Discretionary trusts and powers in English law

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Discretionary trusts and powers in English law are elements of the English law of trusts, specifically of express trusts. Express trusts are trusts expressly declared by the settlor; normally this is intended, although there are situations where the settlor's intentions create a trust accidentally. Normal express trusts are described as "fixed" trusts; the trustees are obliged to distribute property, with no discretion, to the fixed number of beneficiaries. Discretionary trusts, however, are where the trustee has discretion over his actions, although he is obliged to act. The advantages of discretionary trusts are that they provide flexibility, and that the beneficiaries hold no claim to the property; as such, they cannot seek to control it, and it cannot be claimed for their debts. A power, or "mere power", on the other hand, is where not only does the holder have discretion over his actions, he has discretion over whether to act in the first place.

Contents

Express trusts

Express trusts are those expressly declared by the settlor. Typically, this will be intended to create a trust, but there can be situations in which the settlor's intended actions create a trust accidentally, [1] as in Paul v Constance . [2] The creation of express trusts must involve four elements for the trust to be valid. These are capacity, certainty, constitution and formality. Capacity refers to the donor's ability to create a trust in the first place; generally speaking, anyone capable of holding property can create a trust. [3] There are exceptions for statutory bodies and corporations, [4] and minors who usually cannot hold property can, in some circumstances, create trusts. [5] Certainty refers to the three certainties required for a trust to be valid. These are that the trust instrument must show certainty of intention to create a trust, certainty of what the subject matter of the trust is, and certainty of who the beneficiaries (or objects) are. [6] Where there is uncertainty for whatever reason, the trust will fail, although the courts have developed ways around this. [7] Constitution means that for the trust to be valid, the property must have been transferred from the settlor to the trustees. For chattels, this can simply be handing the property to them, while transfers of land and shares must be done in writing following certain prescribed forms. [8]

If property has not been transferred, the potential trustees and beneficiaries are volunteers, and an equitable maxim is that "equity will not assist a volunteer"; the courts will not look at the case. [9] To get around this, the courts have developed exceptions to this rule for situations when the donor has done "all that he could do", the trustees or beneficiaries have acquired the property in a different way, or where the gift was made donatio mortis causa . [10] Formality refers to the specific language or forms used when transferring property. For chattels, no formal language or documentation is needed, unless it is made as a will. [11] For land, the transfer must be drafted in line with the Law of Property Act 1925 and the Law of Property (Miscellaneous Provisions) Act 1989. [12] When disposing of an equitable interest, the Law of Property Act 1925 must also be followed; much of the case law in this area has centred on the meaning of "dispose", with many cases involving people attempting to avoid tax. [13]

Discretionary trusts

Normal express trusts are "fixed" trusts; the property is held for a fixed number of beneficiaries, and the trustee is obliged to distribute property without any discretion over who gets what. [14] In a discretionary trust, however, the trustee has discretion over his actions, although he is obliged to use it. Alastair Hudson gives the example of a trust "that [the trustee] shall divide the £1,000 between any of my sons who become unemployed, with the power to retain the whole of that £1,000 for the remainder beneficiary". This is a discretionary trust; the word "shall" means the trustee is forced to exercise his power, while the "power to retain the whole of that £1,000" gives him discretion over whether to retain the money. Discretionary trusts are regularly used, because they provide flexibility; in this situation, for example, the money could be retained and redistributed in a different form if one beneficiary develops some urgent need for it. [15] They also help protect the trust fund. In fixed trusts, the potential beneficiaries have the equitable ownership of their property; in discretionary trusts, this is not the case. Because of this, the property cannot be made liable for their debts or controlled by them. [16]

The creation of a discretionary trust is different from the creation of any other type of express trust, due to the requirement of certainty of objects. This doctrine is that, for an express trust to be valid, the trust document must say with certainty who the beneficiaries there are. [17] This is a problem with discretionary trusts, which can contain a class of beneficiaries rather than a list of named ones. The leading test of certainty of objects here is the "any given postulant test", laid down in Re Gulbenkian . [18] This states that the trustees must be able to say with certainty, when a potential beneficiary comes before them, that he either is or is not a beneficiary. [19] The test was applied to discretionary trusts in McPhail v Doulton . [20] The courts attempted to mitigate this test in Re Baden (No. 2) ; [21] however, all three judges of the Court of Appeal gave separate new tests and reasons. Stamp LJ had an approach based entirely on the facts, with no greater impact on certainty of objects. Sachs LJ took the approach that the burden of proof was on the claimants to prove they were beneficiaries, not on the trustees to prove the trust was valid. [22] Megaw LJ, however, took the approach that a trust could be valid, even with uncertain beneficiaries, if there was a "core number" of beneficiaries who were certain. [23]

