POWERS AND TRUSTS

Question 1

Duty v Power

Answer 1

• A trust is a duty owed by a trustee to do something or refrain from doing something
  
  • A duty: where the law requires of prevents you from doing something
• A power is something that a trustee or another may choose to exercise
  
  • A power is an authorisation to do certain things which affect property to which the appointor is not solely entitled, and in which he or she may have no beneficial interest at all
  • Something you may do but do not have to
• Most express trusts consist of both duties and powers (i.e. things that trustees must do and things they may do)
• Trustees have by statue powers of investment, sale, etc.
  
  • They may also be given other powers by the terms of the trust instrument
• A trust is imperative and mandatory and a power discretionary
  
  • A trust power is a power given to a trustee

Question 2

What rights does the object of the power have?

Answer 2

• Powers are not mandatory
• No one individual can demand that the power can be awarded in their favour
• Birrs J in Pugachev: “The task of construction is to consider objectively what the purpose is for which the power has been conferred. Putting it another way, the question is: for whose benefit, as a matter of construction of the trust deed, has the power been given?”
• Equity looks to substance rather than form

Question 3

Bare v fiduciary powers

Answer 3

BARE POWER

FIDUCIARY POWER

Held in personal capacity

• Not held in an office

Held in official capacity for particular purpose

• There is an obligation to consider whether the power is exercised
• It would be inconsistent with the duties of a fiduciary to fail to consider this

No duty to consider whether to exercise

Must consider whether to exercise

e. g. power of appointment in will
e. g. trustees, agents

Question 4

Administrative v Dispositive powers

Answer 4

• Powers let trustees do things
• The settlor can give certain powers that otherwise the trustee would not have

ADMINISTRATIVE

DISPOSITIVE

Invest

Maintenance

Sell

Advancement

Lease

Appointment

Insure

Question 5

Rights of the object of dispositive powers

Answer 5

• No property rights
• No right to compel payment
• No right to compel exercise of the power
• Can invite court’s intervention to ensure trustees consider the exercise of the power
• Can prevent invalid exercise of power

Question 6

Powers, discretionary trusts and fixed trusts

Key differences

Answer 6

MAY DISTRIBUTE

MUST DISTRIBUTE

CHOICE OF OBJECTS

Powers of Appointment, Maintenance, or Advancement

Discretionary Trust

FIXED OBJECTS

Fixed Trust

• These powers might be in favour of a list or class of objects, in which case there would be normally be a choice of objects, but they could be in favour of only one object

Question 7

Re Gulberkian’s ST

Ruling on trust powers

Answer 7

A power does not require a complete list of objects, whilst discretionary and fixed trusts require a complete list

Question 8

McPhail v Doulton on trust powers

Answer 8

• A discretionary trust is treated like a power, whilst a fixed trust requires a complete list
  
  • If you do not specify the shares, the trust will be divided equally
• We need to treat a discretionary trust more like a power in terms of the test we adopt even though a power is permissive and a trust is mandatory

Question 9

Re Hay’s Settlement Trust on trust powers

Answer 9

• “A trustee to whom, as such, a power is given is bound by the duties of his office in exercising that power to do so in a responsible manner according to its purpose. It is not enough for him to refrain from acting capriciously; he must do more”
  
  • The difference between being given a power as a trustee / fiduciary and just being given a power is that you are bound by your obligations of your office as a fiduciary
  • You cannot be obligated to exercise the power in favour for someone or exercise it at all, but the court may compel the trustee to consider the exercise of the power

Question 10

Trust powers and complaining

Answer 10

• The other duties owed as a trustee can be relevant to what people can complain about
• As a trustee, you are obliged to exercise your powers seriously [Turner v Turner]
  
  • The court requires you to do your duty, which is engaged when you come to consider when the power is exercised.

