [the settlor’s] nephews and nieces or their children, either all to one of them, or to as many of them as [the] surviving child shall think proper”

Notwithstanding the apparent terminology of powers, the court inferred a general intention on the part of the settlor to benefit the class of potential beneficiaries as a whole and held that the disposition in favour of the nephews and nieces created a discretionary trust, and that, since the surviving child, as trustee of that discretionary trust, had failed to carry out the trust, it was for the court to do so. In deciding how to execute the trust, the court attached particular significance to the intention of the settlor – to distribute to one or some OR ALL members of the class. In default of selection by the trustee, it was appropriate to order that the trust property be divided equally among all members of the class.

Question 16

McPhail v Doulton [1971] AC 424 (aka Re Baden No 1)

Answer 16

Facts:

The settlor transferred property to trustees, to “apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit”

The court decided that if trustees failed to carry out their duty of selection and distribution, the court would normally infer an intention on the part of the settlor that the trustees should distribute to one or some but not all members of the class. Equal division of the trust property would therefore not accord with the settlor’s intention and the court would adopt some other means to ensure a more appropriate distribution of the trust property that would accord with the settlor’s intention.

Question 17

When does a Baden-type discretionary trust appear?

Answer 17

In Baden-type discretionary trusts, the class of potential beneficiaries is much larger - often very large, e.g., a company, plus children of employees etc - large number of individuals.

In this context equal division would seem inappropriate and unlikely to be in line with what settlor intended. The settlor’s purpose in creating the fund would be completely defeated if, in the event of the trustees’ default, each and every member of the class were to receive an insignificant payment which was far outweighed by the administrative costs of determining the full extent of the class.

Logic: if company and company employees plus offspring, could be thousands of people. This could result in only a penny going to each beneficiary. This cannot be what was intended when the trust was set up, therefore equal division seems inappropriate in this context.

Question 18

What did Gravells say about trusts and powers?

Answer 18

trusts and powers remain conceptually distinct…however, more recently, the greater incidence of trust/power combinations – particularly Baden-type discretionary trusts and fiduciary powers of appoint – has led to a dramatic reduction in the practical significance of this distinction.

First, the requirements as to certainty of objects (and thus initial validity) for Baden-type discretionary trusts and powers of appointment were assimilated in McPhail v Doulton (except in relation to the issue of administrative unworkability); and it is arguable that the decision in Mettoy must inevitably result in complete assimilation.

Second, although the interests of the potential beneficiaries in the event of a failure of selection and distribution remains a point of distinction, that distinction has, to some considerable extent, been sidelined by the assimilation of the duties of trustees of trustees of Baden-type discretionary trusts and of trustee-donees of powers of appointment during the operational period of the trust or power and by the assimilation of the remedies available to enforce those duties.

…it may be possible to assert that the courts have acknowledged and addressed the artificial distinction between Baden-type discretionary trusts and fiduciary powers of appointment - a distinction which, according to Lord Wilberforce, has probably never commended itself to laymen or logicians”

Question 19

Saunders v Vautier

Answer 19

The rule in this case applies to fixed trusts and says that if all the beneficiaries of age and capacity – adults with mental capacity – come together as one (agree), they can force the trustee to transfer the title to them. The effect of that is that the trust is brought to an end.

Question 20

Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’

Answer 20

[W]hen we think about trusts we use a terminology which averts our eyes from the very enquiry which we most want to make, namely … as to the facts which bring trusts into being. … [W]ith trusts, we know they can arise by consent (express declaration) but as for such trusts as do not arise expressly, we know only two bits of gobbledegook, that they are resulting or constructive. These words turn out to tell us, so far as they tell us anything at all, something entirely negative, namely that in non-express trusts the intentions of the parties play no part at all (constructive trusts) or a minor role in rebutting presumptions (resulting trusts). Meanwhile all we actually want to know is the facts on which non-express trusts do arise. … Do trusts arise from consent? We know they do. Do they arise from wrongs? Do they arise from unjust enrichment? And do they arise from any other events?

