Beneficial Entitlement Flashcards
Proprietary rights
1 Fixed trusts
The beneficiaries of a fixed trust have equitable proprietary rights. These rights are assets which
are capable of sale or other forms of transfer and can be asserted against third parties (for
example, if a trustee gives away the trust property, the beneficiary can assert their equitable
rights against the new legal owner). The beneficiaries’ right may be vested (in other words they
have a current right) or contingent (meaning their right is conditional).
1.1.2 Discretionary trusts
In contrast, the objects of a discretionary trust do not have proprietary rights, at least not in the
true sense, although some of their rights are akin to proprietary rights. Until the discretion is
exercised, all the objects have is a hope that that discretion will be exercised in their favour. They
cannot assert their rights against third parties although they do have sufficient interest in the
trust property to compel its return to the trust fund.
Personal rights
The objects of trusts also have personal rights. The beneficiaries of a fixed trust have the right to
compel the proper administration of the trust by the trustees, meaning they can direct the trustee
to take action such as suing a third party on behalf of the trust. Beneficiaries can always sue the
trustees for breach of trust if they act outside their powers or in breach of their duties (although
any compensation will be paid back to the trust fund rather than the individual). They also have
the right to be informed of their entitlement under the trust once their interest has vested.
The objects of discretionary trusts have similar rights although they are more limited because they
do not have proprietary interests in the trust fund, at least not in the true sense. They can enforce
the trust by asking the court to ensure that the discretion is exercised (whether by the trustees, by
appointment of new trustees or by the court itself) but they have no right to request that it is
exercised in a particular way. Once a discretion has been exercised in favour of an individual,
they have the right to be informed of their entitlement. Like the beneficiaries of fixed trusts, they
can also sue the trustee for breach of trust and require the trustee to personally compensate the
trust fund for any loss.
Fixed trusts
The trustees of a fixed trust have no discretion in relation to the distribution of the trust property.
They must distribute as directed by the settlor.
A fixed trust can have one or more beneficiaries, and those beneficiaries may have very different
entitlements in respect of the trust property. The following examples will introduce you to some
common forms of fixed trust.
Successive interest trusts
Successive interest trusts are another type of fixed trust. They give some beneficiaries a right to
income while others are entitled to capital.
Discretionary trusts
As we have seen, the trustees of fixed trusts do not have a discretion in relation to the distribution
of the trust property. By way of contrast, the trustees of a discretionary trust do have a
distributive discretion. Although the settlor determines the potential beneficiaries of the trust
(known as the ‘objects’ of the trust), the trustees must determine who from within that class of
objects is to receive what sum. (Discretionary trusts are sometimes described as a ‘power in the
nature of a trust.’)
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Discretionary trusts are flexible. They enable a settlor to make provision for different beneficiaries
according to their future needs.
The objects of a discretionary trust are only potential beneficiaries. They have no equitable
interest in the trust property until the discretion is exercised in their favour. They do, however, have
a right to ensure that the trustees exercise their powers properly.
Powers of appointment
Power of appointment: A right to choose who, from within a specified class of objects, receives
property.
Donor: The person who confers the power.
Donee: The person who receives the power.
Fiduciary power of appointment: A power of appointment given to a trustee. The trustee does
not need to exercise it but must periodically consider whether to do so.
Personal power of appointment: A power of appointment given to someone who is not a
trustee. They are not even required to consider exercising it.
The essence of a power is the donee’s complete discretion. They can choose whether to exercise
the power. If exercised, they have a discretion as to which member(s) of the class of objects
should benefit from its exercise.
The objects of a power therefore have even more limited rights than the objects of a discretionary
trust. They cannot compel the exercise of the power but can constrain an improper exercise.
Powers are not trusts but it is common for trusts to include powers. Often (but not necessarily) the
trustee will be the donee.
2.3.1 Powers of appointment: Key features
As we have seen, the key difference between a power of appointment and a discretionary trust is
that there is no obligation on the donee to exercise a power of appointment, whereas the trustees
of a discretionary trust must exercise their discretion.
Because a power does not have to be exercised, it is good practice for the donor to make clear
what will happen to the property if it is not. This is sometimes described as a ‘gift-over’ in default
of the exercise of the power.
When analysing an arrangement to determine whether it is a power of appointment or a
discretionary trust, the following are helpful indicators:
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(a) Imperative wording such as ‘must’ suggests a discretionary trust whereas permissive wording
such as ‘may’ suggests a power of appointment.
(b) If discretion has been given to a third party (not a trustee) it is a power of appointment, not a
discretionary trust.
(c) The presence of a gift-over indicates a power of appointment (because it means the power
does not need to be exercised) but lack of a gift-over is not determinative.
Vested interests
As we have already seen, a vested interest is a current entitlement to property.
Vested interests may be sub-divided into interests which are vested ‘in interest’ only and interests
which are vested ‘in possession’.
Vested in possession: A current right to current enjoyment of the property.
Vested in interest: A current right to future enjoyment of the property.
