Certainty of Objects - Lecture notes and Virgo\'s \'The Principles of Equity & Trusts\' notes PDF

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Lecture notes and Virgo's 'The Principles of Equity & Trusts' notes...

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For a trust to be valid, certainties must be satisfied in three areas, Knight v Knight. 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.” Describes it’s just as much of a requirement now. These are fixed rules but still there are some exceptions. “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”.” The identity of the objects of a trust will depend on the type of express trust that is being considered. Usually, the objects will refer to the beneficiaries, but for purpose trusts, such as charitable trusts, the relevant object will be the designated purpose. Where the trust is an express trust for persons, the key principle relating to certainty of objects is that the objects of the trust must be defined with sufficient certainty to enable the trustees, or, if they default, the court, to execute the trust according to the settlor’s or testator’s intention. If it is unclear who the objects are, the trust will be void. Different tests of certainty of objects have been developed for several different types of trust and power. The beneficiary principle As an aside – you will address the beneficiary principle next week – there must be someone: With locus standi; Who is not vague; Makes administration possible “my children” “my old friends” must be sufficient certainty to tell who belongs to the class and who does not. Traditional tests for certainty of objects Class ascertainability test- is it possible for the trustees to draw up a list of every person who comes within that class, yes then this is satisfied. Individual ascertainability test- is it possible for the trustees to tell an individual person whether they fall within the class of beneficiaries. Stricter test is class one, makes trust easier to administer and enforce. But individual is more flexible test so better for maker of trusts intention as less likely to be void. 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……… All arrangements where A has legal title holding it for B. If A cannot help themselves to that property it is a trust. If they can then it is not a trust. Personal power to give their property to someone then no trust. If holding it for someone and not allowed it themselves then trust. No doubt as to certainty then there is a fixed obligation to hold that on trust for someone. If instrument says someone must hold something but not

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certain who gets what e.g. a body will decide then this is a trust of a discretionary nature. If someone does not have power to keep it for themselves but can retain money and give out when they want and don’t have an obligation to immediately give it out then this is a fiduciary power. If you have power to distribute money and if they don’t want to they don’t have to then this is personal power. To distinguish look at their obligation, choice about obligation, can you keep it. Fixed trusts: yes, obligation to give out. Absolutely no choice- laid out clearly. Cannot keep it for themselves. Discretionary trusts: yes, obligation to give out. Choice about how they fulfil obligation (who gets what). Cannot keep it for themselves. Fiduciary powers: do not have an obligation to do something (can but don’t have to). If you do something you have a choice as to who gets what. Because of fiduciary nature they cannot keep it for themselves. This power is a power of appointment that is given to a trustee in their capacity as a trustee. It is a true power because the trustee is not obliged to exercise it at all. But its fiduciary by nature means that the trustee must consider whether or not the power should be exercised. If the power is not exercised, it will lapse and the property that is subject to the power will devolve on default of appointment according to the terms of the trust. Personal powers: do not have an obligation. If you do something you have a choice as to who gets what. Can keep it for themselves if they don’t exercise it. Powers may be given to people who are not trustees or otherwise in a fiduciary relationship. These mere powers are where the donee of the power is not even required to consider the exercise of it. A trustee may be given a mere power if the power is given to them in a a personal capacity, rather than a trustee. Power of appointment is the ability to give stuff out.

o Keep it simple o Work out what arrangement it is first out of the four. o Whether the settlor or testator has created a trust obligation or a discretionary power depends on their intent, as deduced from careful construction of the trust instrument. If mandatory language is used, this suggests that there is a trust obligation that must be exercised. Discretionary language suggest a fiduciary power, such as the trustee ‘may appoint’.