Powers

Where a fixed trust gives the trustee no discretion, and a discretionary trust (a "trust power") gives the trustee discretion and requires him to exercise it, powers go a step further. A "mere power", while not a trust obligation, grants the holder of the power the ability to exercise it, but without any requirement to do so. These powers are normally given to trustees; Hudson gives the example of a situation where the trust instrument states that "the trustee may advance £1,000 to X". The trustee has the power to advance £1,000, but as evidenced by the word "may", is not required to. However, the trustee is bound to consider exercising his powers, and must be able to justify his use. In Re Hay's ST , [24] Megarry VC said that:

A mere power is very different [from an ordinary trust obligation]. Normally the trustee is not bound to exercise it, and the court will not compel him to do so. That, however, does not mean that he can simply fold his hands and ignore it, for normally he must from time to time consider whether or not to exercise the power, and the court may direct him to do this. [25]

The holder of a mere power is therefore free to do what he wants with the property he holds; if he fails to consider his exercise of the power, the courts may force him to do so. In relation to certainty of objects, mere powers are also a problem, for the same reason that discretionary trusts are. The leading test for mere powers is also the "any given postulant" test, which was laid down in Re Gulbenkian . [26] [27] The traditional distinction between trusts and powers has been that "a trust is obligatory, a power discretionary"; [28] the problem is that discretionary trusts, while trusts, contain discretionary elements, to the point where they have been called "powers in the nature of trusts"; a trust which "whilst it masquerades under the guise of a mere power, has more of the characteristics of a trust proper". [29]

Related Research Articles

Trust law Three-party fiduciary relationship

A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In Anglo-American common law, the party who entrusts the right is known as the "settlor", the party to whom the right is entrusted is known as the "trustee", the party for whose benefit the property is entrusted is known as the "beneficiary", and the entrusted property itself is known as the "corpus" or "trust property". With the strategic and legal use of Trusts, individuals can ensure that their children and grandchildren or chosen beneficiaries are able to benefit completely from the inheritance they want them to receive.

Charitable trust Irrevocable trust established for charitable purposes

A charitable trust is an irrevocable trust established for charitable purposes and, in some jurisdictions, a more specific term than "charitable organization". A charitable trust enjoys a varying degree of tax benefits in most countries. It also generates good will. Some important terminology in charitable trusts is the term "corpus", which refers to the assets with which the trust is funded, and the term "donor", which is the person donating assets to a charity.

Express trust

An express trust is a trust created "in express terms, and usually in writing, as distinguished from one inferred by the law from the conduct or dealings of the parties." Property is transferred by a person to a transferee, who holds the property for the benefit of one or more persons, called beneficiaries. The trustee may distribute the property, or the income from that property, to the beneficiaries. Express trusts are frequently used in common law jurisdictions as methods of wealth preservation or enhancement.

Hague Trust Convention

The Hague Convention on the Law Applicable to Trusts and on their Recognition, or Hague Trust Convention is a multilateral treaty developed by the Hague Conference on Private International Law on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of September 2017 ratified by 14 countries. The Convention uses a harmonised definition of a trust, which is the subject of the convention, and sets Conflict rules for resolving problems in the choice of the applicable law. The key provisions of the Convention are:

<i>McPhail v Doulton</i>

McPhail v Doulton[1970] UKHL 1, also known as Re Baden's Deed Trusts is a leading English trusts law case by the House of Lords on the certainty of beneficiaries. It held that so long as any given claimant can clearly be determined to be a beneficiary, or not, a trust is valid. The Lords also remanded the case to the Court of Appeal to be decided on this new legal principle as Re Baden's Deed Trusts .

In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator. The settlor may also be the trustee of the trust or a third party may be the trustee. In the common law of England and Wales, it has been held, controversially, that where a trustee declares an intention to transfer trust property to a trust of which he is one of several trustees, that is a valid settlement notwithstanding the property is not vested in the other trustees.

