#2531 - Duties And Interests - Trusts and Equity

Duties and Interests

1. Beneficial Interests under Fixed Trusts

Beneficiaries’ rights:

1. Alienate his or her interest to a third party - Provided B’s interest is not made subject to some condition precedent or subsequent that causes it to divest, then B has a vested interest which he may alienate to another.

This may happen on his death through a testamentary gift, or on insolvency by an assignment to the T in bankruptcy - Insolvency Act 1986, s.283(1)(3)(a) (cf. protective trusts).

Restraints on alienation are generally regarded as void on the ground that they are contrary to public policy.

Assignment - B typically alienates his interest under the trust through a direct assignment. The assignee becomes the new beneficiary of the trust (see further lectures on formalities).

Law of Property Act 1925, s.53(1)(c) - Beneficiaries can assign rights inter vivos voluntarily to a third party, and the third party stands in your shoes and has trust claims against the original trustee. He stands in your shoes. Complicated formalities apply.

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2. The rights of the absolute BO of the trust property under Saunders v. Vautier

1. The rule in Saunders v. Vautier – If B is sui iuris (of full legal age and capacity) and is absolutely entitled to the trust fund then he can direct T to convey the outstanding legal interest in the property to himself – so T’s legal title merges with B’s absolute equitable interest = full owner. Absolute B interest may be divided among more than one B.

• Saunders v. Vautier (1841);

Facts: B was absolutely entitled to the income of the trust fund, but trust instrument stated he was not allowed possession of income until he was aged 25. B was 21 at the time (sui iuris) and wanted to wind up the trust.

Decision: The age condition was not a condition to the vesting of the gift – he was absolutely entitled. Had it have been a condition precedent he would not have been absolutely entitled.

NB. In a bare trust a B is absolutely entitled. Saunders is not a bare trust, but here there was active management going on. Unlike Brockbank…

• Re Brockbank [1948];

Facts: Trust of a life interest and a remainder to the surviving children. Neither one or the other is entitled, but collectively they could terminate the trust.

Decision: One B standing alone may not be absolutely entitled, but all Bs collectively are entitled to the entirety of the trust fund. So if all Bs are sui iuris they can collectively exercise Saunders v Vautier. This right may even enforced against a trustee who has active duties and powers under the trust, and who is not strictly a bare trustee.

• Herdegen v. Federal Commissioner of Taxation (1988);

(b) Rationale - If the whole point of setting up a trust is to control property, why allowed trusts to be broken up?

• Powers of control over property remain in line with beneficial ownership of the same property. Once beneficial ownership is entirely in a new group of people they should be allowed the right to control property.

• Rule encourages the free alienability of property by removing restraints imposed by the settlor (cf. Rule against Perpetuities).

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2. T’s Dispositive Powers

The terms of the trust instrument are instructions given to the T on how to distribute the fund.

Duties of discretionary trustees:

• Obey the trust: no ultra vires appointments, as it is a form of delegated power. Cannot give money to anyone outside the objects or money will be clawed back by tracing.

• Fiduciary capacity: hence good faith and avoiding conflicts of interest.

• Proper purpose (letter of wishes): must exercise power for proper purpose. Court will look at wording of the trust instruments to decide what the purposes are. The letter of wishes is an important document which accompanies the trust deed; it is a guiding statement of the settlor’s wishes on how he would like the discretionary powers to be exercised. Settlor tells trustees what his family is like! NB. It is confidential from beneficiaries and is not legally binding.

• ‘Survey the permissible area of selection’ (Lord Wilberforce): Survey range of potential entitlements before you allocate to individuals. Trustees must first group people into different categories of objects (i.e current, ex-employees, families). They must then prioritise categories in the exercise of their discretion into different heads of need as there is a limited pool of assets to be distributed. MUST be a principled basis for the categorisation of priorities. Finally they can appoint to individuals in prioritised categories. Crucial as they define the standard of certainty. If uncertain the trust is void. Certainty test is a direct function of these duties.

