Law of Trusts and Equity - Case Study Example

Discretionary trusts Peter’s next of kin are contesting his will leaving his residuary e to the of Huddersford, where the officers of the University are to use the money for the benefit of the ex-students. The LPA1 has established certain formality requirements that must be met, such as that of bequests being spelt out in writing and duly attested. Therefore trust law has developed in such a way as to require certainty of intention, subject matter and object, as laid out in the case of Knight v Knight2 by Lord Langdale on the basis that no person is to be deprived of his or her property, nor any decision made about the disposition unless there is certainty of the intent of the testator and that the formality requirements have been adhered to as much as possible. In the case of Peter’s kin, the primary concern that arises is the disposition of their equitable interest in Peter’s estate. Therefore, if Peter’s next of kin wish to contest the will, then the Courts will first of all look into the certainty of objects in order to determine whether it is a fixed trust or a discretionary test. Peter’s will satisfies the formality requirements and is therefore a valid one, however if the trust that has been set up Peter in favor of the University of Huddersford fails the certainty of objects test, then the estate will automatically revert to Peter’s estate and therefore his next of kin may have a claim to it. If a trust is to be determined to be a fixed trust, then it must be constituted in such a manner that all the members of the class are clearly known and identified. However, in a discretionary trust, the trustees can pay out incomes from the trust at their discretion and may have a wider range of powers at their disposal in order to act to the full benefit of the beneficiaries. Therefore, in Peter’s case, the qualification as a fixed trust would require a clear identification of beneficiaries and there must not be any uncertainty as to the members that are to be included within that particular class. In Peter’s trust, the class has been defined as the ex-students and descendants of the ex-students of the college of Halifax of the year 1975. But there is the clause in the will that states that the money from Peter’s estate is to be applied at the absolute discretion of the officers of the University of Huddersford. Therefore this raises the issue of ascertainability of the class and the limits of exercise of power of the trustees under a discretionary trust. The case of McPhail v Doulton3 is one of the most important ones that clearly set out the limits for a discretionary trust and what would constitute a discretionary trust. Prior to McPhail, in the case of Re Connor4 it was found that when the class of beneficiaries had been stated as close friends, then the objects of the trust were uncertain because such distribution was to be made by the trustee at his/her discretion. The armchair principle was laid out in this case, wherein the dissenting opinion stated that in order to determine certainty in a trust, an executor of an estate needs to sit in the chair of the testator before determining who the testator would have considered his close friends. The case of McPhail v Doulton which followed established that a discretionary trust would be valid when it may be established with certainty that any given individual is not a member of the class and this is the individual ascertainability test, derived from the powers of appointment. A notable exception that was laid out in this case in the establishment of a discretionary trust that passes the individual ascertainability test, is in the definition of beneficiaries – because if the class of beneficiaries was deemed to be so wide that it could not be assimilated into a class, then the discretionary trust would fail. However, in Peter’s case, the class of beneficiaries has been clearly identified as the ex students and descendants of the ex students who graduated in 1975. Therefore, in applying the principles laid out in the above cases to Peter’s will, it may be seen that the exception to the discretionary trust does not apply and the class of beneficiaries has been fairly well specified in the conditions of the trust. However, it may not be classified as a fixed trust because the members of the class are not constituted in such a manner that the beneficiaries are clearly known because the trustees have some discretion in the matter, in the exercise of their powers. However, in a discretionary trust, it has been established in the case of Re Baden’s Deed Trusts5 that it is not strictly necessary to show that a hypothetical person is within or without a class of beneficiaries. In the case of Peter’s residuary estate, through the power of appointment that Peter has endowed on the University of Huddersford, the authority to select the persons who are to benefit from the trust proceeds. He has stated clearly that the officers of the University are to have absolute discretion in the use of the proceeds but has also identified the beneficiaries as the ex students or descendants. It must therefore be determined whether the trustees (the officers of Huddersford University) have been given a power of appointment or a discretionary power. While a trust may be said to be imperative, a power is discretionary. There are three major differences that exist between a power of appointment and a discretionary power6: (a) under a power of appointment, trustees can decide whether to use their powers, but under a discretionary trust, trustees are obliged to use their powers. (b) The failure to perform the obligation placed upon them will render the trustees liable for a breach under a discretionary trust but not under the power of appointment. (c) In a discretionary trust, the beneficiaries have power unlike the power of appointment where the beneficiaries who may be potentially selected by the trustees do not have the power unless such provision is exercised in their favor. Therefore, in deciding whether or not a discretionary trust or a power of appointment has been created in order to determine how the trust is to be executed on behalf of the beneficiaries, the Courts literally adopt the armchair position advocated in the case of Re Connor7 and it will place itself in the position of the testator or donor in order to determine what was his or her intent. Therefore in this case, the Court is likely to examine what was the result that Peter intended to achieve and whether the underlying