#15703 - Nature Of A Beneficial Interest - Trusts and Equity

THE NATURE OF TRUSTS

There is significant debate as to the nature of rights under a trust, primarily, whether those rights held by a beneficiary are personal or proprietary.

• If personal, interest is related to the individual and only exercisable against the parties of the trust.

• If proprietary, the interest is related to the property / subject matter of the trust, and therefore exercisable against all but the legal owner (trustee).

A beneficiary definitely holds personal rights (illustrated by rights against the trustee), the question is whether there is more than this.

The ultimate test of the nature of a right is exigibility against third parties

• B’s rights have some exigibility against third parties —can sue if trust property is transferred to a third party, but not if it’s damaged by one (although B can join with T to sue: Shell). B’s interest also seems proprietary in that it defeats the interest of D’s unsecured creditors in insolvency proceedings

• The obligation stays attached to the property where it is transferred (suggesting a proprietary nature) to a third party, except where: (i) T is authorised to make the transfer; (ii) the recipient is a bona fide purchaser for value without notice.

  • The bona fide purchaser exception is interesting: here B has no claim against a TP, only a personal claim against T for breach of trust. Ultimately this rule operates to strike a balance between security of receipt and security of title. Given that trusts are private and can’t tell by looking at property that it is subject to trust, it is perhaps appropriate that the risk falls on B rather than an innocent bona fide purchaser.

• B’s right seems more than a personal right but not a complete property right.

SUPPORT FOR A PERSONAL RIGHT APPROACH:

B has no equitable interest under a will until the estate is administered:

Before the estate is administered B under the will has a mere expectation of the property being distributed to them —a personal right to ensure the estate is administered correctly, and not a proprietary right in the estate (a chose in action/ right to sue). If a third party misappropriates the property, B can sue on behalf of the estate, if the property is recovered, it is returned to the estate.

Commissioner of Stamp Duties v Livingston [1965]:

• Facts: Testator left his estate to his wife. Following his death and while the estate was still being administered, his wife died intestate. Her estate was liable to pay tax if she had a beneficial interest in the property left to her by her husband.

• PC (Viscount Radcliffe): She did not have an interest because administration was not complete. On H’s death full ownership passed to the executors and the wife acquired no proprietary interest.

• “Whatever property came to the executor... came to him in full ownership without distinction between legal and equitable interests. The whole property was his. He held it for the purpose of carrying out the functions and duties of administration, not for his own benefit... Certainly he was in a fiduciary position with regard to the assets … and for certain purposes and in some aspects he was treated by the court as a trustee.”

• “At the date of W’s death, therefore, there was no trust fund consisting of H’s residuary estate in which she could be said to have any beneficial interest, because no such trust has as yet come into existence to affect the assets of his estate.”

My thoughts: although this might be authority for the proposition that it is possible to be a beneficiary without having a proprietary interest, Viscount Radcliffe states “no such trust has yet come into existence,” until the administration is complete —it might be better to see such a legatee as not having a beneficial interest at all because there is no trust to be a beneficiary of.

Action for the declaration of the existence of a trust is personal

In Webb the ECJ held an action by a beneficiary for the court to declare the existence of a trust in their favour is personal, not proprietary:

Webb v Webb [1991]

• Facts: Father gave son money to purchase a home in France. The home was conveyed into S’s sole name. F used the home and bore incidental financial burdens of ownership. S denied F’s beneficial entitlement, claiming the purchase money had been a gift. F began proceedings against S —main issue was over jurisdiction (if F was seeking to assert a right in rem, the French courts would have exclusive jurisdiction under EU law).

• ECJ: “The father does not claim that he already enjoys rights directly relating to the property which are enforceable against the whole world, but seeks only to assert rights as against the son. Consequently, his action is not an action in rem within the meaning of article 16(1) of the Convention but an action in personam.”

Birks:

• What appears to have been decided is that every attempt by a beneficiary to compel a trustee to recognise a trust is to be regarded as an action in personam [because it’s just trying to assert against a person]. However, he thinks the court should have declared it an action in rem, albeit outside the meaning of the EU Article (so as to give UK courts’ jurisdiction).

• “A declaration does not create an interest. It states what is already the case,” everything turned on whether F was a beneficiary under a trust, as such “can it in any way be said, in English law, that his claim was not principally an assertion of a proprietary interest?

No proprietary interest in discretionary trusts

A discretionary trust contains a duty to distribution subject to a power of selection exercisable by the trustees amongst the objects. The object, therefore, has no proprietary interest —he does not know if he will benefit until Ts have exercised their discretion.

Gartside v IRC [1968]

• Facts: testator gave a share of his residuary estate to trustees to hold on discretionary trust — they were to use this discretion to distribute trust assets to his relatives. Testator’s son died and the Crown claimed estate duty was owed on his interest under the trust.

• HL: no estate duty was payable. Where a trust is discretionary, the beneficiary has only a right to require the trustees to consider from time to time whether or not to apply the some of the income for his benefit—he has no proprietary interest in the property.

• Lord Reid: “Two or more persons cannot have a single right unless they hold it jointly or in common. But clearly objects of a discretionary trust do not have that: they each have individual rights: they are in competition with each other and what the trustees give to one is his alone”

• Lord Wilberforce: “No doubt in a certain sense a beneficiary under a discretionary trust has an ‘interest’: the nature of it may... be spelt out by saying that he has a right to be considered as a potential recipient of a benefit by the trustees and a right to have his interest protected by a court of equity.”

Bs still have no proprietary interest where the trust is exhaustive (in Gartside the trust was non exhaustive; trustees did not have to dissipate the fund, they could accumulate for the benefit of future unborn beneficiaries).

• Sainsbury v IRC [1970]: Ungoed-Thomas J: “Lord Reid... observed that the objects of a discretionary trust do not have a group interest but only individual rights. This observation seems equally applicable, whether the trust is exhaustive or not exhaustive.” The only right here is, “as in a non-exhaustive, trust... to have the trustees exercise their discretion and to be protected by the court in that right. ““Since... it cannot be said before distribution that an object is entitled to any defined part of the income, this difference between [exhaustive and non- exhaustive] does not make the right of any individual object quantifiable.”

But rule in Saunders v Vautier does apply: For fixed trusts, Saunders v Vautier allows all Bs to get together and demand the trust property is conveyed to them. Re Smith shows that this is still the case with discretionary trusts: all the beneficiaries, together, can invoke Saunders v Vautier —but only where the Bs are a closed class and there is no power to accumulate income.

• Re Smith [1928]: Ts had discretion to pay funds to Mrs. A, her children, legal representative of A’s deceased child. Mrs. A sought to mortgage their interest under the trust. Question: could the objects call upon trustees to pay the whole of the income to them? Romer J: “Mrs. A the two surviving children and the representatives of the deceased child are between them entitled to the whole fund. In those circumstances it appears to me, notwithstanding the discretion which is reposed in the trustees... the four of them, if they were all living, could come to the Court and say to the trustees “Hand over the fund to us.”

SUPPORT FOR A PROPRIETARY RIGHT APPROACH:

In contrast to Commissioner v Livingstone, some interests under a trust necessarily become proprietary in nature in order to continue their existence – for example, when the trustee passes trust property. In these cases, the rights of the beneficiary are proprietary in the sense that it is attached to the property and, if the subject matter ends, so does the trust. To survive such transfers, the interest must therefore go with the trust property.

Life interests in income from trust property are proprietary

Life interest in income from trust property: the majority in Baker argue that such an interest is proprietary and therefore taxable. The minority do not. The difference in reasoning seems to turn, in part, on the degree of control B has over...