Equity and Trust and Validity Discretionary Trusts - Essay Example

EQUITY AND TRUST Introduction A trust is a relationship exists between two people when one person called the trustee holds property under equity, whether personal or real, and whether by equitable or legal title for the benefit of another person who is known as the beneficiary or for some benefit object permitted by law. With trust there is the creation of equity. Equity can be described as being the fairness or justice.1 This is a body of law that evolved in the courts of chancery. The law of trust is one of the most crucial creations of the court of Chancery, which is responsible for the administration of the law of equity.2 The principle of Equity was developed as a result of the hash outcome as a result of rigid application in the common law rules.3 Equity is referred to as fairness and was a powerful source of law because this overcame problems found in the common law. This gives people more appropriate remedies than in common law. Over the years, equity has evolved which brings out the question of it has become more relaxed now than before. This essay takes a look at the development of the law to trust and equity from the common law. It then takes a look at trust, in particular the discretionary trusts, how it has developed and analyzing if the law has become more relaxed now as opposed to before the decision made in the case of McPhail v Doulton. History Since the introduction of common law, decisions were applied strictly and they were unfair. During the early days, there were not many remedies for people and the Chancery rule prevailed. Because of the many weaknesses experienced, there was the introduction of equity. Equity is based on the consciousness where the court correct errors found in the law in order to ease the conscience of individuals. Equity is discretionary and acts as a supplement to the common law and therefore, does not contradict it. A trust is an obligation where the property right grows from. Trust can be defined as a creature of equity.4 Trust was developed centuries ago and incorporated different types like discretionary trust and the fixed trust. Under the fixed trust, also known as “an interest in possession”, the share of a property under trust in which a beneficiary is to receive is fixed into the trust instrument.5 The interests of the beneficiaries are determined at the outset. In this type of trust, the trustee has the obligation to dispose the property under trust as per the terms of the trust which is not the case under the discretionary trust where the trustee may have some discretion on the exact value of the beneficiaries’ entitlement. This kind of trust is has become outdated and outmoded because of the changing circumstances. In discretionary trust or family trust, beneficiaries of trust funds do not have fixed interest or entitlement.6 The trustee has the right to determine who among his or her beneficiaries is to receive the income or capital of a trust and how much of the trust that the beneficiaries are to receive.7 When establishing a discretionary trust, there needs to be a settler who creates the trust through settling money and items on trust on behalf of the beneficiary. There also needs to be a trustee who is legally the owner of the trust property. This person transacts on the trust in his own name and acts in the best interest of the beneficiary. There is also the appointer who has the power to appoint and remove trustees in certain circumstances like death, and the beneficiaries who are the people benefiting from a trust. Discretionary trusts usually have a wide range of beneficiaries to individuals and companies. This trust can also respond to changing circumstances through the application of discretion depending on the situation. The case McPhail v Doulton [1971] AC 424, further change has come up in the law relating to trust and equity. The reasoning behind the development of discretionary trust is that this can respond to change in circumstances. A good example where this trust is most applicable in the case where the beneficiary decides to forego employment and education and live exclusively on the trust property. Under the discretionary trust, the trustee has the power to cut off the beneficiary until he becomes more self-reliant. Case summery and Analysis In the case of McPhail v Doulton [1971] AC 424, Baden had put a trust on behalf of any employees, officers, ex-officers, or ex-employees of the company or to their dependants and relatives in such amounts, on such conditions, and at such times. The issue arose as to whether the objects of the trust are uncertain as to avoid a disposition.8 The court decided that this was not the case because the test from Inland Revenue Commissioners v. Broadway Cottages. In the case of McPhail v Doulton [1971] AC 424 shows the law change on discretional trust. In this case, Lord Wilberforce challenges the correctness in the case of IRC v Broadway, on whether the trust that was constructed by Mr. Baden was invalid based on certainty of objects. Lord Wilberforce shifted from the strict condition set out in Re Gestetner and Broadway Cottage that requires for the beneficiaries to be listed in order to justify the application of discretionary trust. In this case, it was hard to determine if clause (9) constituted a power or trust and also determining the test for certainty of object in case there is trust. The court decided that there is a valid test. It also concluded that the test for discretionary trust would be the, ‘is or is not test’. In the case of McPhail v Doulton the House of the Lords took a more liberal approach to test the certainty of objects for discretionary trusts.9 In this case Lord Wilberforce re-stated the rule from Broadway Cottages, where he stated that trust cannot be valid unless it can be executed and that the court canbe the only executing it by ordering an equal distribution of the beneficiaries’ shares. Lord Wilberforce showed criticism in the test set out by IRC v Broadway Cottages Trust on the validity of discretionary trusts.10 He argued that the tests would make discretional trust fail because of the lack certainty of the objects. He further said that this test should be ignored and instead be replaced by the test that would be valid if it is ascertained if an individual is a member or not of a class. He also criticized the fact that the rule made in IRC was only applicable in cases where discretional trust is a family-style trust where the class of those who are potential beneficiaries was small. This is inappropriate considering the change in the social functioning of the discretionary trust. The classification of certainty of a trust is seen in the case of Knight v. Knight.11 Moffat considers Lord Wilberforce dicta, he sees a wide range of distinction between a valid test and a trust power. He believes that each should not use different tests. He stated that it is not clear from the words of Lord Wilberforce. The is and is not test for certainty After the decision in the case of Mcphail v Doulton [1971] AC 424 by the House of Lords where Lord Wiberforce restated the test for certainty of objects in connection to a discretionary trust, its popularity rose sharply. The law of certainty of objects tests the discretionary trusts and powers in an individual ascertainability test, Lord Wilberforce saw each of this disposition in the case of McPhail v Doulton. 