The Importance of Certainty of Objects in a Discretionary Trust - Essay Example

? The cumulative effect of the test laid down in McPhail v Doulton [1971] AC 424, as applied in Re Baden’s Deed Trusts(No 2) [1973] Ch 9, is that a discretionary trust or power will rarely fail for uncertainty of objects. The effect of the decision also calls into question whether there is really any difference between discretionary trusts and fiduciary powers.” Critically discuss the above statement, with reference to relevant case law Introduction For a valid trust, the power or right assigned to trustees by the settlor should be clearly defined, and the trustee is under a duty to a beneficiary, and the trustee should avoid using the power or right for his own benefit. The certainty needs of a trust mirror the truth that a trustee is under onerous to a beneficiary with regard to an unambiguous right. Thus, the certainty of objects needs a guarantee that the trustee is having a duty to a specified beneficiary, and his obligation is so precise so that it can be implemented without any ambiguity. A discretionary trust is a kind of trust, and it can prevail only if a trustee has the core Trust obligation1. For instance , if a settlor creates a trust for the benefit of John Smith with a trust fund of say ? 10,00,000 by appointing Abraham Lincoln as its trustee and to pay any unspent money in that trust to John Smith after 20 years . He also stipulates that within the 20 year, Abraham Lincoln can spend all or any of the trust fund and its income to all or any of the Settlor’s kids or grand kids. The above fall under discretionary trust as John Smith has the authority to decide how to distribute the trust funds for the advantage of the Settlor’s kids or to Abraham Lincoln himself. A fixed trust is one where the trustee may not have any power to select how to divide the trust funds other than the specified beneficiaries2. This research will analyse in detail how a discretionary trust will rarely fail for uncertainty of objects with the help of decided case laws on the subject. The importance of Certainty of Objects in a Discretionary Trust As laid down in McPhail v Doulton3 case, a discretionary trust must fulfil “any given beneficiary” check, and a court should be able to find out whether any given beneficiary falls within the class of beneficiaries for whom the trust is meant for and is also known as “ given postulant “ check.4 In IRC v Broadway Cottage Trust5, it was held that so as to fulfil the test of certainty of objects, a whole record of the donees should be recognised failing which the trust would be declared as void or the test is continued to be applicable, particularly for a fixed trust6. In McPhail v Doulton7 , Bertram Baden, as a settlor vested some assets to trustees to divide the income in their complete authority, to employees both present and past of Mathew Hall & Co Ltd or their dependants or relatives. The main issue was whether trust fulfilled the litmus test for certainty of objects and whether it is just a power or a trust8. McPhail case is relating to a discretionary trust where trustees have a crucial obligation to use their discretion to offer benefits to beneficiaries which has been assigned by the settlor to the trustees, and it is not “just power” given to the trustees by a settlor. Further, the main objective of the discretionary trust is to safeguard both the income and the capital of the fund and as a result, the beneficiaries derive benefits from the outcome of the Settlor’s profligacy. Moreover, discretionary trust is being mainly planned as a tax-avoidance method by making the rights of the beneficiaries under the discretionary trust as vague as those rights are designed more arduous to tax9. In Re Gestetner Settlement10 case, a trust was established for the members of a “specific class “as the trustees may choose the beneficiaries as they deem fit from that specified class. IRS argued that the trust was void due to uncertainty, and it was held that under discretionary trust, the trustees have such authority to decide or identify the beneficiaries11. In the above case, a reference was made to Re Park 12 and in Re Jones 13 cases, where it was held that just power is as good as it is exercisable to the favour of indistinct class of beneficiaries. Further, In Broadway Cottage Trust14 case, the “list “test was held for ascertaining the certainty of purpose, particularly for private trusts15. Thus before the McPhail’s case, if “list” check is applied to McPhail case, it would definitely fail as the purpose of the trust were too wide. In McPhail case, the House of Lords held that trust was legitimate and laid a new test for ascertaining the certainty of objects as regards to discretionary trust. Under the McPhail verdict, there is no need to ascertain the certainty, whether any beneficiary is a member of that class or not or there is no necessity to detail up a list of the objectives. The verdict given in McPhail case where “any given petitioner or beneficiary” check was analogues to the powers of appointment as held by Lords in Re Gulbenkian’s Settlement Trusts case16. In this case, it was held that the check for certainty of intention in discretionary trust is analogues to the check of fiduciary authority and thus, it could be authoritatively decided that any given beneficiary is eligible or not of a discretionary trust17. In Re Baden’s Deed Trusts (No 2)18, the Court of Appeal was to affirm, on the footing of finding in McPhail test, whether