Charitable and non-charitable purpose trusts Flashcards
Purpose trusts
Rather than setting up a trust with the ultimate objective of dividing the trust property between beneficiaries, the settlor may wish to set up a trust to carry out a purpose or advance a cause.
Such trusts are known as ‘purpose trusts’.
The validity of such trusts raises different problems to those raised by trusts for individuals.
Validity rules for the declaration of trust
(a) Certainty of intention: it must be clear that the person making the declaration intended to create a trust.
(b) Certainty of subject-matter: it must be clear what property is being held on trust.
(c) Certainty of objects: in the case of a purpose trust, the object is the purpose. It must therefore usually be clear what purpose the trustees should be trying to achieve with the trust property. (This does not apply to charitable trusts. Provided the purpose is charitable, it does not matter how vaguely it is expressed. It will fall to the Charity Commission to work out with the trustees exactly what to do with the trust property.)
(d) Beneficiary principle: this principle states that trusts must usually benefit individuals. This clearly creates a problem for purpose trusts.
(e) Perpetuities: property should not be locked away in trusts for too long. Different time- periods are relevant when considering purpose trusts.
(f) Formalities: if the trust property contains land, the declaration of trust must comply with s 53(1)(b) of the LPA 1925.
We will first identify the problems that purpose trusts encounter with the beneficiary principle and the relevant rule against perpetuities, before moving on to consider which types of purpose trusts can overcome these problems.
The beneficiary principle
Generally, trusts are valid only if they have beneficiaries who can, if necessary, go to court to enforce them.
This is known as the beneficiary principle.
Rule against perpetuities
The rules are not so generous when it comes to purpose trusts. If the purpose trust is
not charitable, it will be void if it locks capital away (or, to put it more formally, renders capital inalienable) for a period of more than 21 years.
This is known as the ‘rule against inalienability of capital’.
Therefore, non-charitable purpose trusts are void for offending the rule against inalienability of capital unless either:
(a) the trust states that it is to last for no more than 21 years (in trust deeds, solicitors will often state that the trust will last ‘for as long as the law allows’ – this means the same thing); or
(b) the trustees may spend all the trust capital on the purpose and thereby end the trust at any time.
Exclusively charitable
To be charitable, the trust must be exclusively charitable. A trust with both charitable and non- charitable purposes will not be charitable.
There tend to be two different aspects to this limb of the definition of a charitable trust:
(a) to be charitable, a trust must not have political purposes; and
(b) if a charitable organisation charges fees, the profits from those fees must be ploughed back into the trust rather than be paid over to private individuals (such as the owners of the organisation).
Exclusively charitable - political purposes
Political purposes include:
(a) supporting a political party; and
(b) campaigning for a change in the law (whether here or abroad) or a change in government policy/decisions.
Bodies that have a mixture of charitable and political purposes will not be given charitable status.
Profits must be ploughed back into charity
Institutions can retain their charitable status even though they charge fees for their services (so long as the institution does not exclude the poor)
If the institution realises a profit, that profit must go back into the charitable purpose.
If an institution is carried on as a commercial venture (eg a private hospital or most residential homes for the elderly) with a view to making profits for individuals, it cannot be charitable.
Let us pull together the three conditions set out in the Charities Act 2011.
Valid non-charitable purpose trusts
If a purpose trust is not charitable, it will only overcome the beneficiary principle and the rule against inalienability of capital if either:
(a) it is a Re Denley trust; or
(b) it is a trust of imperfect obligation.
Re Denley Trusts
In order to be a valid Re Denley trust:
(a) the purpose of the trust must be sufficiently clear and give rise to a sufficiently tangible benefit;
(b) the persons who stand to benefit from the carrying out of the purpose must be ascertainable. In order to work out who can enforce the purpose trust, it is thought that the description of those persons who stand to benefit must satisfy the given postulant test (see Chapter 1). The description of this class of persons must therefore be conceptually certain; and
(c) the trust must not offend the rule against inalienability of capital, ie it must be limited to 21 years in duration or the trustees must be able to spend all the trust capital on the purpose and bring the trust to an end.
Trusts of imperfect obligation