<i>Saunders v Vautier</i>

Saunders v Vautier[1841] EWHC J82, (1841) 4 Beav 115 is a leading English trusts law case. It laid down the rule of equity which provides that, if all of the beneficiaries in the trust are of adult age and under no disability, the beneficiaries may require the trustee to transfer the legal estate to them and thereby terminate the trust. The rule has been repeatedly affirmed in common law jurisdictions, and is commonly referred to as "the rule in Saunders v Vautier" for shorthand.

Discretionary trust

A discretionary trust, in the trust law of England, Australia, Canada and other common law jurisdictions, is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia or New Zealand. Where the discretionary trust is a testamentary trust, it is common for the settlor to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion. Letters of wishes are not legally binding documents.

In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction structures. With the exception of charitable trusts, and some specific anomalous non-charitable purpose trusts, all trusts are required to have ascertainable beneficiaries.

Australian trust law is the law of trusts as it is applied in Australia. It is derived from, and largely continues to follow English trust law, as modified by state and federal legislation. A number of unique features of Australian trust law arise from interactions with the Australian systems of company law, family law and taxation.

Three certainties Rule within English trusts law

The three certainties refer to a rule within English trusts law on the creation of express trusts that, to be valid, the trust instrument must show certainty of intention, subject matter and object. "Certainty of intention" means that it must be clear that the donor or testator wishes to create a trust; this is not dependent on any particular language used, and a trust can be created without the word "trust" being used, or even the donor knowing he is creating a trust. Since the 1950s, the courts have been more willing to conclude that there was intention to create a trust, rather than hold that the trust is void. "Certainty of subject matter" means that it must be clear what property is part of the trust. Historically the property must have been segregated from non-trust property; more recently, the courts have drawn a line between tangible and intangible assets, holding that with intangible assets there is not always a need for segregation. "Certainty of objects" means that it must be clear who the beneficiaries, or objects, are. The test for determining this differs depending on the type of trust; it can be that all beneficiaries must be individually identified, or that the trustees must be able to say with certainty, if a claimant comes before them, whether he is or is not a beneficiary.

The Trustee Act 2000 is an Act of the Parliament of the United Kingdom that regulates the duties of trustees in English trust law. Reform in these areas had been advised as early as 1982, and finally came about through the Trustee Bill 2000, based on the Law Commission's 1999 report "Trustees' Powers and Duties", which was introduced to the House of Lords in January 2000. The bill received the Royal Assent on 23 November 2000 and came into force on 1 February 2001 through the Trustee Act 2000 (Commencement) Order 2001, a Statutory Instrument, with the Act having effect over England and Wales.

The Variation of Trusts Act 1958 is an Act of the Parliament of the United Kingdom that governs the courts' ability to vary the terms of trust documents. Prior to the 1950s, the courts were willing to approve "compromise" agreements as to what terms meant, not only when they were disputed but also for the benefit of certain parties, such as minors. In 1954, the House of Lords decided in Chapman v Chapman that this would no longer be permitted, creating a gap between the rights of trusts under the Settled Land Act 1925 and those trusts that were not. As a result, following a report by the Law Reform Committee, Petre Crowder introduced the Variation of Trusts Bill to Parliament, where it was given the Royal Assent on 23 July 1958, and came into force as the Variation of Trusts Act 1958.

<i>Schmidt v Rosewood Trust Ltd</i>

Schmidt v Rosewood Trust Ltd[2003] UKPC 26 is a judicial decision concerning the information rights of a beneficiary under a discretionary trust. Although the judgment involved a question as to the law of the Isle of Man, the Privy Council's judgment in Schmidt v Rosewood was adopted into English law by Briggs J in Breakspear v Ackland[2008] EWHC 220 (Ch).

Charitable trusts in English law Express trusts dedicated to charitable goals in English law

Charitable trusts in English law are a form of express trust dedicated to charitable goals. There are a variety of advantages to charitable trust status, including exception from most forms of tax and freedom for the trustees not found in other types of English trust. To be a valid charitable trust, the organisation must demonstrate both a charitable purpose and a public benefit. Applicable charitable purposes are normally divided into categories for public benefit including the relief of poverty, the promotion of education, the advancement of health and saving of lives, promotion of religion and all other types of trust recognised by the law. There is also a requirement that the trust's purposes benefit the public, and not simply a group of private individuals.

