The Principle Distinction Between the Two Types of Trusts According to a General Principle of Law - Essay Example

1). Recent reports demonstrate that it has become increasingly common for the family home to be registered in the of one party usually due to ownership before marriage or cohabitation1. The changing dynamic of the family nucleus coupled with socio-economic variances shaping property ownership can be problematic on the breakdown of a family relationship whether in the context of marriage or cohabitation. The increase in cohabitation has also fuelled debate regarding the law’s approach to determining rights on subsequent relationship breakdown, and the rising divorce rate2 has increased the importance of effective legal mechanisms in determining ancillary relief proceedings3. The focus of this analysis is to evaluate the varying approach of the law with a comparative analysis with family law to the division of assets on relationship breakdown in cohabitation, consider the main defects of the current law and how far the 2007 Law Commission’s proposals in “Cohabitation: The Financial Consequences of relationship breakdown4” go towards remedying the gaps in the current law. I will also consider UK law in context of the Australian and Canadian approach to division of rights to the family home, which were also referred to in the Law Commission’s report. With regard to relationship breakdown, the difficulties and uncertainties surrounding rights to a family home have been traditionally dealt with through resulting or constructive trusts5. However, many commentators have criticised the courts’ wide interpretation to of established trust law principles in contradicting the purpose of the trust6. The difficulty that has exercised the courts in particular is the concept of contributions and the need to balance this so as to not apply discriminatorily. Traditionally, cases have had to address the pattern whereby the women have been homemakers, (with property registered in their partners’ name) looking after the children only to face the possibility of no proprietary rights to a property on subsequent relationship breakdown7. Whilst clearly unfair, the common law does not provide any protection and in such cases equity has sought to address the balance through resulting trust or constructive trust8. Resulting trusts usually involve contribution to the initial cost of the family home, which is registered solely in the name of another person9. Equity does not presume an outright gift, but rather a presumption that the contributing party intended to retain a beneficial interest in the property10 (despite no evidence of actual intention). Whilst this approach has been criticised theoretically as the imposition of an “artificial presumption11”, it is arguably a necessary approach to protect third party interests. However, the resulting trust will not cover a situation where one party has foregone a career and been a full time home-maker and in this case the constructive trust is relied upon. The leading case of Lloyds Bank plc v Rosset12 highlighted the essential requirements for the imposition of a constructive trust asserting its foundation in the common intention of the parties to share the properties. Lord Bridge further asserted in this case that “intention” could be express or inferred from conduct13. Furthermore, Lord Bridge highlighting the reasoning in Gissing v Gissing14 asserted the concept of detrimental reliance in order for there to be a constructive trust. Notwithstanding the widening interpretations of trust law to accommodate relationship breakdown, the constructive trust is limited by reluctance to acknowledge indirect contribution, which has worked primarily against women in practice15. Moreover, the courts’ approach has been positively inconsistent in relation to indirect contributions. Moreover, there is no consistent approach to what constitutes a “substantial contribution”, which is clearly evidenced in the approach to determining a beneficiary’s share in the proceeds of the sale under constructive trust16. Alternatively, the courts have been reluctant to extend the application of common intention constructive trust and “contribution” to cohabitation, with the result that cohabitees generally have had to rely on the resulting trust, which is limited to contribution at the time of purchase. However, it is submitted that this fails to address the modern reality of cohabitation and as asserted by Canadian legal academics “it is difficult to articulate a policy basis for distinguishing between married couples and common law couples17”. In contrast, the House of Lords and Court of Appeal have struggled to cope with cohabitation in the trust law context. For example, in the case of Oxley v Hiscock18 on the breakdown of a long-term cohabitation, the Court of Appeal held that the appropriate question was what would be a fair share to each party given their contributions to the property and not to infer intention regarding ownership as in first instance. Moreover the UK legal approach to cohabitee rights is further compounded by a comparison with the family law approach to distribution