Process driven problems:

• Do you need to identify EVERY employee or ex-employee and EVERY one of their relatives or dependants? No. Notion of budgetary limitation as there is only a finite pool to be allocated; must not spend more money on making a comprehensive survey than on what you have left to allocate. Do not need a ‘complete list’ of every potential individual identifiable object – overruled by McPhail.

• Class too wide to administer. E.g. Class much too wide to be able to distribute to in a meaningful way – ‘all the inhabitants of Greater London’ (Wilberforce in McPhail) said it would be void as would be ‘administratively unworkable’. Why couldn’t you make it work? Easy to administer power for proper purposes and avoid conflicts of interests, but Wilberforce means you could not categorise into groups or prioritise. There is no info on the prioritisation scheme. Unworkability means you cannot meaningfully carry out duties of selection and distribution according to the settlors appropriate purposes. A trustee cannot do it because of their obligations – duties interact negatively with what the settlor has asked people to do (an absolute owner, not a trustee, could).

• McPhail v. Doulton; Re Baden’s Deed Trusts [1971];

Facts: This was an employee welfare trust set up by the deceased founder of the company who wanted to provide for his workforce. The trust instrument provided, “The trustees shall apply the net income from the Fund in making in their absolute discretion grants to or for the benefit of any…employees or ex-employees of he Company or any relatives or dependants of any such person in such amounts at such times and on such conditions…as they think fit”.

(i) Discretionary trusts

The T has a duty to make appointments from the fund, though a discretion to select which of the objects of the trust should receive them and in what amount.

• E.g. A testator, T, leaves a fund to professional trustees to hold on trust for his wife, W, for life, should she survive him, remainder to such of his children as his trustees shall (mandatory obligation of distribution - duty) in their absolute discretion select.

The T holds his or her duty to make appointments in a fiduciary capacity. This governs the trustee in his exercise of the duty to make appointments. Any potential object of the trust has sufficient standing to enforce the trustee’s duty.

The power must be exercised for a proper purpose and without taking into account irrelevant considerations:

The trustee can discharge his or her duty under the discretionary trust without necessarily having a complete list of all potential objects of the trust (Cf. I.R.C. v. Broadway Cottages Trust [1955] Ch. 20).

The settlor may leave a letter of wishes to guide the trustee: Schmidt v. Rosewood Trust Ltd [2003] 2 A.C. 709.

‘Administrative unworkability’

The definition of the class of objects may prevent the trustee from exercising his or her power to select beneficiaries in a manner consistent with his or her duty as a fiduciary. Such a class may be administratively unworkable, e.g. ‘a trust for all the inhabitants of greater London’: McPhail v. Doulton [1971] A.C. 424, 457 per Lord Wilberforce.

• R v. District Auditor, ex p. West Yorkshire District County Council (1985);

Facts:

Attempt by local authority to avoid clawback of money by local gov. Had 400,000 surplus in account so they appointed the property to a trust ‘for the benefit of any or all or some of the inhabitants of West Yorkshire’ (so outside reaches of S of S).

Decision: Trust failed as too wide – no clear indication of purpose and so no basis of grouping the inhabitants into different categories of need to allow fiduciary categories to be carried out in a meaningful and not arbitrary way; (although could be done without breaching ultra vires stuff).

Conclusion – if u are a settlor you cannot create enormously wide classes of objects. But there are ways of clever drafting to get around general law limitation Re Manisty.

But the settlor may define a workable class of objects of the discretionary trust but confer on the trustees a wide power to add objects to the class. In this way the class of objects of the discretionary trust can be expanded. The width of the class from which the trustees may select persons to add to the class of objects of the trust does not invalidate the power (for the duties of donees of fiduciary powers of appointment, see below).

(cf. non-charitable purpose trusts which are generally void since there are no human beneficiaries with standing to enforce them).

• Cf. Re Manisty’s Settlement [1974] Ch. 17;

Facts: Clearly a discretionary trust where the settlor wanted to benefit his...