3 cert lecture - 3 certainties PDF

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Introduction to Trusts: The 3 Certainties.

Types of Express Trusts: Whilst trusts may be express or implied, we are concentrating on the requirements for a valid (thus enforceable) EXPRESS trust. Express trusts are trusts that have been intentionally created by the settlor declaring himself as trustee or transferring property to a trustee. Sub categories of express trusts include: Fixed trusts - where the beneficiaries and their shares are stipulated expressly by the settlor Discretionary trusts - where the settlor gives the trustee the discretion to select who from a class people receives the trust property and the quantity of their share Exhaustive - where the trustees must distribute all income accruing to the trust fund; and Non-Exhaustive - where the trustees have a power to accumulate income. To create a valid express trust you must have … The three certainties + Constitution Formalities = A valid and enforceable express trust

Problems that you may encounter when trying to establish a validly constituted trust:

Problem 1: Distinguishing the creation of a trust from the act of giving a gift Problem 2: Is the gift valid, i.e. fully constituted i.e. formality compliant? Problem 3: If it is a trust that is being created, is it a valid (therefore enforceable) trust? To work this out ask, are the three certainties complied with, is it fully constituted i.e. is it formality compliant? If not, the trust will fail and the property will either remain with the donee or remain with/be returned to the donor. The 3 certainties:

Certainty is important for the court to be able to advise the trustee how he can discharge his obligations if there are problems with the administration of the trust. What are the 3 certainties? For the court to give directions, it has to be certain that: 1. The settlor intended to create a trust (not a gift or power) – this is called certainty of intention 2. What property is to comprise the trust fund – this is what we mean by certainty of subject matter 3. Finally the third certainty is certainty of object, (object means beneficiaries), and so this means that we have to be certain about who the beneficiaries are under the trust. 1.

Certainty of Intention:

It has to be clear that testator / settlor intended to create a trust (not a gift or power). To determine this we look at (a) wording, (b) conduct and (c) circumstances. In a perfect world, the most straightforward way of manifesting your intention would be take advice from a solicitor and to sign a formal declaration of trust in a deed. However, difficulties arise where a settlor unknowingly behaves in a way which may have created a trust, or where the testator leaves her intention ambiguously in the terms of a will or other document.

a)

Certainty of Intention – wording:

Includes both Inter vivos or testamentary wording Settlors do not have to use specific words to show intention – (apart from where the trust is over land - Law of Property Act (1925) s.53 (1) (b)) Precatory words: sometimes it is tricky to make the distinction between words that impose a moral obligation and words that impose trust obligations – merely precatory words do not create substantial trust obligations as discussed in the following cases: Lambe v Eames (1871) 6 Ch App 597 Mussoorie Bank Ltd v Raynor (1882) 7 App Cas 321 Re Adams and Kensington Vestry (however contrast this with) Comisky v Bowring- Hanbury (1905) AC 84 HL “in full confidence”. Harrison v Gibson [2006] also suggests that identical words can have different meanings depending on the person using them and the circumstances in which they are used. In this case, the court confirmed that they would look at the words used in the context of the entire will when attempting to decipher a testator’s intent. b)

Certainty of Intention – Conduct:

The settlor/ testators conduct is also taken into account when trying to decipher intention to create a trust: Paul v Constance [1977] 1WLR 127 Held: Constance had declared a trust over the money in the bank account. The reasoning was that the words ‘the money is as much yours as it is mine’ manifested sufficient intention that Constance held the property on trust for them both. Furthermore that the couple had treated the money in the account as joint money was taken to be evidence of the intention to create a trust. Significantly in this case the court held that the trust was an express trust even though in the words of the court, Constance was a man of ‘unsophisticated character’ who did not know he was creating a trust! Paul v Constance applied more recently in Rowe v Prance [1999] 2 FLR 787

c)

Certainty of Intention- Circumstances:

The circumstances in which the prospective trust is made is also taken into account when attempting to decipher a testator’s intention: Jones v Lock (1865) 1 Ch App 25 Held: that there had not been a perfect gift of the cheque because it was made out in the father’s name without having been endorsed in favour of the baby. The court held further that there was no indication of an intention to create a trust. Conduct and circumstances are also considered in commercial context as demonstrated in cases such as Re Kayford [1975] 1 All ER 604 and in the (very controversial) judgement in Re Farepak Food and Gifts Ltd [2006] EWHC 3272 (Ch) Re Kayford [1975] 1 All ER 604 Held: That the company's intention was to create a trust over the prepayments. The company as legal owner of the bank account was trustee and the customers were beneficiaries in the period between paying for their items and receiving them. (Again in this case an express is uncovered from the parties’ actions without the need for any conscious intention to create an express trust). Re Farepak Food and Gifts Ltd [2006] EWHC 3272 (Ch) Thousands of families participated in this Christmas fund whereby they contributed a certain amount of money each month throughout the year so that they would have saved up a large amount by November which they could then spend on their families Christmas presents and or food ( in the form of a hamper of vouchers). The Christmas fund was therefore a pool of shared monies contributed by various customers. The Christmas fund was managed by ‘Farepak Food and Gifts Ltd.’ which then went into insolvency. Their directors decided they would stop trading in October 2006. They then went into insolvent administration later that month. Before the company went into insolvency attempts were made to create a new bank account into which any further contributions to the Christmas fund could be made so as to keep them separate from the other assets of Farepak. The principle question in this case was whether or not these funds were deemed to be held on trust for the customers who had contributed them, if not they would be assets of the company and therefore be paid to their creditors. Notably this was a rather rushed judgment as, due to the nature of the company, it was of great public concern and time sensitive with Christmas fast approaching. There were two aspects which were uncertain, uncertainty of intention and uncertainty as to the segregation of subject matter (which we’ll look at below).

In relation to certainty of intention, on the facts of the case Mann J held that it would be ‘an obstacle at a practical level to enforcing such an express trust as that trust would elevate the status of those customers who had paid into the fund after administration – i.e. it would make them preferred creditors. Alistair Hudson criticises this stating ‘The most unsatisfactory factor here is the omission of any mention of Re Kayford which is the most valuable authority in relation to the existence of an express rust in commercial setting. Setting up a separate bank account as in the Farepack case achieves the creation of an express trust in the opinion of Megarry J in Re Kayford ’ (Hudson, A. (2010) Equity and trusts 8th edition, Routledge, p. 99) See also Crossco No. 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619 A cautionary note on certainty of intention: The use of the word ‘trust’ although not conclusive (as shown in Tito v Waddell (No.2) [1977] Ch 106 and Duggan v Governor of Full Sutton Prison [2003] 2 All ER 678) will usually infer a trust, particularly where someone is holding property for the benefit of another (see Re Ahmed & Co. [2006] EWHC 480 (Ch) See also Crossco No.4 Unlimited v Jolan Limited [2011] EWCA Civ 1619. …However, sham trusts are not permitted! Midland Bank v Wyatt [1997] 1 BCLC 242 Intention to make a trust not a gift: If the owner (donor) wants to make a gift then this cannot be interpreted as an intention to create trust. As we found out last week when a gift is given the donee becomes the absolute owner whereas in a trust we have division of title. A gift that fails therefore cannot be rescued by interpreting the owners intention to be one to create a trust. Milroy v Lord [1862] 4 De GF & J 264

2. Certainty of Subject Matter: There are 2 aspects to this: 1. The trust property itself must be sufficiently certain – so that the trustee knows what she is holding on trust for the benefit of the beneficiaries. 2. In the context of a fixed trust, the interest of the beneficiaries in the subject matter must also be sufficiently certain- so the trustee knows the extent of the interest each beneficiary has over the trust fund.

1.