Question 21

Chambers, Resulting Trusts

Answer 21

Much more useful than the conventional classification of trusts, as express, implied, resulting or constructive, would be a classification distinguishing trusts as generated by consent, wrongs, unjust enrichment or other events. The advantage of this approach would be the greater ease of aligning the law of trusts with other areas of law responding to the same ideas.

Question 22

Hayton: - Developing the Obligation Characteristic of the Trust (2001)

Answer 22

Challenges the traditional view that trusts are about accountability to beneficiaries. He asks: why not accountable to someone – need not be the beneficiary – ‘why not trust enforcer.’ So long as there is someone to enforce – why is it not valid? Settlor nominates in instrument, the aims of the trust are still achieved – trusts are about ensuring obligations are met.

Question 23

Parkinson: - ‘Reconceptualising the Express Trust’ [2002]

Answer 23

Picks up on Hayton’s idea, and reconceptualises the trust as an ‘equitable obligation binding the trustee to deal with the property for the benefit of others’

Question 24

1. What is a power and how is it different from a trust?

Answer 24

Powers of appointment confer on a person who does not own property the authority to choose who shall become the owner. It is discretionary in character.

Unlike the powers of trustees, which are management powers which do not affect the rights of the beneficiaries, powers of appoint allow the trustees (or others) to make decisions identifying beneficiaries or quantifying their rights.

Question 25

Gravells, ‘Discretionary Trusts and Powers of Appointment: Progressive Assimilation’

Answer 25

“A power is an authorisation given to a person to take certain action affecting property in circumstances where that person is not absolutely entitled to that property, or even where that person has no interest at all in that property….the power of appointment authorises the donee of the power to dispose of the settlor’s property by “appointing” it to another person or persons as beneficiaries. However, in common with the discretionary nature of all powers, the essential feature of a power of appointment is that the donee of the power is merely authorised to appoint the property to one or more of the beneficiaries without being under a duty to do so.”

Question 26

Re Weekes Settlement

Answer 26

Mrs Slade granted a life interest of her estate to her husband and gave him a power of appointment over the reversionary interest in favour of their children. This created a special power in favour of the class of their eight surviving children. Mr Slade had discretion whether or not to make any appointments, but he could only make appointments to those who fell within the class of potential objects.

Question 27

Re Penrose

Answer 27

If it is within the scope of the power, the donee may appoint the fund entirely to himself without even considering the other potential objects.

An exercise of a special power of appointment by the donee in favour of himself, where he was an object, was upheld.

Question 28

Re Gulbenkian’s Settlements

Answer 28

Lord Reid -

“It may be true that when a mere power is given to an individual he is under no duty to exercise it or even to consider whether he should exercise it. But when a power is given to trustees as such, it appears to me that the situation must be different. A settler or testator who entrusts a power to his trustees must be relying on them in their fiduciary capacity so they cannot simply push aside the power and refuse to consider whether it ought in their judgment to be exercised.”

Question 29

Re Hay’s Settlement Trusts

Answer 29

An example of a fiduciary power is given in:

, the duties of a trustee which are specific to a [fiduciary] power seem to be threefold. Apart from the obvious duty of obeying the trust instrument, and in particular of making no appointment that is not authorised by it, the trustee must, first, consider periodically whether or not he should exercise the power; second, consider the range of objects of the power; and third, consider the appropriateness of individual appointments. I do not assert that this list is exhaustive.

Question 30

Gravells

Answer 30

“thus, although the power remains a power and, as such, the trustees have no duties to exercise it and cannot be compelled to exercise it, the trustees as trustees nonetheless have duties in relation to the power – in particular, a positive duty to consider whether or not to exercise it”

Question 31

Turner v Turner

Answer 31

This is a useful case for seeing the consequences of donees of power not grasping the nature of their role. “the court declared invalid the purported exercise of the power in question”

Facts: A settlor created a trust for the benefit of certain members of his immediate family. The settlement also conferred on the trustees a power of appointment under which the trustees were authorised to distribute income or capital out of the trust fund to any or all of the beneficiaries. The case concerned three purported appointments made pursuant to that power of appointment. The settlor, contrary to the advice of his solicitors, had appointed as trustees other members of his family, none of whom had any experience or understanding of trust matters.

