Beneficiaries Flashcards
How do trusts work?
- Trusts work by containing both a proprietary and obligation requirement.
- From the perspective of the beneficiary, they have both equitable and proprietary rights in the property, and personal rights to enforce the trust against the trustee.
Two principles relating to the ability to enforce the trust
Morice v Bishop of Durham
(1) The beneficiary principle - As a general rule, the trustee must have a beneficiary because they are the one able to hold the trustee to account. Without someone to take the trustee to court if they do not perform their obligations, the obligation requirement is meaningless. There are some limited exceptions e.g. charitable purpose trusts, which can be enforced by the Charity Commission
(2) Certainty of objects - The objects of the trust will usually be the beneficiaries, or in the case of a discretionary trust, the potential beneficiaries. It is essential that there is certainty as to who these objects are; it is also key to the enforceability of the trust. The precise rights of the objects of a trust will depend on the terms of the trust. There are some broad rights which apply as they go to the root of the nature of a trust, and these depend on whether the trust is fixed/discretionary.
Rights of objects of fixed trusts
Proprietary rights - May be vested or contingent - Assert against third parties - Can dispose of interest - Right to terminate trust (Saunders v Vautier) Personal rights - Right to compel administration - Right to be informed - Right to sue trustees for breach
Rights of objects of discretionary trusts
Proprietary rights (?)
- Can seek return of misappropriated property to the trust
- Objects can agree to terminate but unlikely in practice
Personal rights
- Right to compel exercise of discretion
- Right to be informed
- Right to sue trustees for breach
What type of rights do the beneficiaries of a fixed trust have?
- Equitable proprietary rights
- May be vested (they have a current right) or contingent (their right is conditional)
- These rights are assets which are capable of sale or other kinds of transfer, and can be asserted against third parties.
What type of rights do the objects of a discretionary trust have?
- They do not have proprietary rights in the true sense.
- Until the discretion is exercised, all the objects have is a hope that the discretion will be in their favour. They cannot assert their rights against third parties
- The objects of both sorts of trust have the power to bring the trust to an end by exercising the rule in Saunders v Vautier.
Beneficiaries’/objects’ personal rights
- The beneficiaries of a fixed trust have the right to compel the proper administration of the trust e.g. directing the trustee to take action
- Beneficiaries can always sue the trustees for breach of trust 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 is vested
- The objects of discretionary trusts have similar rights although they are limited because they do not have proprietary rights in the trust fund, in the true sense.
- They can enforce the trust by asking the courts to ensure the discretion is exercised but they have no right to request it is exercised in a particular way.
- Once a discretion has been exercised in favour of someone, they have the right to be informed of their entitlement and will have the right to sue trustees for breach of trust.
Vested interest
A current right to property. Nothing more needs to happen for the beneficiary to become entitled to the property
- Vested interests can be defeated by a ‘condition subsequent’ meaning that the beneficiary’s interest is lost if the condition is satisfied.
Contingent interest
Conditional upon the occurrence of a future event (known as a ‘conditional precedent’)
- Contingent interests become vested if the condition precedent is satisfied. The beneficiary has no entitlement until the condition is satisfied.
Types of vested interest
Can be sub-divided into interests which are vested ‘in interest’ only and interests which are vested ‘in possession.’
Vested in possession
Has a current right to current enjoyment of the property.
Vested in interest
Has a current right to future enjoyment of the property
Vested interests - examples
- A common example which involves both types is a successive interest trust, involving both life and remainder interests
- e.g. where a house is held on trust for a woman for her life, with the remainder to the woman’s son.
- both the woman and her son have vested interests:
- the woman’s are vested in possession, i.e. she has a current right to current enjoyment of the property
- the son’s are vested in interest, i.e. he has a current right to the property but he is not entitled to enjoyment of the property until the woman dies. His interest is not contingent; he does not obtain the house if the woman dies, but when she dies.
- if the son dies before the woman, the son’s interest remains part of his estate, and so can be passed on to someone else under his will.
Contingent interests - examples
- e.g. 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 in these circumstances, and so the charity will be entitled to the house on the woman’s death.
- The provision in favour of the charity is known as a ‘gift-over.’
- Lack of a gift over will not be fatal to the creation of a contingent interest. The use of the word ‘if’ makes it clear that the son’s interest will not survive his death if he predeceases his mother, even without the charity part included.
Distinguishing between a condition precedent and a condition subsequent
(1) A trustee holds property on trust for an individual if the individual gets married - condition precedent. The beneficiary’s interest is contingent and they are not entitled to receive the income from the trust unless and until they marry.
