WEEK 3 express trusts for people - certainty of objects

What are objects? 

• The people or purposes to benefit from the trust (in other words, the beneficiaries)

• Simple when these are named individuals, but more complex when the class is described by reference to particular relationships or characteristics (e.g. ‘my relatives’ or ‘people who like trusts’)

• Certainty of objects is concerned with how certain the description of the beneficial class must be

• Objects must be sufficiently certain for the court to take over from the trustees and administer the trust, if necessary

Types of trust

1. Fixed trust

2. Discretionary trust

3. Subject to condition precedent

Types of powers

1. Fiduciary power (power held by trustee)

2. Bare/mere power

Trust vs powers

• Trusts are mandatory to be distributed amongst beneficiaries

• Trusts must be carried out.

• Powers are permissive, there is a option

• Powers may be exercised, but they don’t have to be.

• Powers can be built into a trust

• Powers are usually accompanied by a provision which ‘gifts over’ whatever is left after the exercise of the power, to a separate disposition.E.g.‘The trustees may distribute the trust fund among such of the beneficiaries and in such proportions as they, in their absolute discretion, think fit. Such part of the fund as remains undistributed one year from the execution of this deed shall be divided equally among the beneficiaries’

Trust

Trusts use mandatory language, e.g.’‘The trustees shall distribute the trust fund among such of the beneficiaries and in such proportions as they, in their absolute discretion, think fit.’

Powers

Powers use permissive language, e.g.‘The trustees may distribute the trust fund among such of the beneficiaries and in such proportions as they, in their absolute discretion, think fit.’

What is a fixed trust? 

• Where each beneficiaries entitlement is fixed by the terms of the trust itself. Trustee has no discretion 

• E.g. ‘£100,000 to be held on trust for Bob’ 

• E.g. ‘£100,000 to be divided equally between such of my trusts students as get an overall First in the unit this academic year’ 

What is a discretionary trust?

• Who benefits and /or what in what amount lies in the discretion of the trustee

• Trustee has discretion as to who benefits

• E.g. “£100,000 to be divided between such of my trusts students as my trustee shall think fit’

Trusts can be called gifts subject to condition precedent

• This is where the interest which a beneficiary receives is fixed, but they only receive it if they satisfy a condition first (the “condition precedent”)

• E.g. ‘One of my law books to each of my trusts students who attains a first class degree this academic year

What is the difference between fiduciary powers and mere/bare powers

Fiduciary powers 

• Held in a fiduciary capacity 

Mere/bare powers 

• Not held in a fiduciary capacity 

Rules on certainty of objects

• Key is to remember why we require certainty of objects.

• Court wants to uphold trusts, but must have sufficient certainty to administer the trust itself (incase the trustee defaults).

• So the tests for certainty of objects require the minimum certainty necessary in order to administer the trust.

• Consequently, there are different tests for different types of trust.  

Rules on fixed trusts (certainty of objects)

• Fixed trusts must satisfy the Complete List test (IRC v Broadway Cottages [955] Ch 20)

• It must be possible to draw up a complete list of all beneficiaries (no ambiguity)

Rules on fiduciary power (certainty of objects)

• Powers don’t need to be exercised (‘may’ not ‘must’)

• The holder of a fiduciary power does owe some obligations: to periodically consider whether to exercise the power, to consider the range of objects, to consider the suitability of any individual exercise of the power. Established in Re Hay’s [1982] 1 WLR 202 by Sir Robert Megarry VC at 209A-D

Re Gulbenkian’s [1970] AC 508

Facts

Trustees could ‘ at their absolute discretion’ pay funds to '“any person or persons in whose house or apartments or in whose company or under whose care or control or by or with whom the said Nubar Sarkis Gulbenkian may from time to time be employed or residing”

Held

• This was a fiduciary power (ie a power held in a fiduciary capacity)

• The applicable test for certainty was the ‘any given person’ test.