In the circumstances, the trustees effectively left all the decision making to the settlor (who was not one of the trustees) and they executed a series of documents at his request without reading them and without understanding their effect. They blindly followed the directions of the settlor. The court said that, in so doing, they had clearly failed to appreciate the nature of their powers and duties and, in particular, they had failed to understand that they had a discretion to refuse to go along with the directions of the settlor. The donees had breached the terms of the power because they had not considered exercising the power, they had merely blindly followed.

Question 32

What did Megarry in Re Hay’s Settlement Trust?

Answer 32

In Re Hay’s Settlement Trusts, Megarry indicated that the courts would compel the donee of a fiduciary power to consider exercising it. However the courts have been reluctant to suggest that they would compel the donee to exercise the power, as this is inconsistent with its discretionary character. However, in the following case, Warner J considered that in some circumstances the court might be willing to step in and compel the exercise of a fiduciary power in Mettoy.

Question 33

Mettoy v Evans

Answer 33

Facts: Mettoy, a toy manufacturer, went into liquidation. There was a surplus in its pension fund. Mettoy held a power of appointment in favour of the beneficiary pensioners. Any surplus not appointed to them was to go to the company itself. The surplus was in excess of £9 million. However, because the company had gone into liquidation, there was a conflict of interest, with predators in the background. The liquidators wanted to release the power and use the surplus funds to pay off the company’s creditors – they argued that the power to augment the fixed entitlements was entirely discretionary and that they had no obligation to exercise; the power could therefore be released, which would allow the surplus funds to be available for Mettoy’s creditors. But the beneficiaries clearly wished to establish that they were entitled to the surplus funds, or at least to have their claim to those funds properly considered. As the power was fiduciary in nature it could not simply be released as the donee of the power had a duty to consider exercising it. The problem was this: the donee of the power was the company itself, which, since it had gone into liquidation, could not now exercise the power and, moreover, the liquidator could also not exercise the power as it had a conflict of interest between its duty to the company creditors and its duty to the beneficiary pensioners under the scheme. The power does not have to be exercised or executed – what happens to the surplus money?

The matter came before the court, who identified that this was an unusual and difficult situation with a conflict of interest at its heart. They decided that, in this case, the court would step in to exercise the power, as it had no choice but to step in. The liquidators had a conflict of interest and the business had gone bust, therefore the court had to step in to exercise the power.

“in that situation the court must step in.”

Warner J concluded that all the remedies available to the potential beneficiaries in the context of discretionary trusts should also be available in the context of fiduciary powers of appointment. In the absence of a request for the appointment of new trustees, he took the view that he was entitled to approve a proposed scheme or even dictate a scheme himself. In such circumstances, the court could exercise the fiduciary power in the same way that it was entitled to intervene if the trustees of a discretionary trust were failing to carry out there duties.

Question 34

Why is Mettoy v Evans important?

Answer 34

This case is either very important or complete confined to its facts and therefore not important. But it is important to know about it and assess its significance.

• Does Mettoy suggest an assimilation of judicial response to failure to exercise a fiduciary power and failure to distribute under a discretionary trust?
• How far do we interpret Mettoy as a collapsing/blurring of the line between powers and trusts?

Mettoy either sanctions the court to intervene in powers, or it is an exceptional case with exceptional facts which is only authority for the provision that, should there be no other way forward, the court will intervene. There is a tendency towards the latter – the court clearly had its back against the wall. There was nothing else it could have done, other than leave a surplus of money floating in the air.

It is suggested that caution is needed. The traditional distinction between trusts, which the court will enforce, and powers, which it will not, would be all but abolished if the courts are willing to enforce fiduciary powers in the same way that they will enforce discretionary trusts. the limitation seems to be the recognition that this procedure is only available in the limited exceptional circumstances where the power cannot be exercised because there is no donee able to make any appointments, or where the nature of the obligation is such that the donee is obliged to exercise the power.

This is a useful case for critiquing the law: set out the traditional understand of powers, and then use Mettoy to critique the law, as it pushes at the more difficult aspects of the law: question, why are powers treated differently?

