Discretionary Trust - Essay Example

There is no reason why the test for certainty of objects in the case of discretionary trusts should be any different from the test for certainty of objects - Re Baden's Trust: A trust is a tool of equity to ensure that the intention of the creator of the trust is fulfilled and in the case of constructive trusts the courts use this tool to ensure that justice is fulfilled. The problem that the law commission is discussing refers to the formalities that surround the creation of trusts, disposition of equitable interests and transfer of certain types of trust property that sometimes causes uncertainty of law and/or inequity to happen. This will be seen in this discussion, which will explore the formalities that surround trusts and then the possible exceptions that equity has formed; hence creating uncertainty in the law, which points towards a need for the law surrounding these formalities need to be reformed in relation to discretionary trusts. There are four requirements of a trust, which are capacity; formality; certainty and constitution, each factor is important in creating a valid trust and in order to determine the validity of each disposition within the will these requirements must be fulfilled. Capacity: This requirement concerns the creator and beneficiary of the trust; whereby any person can create a trust if thy have the ability to own any type of property, with four exceptions; minors whom cannot own land therefore cannot create a trust of land but can be a beneficiary of a trust until the appropriate age; any mentally disordered person under the 1983 Mental Health Act cannot create a trust but can be a beneficiary of a trust; corporations can only create a trust if there is a power in their memoranda of association; and statutory bodies can only create a trust if there is this power within the enabling legislation. There are also limitations to two further types of beneficiaries which are; non-citizens of Britain whereby they can hold a trust in any property but British ships and aircrafts; and trustees who cannot be the sole beneficiary and sole trustee. However the general rule is that any person who has the capability of owning property can create or be a beneficiary of a trust. Formality: Generally trusts can be created in any manner, because equity deals with the substance of the trust not its formal requirements. Therefore as long as the creator of the trust makes their intentions clear then a trust will be upheld by the courts. However a trust in land is a different situation whereby it must comply with the Law of Property Act 1925 section 53(b) and 53(c) for existing equitable interests in land whereby; "a declaration of trust respecting any land or interest therein must be manifested and proved by writing signed by the person who is able to declare such trust or by his will (LPA 1925 53(b)). It will it is assumed that it meets the formal requirement because there is no information to the contrary; however it must be kept in mind that if the formal requirements were not met then it would not be a valid trust, when considering the dispositions certainty and constitution will be the main focus to ensure the trusts in the will can be upheld. However there may be a problem with the transfer formalities of the shares, which will be discussed with reference to the constitution of the trust. Certainty: The creator of the trust must make his intentions clear when creating his trust; he must make it clear which property is subject to the trust; and finally he must identify the beneficiary of the trust. In Wright v Atkyns1 it was determined that the words must be imperative, but there does not have to be created with the word trust or obligation2 but sufficient intention must be apparent from conduct and words3. The court will always aim to impose a trust as long as the intention of the creator is present. In relation to the subject of the trust this also must be clearly stated, whereby the exact size and amount of the subject matter is clear, e.g. the bulk of my estate4 is not clear enough, whereas a reasonable income was clear enough for the courts to determine from the living costs of the individual.5 Therefore the court will determine the subject matter as long as there is enough clarity made by the testator. Finally the trust must clearly state the beneficiaries of the trust, i.e. it must be a clear set of beneficiaries, if not the trust is void. To ensure that a trust is successfully completed then the trustees must know all the beneficiaries of the trust, i.e. this is known as the list principle - a list of beneficiaries can be made6. In Re Eden7 it was determined that it is not necessary that all potential beneficiaries are known, but whether it is not possible to determine the range of potential beneficiaries on the date that the trust comes into being. Also in Re Benjamin8 it was determined if a beneficiary was unavailable that all the property of the trust would be divided amongst the existing beneficiaries and the remaining amount is kept in trust until finding the missing beneficiary; however "this kind of order cannot save a gift where the class is not identified with sufficient precision, but only benefits a class which is precisely defined but where members cannot be found."9 In respect to this trust it is assumed that the trust is certain, because it is deeded and it specifically states that all the property will be held in trust for himself until a given date. Therefore there is certainty of intention because of the deed10 that specifically names an individual as the trustee; also there is certainty subject matter, i.e. the property of the trust11; as well as certainty of objects, i.e. the beneficiaries12. Until a specified date the given person is the beneficiary and after that date all relatives that are alive on that date get equal shares, therefore making a clear and certain class of beneficiaries13. Constitution: "Where a settler creates a trust by declaring himself to be a trustee of property then, provided that the requirements of formality and certainty are satisfied, the trust is complete and the beneficiaries