o sufficient practical certainty of the objects differs depending on classification. FTclass ascertainability test. DT- individual ascertainability test. FP- individual ascertainability test. PP- doesn’t matter.  Fixed Trusts o Under a fixed trust, the duty to distribute trust property to the beneficiaries must be discharged. If not, the court will ensure that the duty is performed by appointing the trust property according to the terms of the trust. o Where holding trust on behalf of beneficiaries in shares. o IRC v Broadway Cottages [1955] Ch. 20 where class ascertainability created. Must be so certain you can write a complete list. CA. o This is what is known as the Class Ascertainability test. Comprehensive list can be made, excluding those who fall outside the class. o In McPhail v Doulton [1971] AC 424, test was confirmed, Lord Wilberforce said: o ‘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 shares.” o Trust will fail if conceptually uncertain, cannot write a list. If there is no clear evidence of who is in the class then the whole thing fails. ‘It does not seem satisfactory that the entire validity of a disposition should depend on such delicate shading’ critiquing the class ascertainability test o In McPhail v Doulton- a clause in the trust instrument stated that the trustees should apply the income from a fund for employees and their relatives and dependants in such amounts, at such times, and subject to such conditions as the trustees thought fit. The trustees were not obliged to exhaust the income of the fund each year and could realise capital if the income was not sufficient. It was held by the HOL that this had created a trust power rather than a fiduciary power because of the use of the words ‘shall distribute’- mandatory language. o A fixed trust is a trust under which the trustees are required to distribute the trust property to the beneficiaries in the proportions identified by the trust document. The trustees have no discretion as to which people are to benefit from the trust and in what proportions; the objects of the trust are fixed from the start. Consequently, it must be possible to identify who all the beneficiaries are. This is known as the ‘complete list test’ and it requires that a list be compiled of all beneficiaries at the time when the trust property is to be distributed. It does not matter that a complete list cannot be drawn up when the trust is created. For example, may be valid to say ‘Angela’s grandchildren’ including those not born yet. If it is not possible to draw up a complete list of objects at the time of distribution, the trust will be void from the start. o Conceptual certainty- the need to satisfy the complete list test means that, if the definition of the objects is unclear, it will not be possible to compile a complete list, so that the trust will be void. For example, a fixed trust for the settlor’s friends will be void for conceptual uncertainty, because it is not possible to define clearly who is a friend. o Evidential certainty- even if the definition of the objects is certain, if it is not possible to prove who the objects are, the complete list test will not be satisfied. For example, a list of all the people in the school football team is conceptually certain. But if the school no longer have records of this the trust will fail for evidential uncertainty, because it is not possible to complete the list of objects. o Ascertainability- it does not matter that the location or continued existence of particular beneficiaries cannot be established. The property will be distributed

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amongst those who can be ascertained and the share of anybody who cannot be ascertained can be paid into court. Size of the class- Significant when considering the validity of discretionary trusts but not relevant when determining the validity of a fixed trust. If it is possible to list all of the objects, there should be no concerns about the size of the class. The size of the class is relevant to discretionary trusts because if the class is too large, the act of selection will not be administratively workable. There is no such concern for fixed trusts because trustees do not select from within the class; instead they distribute amongst the whole class, which makes the administration of the trust a great deal easier. By its nature, the class in fixed trusts tends to be small. McP facts- A deed, executed on July 17, 1941, by the settlor, Mr Bertram Baden, provided that a fund was to be held upon certain trusts in favour of the staff of Matthew Hall and Co Ltd and their relatives and dependants. The deed provided (clause 9 (a)) that trustees should apply the net income in making grants at their absolute discretion ‘to or for the benefit of any of the officers and employees or exofficers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit…’ Two main questions arose: whether the deed created a power or a trust; and whether it was void for uncertainty. At first instance, Goff J held that it was a power and not a trust and that it was valid, applying as the test of certainty that was used by the Court of Appeal in Re Gulbenkian’s Settlements: a power was valid if it was sufficiently certain to enable any one claimant to show that he or she comes within the description. The Court of Appeal agreed that it was a power and not a trust; but remitted the case to the Chancery Division to determine the validity upon the application of the test or certainty of powers which had been laid down by the House of Lords in Re Gulbenkian’s Settlements. The decision of the Court of Appeal was appealed to the House of Lords. The House of Lords Held that: the deed created a trust not a power; the test for certainty for discretionary trusts was the same as that for power i.e. whether it could be said with certainty that any given individual was or was not a member of that class (Lord Hodson and Lord Guest dissented). The case was remitted to the Chancery Division for the determination of validity upon this basis. Brightman J upheld its validity and this was affirmed by the Court of Appeal in Re Baden’s Deed Trusts (No. 2). Fiduciary powers Re Gulbenkian [1970] AC 508 said that for fiduciary powers the test for certainty is the individual ascertainability test- Lord Upjohn. The ‘any given postulent’ test The ‘is/is not’ test The Individual ascertainability test Discretionary trust- not to fix shares at outset but give trustee some discretion of how to give out stuff. Trustees must distribute property. In a power they do not have to. The Trusts/Powers distinction In McPhail v Doulton [1971] AC 424, Lord Wilberforce stated that: “It is striking how narrow and in a sense artificial is the distinction, in cases such as the present, between trusts or as the particular type of trust is called, trust powers, and powers. It is only necessary to read the learned judgments in the Court of Appeal to see that what to one