Question 11

Protector

Pugachev

Answer 11

• Under a trust, there must be trustees, beneficiaries and trust property. In addition, the trustee might appoint someone as a protector
• “A person other than the trustee who, as the holder of an office created by the terms of the trust, is authorised or required to play a part in the administration of the trust” [Duckworth]
• They can give directions to the trustees and keep an eye on things

Question 12

Pugachev

RULING

Answer 12

• On the facts of the case, it was possible for Mr Pugachev to do whatever he wanted, and so in reality although it was a trust relationship in form, in substance (because he had given himself such extensive powers as protector and a member of the class of beneficiaries) he was able to act as the owner and make the beneficiaries act in his favour

Question 13

Pugachev

REASONING

Answer 13

• “When considering what powers, a person actually has as a result of a trust deed, the court is entitled to construe the powers and duties as a whole and work out what is going on, as a matter of substance”
• The reality in this case was that Pugachev was the owner
• There is no absolute rule about whether the protector is a fiduciary or not, but the exercise of the powers will be based on normal principles unless the trustee specifies they do not

Question 14

Powers of appointment

Answer 14

• A power of appointment is one given by the donor of the power to the donee of the power (the appointor) to appoint property to someone (the appointee)
• A power to dispose of assets, but it does not need to be beneficiaries of the trust
  
  • May be given to trustees
  • May be given to beneficiaries or others (this is not a breach of trust because the fiduciary has been given the power to do so)
• There is no duty to exercise power unless the trustee imposes a separate duty on you
  
  • Fiduciaries have duty to consider whether to exercise it
  • Others are free to do nothing

Question 15

General powers

Answer 15

• A general power is for many purposes equivalent to ownership
  
  • Unlimited, can be exercised in the favour of anyone you choose

Question 16

Special powers

Answer 16

• A special power is one in which the choice of appointees is restricted by the terms of power
  
  • Where a list of potential people in whose favour the power can be exercised
  • If the trustee is considering to give it to someone who is not eligible, you can complain

Question 17

Intermediate / hybrid powers

Answer 17

• There can be a donee is given to power to appoint to anyone except certain people or groups of people. These are intermediate or hybrid powers
  
  • Anyone except …
  • Usually for tax purposes

Question 18

Duties of donnee of power

Rights of Object

Answer 18

• This is a bare, or personal, power of appointment
• This must be contrasted with a fiduciary power held by a trustee by virtue of her office, which in turn must be distinguished from the obligation of a trustee of a discretionary trust

Question 19

Discretionary trust

Answer 19

A discretionary trust is a trust in which the property is held by the trustees on trust, not for named beneficiaries in fixed proportions, but on trust for such members of a class of beneficiaries as the trustees shall in their absolute discretion select

Question 20

Can a trustee disregard a power

Answer 20

• A trustee may not disregard a power, or forget about it, or release it
• Their fiduciary duty requires them to give consideration to the exercise of power “in a responsible manner according to its purpose … he must do more. He must make such survey of the range of objects or possible beneficiaries” [McPhail v Doulton]
• “What is needed is an appreciation of the width of the field … he is not required to make an exact calculation whether, as between deserving claimants, A is more deserving than B” [McPhail v Doulton]

Question 21

Power to apply for purposes

Answer 21

• There is no reason why a power should not permit the application of money for specific purposes.
• The purposes must be sufficiently certain to enable a court to determine whether any particular application is within the terms of the power of not [Twinsectra v Yardley]
  
  • This is useful for permitting the application of money to non-charitable purposes

Question 22

Delegation of powers

Answer 22

• A person to whom a discretion has been given may not delegate their discretion to others
  
  • Delegatus no potest delegare
• A donee may delegate the performance of merely ministerial acts [Re Hetling and Merton’s Contract] and the donee of a general power equivalent to absolute ownership may appoint to a class in such proportion as another shall select
• Many powers involve a personal discretion and this prevents delegation
  
  • There is no objection however to a testator or settlor giving a power of appointment to a trustee. Such a power given by a testator is not to be impugned as a delegation of testamentary disposition

