The Concept of Beneficiary Trust - Case Study Example

Legal ownership vested in trustees must be balanced by identifiable equitable ownership.” Critically discuss this ment and the difficulties inherent in it in relation to the interests of beneficiaries under discretionary trusts. What is the practical importance of determining where the beneficial interest lies in discretionary trusts? (word count 2055 excluding end notes,bibliography , list of cases and title page) List of Cases Referred Edge v Pensions Ombudsman Gartside v IRC Gisborne v Gisborne IRC v Broadway Cottages Trust IRC v Gartside McPhall v Doulton re Beloved Wilke’s Charity Re Gulbenkian’s Settlement Re Smith (1928) Re Vandervell’s trust (No 2) Sainsbury v IRC Saunders v Vautier Trafford’s Settlement Trustee Executors and Agency Co Ltd v Margottini Vandervell v IRC Introduction Both fixed trust and beneficiary trust will fall under an express trust. In a fixed trust, the beneficial interests are expressed or fixed whereas under a beneficial trust, the beneficiaries are not fixed but the trustee is entrusted to have a dispositive authority as legal ownership is vested with such trustees. The trustee in a discretionary trust to whom the legal ownership of trust property is not only vested with but also has a dispositive discretion. A trustee under discretionary trust has the authority to decide the exact value of the benefit which the beneficiary is entitled to receive or even to decide whether to negate their entitlement. If a trust is created for the benefit of a group of people as the trustee shall in their absolute authority is to divide between the beneficiaries in such percentage of their entitlement in the trust property through their dispositive discretion is known as discretionary trust1. As held in Re Smith (1928), when the settlor ushers discretion on the trustees to choose out of a designated class of beneficiaries, who to derive advantage and the quantum of such a benefit, then it is known as discretionary trust. The interest of the beneficiaries of the discretionary trust has not been prescribed or fixed, and that is the unique nature of such trust. Even in case where the beneficiaries are known or fixed, yet the trustees have an authority to decide the process in which the corpus shall be distributed, then such trust is fixed instead of discretionary in nature2.This research essay will analyse whether any the beneficial interest lies in discretionary trusts with the help decided cases laws on the subject. Whether beneficial interest lies in discretionary trusts?- An Analysis A discretion trust can be said to some degree anomalous in nature since the very spirit of the trust denotes commitments and duties and on the other hand, discretion denotes choice or freedom. Instead of specifying the beneficiaries, in discretion trusts, the settlor confers the authority on the trustee to decide who should derive advantage from the trust corpus3. One of the main reasons to create a discretionary trust is to minimise tax liability, particularly in a family trust where trust is given authority to allocate the trust corpus among the beneficiaries4. A trustee under discretionary trust may have an authority or discretion as to fix the exact value of the beneficiary’s rights or to decide even whether certain beneficiaries can be excluded from the enjoyment of such rights5. Lord Cairns LC briefed the power of discretionary trustees in Gisborne v Gisborne that trustees have discretion to decide, and such discretion is uncontrolled one. In re Beloved Wilke’s Charity6, it was held that if the court found that if the trustee of a discretionary trust took an unsound decision, the court will annul such a decision7. The unique feature of discretionary trust is that an individual who is one of the classes of probable beneficiaries may not be having an equitable interest, or title as regards to the property of the trust till such a juncture, the trustee employs his discretion in favour of such an individual. This raises serious question as to how the legal ownership associated with the trustee can be equated by a recognisable beneficial ownership. The best example of beneficial interest in the discretionary trust can be explained through the case law 8McPhall v Doulton9. In 1971, Mr. Baden created a trust for the advantage of the employees, the dependants and relatives of such employees. Mr. Baden gave full freedom or absolute discretion to the trustees to allocate the trust fund to such persons which they deem fit. Thus, Baden trust can be called as a discretionary trust since the trustee was given absolute discretion to select the beneficiaries10. In Gisborne v Gisborne11, by virtue of a trust instrument, the trustees were accorded with an uncontrollable discretion. The court did not intervene when one of the beneficiaries approached the same on the ground that she had not received her due share of trust property as she had hoped much and the court was under the impression that the trustee had functioned within his power as accorded by the trust instrument. In such instances, the court will look upon whether the discretion exercised by the trustee is in the best interest and in good faith of the beneficiaries or objects. Thus, the good faith and best interest factors do not help in proving the beneficial interest, but it does offer a vital limit on a trustee’s discretion. Thus, as long as there is no mala fide from the side of a trustee, the exercise of discretionary power by a trustee will be without any checks and balances or interruption by courts12. In 13Edge v Pensions Ombudsman14, it was held that a court would not interfere until the trustee employed irrelevant, improper or illogical approaches. However, this verdict does not help in recognising the beneficial interest to offset the legal interest vested in the trustee15. (Gardner 2011:198). In considering the beneficial interest under a discretionary trust, it is necessary to differentiate between a trust and the power as trusts are vital and powers are flexible or discretionary in nature. It is to be noted that as per the principles held in 16Saunders v Vautier17 , the beneficiaries either as a whole or as a single has the equitable interest in the title of trust property and can even force the trustees to transfer the title of such trust properties to them. However , if there is a chance either that there may be further members of