The Concept of Discretionary Trust in the Light of Social Changes - Case Study Example

Trusts: case study Case: I -- Discretionary Trust and test of certainty Traditionally trusts are created for a variety of purpose, such as e planning, tax planning, financing, investment, as well as charitable purposes, and a trust has an equitable obligation in relation to particular property and its beneficiaries. The fundamental obligation of all trustees is to act in the best interests of the trust, for its present and future beneficiaries, in the exercise of their trustee functions. The relevant statutory powers enjoyed under the general principles of trust law derive in part from case law and in part from statute, and these powers are to be found primarily in “Trustee Act 19251”. While considering the issue it is worth noting that both economic and social nature of trusts and the assets that are characteristically held by them are now very different from what they were when the Trustee Act 1925 was enacted. In addition there have been fundamental changes in the way in which investment business is being transacted now. It may also be seen that trustee legislation has not been kept up to date and the existing statutory default provisions have long since ceased to give the powers that trustees need to administer a trust effectively and are indeed generally regarded as seriously restrictive. Thus, it is essential to consider the concept of discretionary trust in the light of social changes and certainty of objects conceived by the testator as well as the objective that has to be fulfilled by the trustees. A ‘trust’ is commonly defined as an equitable obligation binding a person (who is called a trustee) to deal with the property over which he or she has control (which is called trust property) for the benefit of persons (who are called beneficiaries) for whom he or she may be one and nay one of whom may enforce the obligations. It involves the formal transfer of assets to a small group of people or to a trust company with instructions that they hold the assets for the benefit of others. Trusts have also been used to avoid or address problems in taxation and domestic matters. The trust documents states: who are responsible for looking after the gifted assets; who are to benefit; and any roles or conditions which the trustees and beneficiaries must adhere to. The basic principles underlying on the legislation of trustee’s powers are that it should operate only as a default, and it should not embody the best practices adopted by trust draftsmen, as the powers conferred on the trustees are based on the well-drafted trust deed. The obligations of trusteeship are “onerous”2 and in the absence of an express charging clause it may be unremunerated. The confidence relied upon and moral weight given to the trust and the trusteeship and operation of the trustees to be in breach of a trust has serious repercussions and significant impact on both the scope and the contest of the trust law principles. Hence, it may be difficult to find a person who is willing to act as a trustee, whether in respect of a trust created in the life time of the settler or one which arises under his or her will, and whether as first trustee or to replace one who has died or wishes to retire. In the case of Admas vs Kensington Vestry3 it was held that ‘in full confidence’ does not create a trust, which emphasises that a trust arises only when the intention of settler is certain. In a discretionary trust the trustees have discretion in the distribution of property. The trustee must distribute trust property in an exhaustive discretionary trust, whereas in a non-exhaustive trust the property part or whole of the trust property is left to accumulate, instead of distributing. It is the paramount duty of trustees to exercise their powers in the best interest of the present and future beneficiaries of the trust when the purpose of the trust is to provide financial benefits for the beneficiaries as the best interests of the beneficiaries are normally their best financial interests. Every trustee wishes to invest and manage the trust in the manner that is likely to secure the most effective results for the beneficiaries or for the purpose of the trust. The separation of the legal ownership and beneficial ownership is the unique characteristic of the trust concept as the trustees are the legal owners, but the beneficial owners are the beneficiaries. Although it has been said that legal nature of a corporate charity is not entirely clear it is in fact now apparent that such corporations are not “trustees,”4 though they are “analogous to them.”5 It may be seen that the law governing the powers and duties of trustees has not kept pace with social, economic and technological developments, particularly with changes in the conduct of investment business. This created a situation where trustees working under the trust documents make insufficient provision for handling trust investment, which obliterates fundamental obligations of trust. By giving more powers to appoint agents, nominees, and custodians to purchase land, to insure trust property, and to manage trust funds by professional trustees it will be possible to increase trustee investment opportunities. At this juncture it is essential to note that as a result of changes both in the way in which financial markets operate and the purpose for which trusts are now employed, the present law is no longer always adequate to enable trustees to administer a trust to the best advantage of the beneficiaries or the objects in the trust”.6 A trustee must consider the suitability of the kind of investment proposed and also the suitability of the particular investment proposed as an investment of that kind, after identifying the need for diversification of investment to the extent appropriate for the trust. It will be possible by appointing an expert trustee having special knowledge, experience or professional acumen than a person of ordinary talents. Generally, trust assets were invested in land, mortgage and government stocks, and a professionally drawn ‘trust instruments’ and ‘will’ includes powers which enable trustees to invest as if they were beneficial