Certainty of objects PDF

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Certainty of objects...

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Certainty of objects The third of the three certainties is certainty of objects, or beneficiary. All trusts must have identifiable beneficiaries able to take the beneficial interest. If they do not, the trust will fail. The beneficiary must, as a general rule, be a human being (Morice v Bishop of Durham (1804) 9 Ves 399), for only a human has the standing to bring an action against the trustee if necessary. In most cases, identifying the beneficiary will be relatively straightforward as, for example, where they are named specifically in the trust deed: My shares in ICI plc to Andrew and Belinda . This will be valid, so long as it is known who Andrew and Belinda happen to be. Alternatively, the beneficiaries might be identified by reference to a ‘concept’, eg, my shares in ICI plc to my nephews. This would also be valid so long as it was possible to identify the settlor’s nephews, ie, so that the trustees could create a list. These relatively straightforward trusts caused little in the way of difficulties for the “ list test” which was the test for identifying beneficiaries under a trust. In the words of Jenkins LJ in Inland Revenue Commissioners v Broadway Cottages Trust [1955] Ch. 20, “the trustee should know, or be able to ascertain, all the objects from which he was enjoined to select by the terms of the trust.”(at page 31) The rationale appears to be: “...the validity of the trust must be tested by considering its terms and asking oneself whether the court would be able to control and execute the trust if called upon to do so. That question must be answered by reference to what might happen, and not merely by reference to what would be likely to happen. That is to say, the charge of invalidity cannot be met by making the assumption (in itself reasonable enough) that trustees undertaking a trust such as this would, in all probability, carry it out, by distributing the income amongst persons falling within the class of beneficiaries as defined by the settlement. On the contrary, it must be assumed that the trustees for some reason or other might fail or refuse to make any distribution, and see whether the court could execute the trust in that event. Consideration of the case on that assumption shows that the most the court could do would be to remove the inert or recalcitrant trustees and appoint others in their place. That, however, would not be execution of the trust by the court, but a mere substitution for one set of trustees invested with an uncontrollable discretion of another set of trustees similarly invested, who might be equally inert or recalcitrant.”(at page 31). It must be possible to identify all the beneficiaries and choose from them in order for the trust to be valid. However, this view came somewhat more difficult to rationalise given a pressing social phenomenon which developed in post-WWII England and Wales, namely philanthropic employers using tax advantages to establish large discretionary trusts for the benefit of their employees and their families. This issue came to a head in the House of Lords case of McPhail v Doulton [1971] AC 424. In this case, Bertram Baden set up a trust, “to establish a fund for providing benefits for the staff of [his] company and their relatives and dependants...” The income of the fund was to be used to make grants for, “to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons...” At first instance, Goff J interpreted the clause as a power and held that it was valid. The Court of Appeal upheld the interpretation of Goff J, stating that the correct test for certainty in respect of powers was that set down by the House of Lords in Re Gulbenkian's Settlements [1970] AC 508. In Gulbenkian, the House stated that a power is valid if it could be said with certainty whether any given individual was or was not a member of the class, and that it did not fail simply because it was impossible to ascertain every member of the class. In doing so, the House followed and endorsed the cases of Re Park [1932] 1 Ch 580 and Re Gestetner Settlement [1953] Ch 672. In McPhail, the settlor’s executors appealed to the House of Lords on the basis that the whole clause was void as it was not possible to identify all the beneficiaries who could benefit from the trust, following the Court of Appeal in IRC v Broadway Cottages. The House of Lords rejected the appeal (Lords Wilberforce, Reid and Viscount Dilhorne; Lords Hodson and Guest dissenting), finding that the clause in fact created a discretionary trust and not a power of appointment. In doing so, the House assimilated the tests of certainty of objects for discretionary trusts and powers. Lord Wilberforce stated:

“...I think that we are free to review the Broadway Cottages case [1955].... The conclusion which I would reach, implicit in the previous discussion, is that the wide distinction between the validity test for powers and that for trust powers is unfortunate and wrong, that the rule recently fastened upon the courts by Inland Revenue Commissioners v Broadway Cottages Trust ought to be discarded, and that the test for the validity of trust powers ought to be similar to that accepted by this House in In re Gulbenkian's Settlements [1970] AC 508 for powers, namely, that the trust is valid if it can be said with certainty that any given individual is or is not a member of the class.”(at page 456B – C; note that the House use the regrettable and somewhat confusing term ‘trust powers’ to refer to ‘trusts’). Lord Wilberforce appears to base his reasoning on the “narrow” and “artificial” distinction between trusts and powers. A layman, he suggests, would find it difficult to see the difference between the two and that, therefore, the validity of a clause should not depend on such “delicate shading”. He goes on, “...a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know.”(at page 449D). Lord Wilberforce, in the course of his speech calls in aid the words of Harman J (as he then was) in Re Gestetner Settlement [1953] Ch 672: “The settlor had good reason, I have no doubt, to trust the persons whom he appointed trustees; but I cannot see here that there is such a duty as makes it essential for these trustees, before parting with any income or capital, to survey the whole field, and to consider whether A is more deserving of bounty than B. That is a task which was and which must have been known to the settlor to be impossible, having regard to the ramifications of the persons who might become members of this class.” If, therefore, there be no duty to distribute, but only a duty to consider, it does not seem to me that there is any authority binding on me to say that this whole trust is bad. In fact, there is no difficulty, as has been admitted, in ascertaining whether any given postulant is a member of the specified class. Of course, if that could not be ascertained the matter would be quite different, but of John Doe or Richard Roe it can be postulated easily enough whether he is or is not eligible to receive the settlor's bounty. There being no uncertainty in that sense, I am reluctant to introduce a notion of uncertainty in the other sense, by saying that the trustees must worry their heads to survey the world from China to Peru, when there are perfectly good objects of the class in England.”(at pages 688 – 689). Lord Wilberforce then turns his attention to the speech of Lord Upjohn in Re Gulbenkian, commenting that the decision of that case respecting powers was that it: “...was valid if it could be said with certainty whether any given individual was or was not a member of the class, and did not fail simply because it was impossible to ascertain every member of the class.”(at page 454D) ... “...in the case of a trust, the trustees must select from the class. [They need not] have before them, or be able to get, a complete list of all possible objects.”(at page 456A – B). Where the court was called upon to execute such a trust, it would, “do so in the manner best calculated to give effect to the settlor’s or testator’s intentions.”(at page 457A). Therefore, following the majority decision in McPhail, it would seem that though trusts may be defeated for linguistic or semantic uncertainty, ie, where the concept which defines the class of beneficiaries is uncertain, evidential uncertainty will not defeat the claim since an application might be made to court for directions. The final matter on which Lord Wilberforce comments is administrative unworkability, where a trust is so hopelessly wide that it does not form anything like a class. Regrettably, his Lordship provides an example of “all the residents of Greater London”, which was followed in a later case of R v District Auditor, ex p, West Yorkshire Metropolitan County Council [1986] 26 RVR 24 where a trust fund