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mind may appear as a power of distribution coupled with a trust to dispose of the undistributed surplus, by accumulation or otherwise, may to another appear as a trust for distribution coupled with a power to withhold a portion and accumulate or otherwise dispose of it. A layman and, I suspect, also a logician, would find it hard to understand what difference there is”. Sometimes difficult to tell which is a discretionary trust and which is a fiduciary power, if we cannot do this then it might not matter in practice as same individual ascertainability test. For personal powers, low level of certainty needed, not for the Court to intervene- Re Hays ST and Re Wright’s W.T [1981] L.S Gaz 841- Megarry. A fundamental distinction exists between trusts and powers, since trusts impose obligations that must be performed, whilst powers are discretionary, so they may be performed. But sometimes a trust instrument may impose both trust obligations on the trustees and create discretionary powers that may be exercised by the trustees. Necessary to distinguish because it is necessary to determine whether the trustee must or may act, and because trusts can be executed by the court, whereas powers cannot. 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.” 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…. Re Gulbenkian [1970] AC 508- made a will under which trustees had a power to maintain income for his son and people his son employed. Second limb void for uncertainty of objects. Big list of people. Could not be written into a list. Difficulty in establishing. Did not render entire thing void. Lord Upjohn- alluded to different tests applicable in certain circumstances. If donor directs trustees specified provisions then for legal effect it must be possible to identify the person or trust will fail for uncertainty. Distinguished between discretionary trusts and fiduciary powers. For fiduciary powers you do not need a complete list, just say whether an individual is in the class or not. Changed it to an individual ascertainability test. Is/Is not test. In exam have to say individual ascertainability test. 3-2 majority. Discretionary Trusts Test for discretionary trusts is the individual ascertainability test- McPhail v DoultonLord Wilberforce. The discretion of a discretionary trustee can be characterised as a power, in the sense that the trustee can choose who is to benefit. But this power must be exercised and so appears to be a trust. Because it has dual components of trust and power, it is sometimes called a trust power. It is a trust because there is an obligation to appoint, but it is a power because the trustee has a discretion regarding who is to benefit from the appointment of trust property and how much. The trustee of a discretionary trust is subject to a duty to survey the class of beneficiaries and to exercise their discretion in favour of one or more members of that class. If the trustee fails to do so, the trust

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power will not lapse, but will be executed by the court, either by making an order for equal division among the beneficiaries or in such proportions as appear to be appropriate in the circumstances. In a discretionary trust, the trustees are given a discretion as to which objects are to be benefited by distribution of trust property and in what proportion. It is important to have a clear test of certainty of objects for discretionary trusts. Satisfying the complete list test causes more difficulties for discretionary trusts than fixed trusts which tend to involve many more objects. McPhail v Doulton [1971] AC 424 decided shortly after Re Gulbenkian. Embraced individual ascertainability test as more appropriate for discretionary trusts. Originally formulated for powers only. In this case, the settlor purported by deed to transfer shares to trustee to hold for employees. Power or trust? HOL in McPhail v Doulton rejected the fixed list test of certainty of objects for discretionary trusts because if the trustees fail to exercise their discretion, the court will be willing to find a solution to the problem without resorting to the maxim equity is equality. In this case, the settlor established a fund for the benefit of the employees and ex-employees of a company, and their relatives and dependants. He purported to create a discretionary trust, but the validity of this trust turned on whether relatives and dependants were sufficiently certain objects. Lord Wilberforce giving the leading judgement, held that it was sufficient that it could be said with certainty that any given individual was or was not a member of the relevant class, and it was not necessary to ascertain everybody who was in the class. Lord Hodson Lord Guest Lord Reid Viscount Dilhorne Lord Wilberforce Lord Hodson @ 441 “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. 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.” Lord Guest @ 446 “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.” Viscount Dilhorne and Lord Reid disagreed- no reason why if for a power to be valid using individual ascertainability test then no reason why it shouldn’t be used for discretionary trusts too. 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. Lord Wilberforce: “As a matter of reason, to hold that the principle of equal distribution applies to...