owners. In managing the investments of the trust the trustees require the services of agents and discretionary fund managers who will provide investment advice and will then execute their instructions, as for successful investment decisions have to be taken rapidly. The mechanism of appointing nominee or custodian for undertaking safe custody and management of trust assets is valuable because it facilities professional handling of trust assets. As far as investing in property and buying land as investment by a trust is concerned, the reason for treating it separately from other assets within the general power of investment has to be considered under the provisions of Settled Land Acts 1882 and subsequent amendments to it. As per Trust of Land and Appointment of Trustees Act 1996 (c.47) “as trust of land”7 means any trust property which consists of or includes land and “trustees of land” means trustees of a trust land. Section 3(2) of Trust of Land and Appointment of Trustees Act 1996 exempt a trust created by will from the provision of Section 3(1) for selling personal property by a trust, if the testator died before the commencement of this Act. Section 6, General powers of trustees of this Act also specify that for the purpose of exercising their functions as trustees, the trustees of land have in relation to the land, subject to the trust, all the powers of an absolute owner. It will be best suited for the trustees to utilize the property under will more profitably using Section 6 of Trust of Land and Appointment of Trustees Act 1996, in the event the testator died before operation of this Act. In the case under review, Beatrix’s will for creation of discretionary trust has to be analysed in the light of constitution and ability of trust to which the property was entrusted to be executed for the benefit of beneficiaries. A discretionary trust may either be exhaustive or non-exhaustive, wherein the trustees have the authority to distribute entire trust fund to the beneficiaries or to accumulate income. In a discretionary trust the objects are not given an interest in the property, but the trustees have the power to select beneficiaries and the amount of trust property that a beneficiary may receive. The trustees are required to decide the identity of beneficiaries from a class of objects and the corresponding interests which they may acquire. As Beatrix’s will envisages that the trust funds have to be allocated to members of black community, a class specified by the settler, the will has social ramifications and restricts discretion of trustees to identify beneficiaries from a particular class only. The nature of the will also mandates for a testamentary trust and makes it operational and effective only upon death of the settler. In addition, as the assets in the will is specifically property owned by Beatrix, the trustees naturally have to manage the property economically in order to attain the certainty of objects vested on the trustees. They must not put their personal interests before the duty to the principal beneficiaries and must not profit from their position as a fiduciary In the case of gifts made in will, as in the present case, it is crucial to analyse whether the language used by the testamentary character is ill advised, or chosen by a testator without him or her being aware of the legal complications involved in it. Since the will specify to use the assets and allocated it to members of black community, trustees should be scrupulous in handling the funds, as identifying beneficial members from a particular community shall also pose controversy. Testamentary dispositions of this nature are open to greater scrutiny than lifetime gifts, and the problems arise in identification of trust recipients. In IRC v Broadway Cottages and Re Sayer (1957)8 it was held that if it was impossible to list every member of the class where the trustee wanted to distribute the trust property among a limited section of a discretionary class such trust was liable to fail. If the gift is construed as being for the individual members of the association there will be identifiable beneficiaries in whose favour the court can enforce the obligations arising from the trust. Traditionally courts have held that unless there is certainty of object no trust relationship would subsist. In McPhail vs Doulton9 it was established that in the case of a discretionary trust there is certainty of object as it was possible to determine whether any given person was a beneficiary or not. In Beatrix’s will there is clear conceptual certainty, as the beneficiaries are black community, and thus the trustees may tell with certainty that a given individual is or is not a member of a class of objects. The UK case of Knight Vs Knight states that, for the validity of trusts there must be the subsistence of three10 certainties. These are certainty of intention, certainty of subject matter and certainty of objects. Thus, the trust is bound to qualify the test of certainty of objects of the will and consequential benefits distributed equitably. The consequential benefits and advantages which accrue to beneficiaries may take the form of benefits in kind or cash and the entitlement of individual beneficiaries should not be fixed in advance as the allocation of benefits are left with the trustees or to third party. It may further be stipulated that interests arise only if a specified contingency is satisfied and the trustees have the power to withhold allocations of benefit leading to accumulation of income. Drawing out a clear policy statement by trustees to give guidance on how the functions should be exercised in the best interests of the trust will ensure compliance with the policy statement of trust by all functionaries, and trustees and beneficiaries should exercise fiduciary relationship. This will fulfil the dream of Beatrix and the trustees will be successful in operating it and achieving its goal. Case: II Problems afflicting Law of Property: Ownership in unincorporated associations. Unincorporated associations play crucial role in social change and community development as is evidenced from the words of the Prime Minister, Gordon Brown11 in his forward to the Future role