the group of beneficiaries can be included in the future or where the trustees have an authority to retain the trust property , then beneficiaries under the discretionary trust cannot try to implement the rights conferred through the Sunders v Vautier principle18 The beneficiaries under discretionary trust cannot demand payment as they are entitled to demand under a fixed trust as there is no identifiable value for which the beneficiaries are authorised till the trustees exercise their authority or discretion. In McPhall v Doulton, it was held that beneficiaries can force the trustee to what he has to do but cannot force the trustees to consider what he will do, and they cannot force him to distribute the trust property or its income19. In 20IRC v Broadway Cottages Trust, it was held that a discretionary trust would fail if it is short of certainty of objects and if a “complete list” of the probable beneficiaries could not be identified or drawn up21. Whether a beneficial ownership lies in discretionary trust can be established by applying a “complete list “test as held in IRC v Broadway Cottages Trust.22 Thus, under complete list test, the beneficial ownership would need to be divided equally by the whole group of beneficiaries if there is any default of duty on the part of a trustee. The status of the discretionary beneficiaries as regards to recognisable beneficial interest in the trust property was detailed in 23Gartside v IRC24. In this case, it was held that two or more individuals cannot have a single privilege until they retain it in common or jointly. In 25Sainsbury v IRC26 , it was held that the objectives of a discretionary trust do not insist that the beneficiaries should have individual privileges , but they are in vie with each other and what the trustees offer to each one is his individual share alone27. In 28Re Nelson, it was held that under discretionary trust, all the beneficiaries should be regarded as one beneficiary and to whose benefit the trustees are expected to exercise the whole trust fund and as such, as the beneficiaries acting as one and may even demand that the trustees to transfer back the trust property to their joint interest as co-owners29. In 30Re Gulbenkian’s Settlement31 case, it was held that a beneficiary who is dependent upon the authority or discretion of the trustee in his support can relinquish his status as a class member32. In Trafford’s Settlement33 case, the question of any beneficial interest in the discretionary trust is further aggravated by the fact that no individual of a group of discretionary beneficiaries can assert his share of trust’s income where there is even probability that some other member could be brought into picture34. The beneficial interest of an object of a discretionary trust is known as sui generis. It is neither a contingent nor vested interest in the trust property, but it is more than a mere anticipation in that property. The beneficial interest can be explained as the interest only known to the law which may be greater than a mere expectancy or less than a contingent interest35. In Trustee Executors and Agency Co Ltd v Margottini36, if the general power of the trustee of a discretionary trust is not exercised within the lifetime of the trustee , then in such cases ,the trust property will be reverted to the settlor and estate of the trustee do not have any such right over such property. In such case, no beneficial interest will be enjoyed by the beneficiaries of a discretionary trust37. In certain cases, the main objective of the donor cannot be accomplished due to the fact that the trust may be void for want of adherence with rule of statute or equity or the original scheme of the trust is not viable. In such instances, the trust property is held on behalf of the trust but there may be no beneficiaries to enjoy the trust property. Under such scenario, a question arises who will be the beneficiaries for such discretionary trust? In such circumstances, the trustee cannot hold such trust property as the trustee is a just a formal owner of the property holding it for the equitable or real owners. The solution to such cases is offered by the cannons of resulting trust. In 38Vandervell v IRC39, it was held that in case of those trusts where beneficial interest is not ascertainable, and if it was not belonged to the donee or to be possessed by him in trust for some other, hence, it must remain with donor40. Where there is no ascertainment of beneficiaries in a trust, a resulting trust is established by the court in favour of transferor or settlor. Where there is no clear provision as regards to equitable interest in trust property and in such cases m no person as a beneficiary can make a successful claim towards the property. In 41Re Vandervell’s trust (No 2)42, the resulting trust was classified into two categories as presumed and automatic. Under an automatic trust, the beneficial interest under an express trust remains unarranged. In Vandervell v IRC, it was held that the beneficial interest cannot subsist in a vacuity. Thus, the resulting trust engrosses the objective of beneficial interest when instrument establishing the planned gift or trust is non committal about the application of equitable interest43. In determining where the beneficial interest lies in discretionary trusts or not is really a problematic province since the sole aim of a discretionary trust is to permit the trustee to employ his authority or discretion to allocate the value of property to a specific beneficiary. Until the trustee has exercised his authority or discretion, there is no way out of recognising the individual share as the trust property under discretionary trust is owned by the beneficiaries as a whole. Until the trustee exercises his discretion, the beneficial interest in a discretionary trust can be said to be in a vacuum or in silence. It is to be noted that in 44IRC v Gartside45 two or more individuals cannot have a single privilege until they retain it in common or jointly. Thus, the poignant privilege of the members of the group of beneficiaries can be said to be the right to receive potential benefits from the trust through the trustees. Despite the fact that the group of probable beneficiaries as a whole own the beneficial interest, there is no form to recognise the individual shares in the discretionary trust till the trustee has opted to employ his discretion. End Notes Read More