Certainty of Object PDF

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The teacher's name is Isobel Roele...

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CERTAINTY OF OBJECT

If we answer a question on certainties in an exam, we need to start with:

For a trust to be valid, three requirements must be met (Knight v Knight): 1. Certainty of intention – the settlor must intend to create a trust to pass only equitable title to the beneficiary in order to retain legal title themselves 2. Certainty of subject-matter (Hunter v Moss) 3. Certainty of object

However, there could be exceptions to these rules no matter how fixed these rules are. OT Computers Ltd (In Administration) v First National Tricity Finance Ltd [2003] EWHC 1010 Pumfrey J: 

“The trusts alleged to have been created are necessarily express trusts, and for such trusts to be created there must be certainty of words, certainty of subject matter, and certainty of objects. Certainty of words requires that the words used are sufficient to demonstrate an intention to create a trust, and, so far as necessary, the terms of that trust. Second, the property to be comprised within the trust must itself be identified with sufficient clarity.”

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“Finally, the class of persons who are beneficiaries of the trust have to be sufficiently ascertained. When I use the word ‘sufficiently’ I refer to the underlying requirement that the Court be in as good a position as the trustee to ascertain the nature of the trust, the property comprised within it and the class of objects”.”

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Re Endacott: 

The objects are the persons for whose benefit the trust had been declared. A trust, not being a charitable trust, in order to be effective, must have ascertainable human beneficiaries. Therefore, the requirement of certainty of objects dictates that the trust must be declared in terms which enable the trustees for the court to establish who those beneficiaries are.

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There are a number of reasons behind this requirement.

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The

assumption

underlying

the

beneficiary

principle

underlines

the

supposition that somebody must be able to enforce the trust against the trustees if absolutely necessary. A settlor cannot do that. Once you pass your property to trustees, that’s your end of your powers to deal with that particular property.

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The trust must be capable of being administered which could be impossible if there is a massive class or many people who are supposedly the beneficiaries for that trust.

The beneficiary principle

As an aside – you will address the beneficiary principle next week – there must be someone: •

With locus standi – we need somebody who has a locus standi to bring an action against the trustees

•

Who is not vague;

•

Makes administration possible

Traditional tests for certainty of objects 2



Once there is an identifiable person who undoubtedly fits that description, the requirement appears to be satisfied.

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Where we have a trust that is not for a specific person, but for a class (‘my children’, ‘my friends’, etc.) it can only be carried where there is sufficient certainty to enable the trustees to tell who those beneficiaries are.

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When we say a class is conceptually uncertain, we mean that the class is defined in such broad or vague terms that makes its meanings open to interpretations or where evidence is needed to establish who belongs to the class and evidence is not available -> evidential uncertainty.

Class ascertainability test – the class test: is it possible for the trustees to draw up a complete list of every single person that is to benefit from that trust? If the answer is yes, then the class ascertainability test is satisfied. Individual ascertainability test – is it possible for the trustees to say of any individual person whether or not he falls within the class of the beneficiaries? The class ascertainability test is much more stringent than the individual ascertainability test. The disposition is much more likely to be void for uncertainty if the class ascertainability test is used. On the other hand, if we use this test, it makes the trust easier to enforce and to administer as we know exactly who is to benefit from the trust. The less stringent test is more likely to give effect to settlor’s intention as fewer trusts will fail as long as we can identify one person out of this class.

The tests for certainty are different for different types of trust 3

So, we need to distinguish the type of arrangement. Avoid confusion between trusts, fixed trusts, discretionary trusts, trust power, fiduciary powers, mere powers, powers, personal powers, mere personal powers, super powers, power to clean kitchen surfaces, coercive powers, reward powers, legitimate powers, illegitimate powers, reference powers, big powers, little powers……… K.I.S.S.I.N.G = keep it simple, stupid, don’t make life complicated.

Is there an obligation to do something by the trustee (people who hold the legal title)? 

Fixed Trust – obligation to do something

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Discretionary Trust – obligation to do something, but you have the choice of how to administer it, who gets what is discretionary.

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Fiduciary power – you have the power to give away money, but you also have the power the retain the money under the trust, but you cannot personally keep/use it.

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Personal power – you have the power to give away money, but you also have the power the retain the money under the trust, and you have the choice to keep it.

Do the trustees have a choice about their obligations? 

Fixed Trust – no choice as to do anything in relation to do something

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Discretionary Trust - Obligation to do something but has the choice how to do it

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Fiduciary trust - Mandatory obligation to do something but you have a choice of who gets what

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Personal Trust - You have a choice to do whatever you like

Can the person with the legal title keep it himself?