of Third Sector12 at the Heart of Society: In every part of our society voluntary organizations, community groups and social enterprises are making people’s life better, are fighting inequality and are creating a better environment for us to live in…. At the heart of our approach is the desire to support those thousands of small community organisations who play such a vital role [in] our society… Thousands of social enterprises are changing the decisions we make as consumers and delivering social and environmental outcomes using business approaches. The role played by ‘trusts’ with social motive are paramount and those who resort to unscrupulous mode of operation are an indelible mark on the society. An organisation outside the scope of charity which exist and operates for an altruistic purpose rather than for private benefits, without needing the permission of the state, should be controlled. A ‘trust’ is conceptualized as “a confidence reposed in some other”13 and the confidence so reposed gives rise to moral obligations to which the courts, aided by the legislature, have purported to develop legal parallels. The versatility and elasticity present in trust made it a lawyers’ device capable of serving a wide variety of purposes, used chiefly within the domain of private property transactions and institutions, and was particularly exploited in the context of preserving private family wealth. It may be seen that “majority of those who consciously use trust in a family context have been the minority of individuals and families who own capital to any significant extent.”14 The versatility of a trust is that while establishing a trust a founder could include specific aspects of property ownerships, such as nominal title, benefit, and control, which provide manipulating power to the founder. Further, the rights and obligations expressly created in a trust are equipped with effective equitable remedies and strengthened by a gamut of legal rules. In addition, it has stronger legal reinforcement, than other competing legal institutions. The term “unincorporated association”15 has no clear and exhaustive definition, being simply the collective name for associations which do not come within accepted legal categories of organisations such as partnerships and companies. An unincorporated association is formed when “two or more persons, by mutual understanding, are bound together for one or more common purposes not being business purposes,”16 each having mutual duties and obligations for the organization so formed. The association may be organized for profit or financial gain, or may take the form of a “no profit making organization”,17 and will have rules identifying responsibility for control of the organization and management of its funds, which can be joined or left at will. There are no restrictions on the type of activities that can be carried out by an association provided it is non-profit making. Non Profit associations may be incorporated, after fulfilment of specified registrations procedures, under the Companies Act, the Industrial and Provident Societies Act, the Friendly Societies Act or by Royal Charter. An incorporated entity is able to acquire, hold and dispose of property in its own name, has capacity to enter into contracts, can sue and be sued in its own name, has perpetual succession and is liable for its own tax. Whereas, an unincorporated association may hold land or property, as a subsidiary aspect of their activities, in which assets are normally vested in trustees. It has been said that there are three methods by which property can be held by an unincorporated association. First, property can be held by the members of the association as joint tenants. Second, property can be held by the members subject to their contractual rights and liabilities to each other as set in the rules of the association. The third method is it can be held on trust for the purposes of the association. The holding of property on trust for the members is often not clear. Problems affecting unincorporated associations are different18 from those encountered with other forms of plural ownerships, as they have little or no say about the general operation of trusts of land. As no specific body of law relates to associations as such and the rules applied are simply an application of the ordinary principles of the law of contract, property, and tort, and also governed with reference to the rules of the association, ownership in unincorporated associations are prone to manipulation by it members. Generally speaking, an unincorporated association has no existence separate from its members though it may make profit, its assets are vested with two to three trustees who will hold legal title in a fiduciary capacity for the use and benefit of society and its members. An unincorporated association, whether non-profit or for-profit, is not a separate legal entity as it is an aggregate of individuals, in many ways it has the characteristics of a business partnership. At the same time the term does not include joint tenancy, tenancy in common, or tenancy by the entireties, even if the co-owners share use of the property for non-profit purpose. The status of unincorporated associations as such, and the inability of its members to sue the association in tort is prone to develop problems leading to legal interventions from its activities of holding of property, gifts, devises, and bequests. Thus, legal advice is essential to ensure rights to property of trust members, depending on the condition whether the members hold the property on an implied trust for the fluctuating body of members or whether the members hold as joint tenants or tenants in common beneficially. The beneficiaries of a trust of land may enjoy their rights by occupying the land, and by taking its financial value. The land might be sold and the proceeds reinvested in other assets; or retained but rented out to tenants; or retained but mortgaged to secure a loan; or used by trust itself and enhance profitability, so as to produce income for the beneficiaries. The dominant power to decide how a beneficial right is to be enjoyed lies within the beneficiaries, though they have this power, only if they are all