acquire rights under it."14 However within a will or other trusts the settler or testator appoints a trustee(s) and the testator must ensure that the trust property is sufficiently transferred to the trustee(s). For chattels all that needs to be present is intention of the testator and the acceptance and knowledge of the trustee prior to the date of fulfilling the trust. Therefore in the case of a will the intention, knowledge and acceptance must occur prior to death and the method of delivery is known to the parties.15 In the case of property the LPA 1925 section 53 must be complied with and in the case of shares registration of transfer, if the transfer is not properly undertaken by the testator or trustee then the trust is void; however if the trust is not complete due to the act of a third party and all other parties have completed their obligations then a trust will be valid.16 Therefore once all the components of the trust are complete then the beneficiaries can enforce the trust, if the trustees fail to do so then they can take it to court and if found valid will be enforced; however trusts can only be enforced by beneficiaries not third parties, because equity will not assist a volunteer. In this case the constitution has properly been enacted by the way of the shares as they were not properly transferred until after the creator's death. The Importance of Formalities: In the case of Neville v Wilson17 it was held that there was no need for writing in the disposition of equitable interests, rather if there is enough intention for the disposition then writing is not needed. The formalities surrounding the disposition of equitable interests stems from the 1677 Statute of Frauds, whereby the aim was to ensure that the disposition of all existing equitable interests needed to be formally put into writing to ensure that fraudulent claims where not upheld. This was rewritten as Section 53(1)(c) of the Law of Property Act 1925 and applies in the case where the trust property has already been separated into the beneficial and legal interests. The disposition of an existing trust can be done in four ways; assignment to the third party directly; the creation of a sub-trust; contract of assignment; or through instruction to the trustees to create a subtrust.18 However as the Law Commission argued in its 7th Programme for reform the case of Neville v Wilson has effectively outdated the formality for writing of the disposition of an existing equitable interest. In addition to questioning the necessity of other the formalities of writing, especially in respect to shares, are becoming less necessary in the electronic age, i.e. does an electronic transaction fulfil the writing requirements. In addition cases in respect to death bed gifts (trusts) have questioned the formalities of trust; as well as constructive trusts which focus more on the interests of justice over that of dotting the I's and crossing the T's of the legal formalities. Trusts can be created in any manner, because equity deals with the substance of the trust not its formal requirements, i.e. it is based upon the precepts of justice rather than formalities of common law.19 The courts will generally hold that as long as the creator of the trust makes their intentions clear then this trust will be upheld. There are some exceptions, which include trusts in land, trusts in shares and the disposition of trusts. The transfer of land within a trust must comply with the Law of Property Act 1925 section 53 for existing equitable interests in land whereby: "A declaration of trust respecting any land or interest therein must be manifested and proved by writing signed by the person who is able to declare such trust or by his will."20 Shares as trust property must be properly transferred to the trust because it would not comply with the constitution element of a valid trust, which relies on the completion of formalities. There are also difficulties that arises in respect to section 53(1)(c) of the Law of Property Act because it does not define what needs to be formally put into writing, is it the disposition of all equitable interests or just certain ones. Section 53(1)(c) states that a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will. However this is a much outdated section as suggested in Vandervell and rather than considering the reasoning behind the section it was just reapplied. In Vandervell v IRC21 it ignored the problems and applied an approach that recognized the instances where difficulty and unsatisfactory interpretation of this section has been experience, but still upheld it: "[Under] s 53(1)(c), a successor to the dormant s 9 of the Statute of Fraud, has recently received a new lease of life as an instrument in the hands of the Revenue. .. The subsection, which has twice recently brought litigants to this House is certainly not easy to apply to varied transactions in equitable interests which now occur."22 It was upheld in this case that section 53(1)(c) that there are difficulties in respect to whether personal trust property is subject to this clause. It has been decided that shares and the disposition of existing equitable require to conform with section 53(1)(c) as upheld by Grey v IRC23 and Oughtred v. IRC24. In the case of Grey the question was whether oral instruction was to be upheld on the basis whether it should be held that bare instruction to the trustees constituted a disposition of an existing trust, which upheld the minimum requirements of Section 9 of the Statute of Frauds 1677, i.e. disposition is given the natural meaning and an oral direction is sufficient. The court denied this claim holding that the formal requirement of writing was necessary. In Vandervell it was held if the original trust creator instructs the legal owner, the trustee, orally to transfer the legal property to a new beneficiary and the trustee does within the correct legal and written format then the oral direction is upheld. Therefore oral direction must be backed up with the legal formalities by the legal owner. This creates further confusion where the legal formalities may be used to hinder the intentions of the trust