4. Protective Trust PDF

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PROTECTIVE TRUST Useful for a settlor who wishes to protect his estate against a wasteful or financially irresponsible beneficiary, and agaianst alienation or bankruptcy of such a beneficiary. Section 38 (1) Where any income, including an annuity or other periodical income payment, is directed to be...

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PROTECTIVE TRUST Useful for a settlor who wishes to protect his estate against a wasteful or financially irresponsible beneficiary, and agaianst alienation or bankruptcy of such a beneficiary. Section 38 (1) Where any income, including an annuity or other periodical income payment, is directed to be held on protective trusts for the benefit of any person (in this section called "the principal beneficiary") for the period of his life or for any less period, then, during the period (in this section called the "trust period") the said income shall, without prejudice to any prior interest, be held on the following trusts: (a) upon trust for the principal beneficiary during the trust period or until he, whether before or after the termination of any prior interest, does or attempts to do or suffers any act or thing, or until any event happens, other than an advance under any statutory or express power, whereby, if the said income were payable during the trust period to the principal beneficiary absolutely during that period, he would be deprived of the right to receive the same or any part thereof, in any of which cases, as well as on the termination of the trust period, whichever first happens, this trust of the said income shall fail or determine; (b) if the trust aforesaid fails or determines during the subsistence of the trust period, then, during the residue of that period, the said income shall be held upon trust for the application thereof for the maintenance or support, or otherwise for the benefit, of all or any one or more exclusively of the other or others of the following persons: (i) the principal beneficiary and his wife or her husband, if any, and his or her children or more remote issue, if any; or (ii) if there is no wife or husband or issue of the principal beneficiary in existence, the principal beneficiary and the persons who would, if he were actually dead, be entitled to the trust property or the income thereof or to the annuity fund, if any, or arrears of the annuity, as the case may be, as the trustees in their absolute discretion, without being liable to account for the exercise of such discretion, think fit.

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S.38 of Trustee Act 1949: Use the mechanism of discretionary trust but discretionary trust can exist on his own. S.38 creates absolute interest with determinable event and declare intention interest to be held as protective trust. S.38(1)(a) stated that an income should be held on protective trust for the benefit of principal beneficiaries for the period of his life or for any less period UNTIL he does or attempts to do or suffers any act or thing or until any event happens. This section simply means that principal beneficiaries can enjoy trust income in certain trust period until some event happen. S.38(1)(b) further explain that in the event of the interest terminating, the protective trust stops, and the said income will become discretionary trust where it is then to be held on trust for the maintenance of the following person namely 1. The principal beneficiary and his or her spouse OR his children 2. If there is no wife or husband or issue, the principal beneficiary and the person who, if the principal beneficiary is dead, would be entitled to the trust property. When the protective trust come to an end, second trust that comes to the picture – discretionary trust.

Characteristics of protective trust 1. A life or lesser interest determinable on certain events. 2. A forfeiture clause specifying the determining event. 3. Discretionary trust that arises after forfeiture. Determinable Interest—to be distinguised from Conditional Interest The choice of words used to determine the life interest are words such as “until’ and “so long as.” These are good to show the determining event which will end the first trust. The draftsman must not use words that suggest a condition precedent or subsequent. Examples: 1. A can use my car until he buys one himself whereupon the car goes to his wife C. 2. A can use my car until he changes his nationality where upon the car goes to his wife C. 3. A can use my car until either he or I become bankrupt, where upon the car goes to the wife C. 4. A can use my property until he decides to alienate it whereupon the property passes to his wife C. There is a creation of a valid life interest for one beneficiary plus a determining event which merely delimits the interest granted to that beneficiary with the beneficial interest in the same property going to another beneficiary upon the occurence of the determining event. 

The use of phrases such as “but if” and “when, if ever” generally denotes the existence of ‘bad’ provisional or conditional. o Re King  “It doesn’t insult the English jurisprudence that the court rely on the word until in determining event. The next scenario is condition precedent. There is a big different between the two.  Determining event: The word “until” means a person can enjoy the right until some event happen.  Condition precedent: the word “on condition” means you can’t even start to enjoy the right but you can only enjoy the right if you do something.  To summarise, it is vital to use the word “until”. o Re Gourju’s Will Trusts  Mrs Gourju was a protected life tenant under her husband will. She resided in Nice which was occupied by the Germans in June 1940. By Trading with the Enemy Act and Order 1939 she became disentitled to receive income from the fund and her protected life interest was forfeited. The Custodian of the Enemy Property could not claim the income as he had no better claim than Mrs G. The discretionary trusts came into effect. The trustees wanted to accumulate and pay the income to Mrs G after the war.  It was held that they could not do so as her interest had determined, and the trustees’ duty was to pay to one or more members of the discretionary class. o Re Burrough And Fowler

The settlor by an ante-nuptial settlement settled property on trust to pay the income to himself for life or until certain events should happen, one of which is bankruptcy. He became bankrupt whereupon his trustee in bankruptcy became entitled to his life interest since settlor cannot protect against own bankruptcy under a protective trust. Re Detmold  There was a marriage settlement of the settlor own property until his bankruptcy or until he should suffer something whereby by the same would by operation of the law become payable to some other person and after such determination of trust to pay the income to his wife.  A judgement creditor was appointed (triggering the second event) before the settlor became bankrupt (in any event not valid as cannot guard against own bankruptcy).  However, since second event was triggered the forfeiture has taken place and the beneficiary interest terminated hence the wife was entitled to the income and not the trustee.  North J held: The limitation of the life interest to the settlor was validly determined by the fact that in consequence of the order appointing the receiver, he ceased to be entitled to the income. This took place before the bankruptcy and therefore the forfeiture is valid against the trustee in bankruptcy. 

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