The trust property itself must be sufficiently certain:

This issue is discussed in notable cases such as Sprange v Barnard (1789) 2 Bro CC 585 and Palmer v Simmonds (1854) 2 Drew 221 – ‘the bulk of my residuary estate’- trust failed. However in their Will a testator will often name a residuary legatee, someone who takes the residue of an estate – this is valid (and indeed commonplace) as the residue of an estate is quantifiable; it is whatever property is left after the legacies in the will have been administered. Certainty of Subject: Non-partitioned homogenous subject matter: Difficulties arise where trusts are claimed out of a homogenous bulk i.e. out of a mass of property comprising substantially identical parts Can you think of any trust property that is made of identical homogenous units? Re London Wines Co (Shippers Ltd) [1986] PCC121 - wine Compare to Hunter v Moss [1994] 1 WLR 452 (controversial judgment) - shares. Seems that there is an exception to a the general rule if the trust property is intangible and property made up of identical units See also: Re Lewis’s of Leicester [1995] IBCLC 428 followed Hunter v Moss

Re Goldcorp Exchange [1995] (in receivership) 1 AC 74 This case shows the application of the ‘orthodox approach’ shown in London wines case affirmed that in principle the property must be separately identified before it can be held on valid trust. For a contemporary discussion of these cases in the context of the recent Pearson v Lehman Bros Finance SA [2010] EWHC 2914 confirms the approach in Hunter v Moss - Briggs J found that if the property at question is identical i.e. Mutual substitution is possible the requirement of certainty of subject will be fulfilled (as long as it fulfils the aforementioned requirements).

2. The extent of the beneficial interest must also be certain: Boyce v Boyce (1849) 16 Sim 476 The cause of uncertainty in this case was not vague words but the failure of a 3 rd party to carry out their part in the process of quantifying the interest . In this case the deceased’s wife left his properties to his daughters on terms that the elder should choose which of the properties she wanted and the younger should be entitled to the other. In the event the father outlived his eldest daughter and so she could not exercise her choice. The court held that the trust in favour of the second daughter failed because of the lack of certainty However this case may be contrasted with the later case of Re Golay’s Will Trust [1965] 1 WLR 969 Words such as reasonable or ‘bulk’ are likely to be uncertain but not necessarily. The courts take a pragmatic approach to validity, the key issue is whether the trustee has sufficient info about what was intended so they can be sure they are carrying out the trust correctly: Re Golay’s Will Trust [1965] 1 WLR 969 ‘…to enjoy one of my flats during her lifetime and to receive a reasonable income from my other properties’. In contrast to Boyce v Boyce, the court held that this would not be too difficult to quantify therefore the trust did not fail for uncertainty. The word reasonable used in isolation may, however, still lead to failure- for e.g. where property is left on trust to pay a ‘reasonable legacy’ to a beneficiary. Maybe the difference between these cases is pragmatic? In Golay’s WT the beneficiary was alive and could choose which flat she occupies unlike in Boyce v Boyce???

The extent of the beneficial interest must also be certain – what about discretionary trusts?

A discretionary trust is not uncertain just because the beneficiary does not know whether or what they will receive. The trustee’s discretion “cures” any uncertainty. Certainty

of

Subject:

Trusts

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an

expectancy:

 Anticipated/ future property cannot be subject to a trust, as there is nothing to convey to trustees. See Re Ellenborough [1903] 1 Ch 697 Reflex

of

subject

matter

uncertainty

on

intention

uncertainty:

Mussoorie Bank Ltd v Raynor (1882) 7App Cas 321 Although the certainties of intention and subject matter refer to different aspects of the trust relationship, they are not to be considered entirely independent of one another. Doubt over the certainty of the subject matter of a trust will exacerbate any doubt over the certainty of intention. This was recognised by the Privy Council in this case where the question at issue was whether the use of precatory words had been effective to create a trust; ‘…the uncertainty in the subject of the gift has a reflex action upon the previous words and throws doubt upon the intention of the testator and seems to show that he could not possibly have intended his words of confidence, hope , or whatever they may be to be imperative words. 3. Certainty of Objects (Beneficiaries): This means that a trust will only be valid if the beneficiaries can be identified; this is known as the beneficiary principle. This principle exists because: 1. Without beneficiaries there is no “owner” 2. The trust can’t be enforced by the court 3. The trust will violate the against perpetuity In cases other than charitable trusts the beneficiaries (i.e. objects) of the trust must be: a) Human: Beneficiaries under a private trust must be legal persons (i.e. human beings or trust corporations)

b)

Ascertainable: The trustees must be able to identify who the beneficiaries of the trust are.

