Validity of the Beneficiary Principle - Case Study Example

Validity of the “Beneficiary Principle” Section 9 of the Wills Act of 1837 requires a dying person who is a donor to specify the recipients of his gifts. A “beneficiary” may be defined as the person for whose benefit a trust has been created, to ensure that the property and assets of the dead person are distributed by the trustee to the person/s named as beneficiaries in the will. This is also referred to as “cestui que trust” which establishes the beneficial interest in a trust as clarified by Lord Diplock in Gissing v Gissing1. In English law, a trust that is set up for non charitable purposes will be void unless it clearly designates a human beneficiary who is capable of enforcing the obligations of the trustee. The principle of the “human beneficiary was first set out in the case of Morice v Bishop of Durham2. Since equity starts out in the form of a measure of “confidence reposed in some other” which imposes “a duty or aggregate accumulation of obligations” that connotes some beneficial interest3, therefore in the absence of beneficiaries with equitable interests in the assets of the trust, there will be no one in whose favor the Court can decree performance and therefore the trust will fail.4 Alternatively, when there is no clearly identified human beneficiary, a trust could be classified as a charitable trust where the beneficiaries will extend to an entire class of people rather than being restricted to specific individuals, thereby satisfying the beneficiary principle without a clearly identified human beneficiary. However, in order to qualify as a charitable trust, it must satisfy one of the four purposes spelt out in the case of Pemsel5, i.e, (a) advancement of religion (b) advancement of education (c) relief of poverty and (d) other purposes beneficial to the community. Alternatively, as specified in the case of Re Endacott, “a trust not being a charitable trust, in order to be effective must have ascertained or ascertainable beneficiaries.”6 In the case of Re Lipinski Oliver J draws a distinction in a testamentary disposition, between a purpose which is invalid (excluding tombs, animals and monuments cases), and a ‘people trust’ which is valid.7 Therefore, the beneficiary principle essentially invalidates trusts which are purpose trusts, unless it is (a) charitable (b) has ascertained or ascertainable beneficiaries or (c) is a trust of imperfect obligation, such as a trust for the upkeep of particular animals as in the case of Re Dean where the testator wanted his horses and hounds maintained for 50 years8 or Pettingall v Pettingall9, where the testator wanted a fund of 50 pounds a year set up to care for his black mare. The problem that arises with the beneficiary principle in the case of a non charitable trust is that it becomes impossible to transfer gifts to unincorporated associations through a trust. While the beneficiary principle is based upon the solid premise that a trust, in order to be enforceable, must have someone in whose favor it can be enforced, this has resulted in a restrictive application of enforcement of trusts. The use of a control principle rather than a beneficiary principle may be more useful in transferring gifts to unincorporated associations by making it enforceable only by its members. The use of the discretionary trust has therefore become more widespread in recent times, offering such advantages as (a) wide class of beneficiaries (b) not necessary to establish identity of all beneficiaries (c) facility to add more beneficiaries and (d) the facility to distribute trust assets to beneficiaries any time during the trust period. Discretionary trusts offer a viable alternative to the human beneficiary principle and this concept was first initiated in the case of McPhail v Doulton10 in which the Court held that a trust could not be held to be void for uncertainty of class and attributed a wider discretion to the trustees in the administration of the trust. Contrary to the earlier application of trusts, where the maxim of “equality is equity” was applied in distributing the contents of a trust fund equally among the beneficiaries, the Court held that the contention that execution of a trust is impossible without equal division does not hold good when trustee discretion can certainly be applied towards equitable distribution of assets and as a result, the Court constituted a discretionary rather than a resulting trust. This case is important because it established the highest priority in giving effect to the trust in accordance with the testator’s intentions, irrespective of class uncertainty. Another important case which further elucidated the power of the trustees to add or exclude beneficiaries after a trust has come into existence was that of Re Manisty. The principles established in administration of trust proceeds in accordance with the testator’s intentions by ascribing greater latitude to trustee discretion, has become the cornerstone in modern trust law, for administration of large trusts for financial and commercial reasons and causes. Since modern corporate trusts may include provisions for a wide class of beneficiaries, this calls into play trustee discretion and exercise of trustee responsibilities in executing the trust in accordance with the testator’s instructions. This has largely removed the earlier problems of settlers who ignored trustee duties and responsibilities to make the decisions about the trust on their behalf and the tendency of trustees to function as mere rubber stamps, blindly aping the instructions of the settler11. However, trustee functions and responsibilities are much more wide ranging. A trustee is expected to exercise his discretion in the best interests of the beneficiaries who have been identified in the trust, even in instances where such beneficiaries may not be clearly identified as specific human individuals, but where the testator’s intentions may be more vague and wide ranging. In such instances, it is the duty of the trustee to give effect to the wishes of the testator to ensure that the true beneficiaries are not disappointed with the proceeds of the trust. In the light of the above, it may be noted that while the beneficiary principle that existed in trust law is valid to the extent that a trust, in order to be administered, must identify its beneficiaries – there is no longer such a stringent requirement that definite human beneficiaries must be identified. This allows greater scope for corporate trusts where the testator may wish to donate the proceeds of the trust for a particular cause or class of individuals who cannot be identified definitely and indisputably; rather individual, bona fide trustee discretion will be called upon to correctly administer the proceeds of the trust to the right beneficiaries in accordance with testator intentions. Greater latitude and flexibility in the beneficiary principle has been introduced through wider use of the discretionary trust, especially in the case of corporate or large trusts that invoke a large class of beneficiaries. Bibliography * Commissioners for Special Purposes v Pemsel (1891) AC 531 * Gissing v Gissing (1971) AC 886 * Morice v Bishop of Durham (1804) 9 Ves 399 * McPhail v Doulton [1971] AC 424 House of Lords (sub nom Re Baden) * Moffat, Graham Trusts Law: texts and Materials Fourth edition, Butterworths. * Re Dean (1899) 41 Ch D 552 * Re Lipinski (1976) Ch 235 * Re Endacott (1960) Ch 232 * Pettingall v Pettingall (1842) 11 LJ Ch 176 * Turner v Turner (1984) Ch 100 Read More