The creation of express trusts in English law must involve four elements for the trust to be valid: capacity, certainty, constitution and formality. Capacity refers to the settlor's ability to create a trust in the first place; generally speaking, anyone capable of holding property can create a trust. There are exceptions for statutory bodies and corporations, and minors who usually cannot hold property can, in some circumstances, create trusts. Certainty refers to the three certainties required for a trust to be valid. The trust instrument must show certainty of intention to create a trust, certainty of what the subject matter of the trust is, and certainty of who the beneficiaries are. Where there is uncertainty for whatever reason, the trust will fail, although the courts have developed ways around this. Constitution means that for the trust to be valid, the property must have been transferred from the settlor to the trustees.

A purpose trust in English law is a trust created for the fulfillment of a purpose, not for the benefit of a person. These are normally considered invalid by the courts because they have no legally recognized beneficiaries, therefore nobody to enforce the trust, with the exception of charitable trusts, which are enforceable by Attorney General as they represent public interest. As well as charitable trusts, there are several exceptions to the rules against purpose trusts. If the requirement to fulfill a purpose is a request, rather than an obligation, the trust is valid; a trust will also be found valid if, while being for a purpose, it involves beneficiaries in some respect. Purpose trusts can also be valid if they are for the erection or maintenance of tombs and memorials, the maintenance of animals, and arguably the saying of masses, although these must all obey the rule against perpetuities and not continue for more than 21 years after the testator's death.

In English law, secret trusts are a class of trust defined as an arrangement between a testator and a trustee, made to come into force after death, that aims to benefit a person without having been written in a formal will. The property is given to the trustee in the will, and he would then be expected to pass it on to the real beneficiary. For these to be valid, the person seeking to enforce the trust must prove that the testator intended to form a trust, that this intention was communicated to the trustee, and that the trustee accepted his office. There are two types of secret trust — fully secret and half-secret. A fully secret trust is one with no mention in the will whatsoever. In the case of a half-secret trust, the face of the will names the trustee as trustee, but does not give the trust's terms, including the beneficiary. The most important difference lies in communication of the trust: the terms of a half-secret trust must be communicated to the trustee before the execution of the will, whereas in the case of a fully secret trust the terms may be communicated after the execution of the will, as long as this is before the testator's death.

Re Baden’s Deed Trusts [1972] EWCA Civ 10 is an English trusts law case, concerning the circumstances under which a trust will be held to be uncertain. It followed on from McPhail v Doulton, where the House of Lords affirmed that upholding the settlor's intentions was of paramount importance. It dealt with the same facts as McPhail v Doulton, since the Lords had remanded the case to the Court of Appeal to be decided using the legal principles set out in McPhail.

<i>Re Gulbenkians Settlements Trusts</i>

Re Gulbenkian’s Settlements Trusts [1968] is an English trusts law case, concerning the certainty of trusts. It held that while the 'is or is not' test was suitable for mere powers, the complete list test remained the appropriate test for discretionary trusts. It was only a year later in McPhail v Doulton that the 'is or is not' test was considered appropriate for discretionary trusts by a different panel of their lordships.

References

  1. ↑ Hudson (2009) p.45
  2. ↑ [1977] 1 WLR 527
  3. ↑ Edwards (2007) p.90
  4. ↑ Edwards (2007) p.92
  5. ↑ Edwards (2007) p.91
  6. ↑ Hudson (2009) p.73
  7. ↑ Hudson (2009) p.143-7
  8. ↑ Edwards (2007) p.100
  9. ↑ Edwards (2007) p.106
  10. ↑ Edwards (2007) p.101
  11. ↑ Hudson (2009) p.211
  12. ↑ Edwards (2007) p.107-8
  13. ↑ Edwards (2007) p.109
  14. ↑ Hudson (2009) p.119
  15. ↑ Hudson (2009) p.125
  16. ↑ Edwards (2007) p.125
  17. ↑ Hudson (2009) p.117
  18. ↑ [1968] Ch 126
  19. ↑ Hudson (2009) pp.123–4
  20. ↑ [1970] 2 WLR 1110
  21. ↑ [1973] Ch 9
  22. ↑ Hudson (2009) p.127
  23. ↑ Hudson (2009) p.128
  24. ↑ [1981] 3 All ER 786
  25. ↑ Hudson (2009) p.121
  26. ↑ [1968] Ch 126
  27. ↑ Hudson (2009) pp.123–4
  28. ↑ Hopkins (1968) p.211
  29. ↑ Hopkins (1968) p.212

Bibliography

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