Question 23

What happens if a donnee appoints on protective trusts

Answer 23

• The determinable life interests will be valid, but the discretionary trusts due to take effect on forfeiture of the life interest are void and the trusts in default take effect [Re Boulton]
  
  • There is no objection to the inclusion in an appointment of a power of advancement [Re Morris’ Settlement]
  • Where it is desired that the donee should be able to make an appointment which itself includes a power of appointment or involves any other delegation of discretion, express provision should be made in the instrument creating the power

Question 24

Fraud on a power

Answer 24

• Not fraud in the usual sense
  
  • Improper motive is fraud, even if it is honest
• If a power is exercised for purposes it was not intended for
  
  • Conscious impropriety

Question 25

Cloutte v Storey

Answer 25

• An appointor is under no duty to exercise the power, but if he chooses to do so he must exercise it honestly
  
  • Unless he is a fiduciary, he need not weigh the merits of the possible beneficiaries; he may appoint all the available assets to any one beneficiary (who may be himself). But, he must exercise the power within the limits imposed by the donor who created it

Question 26

Doctrine of fraud in Vatcher v Paull

Answer 26

The doctrine of fraud extends to the intent with which a power is exercised. In the case of a special power, the property is vested in those entitled in default of its exercise subject to its being divested by a proper exercise of the power, and that an exercise of the power for any ‘sinister object’ is not proper, is a fraud on those entitled in default, and void

Question 27

Limits on the exercise of personal power

Answer 27

• Can only appoint to objects
• Cannot avoid restriction by appointing to object for purpose of benefiting non-object
• Depends on the intention of donor

Question 28

Prior agreement; fraud on a power

Answer 28

• Where the appointment is made as the result of a prior agreement with the appointee as to what he will do with the proceeds
  
  • This is void except when the appointor is the person entitled in default, or where the person entitled in default is party to it

Question 29

Benefit to appointor; fraud on a power

Answer 29

• Where the power is exercised so as to benefit the appointor
• The benefit is usually financial in character
• For the exercise of the power to be void, there must be more than a hope of benefit
• For fraud to operate, the appointment must have been made with intent to benefit the appointor
• An appointment is sometimes made which benefits the appointor but is clearly intended to benefit the appointees

Question 30

Non-objects; fraud on a power

Answer 30

• An appointment is sometimes drafted so that the intent appears to be to benefit objects of the power, but the real intent is to benefit non-objects
• It will then be void, even though the appointee was not a party, and might not even have known of the appointment or its intent [Re Nicholson’s Settlement]

Question 31

Excessive exercise; severance

Answer 31

• If there is a genuine intent to benefit the appointee, something expressly added so as to benefit a non-object can be severed, leaving the appointment valid
  
  • Severance will not occur in the absence of such a genuine intent
• If, in a will by which he exercises a power, a testator makes a gift of his own property conditional on the appointee resettling the appointed property, this is a valid condition on his own gift and the exercise of the power is also valid, provided there was a genuine intent to benefit the appointee [Re Burton’s Settlement]

Question 32

Releases; fraud on a power

Answer 32

• The doctrine of fraud on a power does not apply to releases because releases simply benefit those entitled in default
  
  • It is irrelevant that the appointor, in releasing his power, is intended to benefit thereby, as he has no duty in respect of the disappointed objects
  • Nor does the doctrine apply to the revocation of the exercise of power

Question 33

Positions of third parties; fraud on a power

Answer 33

• Those entitled in default of appointment who can challenge the exercise of the power as fraudulent have an equitable interest in the property appointment
• The purchaser of legal estate from that appointee will take free of the equitable interest as long as he or she acts bona fide and without notice of the fraud
• If no legal title passes, the equitable interest of those entitled in default of appointment in principle prevail over the third party who purchase from the appointee, since the appointee had no legal title to give