of full capacity and are unanimous about what they want.19 So, if the terms of a trust restrict use of land and the beneficiaries do not agree to dissolve the trust, the trustees must abide the provision of trust and opinion of trustees20. Section 2 (5) of the Trust of Land and Appointment of Trustees Act 199621, Trusts in place of settlements, prescribe that “No land held on charitable, ecclesiastical or public trusts shall be or be deemed to be settled land after the commencement,” even if it was or was deemed to be settled land before that commencement.” Section 3 (1) states that “where land is held by trustees to a trust for sale, the land is not to be regarded as personal property; and where personal property is subject to a trust for sale in order that the trustees may acquire land, the personal property is not to be regarded as land” It derives that an unincorporated association engaging in property management should ensure that the contracts dealing with land must be made in a formal way and/or in writing should be effective. As per Section 1(2) (a) and (b) of Law of Property (Miscellaneous Provisions Act 1989 (c.34) an instrument shall not be a deed unless “it makes it clear on its face that it is intended to be a deed by the person by making it or, as the case may be, by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed otherwise); and it is validly executed as a deed by that person or, as the case may be, one or more of those parties. Subsection 3 provides that an instrument is validly executed as a deed by an individual if, and only if it is signed by him in the presence of a witness, who attests the signature, or at his discretion and in his presence and the presence of two witnesses who each attest the signature22.” These provisions imply that trustees must act23 with degree of care and skill that the law requires. The scope for application of contract holding is more advantageous to solve property holding problems in unincorporated associations. The right of survivorship principle protects the interests of other members as the interest will accrue to other members on the death or resignation, in a property under contract holding. However, tackling the question of where the remainder funds go after the dissolution of unincorporated association is to be dealt with by applying Re Denley exception, and contractual obligations towards the members are removed. It is worth noting that an inherent disadvantage of ‘rights in rem’: that they damage the economy by making the property to which they apply less exploitable, and therefore less valuable. The ability to overreach beneficial interests on a disposition of trust property enables their in turn rem effect to be temporarily cancelled, undoing its capacity for damage. The provisions of Land Law and Trustee Act 1996, makes the land less marketable, as prospective outright buyer would need to deal with all the stake holders, and it is further exacerbated by the possibility of the sharers’ interest being alienated to new owners. It may be concluded that in not applying overreaching to non-trust rights—leases, easements, etc.—the law seems to have been persuaded of their net usefulness.24 Bibliography As emphasized in Flemyng v Hector (1836) 2 M&W 172. By the Trustee Act 2000 s 1(1) ‘such care and skill as is reasonable in the circumstances, having regard to (a) any special knowledge or experience that has or holds himself out as having, and (b) if he acts as trustee in the course of business or profession to any knowledge or experience that it is reasonable to expect a person acting in the course of that kind of business or profession. Definition given by Lawton LJ in Conservative Central Office v Burrell [1982] 1 WLR 522, as cited from Law reforms Advisory Committee for Northern Ireland. Explain each of the three certainties for the validity of a trust, and in each case give an example of an ambiguous situation which a Maltese court would: accept, and refuse a relationship as a valid trust and on what basis, retrieved 15 January 2008, . For Other legislations relating trusts see also Variation of Trusts Act 1958, the Charities Act 1992 and 1993, and the Pension Act 1995. Gardner, S, An Introduction to Land Law, London: Hart Publications, 2007, p. 297. Gardner, S, An Introduction to Land Law, London: Hart Publications, 2007, p. 283. HM Treasury: Cabinet Office, The future role of the third sector in social and economic regeneration, Final Report, 2007, retrieved 15 January 2008, . Law Reform Advisory Committee for Northern Ireland, Unincorporated Associations: Discussion Paper No. 9, retrieved 15 January 2008, . Moffat, G, Trusts Law: Text and Materials. London: Cambridge University Press, 1988, p.1. Moffat, G, Trusts Law: Text and Materials. London: Cambridge University Press, 1988, p.2. Office of Public Sector Information, Trusts of land, National Archives, 1996, retrieved 15 January 2008, . Office of Public Sector Information, Law of Property (Miscellaneous Provisions) Act 1989 (c. 34), 1989, pp.1-2, retrieved 15 January 2008, Picarda, H, The law and Practice Relating to Charities. 2nd edn, 1995, p.382. Principally problems relating to certainty of objects and the courts’ failure to allow purpose trusts. Sony Connect inc. Ramjohn, Mohamed. Source Book on Law of Trusts. 2nd edn.(on line) London: Cavendish Publishing See Liverpool and District Hospital for Diseases in Heart v Attorney-General (1981) Ch 193, p 209. The law commission, Trustees powers and duties, P. 7, retrieved 15 January 2008, . The remarks of Lord Hardwick in Knight v Earl of Plymouth (1747) Dick 120, 126:21 ER 214, 216 that “a trust is an office necessary in the concern between man and man, and which, if faithfully discharged, is attended with no small degree of trouble, and anxiety, it is an act of great kindness in any one to accept it” still hold true and valid, even after two and a half century. The Government defines the third sector as non-governmental organisations that are value-driven and which principally reinvest their surpluses to further social environmental or cultural objectives, it includes voluntary and community organisations, charities, social enterprises, cooperatives and mutuals. Read More