Equity and Trusts - Case Study Example

Problem Question When a trust is created through a will, the terms of the trust must be sufficiently certain in three aspects (a) certainty of the intention to create a trust, which will be inferred from the conduct of the parties and the circumstances1 (b) certainty of the subject matter of the trust, so that it is possible to identify precisely which property is held on trust2 and (c) certainty about who the beneficiaries of the trust are.3 This must be applied to the provisions of Gretel’s will, to determine which of the specified allocations will constitute a valid trust which can be implemented. For instance, Gretel states that her friend Polly is to get her assortment of porcelain dolls, but ultimately, these dolls are to be shared among Gretel’s “nearest and dearest” according to her expectation, hence Polly is only a trustee for a trust comprised of Gretel’s nearest and dearest who are to receive the dolls. The class of beneficiaries in this case may be held to be unclear, because it may not be possible to draw up a complete list of all the beneficiaries4 and there may also be problems of administrative unworkability5 as far as this provision is concerned, due to the necessity to identify who would be considered as Gretel’s nearest and dearest from her perspective while she was making out her will. According to Hudson (2005), the manner in which equity functions is by mitigating the “rigor of the common law so that the letter of the law is not applied in such a strict way that it may cause injustice.”6 He states that equity applies the doctrine of acting in personam upon the conscience of the defendant; as a result, the major factor that courts are required to consider is whether or not an individual has acted in good conscience.7 Trust law is also based upon the equitable principles of acting on the basis of conscience, however where trusts develop in commercial transactions, certainty is a major requirement; as a result the doctrine of precedent has assumed importance in the application of equitable principles8. In Aurora’s capacity as a trustee of Gretel’s estate, she will be expected to administer the estate in accordance with the provisions of Gretel’s will, however when there is uncertainty, then the validity of the trust itself may be questioned. In the case of Westdeutsche Landesbank v Islington LBC9 Lord Browne Wilkinson also stated that equity is based upon the conscience of the person who acts as a trustee. On this basis, the trustee is required to carry out the specific purposes spelt out in the vesting of property. However, it also prevents a trustee from acting unconscionably on the basis of literal interpretation of a statute. Since Aurora is the appointed trustee of Gretel’s estate, she is required to carry out the specific provisions that are spelt out in Gretel’s will; however these provisions cannot be interpreted literally if it results in an unconscionable outcome. One notable aspect that could be held to be unconscionable in this case is the requirements on distribution of musical instruments by Cinderella who is Gretel’s cousin. As a result, she becomes an “absolutely entitled, sui juris beneficiary10 with some right to title in Gretel’s property, i.e, in this instance the supplies and toys, etc in her shop. Gretel’s will falls into the category of a protective trust, where a beneficiary’s vested title interest in the property is being eschewed. For example, Gretel’s will states that the primary beneficiary of her entire collection of musical instruments is Hansel rather than Christine who is a blood relative with some proprietary rights as an absolutely-entitled beneficiary. However the will further states that Christine may be entitled to the instruments if Hansel fails to carry out the terms of the will; therefore ultimately, there is no benefit that accrues to her because the instruments must be distributed. The question of whether or not Aurora will have the authority to carry out such a provision in the will does arise, because as an absolutely entitled beneficiary, Christine can direct the trustee in dealing with the contents of the property, i.e, the toy shop. Christine has vested interests in the property, which cannot be ignored. The principles of Gretel’s trust mandating distribution of the instruments, is equivalent to a denial of proprietary rights in the property for Christine, since this is the only provision that has been made in favor of Christine. Trusts resulting in such denial of proprietary rights to an absolutely entitled beneficiary were held to be unacceptable and non permissible in the case of Saunders v Vautier.11 Therefore, Aurora will have to take into consideration the fact that if the Court holds Gretel’s will to be unacceptable because it constitutes a protective trust, then her rights as a trustee of Gretel’s estate will be dependent upon Christine’s input, because Christine can direct her in how to deal with the contents of Gretel’s estate. However, one important aspect that must be considered in regard to Christine’s beneficial right and interest in Gretel’s property is her absence since two years, which may negate the principle that a beneficiary under a trust must be ascertainable and existent. When there is a problem in locating the beneficiary of a trust, it will not necessarily invalidate the trust12, but it does place difficulties in the way of locating Christine and ascertaining property rights that she will be entitled to. In the case of Re Endacott13 the Court stated that there is no principle which has greater authority than the requirement for existence of a beneficiary. In the case of Leahy v Attorney General for NSW14 it was held that a trust which does not satisfy the beneficiary principle on the basis of a literal interpretation of its provisions will fail and may be invalidated. On this basis therefore, literally interpreting the provisions of Gretel’s will, Cinderella has literally not been included in the will because the first right over the musical instruments goes to Hansel and it is only if Hansel does not carry out the distribution to school children in Denmark that Christine becomes eligible to receive them. Moreover, applying the will provisions literally, Christine must be physically present or be traceable so that she can make the necessary arrangements to distribute the instruments to the school children in