Trust and Equity - Knight v Knight - Essay Example

Trust and Equity Clause a) A testamentary trust was created by Diablo, and Bertrand Brand was made its trustee. The latter had to hold the paintingsfor Diablo’s sister Tiana. Diablo expected Tiana to deliver the paintings to his brothers Pedro, Marco and Antonio. Pedro was to have the first choice in selecting two of the paintings from a total of six. However, Pedro died prior to exercising his choice. For assessing the validity of the trust, the following issues have to be considered. In Knight v Knight,1 the court stipulated that three elements have to be present for establishing a valid trust. The first of these is the certainty of intention to create a trust. The second relates to the certainty of the subject matter. This requires a clear description of the property involved and the related beneficial interests. The last relates to certainty of objects or specification of the beneficiaries of the trust. Charitable trusts are not required to satisfy this last requirement.2 With regard to discretionary trusts, individuals who can benefit from a discretion, are initially beneficiaries as they are the possible objects of a power of appointment. However, it should be possible for the trustee to establish unambiguously, as to who is encompassed by such power of appointment. This requires certainty of criterion. In other words, the court should be able to determine with certainty whether any specific person is within the range of benefits.3 The fundamental consequence of having a trust is that it imposes a binding obligation on the trustees. In Lambe v Eames, the court held that a trust was not created, merely due to the presence of precatory words.4 In Adams v Kensington Vestry, a husband made a gift to his wife that was for her absolute use.5 The court held that a trust was not created by a testator who gave his entire property to his wife, with the understanding that she would do whatever was necessary regarding the disposal of the property. This was to be done between the children either during her lifetime or upon her demise by means of a will.6 Moreover, the court opined that the entire will had to be interpreted, although confidence could create a trust. As such, the trust relationship has to be expressed in sufficiently certain terms, so as to enable the trustee to carry out his duties. Moreover, trustees should be aware of their obligations under the trust. Strictly speaking, the settlor cannot impose a duty upon a trustee that is legally unenforceable due to its ambiguity.7 Trustees are provided with a measure of protection due to certainties. In Boyce v Boyce, a will served to create a fixed trust. It was comprised of two houses for two beneficiaries. One of these beneficiaries had to select the house that she wanted and the other was to be bestowed upon the remaining person. However, this person died prior to selecting the house. The court held that the trust had failed, because there was uncertainty regarding the objects, namely the houses.8 As such, in Boyce v Boyce, the failure to exercise a choice regarding the property by the first beneficiary resulted in the failure of the trust on grounds of absence of certainty of subject matter. In Palmer v Simmonds,9 a trust failed for uncertainty, as the settlor had declared that the assets were to be the bulk of his estate. In our problem, Antony and Marco’s interests cannot be ascertained until Pedro exercises his choice. However, Pedro died, prior to exercising his choice regarding the paintings. Pedro’s death, before selecting the paintings results in the failure of the trust due to lack of certainty of subject matter. Clause b) In our problem, Diablo had created a discretionary trust in favour of Marco, in order to distribute his shares in DiLux Limited to those whom he had outbid while obtaining paintings in auctions. The decision in McPhail v Doulton makes a trust valid, if a substantial number of the potential beneficiaries are ascertained. As such, the House of Lords had ruled in McPhail v Doulton that it was not necessary for trustees to consider every possible claimant. It was sufficient if it could be determined whether any given individual was a member of the class. The list test is always applied with regard to certainty of objects. This test determines whether a comprehensive list of all objects can be drawn up by the trustees. In addition, in IRC v Broadway Cottages Trust,10 the trustee held property upon trust, with respect to applying the income for the benefit of any or all members of a class of objects. It proved to be impossible to determine all the members of this class of objects. However, given a specific individual, it was possible to determine whether that person was a member of that class. The court held that this trust was void for uncertainty of objects.11 In our problem, a substantial number of potential beneficiaries can be identified from the list of auction participants. Consequently, the trust is valid and the share amount can be distributed among the potential beneficiaries, at the discretion of the trustee. Clause (c) Clause (c) of the will is valid, since it favours the Disabled Artists’ Foundation. In this problem, clause (a) of the will becomes invalid, due to uncertainty of subject matter. Pedro had died prior to selecting the paintings; hence, the paintings to be held on trust for the remaining beneficiaries of the trust, cannot be determined. This invalidates the trust and these paintings will be transferred to Bertrand Brand on trust for the Disabled Artists’ Foundation. Clause1– Deed of Settlement In our case, the beneficiaries in Diablo’s deed of settlement are the illegitimate offspring of Diablo. Moreover, in a fixed trust, distribution of assets is infeasible without ascertaining the comprehensive list of beneficiaries. It is necessary in a fixed trust, for the trustees to be able to compile a complete list of the beneficiaries. This was the ruling in Inland Revenue Commissioners v Broadway Cottages Trust.12 From this requirement it follows that trustees should be able to explicitly declare as to who is a beneficiary. In the absence of such certainty, the trust is considered to have failed on account of lack of certainty of objects. In such instances, the property will be held on trust, by the trustees, for the original settlor, under a resulting trust.13 In OT Computers Ltd (in administration) v First National Tricity Finance Ltd and others,14 the claimant company beseeched the court to establish the identity of the beneficiaries of trust accounts. These accounts had been opened with the intention of servicing the payment of customer deposits and the payment of amounts to the urgent suppliers. The court held that the company was the beneficial owner of the funds. This was to the extent to which the company had not created, by the trust declaration, beneficial interests in favour of the beneficiaries.15 In Paul v Constance, the court held that an intention to create a trust could be deduced from the conduct of the donor. This case involved a dispute as to whether the separated but not divorced wife or the cohabitee of an individual was entitled to the balance available in the individual’s bank account after his demise.16 That person had instructed the bank to permit the cohabitee to withdraw money from the bank account with his permission. This account was in the sole name of that individual. He had repeatedly told the cohabitee that the money was theirs. In addition, they had also deposited amounts from winnings into this account. The court held that these acts were sufficient to infer that a declaration of trust regarding the bank account had been made.17 The description of objects or likely beneficiaries, on being done with some degree of definiteness, any ambiguity that could arise between them could be addressed by the discretion provided to the trustee. In Brydon v Samuel, the trustee had been granted the discretion to distribute property amongst the Liberal associations of the UK. This was deemed to be a trust of imperfect obligation.18 However, in Morice v Bishop of Durham, there had been no clear indication of the objects or beneficiaries. The court held that there was a resulting trust in this case. In this case a bequest had been made to the Bishop of Durham to be disposed of at his discretion.19 This was frustrated by Lord Edon. Moreover, in Yeap Cheah Neo v Ong Cheng Neo, it was held that a discretionary trust created for indefinite persons had failed.20 Referring to the individual ascertainabilty test, Megaw LJ opined in McPhail v Doulton21 that this test was complied with whenever it could be stated with respect to a substantial number of objects that they belonged to the trust.22 Consequently, the trust is rendered invalid. In our problem, the list of beneficiaries for the deed of settlement can be prepared with the help of Tiana, since she is aware of all the children of Diablo. Moreover, Diablo used to support the children regularly through his bank accounts. Based on the decision in Paul v Constance, an intention to create a trust can be deduced from Diablo’s bank transactions favouring his children. An exhaustive list of beneficiaries can be prepared using this information, in conjunction with information provided by Tiana. Hence, the trust will be valid. Bibliography — — ‘OT Computers Ltd (in administration) v First National Tricity Finance Ltd and others’ (LexisWeb.co.uk, May 2003) accessed 28 November 2013 — — ‘The Three Certainties’ (Oxbridge Notes, 2013) accessed 28 November 2013 Adams v Kensington Vestry [1884] 27 Ch D 394 Atkins S, Equity and Trusts (Routledge 2013) Boyce v Boyce [1849] 16 Sim 476 Brydon v Samuel [1933] Ch 678 Inland Revenue Commissioners v Broadway Cottages Trust [1955] Ch 20 Knight v Knight [1840] 49 ER 58 Lambe vs. Eames [1871] 6 Ch App 597 McPhail v Doulton [1971] AC 424 Morice v Bishop of Durham [1805] EWHC Ch J80 Murphy T P, ‘Trusts and exchange control’ [1982] 11 Australian Tax Review 71 OT Computers Ltd (in administration) v First National Tricity Finance Ltd and others [2003] All ER (D) 118 Palmer v Simmonds [1854] 2 Drew 221 Paul v Constance [1977] 1 WLR 527 Ramjohn M, Beginning Equity and Trusts (Routledge 2013) Watt G, Equity and Trusts Law Directions (Oxford University Press 2012) Welstead M and Edwards S, Family Law (4th edn, Oxford University Press 2013) Yeap Cheah Neo v Ong Cheng Neo [1875] LR 6 PC 381 Read More