creator. In the case of Oughtred it was unaminously upheld by the law lords that a constructive bare trust remained in the picture until the completion of the formalities of transfer, i.e. the courts may uphold a constructive trust in the interests of justice but a mere oral disposition is not enough. However the case of Neville v Wilson25 upheld the minority view in the Oughtred Case where the intention of the creator of the trust is upheld in the interests of equity and justice, rather than failing due to the mere non-compliance of formalities. This may be partly to do with tax law modernizing and the acknowledgement of different forms of communication, which outdates the formalities in section 53(1)(c). In addition it has been suggested that the cases of Vandervell, Grey and Oughtred were incorrect because they have not dealt with what exactly this section was dealing with which is to create consistency and predictability of the law26. This is especially indicative with respect to land where formalities are necessary, but as will be seen later equity can sometimes overcome formalities in the interests of justice. It seems inconsistent that equitable interests of personal trust property can be initially created by no formal requirements, other than being part of a valid trust but to dispose of these interests to another requires a set of formal standards. Therefore for consistency's sake it seems more reasonable that the minority in Oughtred should have been followed, which has been subsequently confirmed in Neville v Wilson. There have been reforms in this area, such as the 2001 paper in respect to Electronic Conveyancing to allow for the formalities to be ignored. In addition to the 2004 proposed reforms form the Inland Revenue to make it easier to dispose of trust property. If the creator of the trust has done all in his will to transfer the property to the trust (i.e. the trustee) and it has not been completed because of a third party then the court will hold the trust as valid27. The disposition of a trust must be within the intentions of the creator; a majority of trusts are disposed in the form of a will. A will is subject to the Wills Act 1837 Section 928 where for it to be valid it must be; signed by the creator or representative (witnessed by the creator); that this signature is intended to make the will valid and for no other reason; that this signature is witnessed by two independent witnesses who sign the document as proof at the time of witnessing; and these signatures are witnessed by the creator. Therefore these formalities which in the case of land and the creation of wills and the disposition of equitable trust property which dates back to 167729, but there have been problems with these formalities because the trust created to fulfil the intentions of the creator but the lack of formalities would have created an injustice. This is because the trust would be valid on the grounds of certainty and intention but mere formality problems could cause the trust to fail. This has been attacked by the courts and there have been situations where the lack of formalities has been dismissed30 and the trust has been upheld or a constructive trust has been created, because the law has not adapted to modern living arrangements.31 Discretionary Trusts - A More Flexible Trust: When one considers a trust there has to be certain criteria which has been fulfilled; if a trust is based on a set of facts identical to the McPhail case this trust will be a discretionary or power trust. A discretionary or power trust is a trust whereby the trustees have the ability to determine the validity of the beneficiaries; as well as providing a benefit as the trustees see fit. This discretion radically changes the elements that create a valid trust; because the settlor has allowed the trustee a power of delegation and decision in relation to the benefit and the beneficiaries, therefore unlike a fixed trust the potential beneficiary does not have a proprietary interest in the trust property, i.e. the objects of the discretionary trust do not own anything until they are actually selected and receive their share.32 Therefore the validity of such a trust mechanism lies in trying to reconcile the traditional elements of a valid trust with the lack of definite beneficiaries. The traditional elements of a valid trust are; capacity, i.e. the settlor is legally capable of declaring a trust; formality, i.e. in the case of land or shares certain steps are taken to divest ownership in to the hands of the trustee; certainty, i.e. the certainty of the settlors intention, the certainty of the trust property and the certainty of the objects or potential beneficiaries; and proper constitution of the trust, i.e. all formalities are taken care of. In respect to the McPhail also known as Re: Baden's Trust was a case where the all of the valid elements were satisfied except for the certainty of objects due to the powers of discretion afforded to the trustees by the settlor; therefore this was the key question in the case. The following section is going to consider the McPhail case and discuss the implications that the possible uncertainty of objects had on the validity of discretionary or power trusts. McPhail v Doulton: Prior to the McPhail case the test of certainty was the same as for fixed trusts as per IRC v Broadway Cottages Trust33 -- the list of beneficiaries had to be capable of being drawn up; therefore this resulted in the uncertainty of certain discretionary trusts when the potential list can be determined or altered by the trustees. In the case of McPhail if such a test was applied it would have failed on the certainty of objects due to the impossibility of drawing up a list of past and present employees, in addition to their relatives and dependents. Therefore this case the court decided to provide an equitable solution to this problem, because equity aims to fulfill the intentions of the settlor. This solution was referred to as the any given postulant test, which made a distinction between conceptual and evidential certainty; whereby conceptual certainty is the only necessity in order to ensure certainty of