L6 The Beneficiary Principle (1) Flashcards
Notes
Notes from textbook.
• Private trusts are a trust in favour of ascertainable individuals. A charitable trust is for purposes which are treated in law as charitable.
• It may be possible to support purpose trusts for the benefit of others as examples of discretionary trusts for the benefit of individuals; but they were not so drafted and it may be preferable to regard them as examples of trusts for persons to be benefited in a particular way.
• Trusts for specific purposes like feeding the testator’s animals, or maintaining a tomb or monument, usually pass this test. But general projects, even carefully drafted are likely to be held void. But this point only becomes significant if the problem of the beneficiary principle has been surmounted.
• A charitable trust may last for ever; a non-charitable trust is void if it is to continue beyond the perpetuity period. The reason is that perpetual non-charitable purpose trusts would conflict with the policy of the perpetuity rule, which is the prevention of the tying up of property for too long a period.
In essence, the beneficiary principle is that there must be identifiable object of a trust, who can enforce the trust. This means non-charitable private purpose trusts cannot be valid unless they are for the creation/maintenance of tombs and monuments or for specific animals; the recognised exceptions to this principle.
Also, for trusts to be valid they must come within the exceptions here in L6 where a lack of objects will be accepted, but must not go against the rules of perpetuity.
Note from Wikipedia:
• A purpose trust is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind.
• Note that trusts which fail the test of charitable status usually fail as non-charitable purpose trusts, although there are some exceptions.
*Morice v Bishop of Durham (1804) 9 Ves 399; [1803-13] All ER Rep. 451
- The reason for the existence of the rule
An abstract purpose trust will be void and so all equitable rights in the property will remain with the settlor. A trust will only be valid if it is for the benefit of a person/s.
“There must be somebody in whose favour the Court can decree performance”
• Concerns the policy of the beneficiary principle.
• To take from the case:
o The key legal point was that ‘The testator purported to make a trust for such objects of benevolence and liberality as the trustee in his own discretion shall most approve of.’
o The High Court of Chancery found that the trust could neither be valid as a private trust because it lacked beneficiaries.
o The CA held that non-charitable purposes were void for want of objects.
Re Endacott [1960] Ch. 232
- Concerns the policy of the beneficiary principle.
- It held that outside of trusts for animals, graves and saying private masses no trusts can be made for purposes that are non-charitable.
- Lord Evershed MR held that the trust was invalid, because it would be a purpose trust going beyond the fixed list that had been previously exempt.
Musset v Bingle [1876] W.N. 170
- Exceptions to the principle
• Exceptions whereby you do not need to set up a trust for the benefit of persons. The trust can simply have a purpose without having beneficiaries.
(a) Charitable trusts
(b) “Concessions to human weakness”
(i) Trusts for the erection of tombs and monuments
• This category is narrowly construed by the courts. They want the trust to be specific about the nature of the construction, the purpose and any benefit arising from it.
• A bequest to leave £60,000 to the ‘North Tawton Parish Council for the purpose of providing some useful memorial to myself’ was held not to be valid as it was too vague.
• Significance of case
o The significance of the rule against perpetuity can be seen there.
o In here two dispositions in the testator’s will were contested. The first disposition was used for the construction of a memorial. The second disposition should be set aside for the maintenance of that memorial.
o The court held that the first disposition was valid because it was a recognised exception to the no non-charitable purpose trust rule, and the second disposition was void for going against the rules of perpetuity as no duration of maintenance was stated.
Re Dean (1889) 41 Ch.D. 552
(i) Trusts for the maintenance of particular animals
• Theoretically you cannot have a trust for a pet because legally a pet is regarded as property.
• North J upheld a trust for maintenance of horses and hounds for 50 years relying upon much older authorities and the monument cases.
Re Thompson [1934] Ch. 342
iii. The promotion of fox-hunting
• In other academic textbooks, there are usually a swath of ‘other’ purpose trusts or purported trusts that are held up as a residual anomalous category, the most commonly cited is Re Thompson.
• Here a gift to a friend of the testator for the promotion and furthering of fox hunting was upheld. It has been suggested academically that the case has ‘been elevated to a position of importance which it dies not merit’.
Re Astor [1952] Ch. 534
(c) No further categories of exceptions
• Concerns the principle that non-charitable trusts must be for beneficiaries and not abstract purposes.