The test for certainty of object varies according to the type of trusts i.e. whether the trust if fixed or discretionary: Certainty of Object: Fixed Trusts: For fixed trusts, the test for certainty of object was laid down in: IRC v Broadway Cottages [1955] Ch 20 This test dictates that a trust is void unless it is possible to ascertain every beneficiary – which it is necessary to be able to draw up a list of all the beneficiaries. This is known as the ‘complete list’ or ‘list certainty’ test. This is not a problem where beneficiaries have been identified by name but can present difficulties where the settlor indicates that the beneficiaries are a class or group, such as ‘my employees’. This test was more recently applied in OT Computers Ltd v First National Tricity Finance Ltd [2003] EWHC 101 (Ch)

Certainty of Object: Discretionary Trusts: The test for certainty of object in discretionary trusts used to also be the fixed list test. However this all changed in… McPhail v Doulton [1970] 2 All ER 228. The objects to be benefited in this case were the staff of a company and also their relatives and dependants. Listing them was impossible. Fortunately, for the potential beneficiaries there was little doubt that this was a discretionary trust – it was then recognised that it could be valid if the court applied the same test as was used for powers. The HL were persuaded that list certainty was unnecessary. Their reasons were: 1.

That it was not necessary for the trustees to consider every possible claimant they merely had to survey the field.

2. If the court did have to administer the trust it would not have to distribute the fund equally. Indeed this was the last thing that the settlor would have intended otherwise why give the trustee discretion? They then took the opportunity to introduce a new test for certainty of object in discretionary trusts. Following this case the test for certainty of objects for a discretionary trust is therefore now the ‘any given individual /postulant’ test this means that a trust is valid if it can be said with certainty that any given individual ‘is or is not’ a member if the class. The use of the ‘Gulbenkian’ approach in McPhail did however import that same problems as in Gulbenkian ; that the presence of a single postulant (person) who could not be categorised as being within /outside the class of beneficiaries would invalidate the trust. Consequently, the Court of Appeal sought to mitigate the effects of McPhail when this went back to court. In Re Baden No.2. the court sought to validate a trust that would otherwise have been deemed invalid under the original ‘McPhail’ test.

Re Baden No.2 [1973] Ch 9

All three judges gave different judgements attempting to mitigate the harshness of the ‘ McPhail’ test in order to validate the trust before them:

Stamp LJ: held that the definition of relatives should be restricted to statutory next of kin rather than ‘the descendants of a common ancestor’ because the latter was too broad. Sachs LJ: Drew a distinction between conceptual and evidential certainty - placed a burden of proof on the beneficiaries rather than leaving it to the trustees to demonstrate that the trust was valid i.e. onus was placed on claimants to prove themselves to be a ‘relative’. Consequently the given postulant test remained intact but more trusts would be found valid this way. Megaw LJ: took the approach of prior case Re Allen – sought to validate those trusts in which there are a substantial number of postulants about whom one can be certain – i.e. a trust would be valid despite some potential uncertainties as to the number of postulants provided that there was a distinct ‘core no.’ of beneficiaries who satisfied the terms. Following the above litigation, for certainty of object in a discretionary trust there had to be: Conceptual certainty- i.e. the class has to be conceptually certain. AND: Administrative workability- A discretionary trust must be administratively workable to be upheld as shown in R v District Auditor ex parte West Yorkshire County Council (1985)26 RVR 24. In this case a trust purporting to benefit the 2.5 million inhabitants of the county of West Yorkshire failed as it was deemed to be administratively unworkable. Consequences of lack of certainty. If a person purports to declare a trust over property and the trust fails, whichever certainty is lacking, then the declaration will be invalid. There will therefore be no disposal of property by the person. If property is actually transferred but the attempted trust fails there are different possible outcomes: a) If a trust is lacking certainty of intention: If the property has not been transferred to the trustee, the trust fails ab initio ‘from the beginning’. If property has been transferred to the trustee but intention to create a trust cannot be deciphered then the transfer will be an absolute gift. This means that the donee of the property takes the property beneficially i.e. he/she holds it free from any trust obligations. b) Consequences of lack of certainty of subject: If it is uncertain, as to what property is to be the subject matter of the trust, the trus...