objects. Conceptual certainty refers to the meaning of the words used by the settlor, i.e. do the words have a precise meaning, recognized by the trustees and the courts, to define the class the settlor intends to benefit34 Whereas evidential certainty refers to whether specific persons can be identified as potential beneficiaries; therefore the court decided that as long as the words and intention of the settlor could identify a possible class of persons that were easily identifiable then the certainty of trust objects was valid. In the McPhail case the class of persons was past and present employees, as well as these employees' relatives and dependants. The identification of employees are identifiable through company records and their relatives from public records, as well as dependants who are identifiable via records and the definition set by statute and public records. Therefore as the class of persons was identifiable then the trust was valid as all other elements were satisfied. As the facts of the following hypothetical case of X and the McPhail case are identical then the validity of the trust in this case is satisfied. Therefore the following section is going to consider the case of X and determine whether the trustee were correct in denying X's claim as a beneficiary of the trust; as well as considering the obligations and entitlements the trustees owe X. In relation to powers of a trustee it must initially be pointed out that there is no legal obligation for the trustee or individual to exercise a mere power; however there is a distinction between the individual to a trustee because the trustee must from time to time consider whether or not to exercise the power, and the court may direct him to do this.35 Therefore the court has stepped in to ensure that the trustee at least considers the power that is held and to act upon it. This was further considered in Re Hays Settlement36 where the court held that the trustee that holds the power needs to be aware of the size of the problem and whether the grant of benefit is appropriate in relation to the other claimants. However this may be too strong an obligation because earlier cases re-iterate that trustees that hold a power are under no obligation to act upon this power.37 Therefore there seems to be some confusion on what obligations this power holds upon a trustee, rather than an individual. Conclusion - The Rights of X and the Lessening of Formalities Equals the Settlor's Intention: It is important to stress that the potential beneficiaries in a power or discretionary trust have no beneficial interest therefore cannot force the trustee to exercise their power in their favor. The merely can hope that they will be given a share. The potential beneficiary however can take the trustee to court to enforce the obligations that the trustee has, i.e. consider the power and the class of persons in the trust.38 This mirrors the Boyce v Boyce39 case whereby one sister had the power of decision and when the first sister could not make the decision then the court could not make it for her. In McPhail it was held that it was a trust and the obligations that the on the trustees was that they must consider the distribution of the trust, because the most important aspect is that the trustees fulfill the intentions of the settlor. Therefore as long as the trustees have considered the potential class and have distributed the trust property according to the settlor's intention, then there is no specific obligation for the trustee to distribute the property to specific persons. Therefore all that X can do is to take the trustees to court to ensure that they have appropriately considered the class of persons; however within these class of persons the trustees have to discretion to distribute the property as they see fit. In short this means that they have the power to deny a person of any entitlement, but do not have the right to afford a benefit to themselves or individual outside the class set by the settlor. However the court in McPhail indicated there has to be a scheme to benefit some and not to benefit others, i.e. those in greatest need for the benefit. Therefore this indicates there has to be some sort of formulation in distributing, i.e. reasons for non-distribution should be available to ensure that the trustees are not going outside of their discretion or fraudulently acquiring funds. This should be indicated either in why the claim is turned down or to the court, if the court feels that the intention of the settlor is not being adhered to then the court will intervene and distribute the property in order to fulfill the settlers intention. However it must be stressed that the rights of X are limited to forcing the trustees to consider the class of beneficiaries. This means that X is not necessarily going to receive any benefit and the power of rejection is held in the hands of the trustee, unless it can be proven that the settlor's intentions are being disregarded and then the court will intervene, but only to set up a appropriate scheme of distribution which may end up with X receiving no benefit. Bibliography: W. Ashburner (1933) Principles of Equity 2nd Edition, London, Butterworths Cheshire & Burn (2000) The Modern Law of Real Property 16th Edition London, Butterworths R. Edwards & N. Stockwell (2002) Trusts and Equity, Harlow England, Longman P. Ferguson (1993) Constructive Trusts - a Note of Caution, 109 LQR 530 Hayton & Mitchell (2005) Commentary and Cases on the Law of Trusts and Equitable Remedies 12th Edition, London, Sweet & Maxwell Heydon, Gummow & Austin (1993) Cases and Materials on Equity & Trusts 4th Edition, London, Butterworths J. Martin (2005) Hanbury and Martin: Modern Equity 17th Edition, London, Sweet & Maxwell Megarry & Wade (2000) The Law of Real Property 6th Edition, London, Sweet & Maxwell Oakley (1997) Constructive Trusts 3rd Edition, London, Sweet & Maxwell Parker & Mellows (1998) The Modern Law of Trusts 7th Edition, London, Sweet & Maxwell Pettit (1997) Equity and the Law of Trusts 8th Edition, Croyden, Butterworths Tolley Snell (2000) Principles of Equity 30th Edition, London, Sweet & Maxwell Read More