• So it is clear that trusts for non-charitable purposes will fail unless they are kept strictly within the narrow confines of the exceptional cases: Tombs and monuments; animals and other anomalous purposes. vb
• Facts
o Astor, lover and private secretary of David Lloyd George and the husband of lady Astor, died. He had wished to created a trust for the ‘maintenance…of good understanding…between nations’ and ‘the preservation of the independence and integrity of newspapers’ with money from the shares he owned.
o The will was challenged on the basis that a trust for an abstract purpose, rather than for real people could not be valid.
• Held
o Roxburgh J held that the trust failed because of the lack of beneficiaries, and it was uncertain.
o ‘A court of equity does not recognise as valid a trust which it cannot both enforce and controlled…’
Re Abbott Fund Trust [1900] 2 Ch. 326
- Purpose as motive for the trust
• In here it was accepted that a trust for the maintenance of two old ladies was valid although it seems they did not become owners of any proprietary interest.
• Facts
o Fund collected from several contributors for maintenance of two ladies.
o Surplus remained once both ladies died.
• Issue
o What should happen to surplus funds?
• Held
o Contributors never intended money to be absolute property of ladies: gave money on trust for purpose of maintaining ladies.
o Purpose did not exhaust fund: partial failure of trust & resulting surplus paid back to contributors.
Re Osoba [1979] 2 All E.R. 393
• Facts
o Testator left money on trust for widow’s maintenance and ‘for the training of my daughter up to university grade and for the maintenance of my aged daughter…’
o Surplus remained when both widow & mother died and the daughter completed education.
• Issue
o What should happen to surplus funds?
• Held
o No resulting trust: surplus left belonged to daughter.
**Re Denley [1969] 1 Ch. 373
- Erosion of the Principle?
(a) A gift which is to benefit specified persons by the use of property in a particular way may be construed as a trust for persons and not for purposes.
• The proper analysis of purpose trusts was discussed by Goff J.
o A plot of land was conveyed to trustees ‘for the purpose of recreation or sports ground primarily for the benefit of the employees of the company and secondarily for the benefit of such other person or persons (if any) as the trustees may allow’.
o Goff J upheld the trust as one for the benefit of employees. They were ascertainable and the trust was one which the court could control. If it had been construed as a trust for non-charitable purposes, it would have failed.
• Concerns the policy of the ‘beneficiary principle’. It held that so long as the people benefitting from a trust can at least be said to have a direct and tangible interest, so as to have the ‘locus standi’ to enforce a trust, it would be valid.
• Facts
o In 1936 the settlor company, HH Martyn transferred land to trustees under clause 2(c) ‘be maintained and used as and for the purpose of a recreation or sports ground primarily for the benefit of the employees of the company and secondarily for the benefit of such other person or persons (if any) as the trustees may allow to use the same.’
o Clause 2(j) added that the employees would cease entitlement if the number dropped below 75% of them ‘or if the said land shall at any time cease to be required or to be used by the said employees as sports ground or if the company shall go into liquidation then the trustees shall…convey the said land to the General Hospital or as it shall direct’.
o It was argued that this was a non-charitable purpose trust and should fall contrary of the beneficiary principle.
• Held
o Goff J, held that the trust was valid, because it could be construed as being ultimately for the benefit of people and thus made to work.
♣ ‘Where, then, the trust, though expressed as a purpose, is directly or indirectly for the benefit of an individual or individuals, it seems to me that it is in general outside the mischief of the beneficiary principle.’
o Goff L applied the list certainty test from IRC v Broadway Cottages Trust, although this would now be superseded given McPhail v Doulton.
**Re Lipinski’s Will Trusts [1976] Ch. 235
- A case of a gift to an unincorporated association. There, the testator bequeathed his residuary estate to trustees in trust as to one-half for the Hull Judeans (Maccabi). At first sight, this would appear to be a gift to an unincorporated association to be applied for its (non-charitable) purposes.
- However, the gifts to unincorporated associations are normally upheld as gifts to the members rather than invalidated as purpose trusts.
• Concerns the policy of the ‘beneficiary principle’ and unincorporated associations.
• Facts
o Mr Lipinski, who was active in the Hull Jewish community, gave the residual part of his estate ‘as to one half thereof for the Hull Association in the memory of his late wife to be used solely in the work of constructing the new buildings for the association and/or improvements to the said buildings.’ The other half was one quarter for the Hull Hebrew School, and one quarter for the Hull Hebrew Board of Guardians. The next of kin challenged these provisions, questioning whether the gift to the association would not be void.
• Held
o Oliver J held that the bequest was to the association absolutely, so in fact they did not need to use it for buildings (only constrained by the contract). The purpose was within the association’s power to do, and it would be up to them to honour it.