Question 35

1. What rights, if any, do potential objects of power have?

Answer 35

Those who might receive property are OBJECTS, those who MAY get property.

They MAY be selected to receive property. Potential objects under a power are POTENTIAL – they don’t know even if they are going to be selected at all. At best they have a mere spes (mere hope) of inheriting property.

Key to this is that, because they only have a mere hope, they have no proprietary rights in the property unless and until that power is exercised.

Further, the potential beneficiaries under a power of appointment CANNOT combined together and claim the property for themselves (in contrast with the position under a trust and the principle in Saunders v Vautier)

Question 36

Re Brookes’ Settlement Trust

Farwell J:

Answer 36

“it is…impossible to say that until an appointment has been made in favour of this son that the son had any interest under his mother’s settlement other than an interest as one of the people entitled in default of appointment’”

Question 37

Rights of potential objects of power

Answer 37

Object of power = someone who might benefit.

If there is no duty to exercise the power, then the potential objects of the power have no proprietary right.

If a power is given, “here’s £100 distribute this among my friends if you wish, if you don’t, do anything” – do the friends have any rights? There is potentially a chance that they could receive property, but there is an equal chance that they may never receive anything.

The rights were merely a hope that you might receive property. You cannot have a proprietary right, because you might get nothing. Called a mere “spes” – means “hope”. Hope is weak; you don’t know if will get anything or not.

Question 38

Rights of beneficiaries under a trust:

Answer 38

BUT if there’s a trust – “£100 to distribute among these three friends” – the friends have a right to have a third of that money. Because the trust says £100 for trustee to distribute among 3 friends.

The friends therefore have a proprietary right: one third of the money belongs to them. If the trustees do not act, the court or the beneficiaries can force them to act because they have a proprietary right.

Question 39

Mettoy Pension Trustees Ltd v Evans

Answer 39

Discretionary trusts are ‘cases where someone, usually but not necessarily the trustee, is under a duty to select from among a class of beneficiaries those who are to receive, and the proportions in which they are to receive, income or capital of the trust property.’

Question 40

Re Hay’s Settlement Trusts

Answer 40

This is again different from powers, as the courts will, under a trust, put itself in the shoes of the trustees and distribute the money – the court itself can execute the trust. Classically, this cannot be done with a power. While it has “always been possible for the potential beneficiaries of a power of appointment to apply to the court for an order restraining the donee from appointing to a person outside the class of potential beneficiaries” (Gravells), beyond that, the donee is subject to not duties.

In the case of a trust, of course, the trustee is bound to execute it, and, if he does not, the court will see to its execution. A mere power is very different. Normally the trustee is not bound to exercise it, and the court will not compel him to do so. – Megarry VC

Question 41

Re Locker’s Settlement

Answer 41

The trustees of a discretionary trust were required to apply the income for charitable purposes or among the class of beneficiaries as the trustees ‘shall in their absolute discretion determine’. In response to the expressed wishes of the settlor, the trustees failed to make any distributions of income within three years, from 1965 to 1968; rather, that undistributed income was accumulated.

In 1975, the question arose what should be done with that income, and in particular whether the trustees’ discretion had expired.

The court said in no uncertain terms that the trustees had not followed their obligations, not fulfilled their duties and it was “entirely within the purview of the court that it can exercise the discretionary trust if trustees fail to do so.”

Question 42

McPhail v Doulton

Answer 42

Leading case, which demonstrates the inherent flexibility and idealness of discretionary trusts for allocating large funds among large potential classes of beneficiaries.

Trust to provide benefits to the staff and their relatives and dependants. It was clearly never the intention that each and every member of the specified class (1.300 people_ should receive payments, but that those appointed trustees should have the discretion to select some to benefit. A discretionary trust had been created – there was discretion as to who would receive shares of the income, but they had no freedom to refuse to carry out the trust.

[T]he court, if called upon to execute the [discretionary trust], will do so in the manner best calculated to give effect to the settlor’s or testator’s intentions. It may do so by appointing new trustees, or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution, or even, should the proper basis for distribution appear, by itself directing the trustees so to distribute.