12 Lord Wilberforce restated the test for certainty of objects from the previous way where the trustee was expected to be able to draw up the complete list of those who may become beneficiaries or else the trust would be declared void. This test made discretionary law to be rigid. However, Lord Wilberforce in his judgement, he provided that the trust is valid even if any person described as the settler is in or out of the class. This is because no person under the discretionary trust can claim to have the title of any asset under the trust before it is distributed. The test for certainty also looks at who the beneficiaries are in the trust. In order to analyse this, it is crucial to look at individual kinds of trusts that include the discretionary trust, fixed trusts, and powers. The easiest to dispose off, is the fixed trust where there are no discretions as to the individuals or individuals or the beneficiary interests. The only test here is drawing the list of all the beneficiaries as in the case of IRC v. Broadway Cottages. 13 The test comes under criticism when looking at discretionary trust. This is where Lord Wilberforce showed criticism in the test set out by IRC v Broadway Cottages Trust on the validity of discretionary trusts.14 He argued that the tests would make discretional trust fail because of the lack certainty of the objects. He further said that this test should be ignored and instead be replaced by the test that would be valid if it is ascertained if an individual is a member or not of a class. The ruling of Lord Wilberforce has made the law more relaxed and has increased the fairness of decisions made. Conclusion It is clear that a trust is a relationship exists between two people when one person called the trustee holds property under equity, whether personal or real, and whether by equitable or legal title for the benefit of another person who is known as the beneficiary or for some benefit object permitted by law. 15 With trust there is the creation of equity. In discretionary trust or family trust, beneficiaries of trust funds do not have fixed interest or entitlement. Discretionary trusts usually have a wide range of beneficiaries to individuals and companies. This trust can also respond to changing circumstances through the application of discretion depending on the situation.16 Under the fixed trust, the share of a property under trust in which a beneficiary is to receive is fixed into the trust instrument. In this type of trust, the trustee has the obligation to dispose the property under trust as per the terms of the trust which is not the case under discretionary trust where the trustee may have some discretion on the exact value of the beneficiaries’ entitlement.17 This kind of trust is has become outdated and outmoded because of the changing circumstances. Lord Wilberforce showed criticism in the test set out by IRC v Broadway Cottages Trust on the validity of discretionary trusts.18 He argued that the tests would make discretional trust fail because of the lack certainty of the objects. He further said that this test should be ignored and instead be replaced by the test that would be valid if it is ascertained if an individual is a member or not of a class. He also criticized the fact that the rule made in IRC was only applicable in cases where discretional trust is a family-style trust where the class of those who are potential beneficiaries was small. This is inappropriate considering the change in the social functioning of the discretionary trust. The classification of certainty of a trust is seen in the case of Knight v. Knight.19 After the decision in the case of Mcphail v Doulton [1971] AC 424 by the House of Lords where Lord Wiberforce restated the test for certainty of objects in connection to a discretionary trust, its popularity rose sharply. The law of certainty of objects tests the discretionary trusts and powers in an individual ascertainability test, Lord Wilberforce saw each of this disposition in the case of McPhail v Doulton. 20 The test for certainty also looks at who the beneficiaries are in the trust. In order to analyse this, it is crucial to look at individual kinds of trusts that include the discretionary trust, fixed trusts, and powers. The easiest to dispose off, is the fixed trust where there are no discretions as to the individuals or individuals or the beneficiary interests. The only test here is drawing the list of all the beneficiaries as in the case of IRC v. Broadway Cottages. 21 This analysis shows that the decision made by Lord Wilberforce has made improvements in the law concerning trusts. Bibliography Bray, J. (2012). A students guide to equity and trusts. Cambridge, UK: Cambridge University Press. 2012. p. 3. Dal, P. G. E., & Cockburn, T. (2008). Equity and trusts in principle. Pyrmont, N.S.W: Lawbook Co. Duddington, J. (2006). Essentials of equity and trusts law. Harlow: Pearson Education. Duddington, J. Equity and trusts. 2013. p. 24. Gardner, S. An introduction to the law of trusts. Oxford: Oxford University Press. 2011. P. 152. Gartside v IRC [1968] AC 553. IRC v Broadway Cottages Trust [1955] Ch. 20 (CA). McPhail v Doulton [1971] AC 424. O.A. J. (1996). Trends in contemporary trust law: [papers presented at the First International Conference on Trust Law held in Cambridge, United Kingdom, on Jan. 6-7, 1996, by the Faculty of Law, University of Cambridge]. Oxford: Clarendon Press. 1998. p. 123. Stone, R. (2011). The modern law of contract. Milton Park, Abingdon, Oxon: Routledge. Virgo, G. The principles of equity and trusts. Oxford: Oxford Univ. Print. 2012. p. 9. Read More