Question 34

Exercise of Powers

General title; lifetime

Answer 34

• No technical words are required for the exercise of a power
• All that is required is an intention on the part of the donee that the fund shall pass to someone who is an object of the power
• If the appointment relates to land, it must
  
  • Comply with LPA s53(1b)
  • Be evidenced in writing
  • Signed by the donee of the power
• An appointment of personalty may be made orally
• The terms of the power may require certain further formalities [Hawkins v Kemp] for its exercise, or specific reference to the power or to the property subject to it [Re Lane], and such formalities must be strictly complied with
  
  • If a power is to be executed by deed, it cannot be validly exercised by will [Re Phillips] and a power to be executed by will cannot be validly exercised by an instrument to take effect in the lifetime of the donee of the power [Reid v Shergold]

Question 35

Exercise of Powers

General title; by will

Answer 35

• The Wills Act s27 provides that where a testator has “a power to appoint in any manner he may think proper,” a general devise or bequest shall operate as an execution of power
  
  • This excludes special powers and also intermediate or hybrid powers, which in any way restrict the donee’s freedom of choice [Re Ackerley]
• Any power to which the section does not apply is only exercised by will if “there is an indication of intention to exercise the power”

Question 36

Excessive execution

Answer 36

• The donee has only the power which is given to them by the instrument. They may not exercise it in favour of non-objects; nor in breach of the perpetuity rule; nor impose unauthorised conditions

Question 37

Defective execution

Answer 37

• The donee of a power should exercise it in accordance with the provisions of the instrument creating it
• Failure to comply will usually render the exercise void, but there is a jurisdiction in equity and under statute to validate certain cases of defective execution

Question 38

Toilet v Toilet

Defective execution

Answer 38

• “The court will not help the non-execution of a power, since it is against the nature of a power, which is left to the free will and election of the party whether to execute or not”
  
  • The general rule is that the court will not fix things that have gone done in failing to exercise the power

Question 39

English v Keats

Defective execution

Answer 39

• If the parties have not exercised their powers, the court cannot intervene. But, if they have tried to exercise the power, and taken steps to do so, even if it is ineffective, the court can correct it

Question 40

Defective execution in equity

Answer 40

• Where the donee shows an intention to execute the power “in discharge of moral or natural obligations [Chapman v Gibson]” equity will act upon the conscience of those entitled in default to compel them to make good the defect in the execution
• Relief may be obtained in favour of purchasers for value, creditors, charities and persons to whom the donee is under a moral or natural obligation to provide
• The defects must not do to the essence of the power [Kennard v Kennard]
• There will not normally be relief against the non-execution of a power [Holmes v Coghill]
  
  • Except in the case of fraud by the person entitled in default [Vane v Fletcher]
  • The doctrine applies to defects in the form of the execution of the power, but not to the situation where the trustees have purported to exercise the power after it has expired [Breadner v Granville-Grossman]

Question 41

Defective execution by statute

Lifetime appointment

Answer 41

• Law of Property Act s159, provides that the execution of a deed of appointment will be valid if executed in the presence of and attested by two or more witnesses, even though it does not comply with additional formalities stipulated in the instrument
• S159 does not dispense with any necessary consents, nor does it apply to any acts required to be performed which have no relation to the mode of executing and attesting the document
• It also does not require a power to be exercised by deed where another method of exercise complies with the terms of the power

Question 42

Defective execution by statute

Appointment by will

Answer 42

• An appointment by will is valid as regards execution and attestation if the provisions of the Wills Acts relating to the formalities of wills are complied with [Wills Act 1837; Taylor v Meads]

Question 43

Contract to exercise

Answer 43

• A valid contract to exercise a general power operates as a valid exercise of the power in equity if it is capable of specific performance
  
  • But there can never be specific performance of a contract to exercise a testamentary power
  • The only remedy for breach is an action for damages against the estate [Re Parkin]
• A contract to exercise a special testamentary power is not enforceable [Re Bradshaw] but a release in appropriate circumstances