the phrases “relatives “and “dependents “were really definite.19 The Court of Appeal was asked to find out whether a discretionary trust which is meant for Settlor’s dependents and relatives could the pass the check or test. The Court of Appeal unanimously found it assenting20. This case referred the case McPhail v Doulton where the House of Lords confirmed by agreeing the Settlor’s objective was of crucial significance in a discretionary trust. In this case, the settlor established the trust for his relatives, their dependents and the employees of his company. The trust deed emphasised that trust fund should be utilised by the trustees in their complete discretion, and they had the authority to decide who will be the beneficiaries. It is to be recalled that this case relied on the McPhail case where the House of Lords observed that a discretionary would be found legitimate if it could be observed with sureness that any given beneficiary “is or is not “within the category of donees21. The court of appeal in the above case turned down the appeal that requested to apply what was held in Re Gulbenkian test, particularly for a discretionary trust where “ evidential “ and “ conceptual “ were dissimilar. It is the duty of a claimant to prove that he fits into category of class of beneficiaries22. The court found in Re Baden’s case , that there was the non-existence of intrinsic theoretical vagueness in the phrases “ relatives “ or “ dependents” and held that such clauses were legitimate. Stamp LJ viewed that the trust was legitimate as the court could find who was a relative or a dependent as it could be limited to a practical description of the next of kin. Sachs LJ viewed that the check needed only precision in the concept and if the class of persons to derive advantage is abstractly definite, then one has to decide whether any claimant fits into that clause or not. Megaw LJ was of the view that the needed overall conceptual certainty would tantamount to a return to the record of certainty check23. It is important to distinguish between fiduciary powers and discretionary trusts, between power and trusts and between fiduciary and non-fiduciary powers. A settlor who wants to create a trust for the benefit of his members of his family can create a fixed trust so that the benefits could be conferred to his family members after his death by a trustee where each beneficiary will have a precise share. However, a settlor may wish to give his trustees a power or discretion in sharing the trust income to the beneficiaries by taking into account the changing scenarios in the future and transformation in the circumstance of the trust property after the Settlor’s demise, and this is done by discretionary trust. It is pertinent to note that to differentiate between class rights and individual rights as in discretionary trust, each individual beneficiary will have precise rights in equity before distribution, which is a personal right which fall dearth in the discretionary trust, and these rights are referred as mere equities. However, in a discretionary trust, the beneficiaries may have more widespread rights and if all the beneficiaries of a discretionary trust are adults and of sound mind, they can form as a closed class together and they can even force the trustees to wind up the trust and to handover the assets of the trust to them, which was held in Saunders v. Vautier24. In Burrough v Philcox25, two rules namely the certainty of objects and the certainty of intention was considered. The crux of issue was that the whole class or each member of a class of objects should be recognisable and be known else trust will be declared invalid26. In Gartside v IRC27, in Sainsbury v IRC28 and in Re Weirs29 Settlement cases, it was held that where two or more beneficiaries under a discretionary trust cannot have a single privilege, except they had it in common or jointly. However , the main object of a discretionary trust should not require that they can enjoy individual privilege, and they are in vie with each other and the trustee is having absolute authority to give him his share30. In plain words, the equitable interest rests with the class as a whole. However, if the trustees of a discretionary trust have a power to accumulate the income of the trust or to preserve the income of the trust, then beneficiaries cannot compel the trustees to wind up the trust. Further, the discretionary trust is often known as a trust-power as it mingles an obligation to distribute with a power of choosing the beneficiaries. However, a fiduciary power is also a combination of a power with a trust commitment which is a power to divide the income and an obligation to consider exercising it. In OT Computers Ltd v First National Tricity Finance Ltd31, two trust accounts were opened by a sick company with a bank namely customer deposits account and sums due to “urgent suppliers.” The company prepared two lists where one list contained the names of customers who have advanced deposits, and another list mirrored some of the names of its “urgent suppliers” as the probable beneficiary. Later, the company went into liquidation, and the bank made a claim against the trust amount held for the repayment of its loan and another defendant who was also an unpaid supplier who claimed that his name was omitted from the “urgent supplier” list. The main crux of the issue is that whether a valid trust had been established for dealers and for “urgent suppliers” or not. It was held that there existed