4 - Beneficial Entitlement Flashcards
Who are the settlor, trustee, and beneficiary?
Settlor: The person who puts assets into the trust.
Trustee: The person who manages the trust.
Beneficiary: The person who benefits from the trust.
What are fixed trusts and how is it managed by trustees?
- Where the settlor fixes the entitlements of the beneficiaries.
- Trustees must distribute the trust property as directed by the settlor and have no discretion beyond that.
- The settlor cannot alter this direction after the trust comes into effect, unless they reserved a power to do so.
How are fixed trusts held for a sole beneficiary?
- The trustee holds the entire trust property for that beneficiary.
- The trustee has the legal right to manage the property but must act in the beneficiary’s interest.
- The beneficiary has personal rights against the trustee (can sue to enforce them) and an equitable proprietary interest in the trust property. They are the sole beneficial owner of the trust property (including any income produced by that property).
How are fixed trusts held for beneficiaries with fixed shares?
Multiple beneficiaries have specified proportions of the trust property.
For example, if the trust property is divided equally between two beneficiaries, each has a 50% share.
Trustees must distribute the property and income according to these fixed proportions.
How are successive interest trusts held (a type of fixed trust)?
Successive interest trusts involve a series of consecutive interests in the same trust property.
For example, a life interest trust gives one beneficiary (the life tenant) income for life, while another (the remainderman) receives the capital after the life tenant’s death.
This type allows for separate interests in income and capital.
Income: Earnings from the trust property, like interest or rent, paid to beneficiaries while the trust is active.
Capital: The original trust assets and their growth, given to beneficiaries when the trust ends.
What are discretionary trusts?
- A discretionary trust allows trustees to decide which beneficiaries (objects) will receive property and in what amounts.
- The settlor defines the class of potential beneficiaries (who they are), but the trustees have discretion in distributing the trust property.
- Objects do not have equitable interests until the discretion is exercised. They do have a right to ensure that the trustees exercise their power correctly.
What is a Power of Appointment?
- A Power of Appointment is a right to choose who, from within a specified class, will receive property.
- The donor grants this power to the donee, who has absolute discretion to decide whether to exercise it and whom to benefit.
- Powers of appointment are not trusts but can be included in trusts.
What is the difference between personal and fiduciary power (Powers of Appointment)?
- Personal Power: Given to someone who is not a trustee and is not required to consider exercising it. e.g., “My wife may determine how to distribute the fund within 12 months, otherwise it will be distributed equally”
- Fiduciary Power: Given to a trustee who must periodically consider whether to exercise it but is not obligated to do so. e.g., “Trustees may pay some or all of the fund to the wife and children as they see fit”
What are the key features of Powers of Appointment when distinguishing it from a discretionary trust?
Discretionary Trust: Trustees must exercise their discretion in distributing the property.
Power of Appointment: The donee has the option to exercise the power but is not obligated to do so. Key indicators include:
- Imperative wording (‘must’) suggests a discretionary trust.
- Permissive wording (‘may’) suggests a power of appointment.
- A gift-over in default of exercise indicates a power of appointment, though its absence does not determine the nature of the arrangement.
What is a vested interest?
A vested interest is a current right to property.
No additional conditions need to be met for the beneficiary to become entitled to the property.
Types:
Vested in Possession: Current right to enjoyment of the property. E.g., A life tenant has a right to use and enjoy the property during their lifetime.
Vested in Interest: Right to future enjoyment of the property. E.g., A remainder beneficiary has a right to the property in the future but cannot use it until the life tenant’s death.
What is a contingent interest?
A contingent interest is conditional on the occurrence of an uncertain future event.
The beneficiary has no entitlement unless and until the condition is met.
Examples:
A trust for a woman for life, remainder to her son if he survives her. If the son predeceases her, his interest does not vest, and the property may go to another beneficiary, such as a charity (known as a ‘gift-over’). Or, the remainder interest will return to the settlor on a resulting trust.
What is the difference between capital and income?
Capital:
- The principal value of the trust property.
- Includes assets like land, houses, or investments.
- A capital return relates to the underlying value of the property in question. A capital gain
means that the underlying value of the thing you own has gone up over time.
Income:
- Earnings generated from the capital, such as interest, rent, or dividends.
- Arises from the use or investment of the capital and is usually paid out periodically.
- An income return is money (or a monetary equivalent) received on a regular basis deriving from property. That income return might be generated regardless of whether the underlying property has made a capital gain.
A beneficiary with an interest in capital is often referred to as having an ‘absolute’ interest. A beneficiary with an interest in income only is often referred to as having a ‘limited’ interest.
Overview of the rule in Saunders v Vautier.
The beneficiary under a bare trust (sole, adult beneficiary, and a bare trust is one where the beneficiary has a right to the income and capital) can direct the trustees to transfer trust property to the beneficiary. A group of beneficiaries
can do the same, so long as they are between them absolutely entitled to the trust property, are all in existence, aged 18 years or over and in agreement
What is the rule in Saunders v Vautier?
Definition: A sole, adult beneficiary with mental capacity and a vested beneficial interest can compel trustees to convey trust property to them, thereby terminating the trust.
Rationale: Since the beneficiary is the sole owner of the equitable title, they have the right to become the absolute owner of the trust property if they so wish.
Extended Application: This rule has been expanded to apply in cases where there are multiple beneficiaries.
What is a bare trust?
Definition: A trust where a sole, adult, mentally capable beneficiary holds a vested interest, giving them absolute entitlement to the trust property.
Key Feature: The trustees must follow the beneficiary’s directions, and the beneficiary can bring the trust to an end at any time.
Example: A stockbroker holding a portfolio of shares for a client on a bare trust, allowing the client to take back the shares or terminate the trust at any time.