for, “all or some of the inhabitants of West Yorkshire” was deemed void for uncertainty of objects as being administratively unworkable. The case of McPhail rejects the list test for discretionary trusts, replacing it with the ‘ any given postulant’ test, or the ‘is/is not’. This test requires that the concept which defines the class of beneficiaries to be certain, ie, conceptual certainty, whereas since a complete list is not needed, it does not require evidential certainty. This is in contrast to the ‘list test’ which requires both conceptual and evidential certainty. Notwithstanding the rejection of the ‘list test’ for discretionary trusts, it remains to be seen whether this test will be extended to the fixed trust, since Broadway Cottages concerned a discretionary trust and can now no longer be regarded as good law in this context. The case was remitted to the Chancery Division of the High Court for consideration, so McPhail was not the end of the matter, as the case ended up back in the Court of Appeal as Re Baden's Deed Trusts (No. 2) [1973] Ch 9. The court applied the test of validity set down in McPhail and determined the meaning of “relatives” used in the trust deed. The three judgments in the case are notable for their divergence of opinion. Sachs LJ stated (at page 20): “...it is conceptual certainty to which reference was made when the "is or is not a member of the class" test was enunciated.... Once the class of persons to be benefited is conceptually certain it then becomes a question of fact to be determined on evidence whether any postulant has on inquiry been proved to be within it: if he is not so proved, then he is not in it. That position remains the same whether the class to be benefited happens to be small (such as "first cousins") or large (such as "members of the X Trade Union" or "those who have served in the Royal Navy"). The suggestion that such trusts could be invalid because it might be impossible to prove of a given individual that he was not in the relevant class is wholly fallacious.” Megaw LJ stated (at page 22): “To my mind, the test is satisfied if, as regards at least a substantial number of objects, it can be said with certainty that they fall within the trust; even though, as regards a substantial number of other persons, if they ever for some fanciful reason fell to be considered, the answer would have to be, not "they are outside the trust," but "it is not proven whether they are in or out." What is a "substantial number" may well be a question of common sense and of degree in relation to the particular trust: particularly where, as here, it would be fantasy, to use a mild word, to suggest that any practical difficulty would arise in the fair, proper and sensible administration of this trust in respect of relatives and dependants.” Stamp LJ stated (at page 28): “Validity or invalidity is to depend upon whether you can say of any individual – and the accent must be upon that word "any," for it is not simply the individual whose claim you are considering who is spoken of – "is or is not a member of the class," for only thus can you make a survey of the range of objects or possible beneficiaries.” Of the three judgments in Re Baden (No 2), that of Sachs LJ is probably more closely allied to the words of Lord Wilberforce in McPhail. Megaw LJ, in adopting the idea of ‘substantial number’ seems to generate further problems in one really has no real understanding of what a ‘substantial number’ is, or likely to be, let alone where the line might be drawn in any one case. Finally, Stamp LJ, in indicating that it is only possible to determine whether someone is / is not a member of the class of beneficiaries if one is able to survey the whole class seems to reintroduce the list test by the backdoor. To summarise, for the is / is not test, the concept which defines the class must be certain, whether someone is / is not within the class is a matter of evidence. Evidence alone will not defeat the claim. In Re Baden (No 2), the majority (Sachs and Megaw LJJ) held that “relatives” was a certain concept, giving it the broad definition of descent from a common ancestor. Stamp LJ, while holding it to be a certain concept, adopted the rather more restrictive definition of ‘next of kin’. Other concepts, such as employees, or ex-employees are certain, but ‘friends’ is in the somewhat more questionable category in

that one cannot really state, objectively, who one’s friends might be. Indeed, in the context of the discretionary trust it was doubted, albeit obiter, by Browne-Wilkinson J in Re Barlow's Will Trusts [1979] 1 WLR 278 since it has a, “great range of meanings”. So, what happens if the trust is void for uncertainty? Well, the answer rather depends on which certainty is found to be lacking. If it is certainty of intention, then the person who would have been trustee takes the property as an outright gift; they are free of the trust obligation. If it is certainty of subject-matter, the disposition is regarded as one which was never attempted. However, if there is failure of objects, then there is an automatic resulting trust of the beneficial interest back to the settlor, or to his estate if it is a testamentary trust....