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Fixed: No

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Discretionary: No

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Fiduciary: No

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Personal: Yes

Fixed Trusts The first thing to do is to work out what arrangement we deal with. Courts have distinguished between fixed trusts on the one hand, and discretionary trusts and powers, on the other. IRC v Broadway Cottages [1955] Ch. 20 

Fixed trust arises where the settlor declares that the trustees to hold trust property on behalf of beneficiaries in a specified share. For example, if the settlor transfers £100m to a trustee on trust for X brothers in equal shares, this is definite. In this type of trust, the settlor’s directions can only be carried out if the trustees know or are able to ascertain how many beneficiaries there are in that class so that the money could be divided amongst the beneficiaries according to the instructions. It doesn’t follow that for a fixed trust, you must have equal distribution. Some beneficiaries can get more while others less. What is important is to be able to draw up a list of all the persons who make up that list of beneficiaries or excluding all those who fall outside of the class.

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This is what is known as the Class Ascertainability test

 If the class is conceptually uncertain, the trust fails. Even if there is conceptual certainty, the trust may still fail if it is not possible to draw up a comprehensive list of the beneficiaries due to evidential uncertainty.

Affirmed by: In McPhail v Doulton [1971] AC 424, Lord Wilberforce said: 5

‘The basis for the Broadway Cottages principle is stated to be that a trust cannot be valid unless, if need be, it can be executed by the court, and…that the court can only execute it by ordering an equal distribution in which every beneficiary share.” This is very ‘out of order’ but Fiduciary powers

Re Gulbenkian [1970] AC 508 The ‘any given postulent’ test The ‘is/is not’ test The Individual ascertainability test As far as discretionary trusts were concerned, during the 20 th century, there emerged a novel formal of trust in favour of a class rather than individuals – discretionary trusts. In declaring such a trust, the settlor would opt not to fix the shares of the individual beneficiaries from the outset, but to give the trustees a discretion to determine the way the property was going to be distributed amongst the beneficiaries. In practice, a discretionary trust was very often created as a means of limiting the amount of inheritance tax payable on the estate when somebody died.

The testator in that class defines the class of beneficiaries (‘my spouse’; ‘my children’) and then leave it to the trustees to decide how to divide the property after the testator’s death. A discretionary trust is however not the only trust available to a property owner or a testator who wishes to nominate another person to distribute property on his behalf. Instead of declaring such a trust, it is opened to the original owner/donor/testator/ settlor to confer this power of appointment on a trustee/donee authorising the donee to appoint the property out to others. In other words, it’s only a power to do so rather than an obligation to do so.

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The crucial difference between a discretionary trust and such a power is that in a discretionary trust the trustees must apply their power to distribute the property. In a power, they don’t have an obligation to do so.

The Trusts/Powers distinction McPhail v Doulton [1971] AC 424 Lord Guest @ 444: “If I understand English law correctly there is a basic distinction between a deed containing a power and a deed containing a trust. The distinction may be difficult to draw, but once drawn the effect is different. In the former case [ powers] there is a resulting trust in favour of the settlor upon failure to exercise the power or in the case of an invalid exercise. In the case of a trust the beneficiaries are the objects of the trustee's bounty. The trustees are acting in a fiduciary capacity. If the trustees fail to exercise their discretion, the court can compel them to exercise the trust.” As far as Lord Guest was concerned, the real difference between powers and trusts was what happens if the person with the legal title fails to execute their instructions. In a discretionary trust, if the trustees fail to execute their instructions, then the court will step in and do it for them because the court see the beneficiaries as having ownership of the assets. If on the other hand, someone with the legal title merely has the power to appoint property to other people and fails to exercise that power, the assets go to the estate of the trustee.

McPhail v Doulton [1971] AC 424

Lord Guest @ 444 continued: “Upon the assumption that this is a deed containing a trust power and not a mere power…. 7

What the hell??!!! Where did this ‘trust power’ and ‘mere power’ stuff come from??? The answer, of course, is KISSing! A power of appointment, like a trust, requires a degree of certainty as far as the objects are concerned to ensure that the donee/trustee can distribute property to those within the designated class.

In Re Gulbenkian, the courts were concerned to find a much less stringent approach encapsulated in the individual ascertainability test when dealing with the certainty of objects in relation to powers. In this case, Gulbenkian, a very successful businessman, made a will in 1929 under which the trustees had a power to apply income to maintain his son and also any person who his son from time to time might be employed and for any person in whose house or company or in whose care control might from time to time be residing. It was held that the second limb was void for uncertainty of object because the limb was too uncertain and a list of who those people were, was not drawn up. HoL acknowledged the difficulties of drawing up a list of the beneficiaries, however, it held that this didn’t render the whole gift void for uncertainty as long as it was possible to ascertain whether any given person fell within the specified class.

Dissent Lord Upjohn: 

If the donor/settlor of the trust directs trustees to make some specified provisions to a certain John Smith, then to give effect to that provision, it must be possible to define John Smith. If the donor knows three John Smiths then neither the trustees, nor the court can guess which John Smith the trust refers to.

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On the other hand, supposed that the donor directs that a fund will be distributed equally between members of a class, then that class must be defined as individuals. The court can’t guess at it.

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‘My old friends’ is an uncertain class unless the donor gives specific instructions of who these people may be or what counts as a friend.

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However, as far as powers are concerned, the court cannot compel the trustees to exercise their powers.

