Beneficiaries

Question 1

How do trusts work?

Answer 1

• 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.

Question 2

Two principles relating to the ability to enforce the trust

Answer 2

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.

Question 3

Rights of objects of fixed trusts

Answer 3

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

Question 4

Rights of objects of discretionary trusts

Answer 4

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

Question 5

What type of rights do the beneficiaries of a fixed trust have?

Answer 5

• 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.

Question 6

What type of rights do the objects of a discretionary trust have?

Answer 6

• 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.

Question 7

Beneficiaries’/objects’ personal rights

Answer 7

• 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.

Question 8

Vested interest

Answer 8

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.

Question 9

Contingent interest

Answer 9

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.

Question 10

Types of vested interest

Answer 10

Can be sub-divided into interests which are vested ‘in interest’ only and interests which are vested ‘in possession.’

Question 11

Vested in possession

Answer 11

Has a current right to current enjoyment of the property.

Question 12

Vested in interest

Answer 12

Has a current right to future enjoyment of the property

Question 13

Vested interests - examples

Answer 13

• 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.

Question 14

Contingent interests - examples

Answer 14

• 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.

Question 15

Distinguishing between a condition precedent and a condition subsequent

Answer 15

(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.

Question 16

The rule in Saunders v Vautier

Answer 16

• 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.

Question 17

Saunders v Vautier

Answer 17

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.

Question 18

Extension of Saunders v Vautier

Answer 18

• 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.

Question 19

Practical limits on Saunders v Vautier

Answer 19

• 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

Question 20

Legal limits on Saunders v Vautier

Answer 20

• 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.

Question 21

Certainty of objects

Answer 21

• ‘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.

Question 22

Test for certainty of objects

Answer 22

• 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.

Question 23

Test for certainty of objects for fixed trusts

Answer 23

• 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.

Question 24

Conceptual certainty

Answer 24

• 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.

Question 25

Evidential certainty

Answer 25

• Refers to the extent to which the evidence in a particular case enables the trustees to identify the objects of the trust.
• e.g. there may be cases where the class of objects is conceptually clear but no evidence exists allowing the trustees to actually draw up a list of those objects.

Question 26

Power of appointment

Answer 26

• A right to choose who, from within a specified class of objects, receives property. The person who confers the power is the ‘donor’ and the recipient is the ‘donee’
• Powers are not trusts but it is common for trusts to include powers. Often the trustee will be the donee.
• The essence of a power is the donee’s complete discretion. They can choose whether to exercise the power. If exercised, they have absolute discretion as to which member(s) of the class of objects should benefit.

Question 27

Personal power

Answer 27

Given to someone who is not a trustee (e.g. a will may give the deceased’s spouse power to distribute the estate). They are not even required to consider exercising it.

Question 28

Fiduciary power

Answer 28

A power given to a trustee. The trustee does not need to exercise it but must periodically consider whether to do so.

Question 29

Test for certainty of powers

Answer 29

• A power of appointment must satisfy the test of certainty of objects in order to be valid.
• If the donee of a power is not able to determine who falls within the class of objects, they risk exercising the power improperly (i.e. by choosing someone who is not an object of the power)
• Although the objects of a power have no right to require the donee of the power to exercise it in their favour, they can constrain the improper use of the power.
• For a court to make a judgment on such matters, they must be able to determine whether the individual making a claim is, or is not, a member of the class of objects
• ‘The power is valid if it can be said with certainty whether any given individual is or is not a member of the class and does not fail because it is impossible to ascertain every member of the class.’ (Re Gulbenkian’s Settlement Trusts, Lord Upjohn)
• This is known as the ‘is/is not test’ or the ‘any given postulant test.’

Question 30

Discretionary trusts

Answer 30

• The trustees of a discretionary trust have a distributive discretion. Generally, they may decide which beneficiary is to receive what sum. This is a fiduciary power which can also be described as a ‘power in the nature of a trust.’
• Discretionary trusts are flexible. They enable a settlor to make adequate 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. However, they have a right to ensure that trustees exercise their powers properly.

Question 31

McPhail v Doulton

Answer 31

• Prior to McPhail v Doulton, it was thought that the complete list test also applied to discretionary trusts. It was accepted that if the trustees refused to execute the trust, the court would, in the last resort, do so by ordering equal division among beneficiaries, relying on the maximum ‘equality is equity.’ It followed that it was necessary therefore to have a complete list of beneficiaries.
• In McPhail, Lord Wilberforce rejected this approach and emphasised that the court should try to give effect to the settlor’s intentions. In his opinion, equal division was an inappropriate method as it would often be the last thing the settlor intended.
• Although the trustees have a duty to consider the range of possible beneficiaries and select from the class, this does not mean ‘they must have before them, or be able to get, a complete list of all possible objects.’
• He highlighted the similarities between discretionary trusts and fiduciary powers of appointments, and concluded that discretionary trusts should be subject to the same test: the is/is not test.

Question 32

Re Baden’s Deed Trusts (No 2)

Answer 32

• After the HoL confirmed the test applying to discretionary trusts in McPhail, it remitted to the Chancery Division to reply it. This resulted in an appeal to the CoA: this case.
• The term that caused a problem was ‘relatives.’ All three judges agreed that the term was conceptually certain, but they did not agree on the meaning of the word.
• They also came to the issue of whether a discretionary trust requires both conceptual and evidential certainty.
• It clearly requires conceptual certainty, as the trustees cannot survey the potential class of beneficiaries if they do not know how the class is defined.
• However, if it is unnecessary to draw up a complete list, does that mean evidential certainty is also unnecessary? The three judges gave different views.
• Stamp LJ: Literal application of the is/is not test; the trust would fail for uncertainty of objects if a person came forward of whom it was not possible to determine whether they were or were not within the class. In other words, evidential uncertainty renders the trust void.
• Megaw LJ: disagreed. Concluded that a discretionary trust would be certain if it could be shown that a ‘substantial number’ of persons definitely fell within the class, even though it may be uncertain as to others fell within it or not. What constitutes a ‘substantial number’ depends on the circumstances of the case.
• Sachs LJ: It is for an individual claimant to prove that they are within the class. This is a question of evidence. Where a claimant does not prove themselves to be within the class, they are outside of it and it makes no difference to the validity of the trust.

Question 33

Which Re Baden’s Deed judge’s test to use?

Answer 33

Sachs LJ’s approach is widely considered to be the most pragmatic, providing a practical solution for the evidential certainty problem and preventing discretionary trusts from failing for uncertainty of objects.

Question 34

Administrative unworkability

Answer 34

• In McPhail, Lord Wilberforce said that a discretionary trust is void if the class of beneficiaries ‘is so hopelessly wide as not to form “anything like a class” so that the trust is administratively unworkable.’ He gave the example of a class such as ‘all the residents of Greater London.’
• This dictum was applied in R v District Auditor ex p West Yorkshire Metropolitan County Council where the Divisional Court held that a discretionary trust for the inhabitants of West Yorkshire was void for administrative unworkability.
• The size of the class does not invalidate a fiduciary power of appointment because the donee of a fiduciary power has no duty to exercise the power and so no obligation to survey the class.
• Re Beatty: the court upheld a fiduciary power to appoint property to anyone (or any corporation) in the world.