of assets on divorce. When a court is making decisions with regard to property and financial claims, section 25 of the Matrimonial Causes Act 1973 provides a detailed checklist of factors to be taken into account to assist the court in making its decision. Moreover, section 25(1) requires the child’s interests to be paramount and the usual approach regarding rights to the family home is to make a property adjustment order transferring the family home to the primary care giver until the children has reached majority19. Section 24(1) (a) of the MCA the courts enables an order for a complete transfer or a partial transfer (in any proportion) to be made20. Conversely, the court does not have such wide ranging powers in relation to cohabitees and a sole owner will continue to own the property notwithstanding a relationship breakdown21. If a partner has made contributions to the property under cohabitation they currently have to rely on the complex principles of constructive and resulting trust with no equivalent statutory right of occupation as is applicable to marital relationships22. A cohabitee’s position may be strengthened if a dependant child is involved, as a court order can be obtained to prevent sale23. Again it is questionable whether such an order is really in the best interest of the child where a relationship has broken down and a selective approach to protection of children based on whether they are a product of marriage or cohabitation is undesirable. By contrast, in the Canadian case of Pettkus v Beckers24, although the Supreme Court was not considering property legislation, the Court suggested policy changes and Dickson J asserted that “I see no basis for any distinction, in dividing property and assets between marital relationships and those more informal relationships which subsist for a lengthy period25”. Similarly, in the Australian case of Baumgartner v Baumgartner26, the High Court of Australia acknowledged that the common intention constructive trust was not always applicable and led to some undesirable results. The High Court asserted that even where the traditional concepts of common intention constructive trust were not satisfied, a constructive trust could still be imposed where failure to do so would be “so contrary to justice and good conscience27” that it could not have been permitted. The approach was justified as moving away from the contribution consideration and focusing on the trustee and whether it was unconscionable for the trustee to benefit. Whilst welcome in recognising the reality of modern relationship; the “unconscionable” test is still inherently limited by uncertainty of ad hoc judicial decisions. However, it is also arguable that the complex social dynamics of relationships necessarily require such an approach and both the Canadian and Australian authorities are to be commended in directly addressing the wide range of relationships covered by family breakdown, which in turn impact rights to the family home. In July 2007, the Law Commission published its long awaited report into the financial consequences of the breakdown of a relationship where the parties are cohabiting28. The Commission looked into the changes in society and acknowledged that the present system is “complex, uncertain, expensive to rely on and often gives rise to outcomes that are unjust”29. However, the Law Commission promised in it recommendations that it would offer a workable system to deal with the separation of cohabitants that would be a considerable improvement on the current law along with a fairer approach to asset division30. However, whilst welcome in acknowledging the need to address cohabitee rights relationship breakdown, under the Law Commission proposals, the reforms are not automatically applicable to all cohabiting couples and couples have to satisfy the living together for a significant period of time test and consider whether each party has made a “qualifying contribution”. Moreover, it is necessary to prove that one of the parties either retained a financial benefit because of the qualifying contributions or alternatively suffered an economic disadvantage because of contribution31. However the inherent problem of the proposed reforms is that they arguably the uncertainties of trust law with further ambiguity. Firstly, it is unclear whether indirect contributions are to be taken into account under proposals or whether they come within the definition of economic disadvantage32. Secondly, parties can enter into an opt out agreement from the financial relief provisions on the basis of the Law Commission’s acknowledgment that some parties specifically enter into cohabitation to avoid the financial consequences of marriage. Therefore, whilst the Law Commission report acknowledges the inherent difficulty in addressing the rights of cohabitants in relation to financial rights on relationship breakdown, it is disappointing in failing to adequately address how it considers the courts should calculate economic advantage or disadvantage gained by each party. In any event, it is submitted that the above analysis demonstrates that the current law of trust is not entirely appropriate