Rules on discretionary trusts

• Historically (pre 1971 discretionary trusts had to satisfy the Complete List test (the same as fixed trusts)

• Then came McPhail v Doulton [1971] AC 424 (aka Re Baden’s (No 2 ) [973] Ch 9)

McPhail v Doulton [1971] AC 424

Facts

• Discretionary trust for the officers and employees or ex-officers or ex-employees of the company or any relatives or dependants of any such person

• Issue was whether relatives was sufficiently certain

• In turn, this raised the issue of the applicable test for certainty of objects under a discretionary trust. At that time, the complete list test applied but this was felt to be unduly difficult

Held

• House of Lords held that discretionary trusts only had to satisfy the Any Given Person test, not the Complete List test

• Remitted the case back to the High Court to apply the Any given Person test to the word relatives

Having changed the test, the House of Lords sent the case back to the High Court to apply the ‘Any Given Person’ test to this trust. The High Court upheld the trust as valid, but the case was appealed again to the Court of Appeal where it was renamed Re Baden’s (No 2 ) [973] Ch 9. They upheld that the trust was valid, but the case is interesting for its application of the any given person test.

Re Baden’s (No 2 ) [973] Ch 9

Held

• ‘Officers and employees or ex-offciers or ex-employees of the company or any relatives or dependants of any such persons 

• Sachs and Megaw LJJ defined relative as all descendants of a common ancestor 

• Megan LJ said that the test was satisfied if ‘as regards at least a substantial number of objects’ it can be said with certainty that they fall within the trust. If any given person cannot prove that they are within the class, then they fall outside it

• Stamp LJ agreed with the outcome but dissented from the reasoning of the majority. 

• Must be able to say of ‘any given person’, not just a ‘substantial number’ of persons, whether they are a beneficiary. He defined ‘relative’ as next of kin

Rules on subject to condition precedent

• The odd category, where an interest under a fixed trust is subject to satisfying a condition precedent.

• E.g. ’One painting to each of my friends’

• Need only satisfy the ‘One Person Test’ (Re Barlow’s [1979] 1 WLR 278)

• Valid provided we can say of one person that they satisfy the condition.

• No need to say of ‘any given person’, much less draw up a ‘complete list’ of all people who satisfy the condition.

Conclusion on the various trust tests

Fixed trust = complete list test (IRC v Broadway Cottages)

Discretionary trust and fiduciary power = any given person test (McPhail v Doulton Re Gulbenkian’s)

Subject to condition precedent = one person test (Re Barlow’s)

Administrative unworkability (only discretionary trusts) 

• In McPhail v Doulton Lord Wilberforce went on to say that a discretionary trust which satisfied the ‘Any Given Person’ test could still be void if the class was so numerically large that the trust became ‘administratively unworkable’.

• Per Lord Wilberforce at 457D-E “There may be a third case where the meaning of the words used is clear  but the definition of beneficiaries is so hopelessly wide as not to form “anything like a class” so that the trust is administratively unworkable or in Lord Eldon’s words one that cannot be executed (Morice v Bishop of Durham, 10 Ves. Jr. 522, 527). I hesitate to give examples for they may prejudice future cases, but perhaps “all the residents of Greater London” will serve. I do not think that a discretionary trust for “relatives” even of a living person falls within this category.” 

• So in discretionary trusts, size does matter

• In ex. p. West Yorkshire County Council [2001] WTLR 785 a discretionary trust for the residents of West Yorkshire (c. 2.5m of them) was void for administrative unworkability

Capriciousness (only fiduciary power and arguably discretionary trust)

• In Re Manisty’s [1974] Ch 17, Templeman J said that a fiduciary power could be void for capriciousness if the ‘terms of the power negative any sensible intention on the part of the settlor’ e.g. ‘a power to benefit residents of Greater London’

• But such a power could be sensible if, for example, the settlor was a former London Mayor; The Hay’s [1982] 1 WLR 202, per Sir Robert Megarry VC at 212

• Should be slow to void a power for capriciousness, but will do so if the terms of the power leave the holder unable to sensibly exercise it

• Arguably also applies to discretionary trusts (but not fixed trusts)