a valid trust for dealer’s deposit but in case of “urgent suppliers” the beneficiaries were impossible to recognise due to uncertainty and hence, the latter trust failed and hence, a resulting trust for creditors of the company was established32. It is to be noted before 1971that the narrow test as held in Broadway Cottages was applicable to kinds of express private trust both discretionary and fixed. As of today, the list test is appropriate to fixed trust only as held in OT Computer case. Since 1971, a much broader test is applicable to discretionary trusts33. Thus ,there should be both conceptual certainty and evidential certainty for a valid discretionary trust. Therefore , the details of donee’s should not only be conceptually definite but trutees should be able to recognise all the individual befeneficiaries who fall within that class with evidential certainty. With the help of conceptual certainty , the court or the trustees could decide whether any specified beneficiary fits into such class or not else no exhaustive list could be prepared. As conceptual certainty could not be established as regards to “ urgent suppliers” in OT Computers Ltd case, the trust failed. Likewise , there should be evidetial certainty as to determine each and every beneficiary of that class for a trust to he held a valid one. In Re Sayer case 34, due to the absence of evidential certainty , the trust was held to be invalid as it was not possible to identify each and every employee and past employees of Sayers(confectionaries ) Ltd. However , in today’s context , Re Sayer would be held a valid trust as what has been held in Re Baden (No 2) case that the class of donees only requires to be conceptually definite but not necessarily to be evidentially certain. In Swain v Law Society 35, as regards to conceptual certainty , it was held that a trust may be established for the benefit of yet unaseceratined or unborn but can be identified at the time due date of execution of the trust36. Ascertainability also plays a significnat role as in Re Gulbenkian’s Settements case ,as it was held that whereabout of existence of some beneficiaries would not make the trust invalid. In McPhail case , it was observed that a discretionary trust or power would rarely fail for uncertainty of objects as clear differentiation was made between semantic or linguistic uncertainty. In Re Benjamin37 case, if it was not able to find the whereabouts of a missing benefirary of a trust , then , trustees will not be held accountable if they allocated the share to the other beneficiaries as they secure an order from the court which would safeguard their interest if there is a dispute later on this38. In Re Barlow’s Will Trusts39 case, where a testator established a trust and earmarked some valuable paintings for the benefit of his family members and friends, it was held that there was no evidential uncertainty as anyone can prove that he is a family member or friend of the testator to the trustee40. In Re Tuck’s Settlement Trusts41 case, a testator created a trust for the benefit his future descendents succeeding to the title of the baronet as decided by the Chief Rabbi and held to be valid as there was no uncertainty as the final decision by Chief Rabbi as regards to the eligible beneficiary mitigated the ambiguity42. It is to be recalled that when trustees were unable to identify the beneficiaries due to uncertainty and if the court is able to decide , then such trusts cannot be held invalid as held in Morice v Bishop of Durham43 and in Burrough v Philcox44 Conclusion In McPhail case, Lord Wilberforce emphasised that trustees of a discretionary trust are having greater responsibility to ascertain the class instead of beneficiaries of a fiduciary power. In this case, it is observed that check for certainty of objects of authority should be extended as the check for the certainty of objects of discretionary trusts45. In McPhail case, a distinction between discretionary and power was made. Under a discretionary trust, the donees cannot demand for payment as they are entitled under a fixed trust since there exists no recognisable value to which such donee is warranted till the trustee employs his discretion. However, the beneficiaries can compel the trustees to implement that discretion. Individual beneficiary is really at disadvantage in a discretionary trust as main objective of a discretionary trust is to facilitate the trustee to exercise his discretion to divide a value of the trust property to a specific beneficiary. Despite the fact that the class of probable donees as a whole possess the beneficial interest, it is not easy to recognise the individual’s entitlement until the trustee has employed his discretion. The snowballing impact of the chck held in McPhail v Doulton , as practiced in Re Baden’s Deed Trusts(No 2), is that a discretionary power or trust will rarely fail for ambiguity of objects. It is to be noted that the same yard stick was applied in Re Sayer, Swain v Law Society ,Re Gulbenkian’s Settements, Re Benjamin, Re Barlow’s Will Trusts, Re Tuck’s Settlement Trusts, Morice v Bishop of Durham and in Burrough v Philcox cases. 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Rev 2 65 Tey, Tsun Hang, ‘Trustee's duty of disclosure’ [2012] SAcLJ 24 191 List of Cases Broadway Cottage Trust Burrough v Philcox Gartside v IRC IRC v Broadway Cottage Trust McPhail v Doulton Re Baden’s Deed Trusts (No 2) Re Gestetner Settlement Re Jones Re Park Re Weirs Settlement Sainsbury v IRC Read More