nature of the provision that has been made on the trustees is an obligatory one or whether it allows the trustees flexibility to decide whether or not to so execute it. In the case of McPhail v Doulton, in highlighting the subtle difference in a power of appointment and a trust, Lord Wilberforce stated that: “what to one person may appear as a power of distribution coupled with a trust to dispose of the undistributed surplus….may to another appear as a trust for distribution coupled with a power to withhold a portion and accumulate or otherwise dispose of it.”8 In Peter’s case, it may be noted that although a class of beneficiaries has been identified, it is distinctly stated that the trustees have absolute powers to exercise their discretion in allotting the proceeds of the trust. Therefore, the Court is likely to find that it is not a discretionary trust that exists in this instance, but rather a power of appointment. Although it makes little difference to an actual beneficiary in terms of his/her entitlement, however one important aspect is that if the power is not exercised within the stipulated time that is evident in the will, whether implied or direct, then the property will be transferred to those entitle din default of appointment, which in this case will be Peter’s kith and kin. Therefore, this issue will work in favor of Peter’s next of kin, because it implies that there is a great deal of legal flexibility that can be allowed in the case of a power of appointment, which does not exist in the case of a trust. The next issue that must be considered is whether there is the certainty of objects in the case of the power of appointment While there are many legal requirements that must be adhered to and many conditions satisfied in order for a valid trust to actually exist, this is not so in the case of a Power of Appointment. There are only two main conditions that must be satisfied. The first is that the power that is allowed under the trust must be not be such that it could be construed to be capricious – for example, some of the issues could be the selection of an invalid class, or a class of recipients which is silly or based upon irrelevant criteria, as was postulated by the Court in the case of Re Manisty’s Settlement9. The second is that it must pass the individual ascertainability test and that there must be no conceptual uncertainty about whether an individual is a member of a given class. This test was laid out in the case of Re Gulbankain’s Settlement Trusts10 in which it was established that when a class of beneficiaries has been identified as recipients, then the class must be clearly defined and all potential appointees who could be members of that particular class must be clearly identifiable as belonging to that class. The Court cannot make any guesses as to who the members of that class may be. While examining the issue of certainty, the court will be faced with two kinds of uncertainties: (a) evidentiary and (b) semantic uncertainty. In the case of evidentiary uncertainty, what may be unclear is which particular beneficiary is implied in the class and under such an instance, the certainty of object cannot be established. In the case of semantic uncertainty, the degree of uncertainty will arise because the language is not clear, in such an instance the Court will not attempt to interpret the meaning of the words, rather the lack of clarity will render the certainty of object unable to be established. In the absence of formality requirements, the Courts have also been willing to concede beneficial interest on the principle that any property can be the subject matter of a trust, provided it is properly specified such that beneficial interests can be identified. In the recent case of Hunter v Moss11, the issue at stake was a 5% beneficial interest in the shares that belonged to the defendant and the Court deemed that a valid trust had been set up on the basis of certainty of subject matter. Therefore, applying the above principles in the case of Peter’s estate, the issue that needs to be examined is whether any evidentiary or semantic uncertainty in the words that have been stated in Peter’s will, designating the beneficiaries of the residuary estate. It may be noted that this is not the case, because the beneficiaries are clearly identified as the ex-students of a particular year and their descendants. Therefore, no uncertainty exists as to class and therefore, the Court is likely to enforce the power of appointment that Peter has provided to the trustees. Therefore, Peter’s next of kin are not likely to have much of a chance to secure any of the proceeds of Peter’s residuary estate. Beneficial interest of third parties: In determining any interest that may exist for Peter’s next of kin, the guidelines set out in Timson’s Executors v Yerbury12, may be considered. Romer LJ laid out four methods that would constitute a disposition, by a person entitled to equitable interest in a trust, to a third party. The person can: (a) assign it to the third party directly; (b) direct the trustees to hold the property in trust for the third party; (c) contract for valuable consideration to assign the equitable interest to him; and (d)declare himself to be a trustee for him of such interest. The Courts have also exercised more flexibility in directing the disposition of trusts where there are fiduciary interests involved, such as for example in the case of Mettoy Pension Trustees Limited v Evans13 where the Court considered that the donees of power had to exercise that power. However, on an overall basis, it appears that in Peter’s case, the disposition that has been set up on behalf of the officers of Huddersford University is likely to stand and be construed as a power of appointment and it is only if the power of appointment is not exercised within a stipulated period that Peter’s kith and kin could stand a chance to acquire any of the proceeds of the estate. Bibliography Books/Legislation: * Section 53(1) (c) of the Land and Propetry Act * Moffat, Graham. Trust law: Texts and Materials, Cambridge University Press Cases: * Knight v Knight 1840 3 Beav 148 * Hunter v Moss (1993) 1 WLR 934 * McPhail v Doulton [1971] AC 424 HL * Mettoy Pension Trustees Limited v Evans (1991) 2 All ER 513 * Re Connor Estate (1970) CA * Re Baden’s Deed Trusts[1973] 3 W.L.R. 250 (C.A.) * Re Manisty’s Settlement [1973] 2 All ER 1203 (Ch.D.)). * Re Gulbenkain’s Settlement Trusts [1970] AC 508. [13] [1996] AC 421 * Timson’s Executors v Yerbury (1936) 1 KB 645 CA Read More