Denmark. While the class of ultimate beneficiaries in this case is ascertainable, i.e, school age children in Denmark, the absence of Christine makes it difficult to carry out the disposition of the instruments to the primary beneficiary in this case, i.e, Christine. The question of uncertainty in the class of beneficiaries also arises in the case of the residue of the estate for which Aurora has been made the trustee. These beneficiaries are identified as those who frequently purchased items from the store and derived pleasure from seeing the toys. This includes a subjective element which it is difficult for a trustee to effectively determine. Moreover, it also creates a problem for Aurora, in that any of Gretel’s previous customers can demand items from Gretel’s estate and contest Aurora’s distribution. The number of beneficiaries is potentially such a large group that it may be difficult to execute and for this reason, may fall under the category of a trust with an abstract purpose. While Courts have held trusts to be abstract because there is no beneficiary to enforce the trustee’s obligations15 in this case it effectively leaves a large and indeterminate group of beneficiaries who can petition the court for an enforcement of Aurora’s obligations as a trustee to distribute the residue of the estate to them. The courts have validated those trusts where there is a person or group of persons who can be identified as controlling the trust by bringing matters to court.16 In this instance, Aurora becomes the recognized trustee according to the provisions of Gretel’s will, but due to the fact that this will may be held to be a protective trust in that it does not take into account Christine’s rights as a fully entitled beneficiary, it could create a problem for Aurora later if Christine appears and demands that her rights as a beneficiary be recognized. This will allow Christine some say in how the proceeds of the trust are to be allocated because her rights in the property have not been recognized. If Aurora chooses to rely on the fact that Christine is not currently traceable and go ahead with the disposition of the contents of the estate in accordance with Gretel’s will, it may be challenged later, it could still create problems because she will be disposing of the residual estate on the basis of her own discretion rather than allowing for Christine’s property rights to be recognized. In conclusion, it must be stated that Gretel’s will presents several problems. There are some dispositions that are clear and can be validly made, such as the three antique teddy bears for Gretel’s three grandsons and one rocking horse each to Gretel’s old business suppliers. However, at the outset, Aurora will have to determine if there are any other members of Gretel’s family, apart from Christine who would also classify as fully entitled beneficiaries who can dispute the contents of the will. Moreover, the dispositions in the will are also lacking for want of certainty in some aspects that have been identified above; therefore these elements may be the subject of dispute. It appears likely that there could be many claims made on Gretel’s estate due to the diffused and wide ranging base of beneficiaries that has been identified in the will. Gretel needed to exercise greater care in formulating her will. As it stands, it allows room for several disputes that may arise because it has not provided adequately for family members and others who may be fully entitled as beneficiaries to receive the primary proceeds of the estate. In view of the absence of such provisions, it was necessary for Gretel to be more specific in allocation and distribution of the proceeds of the estate. Furthermore, there is only one beneficiary or set of beneficiaries that can be identified for a particular item, just as one trustee/s may be identified for one estate. But in Gretel’s case, Polly will also be a trustee for the porcelain dolls, Hansel/Christine for the musical instruments and Aurora for the rest of the estate. This creates complications in terms of administration of the estate. There cannot be multiple trustees for the proceeds of one estate, since there is scope for disputes and disagreements to occur. There is also scope for disputes to arise from the beneficiaries, who belong to a diffused; wide ranging category as identified in Gretel’s will. Therefore, Gretel should have prepared her will with a clearly identified trustee to manage the proceeds of the entire estate. The final class of beneficiaries for the porcelain dolls is Gretel’s nearest and dearest and these should have been clearly identified. Similarly, the beneficiaries for the rest of the estate should have also been more clearly identified. However, the most important aspect in which Gretel’s will is lacking is in failure to provide adequately for her family members. This lays the will wide open to lawsuits from other family members who could contest its provisions and the manner in which Aurora is to administer the estate, since these fully entitled beneficiaries also have the right to some say in how the estate is managed. Rather than spelling out beneficiaries for certain properties and requiring those beneficiaries, i.e, Polly and Hansel/Christine to make distributions to further beneficiaries, it would have been better for Gretel to spell out the final class of beneficiaries directly, so that one trustee specified in the will can take over the responsibility of making the necessary allocations. In this way, Gretel could have avoided many of the problems of uncertainty arising out of the present will. In the event she specifically did not want her family members to have any rights to her property, a clause in the will laying out this condition would have negated any claims that other family members might have had and made the process of administration of the will simpler to execute. Bibliography * Hudson, Alastair, 2005. “Equity and Trusts”, Cavendish Publishing Ltd Cases cited: * IRC v Broadway Cottages Trust (1995) 2 WLR 552 * Leahy v Attorney General for NSW (1959) AC 457 * McPhail v Doulton (1970) 2 WLR 552 * Paul v Constance (1977) 1 WLR 527 * Re Denley (1969) 1 Ch 373; Re Lipinski (1976) Ch 235 * Re Endacott (1960) Ch 32 * Re London Wine Co (shippers) Ltd (1986) PCC 121 * Re Gulbenkian (1968) Ch 126 * Saunders v Vautier (1841) 4 Beav 115 * Westdeutsche Landesbank v Islington LBC (1996) AC 669 Read More