Brown v Burdett (1882) 21 Ch.D. 667
• Concerns the ability to create a trust for the purpose that does not benefit any actual person.
• Facts
o A lady demanded in her will that her house be boarded up with ‘good long nails to be bent down on the inside’, but for some reason with her clock remaining inside, for twenty years.
o She directed her trustees to visit the house every three months to see that the trusts were effectually carried out, and if any trustee neglected this they should lose their entitlements under the will.
• Held
o Bacon VC cancelled the trust altogether, and held that the twenty-year term was invalid for the house, yard, garden, and outbuildings.
Barclays Bank Ltd v Quistclose Investments Ltd [1970]AC 567
b) A loan for a particular purpose has been construed as creating rights analogous (comparable) to those of beneficiaries.
• Take from this case relating to this topic, that a loan for a specific purpose creates rights that are comparable to those of beneficiaries. See the facts:
o Rolls Razor Ltd owed £484,000 to Barclays Bank Ltd. It still needed more money to pay a dividend which it had declared to its shareholders. Quistclose Investments Ltd agreed to a loan of £209,719 on the condition that the dividend would be paid with it, and the money would be put in a separate account (also with Barclays Bank). The money was paid into the account, but before the dividend was distributed, Rolls Razor Ltd went into voluntary liquidation. Quistclose sought to recover the money, contending that its agreement meant Rolls Razor Ltd held the money on trust. Barclays contended that the account was part of the general assets of the company and that they were entitled to exercise a set-off of the money in the account against the debts that Rolls Razor owed with respect of Barclays.
The Rule against Perpetuities and Accumulation and the Rule against Perpetual Duration
- What the rules are for
The rule against perpetuities prevents settlors from creating perpetual trusts and tying property up forever. The rule requires that the beneficiaries’ interests in the trust property must vest in interest, and vest absolutely, within a certain period from the time the trust came into effect. Since the perpetuity rule relates to the vesting of property in people, the statutory period does not apply to purpose trusts. However, the rule against perpetual duration (or as it is otherwise known, the rule against inalienability) is directed principally at non-charitable purpose trusts and prevents income produced by a capital fund from being used for longer than the perpetuity period. This rule is unaffected by the reforms made by the Perpetuities and Accumulations Act 2009 (see below).
- The principle under the case law: trusts created before 1964
Re Thompson [1906] 2 Ch 199, 202, Joyce J:
‘The rule against perpetuities requires that every estate or interest must vest, if at all, not later than 21 years after the determination of some life in being at the time of the creation of such estate or interest, and not only must the person to take be ascertained, but the amount of his interest must be ascertainable with the prescribed period.’
The maximum period (under the case law) for the vesting of interests under trusts is a Life or lives in being + 21 years.
- Trusts created after 16 July 1964
ss. 1, 3 and 4 of the Perpetuities and Accumulations Act 1964:
(a) The parties “wait and see” for a statutory limitation period whether or
not the trust comes to an end, further to s.3.
(b) If it does not, then the class closing rules in s.4 apply so as to close the
beneficial class to any future members.
- Trusts created after 6 April 2010
Perpetuities and Accumulations Act 2009
(a) The ambit of the Act. Section 1 describes the ambit of the PAA 2009,
subject to the notion in s.1(1) that “The rule against perpetuities applies (and applies only) as provided by this section”
Hence, the Act applies to:
(i) trusts with successive interests;
(ii) trusts subject to some condition precedent (such as “the beneficiary must reach the age of 21”);
(iii) trusts subject to some condition subsequent (such as “provided that the beneficiary does not marry”);
(iv) wills with successive interests; and
(v) powers of appointment.
(b) The statutory perpetuity period
(i) s.5(1): ‘The perpetuity period is 125 years (and no other period).’
(ii) Section 5(2): s.5(1) applies “whether or not the instrument … specifies a perpetuity period; and a specification of a perpetuity period in that instrument is ineffective”.
(iii) Section 6: the starting point for measuring the period of 125 years is the time at which the relevant instrument takes effect.
(c) Trusts which would otherwise be invalid
(i) Section 7: “wait and see” until the statutory period has expired and then any unused parts of the trust come to an end.
(ii) Section 8 then introduces a “class closing” rule to eliminate beneficiaries once the statutory perpetuity period has been reached.
(d) Non-charitable purpose trusts. Section 18 provides that nothing in the
Act affects the rule that “limits the duration of non-charitable purpose trusts”