to address the complex issues created by family breakdown, in particular cohabitation, which is becoming increasingly common. The Canadian and Australian authorities have expressly acknowledged this and it is recommended that the UK courts follow suit. However, whilst the Canadian case law opens up the application of constructive trust to cohabitation relationships and the Australian law widens its applicability to considerations of “unconscionability,” it is submitted that a general overhaul of this area of law is needed to address rights to the family home outside the limited confines of established trust law. Whilst the Law Commission report acknowledges this, it is difficult to see how the ambiguities of “qualifying contributions” and “economic advantage” will really differ in practice to the current trust law paradigm. A genuine approach outside the parameters of trust law would not only specifically address relationship breakdown, but would also promote legal certainty in avoiding ad hoc interpretation of existing trust law. 2) In order for there to be a valid trust, the trust must satisfy the three certainties rule. In the case of Milroy v Lord33, Turner LJ asserted that: “in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary, to be done in order to transfer the property, and render the settlement binding upon himself34”. Accordingly, there must be certainty of intention, objects and certainty of subject matter35. With regard to the current scenario, there is no issue regarding certainty of intention and the central issue is whether there is certainty of objects, which must be satisfied to validate the trust36. A valid trust must have “cestque tui trust” and must be able to establish who the beneficiaries are, whether the trust is fixed or discretionary37. In a classic fixed trust, the general applicable principle is that the trustees will have no discretion as to how to distribute the benefits to and between the beneficiaries. The traditional test was as extrapolated in the case of IRC v Broadway Cottages Trust38that it must be possible to make a complete list of all the beneficiaries of the trust, referred to as the “complete list test”39. However, in the current scenario, the terms of the trust provide discretion to the trustees to divide the trust “as they think fit” to “needy” relations. As such, the trust falls within the discretionary trust umbrella. A discretionary trust is very flexible and the trustees own the trust’s property on behalf of the beneficiaries40. In this case, the beneficiaries and entitlements to trust are not fixed, but determined by criteria by the settlor41. Traditionally, the discretionary trust was subject to the same test as fixed trust42however this was overturned in the case of McPhail v Doulton.43 In this case, the terms of the trust provided for division to be according to the trustee’s choices and not equally. Lord Wilberforce rebutted the presumption set out in Broadway Cottages regarding equal distribution among beneficiaries for validity of trust: “As a matter of reason, to hold that a principle of equal division applies to trusts such as the present is certainly paradoxical. Equal division is surely the last thing the settlor ever intended: equal division among all may, probably would produce a result beneficial to none44” Prior to the McPhail decision, in order for a discretionary trust to be valid, a whole list of beneficiaries had to be drawn up. However, in the McPhail case, the House of Lords restated the law, replacing the complete list test with the “in or out test”. Lord Wilberforce reformulated the law regarding certainty thus “can it be said with certainty that any given individual is or is not a member of the class”45. However, this has caused problems for example in the current scenario, the definition of “needy” is not defined and therefore it is inherently difficult to define who would satisfy the member of the class test. In the case of ReBaden No 246, on appeal the Court of Appeal, Stamp LJ adopted a rigorous test and stated that it had to be possible to determine with certainty that the individual was a member of a certain class. Moreover, in the case of ReBarlow47a testatrix had left instructions to her executors to permit her artwork to solely be purchased by “friends of mine”. Browne Wilkinson determined that the appropriate test in this case was whether it was possible to determine with certainty whether one or more persons qualified as “friends of mine,” even if it would be impossible to make such a determination in the general case. As such, this case seems to suggest that the class does not need to be conceptually certain itself. If we apply this by analogy to the current scenario, the trust is stated to be for the benefit of my “relatives that are needy” and is therefore subject to a condition precedent. In line with the rationale in Re Baden No 2 and Re Barlow, it would seem that the appropriate test is whether one or more persons qualify as relatives that are needy. If so, the trust will be valid as a discretionary trust on grounds of the in and out rule. Alternatively, if the trust stated that “my trustees to be the sole judges of whether my relations are needy or not” then it wouldn’t alter the validity, provided the relatives could demonstrate they were a member of the class on the McPhail in and out test. However, if this is the case it is further evident that as a discretionary trust, this is a non-exhaustive discretionary trust with no drawn up complete list of beneficiaries. As such, the beneficiaries under the trust can only require that if the trustees exercised their discretion they exercised it properly and they cannot rely on the rule in Saunders v Vautier48to terminate the trust. 