(2) A trustee holds property on trust for an individual for as long as the individual remains unmarried - condition subsequent. The beneficiary’s interest is vested but defeasible. They are entitled to the income from the property unless and until they marry, when their entitlement will cease.
The rule in Saunders v Vautier
- Basic principle: an adult beneficiary of sound mind, with an indefeasible vested interest in the trust property, is entitled to direct the trustee to transfer legal title to them, bringing the trust to an end.
- If their interest is contingent or defeasible, they are not the only person who could receive that property so they have no entitlement to have it transferred to them and become the absolute owner.
- Saunders v Vautier also clarifies that whilst it is possible to create a contingent trust without a gift over, it is advisable to include one to put the matter beyond doubt.
Saunders v Vautier
FACTS: Under a testamentary trust, shares were held for Vautier until he reached the age of 25, with a requirement to accumulate the income from the trust (i.e. the dividends) until then. There was no gift-over. When he reached the age of majority (21 at the time), Vautier claimed a right to have the trust property transferred to him on the basis that he had a vested, indefeasible interest in it.
HELD: Vautier’s interest was vested. The intention was not to make his interest conditional upon surviving until 25 but merely to delay enjoyment of the property until such time. The absence of a gift-over indicated that the testator had not intended the property to pass to anyone else. If Vautier wished to receive it early, he had a right to do so.
Extension of Saunders v Vautier
- Saunders has 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 other, they can separately exercise their Saunders v Vautier rights.
- e..g 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 equally divisible, the adult beneficiary can require the trustee to transfer their share to them.
- Saunders v Vautier rights can also be exercised by the beneficiaries of more complex fixed trusts e.g. 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.
Practical limits on Saunders v Vautier
- Beneficiaries with contingent or defeasible interests may exercise the 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 Saunders v Vautier can also be exercised by the objects of a discretionary trust. 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. As long as they are all adults of sound mind, they can agree to collapse the trust and share the property between them.
- Practically, this is very unlikely to happen, esp. in the cases of large discretionary trusts where the objects may not all be identifiable let alone able to reach a consensus. It is more likely in the case of v.small, private discretionary trusts e.g. testamentary trusts for the children of the testator, who could decide to collapse the trust once they all turn 18
Legal limits on Saunders v Vautier
- The rule acknowledges that the objects of the trust 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 they are able to interfere in the administration of a trust while it still exists. They have a choice:
(1) Exercising their Saunders v Vautier rights
(2) Remaining objects of the trust and allowing the trustees to continue to act in accordance with the terms of that trust. - If the beneficiaries are not happy with the administration of the trust, they may seek appropriate remedies (incl. removal and replacement of the trustee) but they cannot tell the trustee how to perform their role.
Certainty of objects
- ‘As it is a maxim, that the execution of a trust shall be under the control of the court, it must be of such a nature, that it can be under that control..unless..the objects can be ascertained…the court can neither reform maladministration, nor direct a due administration.’ - Lord Eldon LC, Morice v Bishop of Durham
- The objects need to be certain so the trust can be regulated and enforced by the court.
- If it is not possible to say who the objects are, it may not be possible to properly administer the trust, e.g. to prevent improper payments.
Test for certainty of objects
- A greater degree of certainty is required for a fixed trust than for a discretionary trust, because the trustee is required to divide the property exactly as the settlor has instructed. If they cannot identify all the beneficiaries, this will not be possible.
- The power afforded to the trustee in a discretionary trust allows the courts to apply a less stringent test of certainty. They do not need to be able to divide the property between all of the beneficiaries, and so do not need to be able to identify them all.
- Where a power of appointment is exercised, the donee of the power is not required to exercise the power. They therefore do not need to be able to identify all the potential objects of the power.
Test for certainty of objects for fixed trusts
- If trustees are to distribute a trust fund in fixed proportions, they must be able to say who all the beneficiaries are.
- The test for a fixed trust is the ‘complete list test.’ It must be possible to draw up a complete list of all the beneficiaries (IRC v Broadway Cottages Trust)
- Fixed trusts therefore require both conceptual and evidential certainty.
Conceptual certainty
- Refers to the precision of language used by the settlor to define the class of persons whom they intend to benefit.
- Sometimes described as ‘linguistic’ certainty.
- If the objects of the trust are not clearly defined, it will not be possible to draw up a conclusive list and the trust will fail.
- ‘Friends’ is a classic example of a conceptually uncertain class.