– Lord Wilberforce

Question 43

Re Locker

Answer 43

says that the trust is used in order to fulfil the settlor’s intentions and ensure that they are fulfilled.

Question 44

Breadner

Answer 44

Facts:

The two trustees of a discretionary trust were granted a power of appointment in 1976. Under the terms of the trust, this power had to be exercised before a specified date. At a late stage, one of the trustees prepared a deed appointing the entire beneficial interest to one beneficiary, which he only explained to his co-trustee on the day before the deed was executed. The beneficiary claimed the appointment was still effective in equity.

It was held that while the trustees had failed to perform their duty to consider exercising the power, the court could not intervene because the power had ceased to be exercisable, even though they would have made the appointment if they had performed their duty.

Question 45

Re Smith:

Answer 45

three friends essentially represent the whole class. Together, they know the money will be distributed between them: shouldn’t that give them rights?

However, the House of Lords rejected the Re Smith approach, and said if you are a potential beneficiary under a discretionary trust, you are in competition with the others. Friend 1, 2 and 3 are all thinking they could get the whole £100. Until the discretion is exercised, they don’t know what they will get. At best, they have an expectation of receiving property.

Question 46

Gartside v IRC

Answer 46

This case concerned a non-exhaustive discretionary trust in favour of John Gartside and his wife and children. The central question was whether estate duty was payable on the trust fund, which had not yet been distributed at the date of John’s death. The relevant legislation would render the whole fund liable to estate duty if he was regarded as having an ‘interest’ in the fund.

The House of Lords held that the deceased beneficiary had no ‘interest’ in the fund and that estate duty was not payable. It rejected any possibility of a ‘group interest’ in the fund.

Lord Reid:

‘two or more persons cannot have a single right unless they hold it jointly or in common. But clearly objects of a discretionary trust do not have that: they each have individual rights: they are in competition with each other and what the trustees give to one is his alone.’

Lord Wilberforce:

Although a beneficiary has more than a mere hope, ‘that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust’s income’

Question 47

What did Gravells says about the expectation of receiving property?

Answer 47

“since the trustees of a discretionary trust have a discretion to select some and not others to benefit from the distribution of the trust property, it must follow that, as in the case of a power of appointment, no individual member of the class has an interest in any part of the trust property unless and until the trustees exercise their discretion in his favour”

Question 48

What is an exhaustive trust?

Answer 48

requires trustees to distribute the entire trust fund, or its income, to the potential beneficiaries (arising in one year (or other period)). This duty is only discharged if the income is distributed exhaustively. They have no power to decide not to distribute part of the fund. They will normally arise when the trustees are not given an express power to retain all or part of the income from the fund.

This is the traditional discretionary trust.

Question 49

What is a Non-exhaustive trust?

Answer 49

trustees are authorised not to distribute all income arising and can accumulate some or all of the income for a certain period. They are not obliged to distribute the whole of the trust fund or its income among the class of beneficiaries but may, in their discretion, decide to accumulate it. This is only possible if the trustees are expressly given the power to retain and accumulate the income, or part of the income, from the trust fund by the terms of the trust, e.g. McPhail v Doulton is a non-exhaustive discretionary trust.

Most large-scale discretionary trusts are in fact non-exhaustive insofar as the settlor gives the trustees power not to distribute all the income arising.

This is all subject to the terms of the trust.

Question 50

McPhail v Doulton (Re Baden (No 1))

Answer 50

‘9(a) The trustees shall apply the net income of the Fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers and ex-employees of the Company or any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit …

(b) The trustees shall not be bound to exhaust the income of any year’
* Lord Wilberforce*,

“It is striking how narrow and in a sense artificial is the distinction”

McPhail sets out how unsatisfactory the line is between powers and trust. This case is useful for critiquing the law and asking whether it is set up in the correct way. Should we collapse the distinctions, as in Mettoy?

The categories are not neat, and the lines are blurred.

Since the landmark ruling in McPhail v Doulton of the House of Lords, the courts have recognised that the two categories are not wholly distinct and it is possible to combine trusts and powers in an almost infinite variety of forms.