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The trustee or the court must be able to say with certainty who is within and who is without the power.

Lord Upjohn distinguished in this case between discretionary trusts and fiduciary powers and for fiduciary powers we do not a complete list. What we need to know with certainty is whether any individual is within the class or without the class. In other words, he’s changed it to an individual ascertainability test. Fixed trust – complete list of exactly who the beneficiaries are. Discretionary trusts – complete list of beneficiaries

Fiduciary powers – we don’t need a complete list -> Individual ascertainability test (is or is not within the class = is or is not test)

DISCRETIONARY TRUSTS McPhail v Doulton [1971] AC 424

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

Lord Hodson



Lord Guest

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Lord Reid

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Viscount Dilhorne

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Lord Wilberforce

McPhail v Doulton [1971] AC 424 = also known as Re Baden (No 1) Facts: o Settlor, Mr Baden, purported by deed to transfer shares in a company to trustees to form a trust for the benefit of the employees of the company, their relations and their dependence. Clause 9 provided that the net income of the trust was to be applied by trustees at their absolute discretion at such amounts, and such times, and such conditions, if any, as they think fit. o After Mr Baden’s death, the executors of the estate claimed that this particular disposition was void for uncertainty of object. It was argued that the disposition created a discretionary trust, not a power and the applicable test was the class ascertainability test not the individual ascertainability test because of the nature of a discretionary trust. In this case, the HoL discarded the class ascertainability test and embraced the individual ascertainability test as the more appropriate test for determining whether the objects of a discretionary trust are sufficiently certain. Their Lordships accepted that in the case of discretionary trusts, in so far as the trustees were not obliged to distribute amongst all the beneficiaries, then the share to be taken by a given beneficiary was not contingent on the number of potential beneficiaries within a class. Accordingly, the purposes of determining whether the objects of a discretionary trust were certain, it was not necessary for trustees to be able to draw up a complete list. Their Lordships concluded that the individual ascertainability test originally formulated for powers only could also apply to discretionary trusts.

Lord Hodson @ 441 o The distinction between a trust and a mere power is that where there is a trust, there is a duty imposed on the trustees to give effect to the settlor’s instructions. Where the trust is discretionary, the court must be in a position to control

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execution in the interests of the beneficiaries. Where there is a power, the object have no right to complain. o “In the Gulbenkian case [1970] A.C. 508 the majority of your Lordships held the view that where there is a valid gift over in default of appointment a mere or bare power of appointment among classes is valid if it can be said with certainty whether any given individual is or is not a member of a class and that the power did not fail simply because of the impossibility of determining every member of the class. o In my opinion a mere power is a different animal from a trust and the test of certainty in the case of trusts which stems from Morice v. Bishop of Durham, 10 Ves.Jr. 522 is valid and should not readily yield to the test which is sufficient in the case of mere powers.” o From his point of view, the responsibilities of trustees are completely different if there is a mandatory obligation to do something as opposed to a power to do something. o Lord Hodson argued that for a discretionary trust, we should retain the class ascertainability test.

Lord Guest @ 446 o Followed Lord Hodson’s reasoning. o “It seems to be as plain as can be that if all the objects are not ascertainable, then to distribute amongst the known objects is to take a narrower class than the settlor has directed and so to conflict with his intention.” o “If I understand English law correctly there is a basic distinction between a deed containing a power and a deed containing a trust. The distinction may be difficult to draw, but once drawn the effect is different. In the former case [powers] there is a resulting trust in favour of the settlor upon failure to exercise the power or in the case of an invalid exercise. In the case of a trust the beneficiaries are the objects of the trustee's bounty. The trustees are

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acting in a fiduciary capacity. If the trustees fail to exercise their discretion, the court can compel them to exercise the trust.”

McPhail v Doulton [1971] AC 424

In unargued judgments, Lord Reid and Viscount Dilhorne concluded that the test for discretionary trusts should change and become assimilated to that for fiduciary powers. They argued that: we see no reason whatsoever why the individual ascertainability test cannot apply to discretionary trusts.

Lord Wilberforce: o “As a matter of reason, to hold that the principle of equal distribution 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 none. Why suppose that a court would lend itself to a whimsical execution?”

What Lord Wilberforce did was to look at the situation and conclude that we don’t need to know everyone when dealing with a discretionary trust. All we need to know is whether someone is or is not within that class of beneficiaries. Conceptual certainty is the first requirement. In Re Gulbenkian, Lord Upjohn held that friends dealing with trusts is not conceptually certain.

Certain things are conceptually certain, therefore if we can satisfy this conceptual certainty test, Lord Wilberforce says that we don’t need to know everyone who is within that class. We just need to say with certainty whether any claimant does satisfy it or not. Evidential certainty 12

@449 o “To say that there is no obligation to exercise a mere power and that no court will intervene to compel it, whereas a trust is mandatory, and its execution may be compelled, may be legally correct enough but the proposition does not contain an exhaustive comparison of the duties of persons who are trustees in the two cases. A trustee of an employees' benefit fund, whether given a power o...