3) In advising Dilys, it is necessary to consider the validity of the will. The original will left the smallholding to her. Moreover, there was no contingency requirement in this case and the testamentary trust in the wills was created stating that Dilys would receive ownership of the entire smallholding on the death of the survivor. As such, as soon as the trust was created, Dilys owned the interest in the property in remainder.49Accordingly, this constitutes a real interest at the time of creation. Moreover, as a fixed trust there is no issue regarding the validity of the trust on the three certainties rule. To this end, it would be appear that as Dilys had a vested interest in the property in remainder, upon sale of the property, Megan holds the proceeds of sale on trust for Dilys and therefore Megan is in breach of trust in respect of the proportion of funds representing the value of the smallholding that has been given to the Wrexham cats home. This further raises the issue of validity of Megan’s new testamentary trust and it is necessary to consider whether legacy may take effect as a valid trust for charitable purposes, or if not as a non-charitable purpose trust50. The principle distinction between the two types of trusts is that the former is prima facie valid and as a general principle of law, non-charitable purpose trusts “are void however, outward-looking and beneficial the purposes might be51” and a “trustee must be subject to the supervision of a human beneficiary with a legal interest in performance of that duty52”. However, there have been a limited number of cases in which purpose trusts without human beneficiaries have been upheld53. The legal definition of charity for the purpose of charitable trusts has developed on an ad hoc basis and has been criticised as being “riddled with anomalies” with no statutory definition of charity54. The general principle established by Lord Macnaghten in Commissioners for Special Purposes of Income Tax v Pemsel55, highlights four divisions of charitable trusts as: “trusts for relief of poverty; trusts for the advancement of education, trusts for the advancement of religion and trusts for other purposes beneficial to the community”56. However, due to the piecemeal application of the definition of charity, the validity of such trusts has often been dependent on the facts of each particular case. The general presumption is that trusts for private purposes are void save for some exceptions57. One exception is the maintenance of a particular animal or group of animals58. In the case of Re Astor Settlement Trusts59, it was asserted that trusts for such non-charitable purposes of the care of animals would fail unless falling within strict confines of narrow principles. For example, an annuity of £50 for maintenance of the testator’s favourite black mare was held valid in the case of Pettinghall v Pettinghall.60 Accordingly, the legacy to the Cats home cannot constitute a charitable trust as it is for the benefit of an animal and therefore confers no public benefit61. Alternatively, the legacy is likely to fall under the ReDean62 definition of a private purpose trust with imperfect obligation. In this case, a gift of £750 for 50 years was upheld for the maintenance of the testator’s horses and hounds. It was held that trust was valid “provided …. That it is not to last for too long a period”63. Accordingly, this has been cited as authority for the principle that trusts stated to be for the upkeep of specific animals are valid for the perpetuity period provided someone interested in the money under the legacy is willing to carry out the trust64. In the current scenario, the legacy is to the Cats home which at the time of entering into the legacy would clearly satisfy the requirement that someone interested in the money under the legacy is willing to carry out the trust. With regard to the period of validity of such legacies, the decision in Pirbright v Salwey65 establishes that the gift in such cases is valid for 21 years. However, a degree of discretion is permitted to take account of the longevity of the animals in an attempt to preserve the gift66. Accordingly, the legacy itself is prima facie valid as a private purpose trust with imperfect obligation, however will be limited in perpetuity under the section 15(4) of the Perpetuities and Accumulations Act 1964. 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Cohabitation: The Financial Consequences of relationship breakdown. Law Com No 307 Perpetuities and Accumulations Act 1964. Matrimonial Causes Act 1973 Read More