Contingent interests
Contrast the example above with the case where a settlor creates a trust of a house for a woman
for life, remainder to her son if he survives her, and if not, to charity.
* In this example the son’s interest is contingent. His interest will only vest if he is alive when his
mother dies. His contingent interest cannot pass to his estate if he dies before the woman.
Instead the charity would be entitled to the house on the woman’s death.
* The provision in favour of the charity is known as a ‘gift-over’. It is a clear indication that the
son’s interest was intended to be contingent.
* Lack of a gift-over will not be fatal to the creation of a contingent interest. In this example,
even without the gift-over, the use of the word ‘if’ makes it very clear that the son’s interest will
not survive his death if he predeceases his mother. The remainder interest will return to the
settlor on a resulting trust.
Successive interest trusts
As we have already seen, a successive interest trust involves separate beneficial interests which
follow each other. The beneficiary with an entitlement to the income receives their interest first (for
a designated period of time), followed by the beneficiary with the interest in the capital.
Although we have given the example of a life interest trust, it is also important to note that this is
not the only way to create a successive interest trust. An interest in income does not have to be
created for the lifetime of the beneficiary. It could be limited in some other way. For example, it
could be a trust of income for A until they reach the age of 18 and then payment of the capital to
B. Or even a series of interests in the income over time, perhaps to a settlor’s children, then
grandchildren, but ultimately the trust must provide for an interest in the capital to vest in a
beneficiary (or charity) within the statutory perpetuity period of 125 years. (Perpetuity is
considered in the chapter on ‘Perpetuity’.)
The rule in Saunders v Vautier
The basic principle in Saunders v Vautier is that a sole adult beneficiary of sound mind, with a
vested interest in the trust property, is entitled to direct the trustee to transfer legal title to them,
thereby bringing the trust to an end early.
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A beneficiary is only able to do this if they are absolutely entitled to the trust property. If someone
else could obtain a beneficial interest (eg the beneficiary’s interest is contingent or could be
affected by the exercise of a power of appointment) the beneficiary has no entitlement to have it
transferred to them and become the absolute owner.
Beneficiaries with vested interests
The rule has subsequently been extended to cases involving multiple beneficiaries. If each
beneficiary has a distinct interest in the trust property, which can be severed without impacting
the others, they can separately exercise their Saunders v Vautier rights.
A simple example is a fixed trust in equal shares, where one beneficiary is an adult and the other is
a minor. As long as the trust fund is easily divisible, the adult beneficiary can require the trustee to
transfer their share to them. They cease to be a beneficiary and the remaining half of the fund is
held entirely for the minor.
Saunders v Vautier rights can also be exercised by the beneficiaries of more complicated fixed
trusts, such as successive interest trusts. However, because the rights of the beneficiaries under
such trusts are not easily severable, it can only be done if all the beneficiaries agree (and they
must all satisfy the conditions relating to age and capacity).
In such circumstances, the beneficiaries may direct the trustee to transfer the trust fund to them
(in such shares as they choose). This is because collectively they are absolutely entitled to the
trust property.
Objects without vested interests
The effect of the extension above means that Saunders v Vautier rights are not strictly exercisable
only by beneficiaries with vested interests.
Beneficiaries with contingent interests may exercise those rights but only if they act together with
all the other persons who share the beneficial interest in the property. In the case of contingent
interests, this will include the objects of any gift-over.
This means that Saunders v Vautier can also be exercised by the objects of a discretionary trust or
even the objects of a fiduciary power which has a gift-over in default of appointment.
Even though none of the objects have vested interests in the trust property, together they can be
treated as a single object in whom the interest subject to the discretion or power is vested. Again,
as long as they are all adults of sound mind, they can agree to collapse the trust and share the
property between them.
Practical limitations: Large and complex trusts
Although all the objects of a large, complex trust could exercise Saunders v Vautier together, this is
very unlikely to happen in practice, particularly in the case of large discretionary trusts where the
objects may not all be identifiable let alone able to reach a consensus.
It is more likely to occur in the case of very small discretionary trusts with a closed class of objects
(such as testamentary trusts for the children of the testator, who could decide to collapse the trust
once they are all over 18).
Legal limitations
There are also legal limitations on the rule in Saunders v Vautier, which stem from the nature of
the trust itself.
The rule acknowledges that the objects of trusts are the true owners of the property and should
not be denied the right to manage their own property should they wish to.
However, it does not mean that they are able to interfere in the administration of a trust while it
subsists. They have a choice between the following:
(a) Exercising their Saunders v Vautier rights by directing the trustee to transfer the property out
of the trust (whether to them or to a third party); or
(b) Remaining objects of the trust and allowing the trustees to continue to act in accordance with
trust terms.
If the beneficiaries are not happy with the administration of the trust, they may seek appropriate
remedies (including removal and replacement of the trustee) but they cannot tell the trustee how
to perform their role. If they wish to vary the trust terms, they could exercise the Saunders v
Vautier rights and create a new trust on those terms.
