‘The tests for certainty of objects are too diverse; they should be the same for powers and all types of trusts. Furthermore, since a power may be created in favour of the entire world, there is no reason why you should not have a trust for the entire PDF

Preview

Summary

‘The tests for certainty of objects are too diverse; they should be the same for powers and all types of trusts. Furthermore, since a power may be created in favour of the entire world, there is no reason why you should not have a trust for the entire world.’...

Description

‘The tests for certainty of objects are too diverse; they should be the same for powers and all types of trusts. Furthermore, since a power may be created in favour of the entire world, there is no reason why you should not have a trust for the entire world.’ Discuss this statement. The essay aims to discuss the several tests in determining the certainty of objects in the law of trusts. This will be considered by explaining the diversity of tests in certainty of objects and demonstrating how the tests should be the same for powers and all types of trusts. It will conclude upon its findings by critically discussing on how both power and trusts should be created in favour of the entire world. But it is seen from the majority of cases, that tests for certainty of object created some positive and negative impacts for being diverse. The case of McPhail v Doulton shows a clear distinction between trusts and power. There are three fundamental obligations which are important in creating an express trust. These requirements are known as certainty of intention, certainty of subject and certainty of object. Lord Langdale notably set out all three certainties in Knight v Knight that a trust is only binding where they all are satisfied.1 The purpose of these are to ensure that courts can enforce the trust if the trustee fails to do so, or make it void if it failed to be created in the first place. Therefore, for an enforceable trust, it is crucial to undoubtedly identify the trust object. As Lord Evershed M.R. stated, “No principle perhaps has greater sanction or authority behind it than the general proposition that a trust by English law…in order to be effective must have ascertained or ascertainable beneficiaries”.2 Therefore, for an individual to have locus standi, there must be someone who can enforce the trust or someone in whose favor the court can enforce the trust.3 If there is no ascertainable beneficiaries there is no trust.4 Some tests for safeguarding the certainty of objects have provided much clarity on how courts perform a trust in the event of uncertainty. This is especially relevant to fixed trusts and operation of the ‘complete list test’ in the case of IRC v Broadway Cottages Trust.5 Nevertheless, the court failed to provide the same level of clarity in the application of the ‘any given postulant test’ in discretionary trusts,6 which House of Lord prevented the use altogether.7 To explore the diversity of tests in certainty of objects in more detail, it is essential to distinguish between fixed trusts, discretionary trusts, and powers of appointment. A careful approach is normally applied to fixed trust because greater degree of certainty is essential than for discretionary trusts. A fixed trust is where the interests in the trust’s property are fixed in the trust instrument. The beneficiaries might be named individually or defined by class, for example, “To all my children in equal shares”. The essence of such a 1

Knight v knight [1840] 3 Beav 148, 173. Re Endacott [1959] 3 All E.R. 562 at 568. 3 Morice v Bishop of Durham [1805] 10 Ves. 522. 4 Tackaberry v Hollis [2007] EWHC 2633 (Ch). 5 [1955] Ch 20. 6 Re Gulbenkian’s Settlements [1970] AC 508. 7 McPhail v Doulton [1971] AC 424. 2

fixed trust is to confer fixed benefits to fixed beneficiaries. Every beneficiary, therefore, is to benefit under fixed trust. But there is no room for any discretion by the trustees as to the distribution of trust property. The test for a fixed trust is known as the ‘complete list test’, which demands that the trustee must be able to draw up an exclusive list of all the beneficiaries. If the trustee cannot compile such a comprehensive catalogue, a fixed trust will fail for uncertainty of object. This was emphasised in Re Eden8 that, although it might be costly and time consuming, an exhaustive catalogue of beneficiaries must be still listed. A useful illustration of complete list test is demonstrated in the case of OT computers Ltd v First National Tricity Finance Ltd.9 The claimant who are OT computers was retailer of computer products that instructed Lloyds TSB to set up two separate trust accounts, one for monies owned to ‘urgent suppliers’ and the other for customer deposits. The trust in favour of customer was upheld because the beneficiaries could be identified from the payments that they made to the company. However, Pumfrey J.10 concluded that the trust made in favour of suppliers failed due to lack of certainty of objects. This was because it was impossible to draw up a complete list of urgent suppliers. Mainly, the term ‘urgent’ was ambiguous to identify any class of beneficiaries and, therefore, the trustees could not draw a complete list. The money in suppliers’ account remained in beneficial ownership of the business. Also, in the key case of IRC v Broadway cottages Trust regarding fixed trust demonstrate that the amount of £80, 000 was settled upon trustees to apply the income within the perpetuity period in their absolute discretion, the objects being a very wide class, mostly of remote issue, contained in a schedule. There was no gift over in default of appointment, and this was an attempt to set up a trust rather than a power. There were two charities named Broadway Cottages Trust and Sunnylands Trust who were among the beneficiaries and claimed income tax exemption on income received under settlement. The IRC claimed the trust was void for uncertainty and the whole range of objects had to be ascertainable and the income belonged in equity to the settlor on resulting trust. As stated in the case of Re Benjamin, a fixed trust which requires complete list will not fail if the beneficiary cannot be traced or is dead. The court, therefore, will equally distribute the trust property to other beneficiaries and if lost beneficiary is found, his/her share can be recovered from other beneficiaries. Evidential certainty is concerns with the practical struggle of finding whether the individual is or is not within the class of beneficiaries. The requirement of evidential certainty only applies to fixed trust which requires the trustees to must draw up the complete list. It is necessary to have an evidence of every beneficiary belonging to the complete list. For example, Brunel university sets up a fixed trust for all the law students in 1986 but if the records are destroyed in the fire, it is impossible for the trustees to draw up the complete list and therefore, the trust will fail for evidential uncertainty. Discretionary trust reflects the discretion exercised by the trustees from amongst a specified class of beneficiaries who will benefit under the trust and how the trust property will be distributed. Discretionary trust is extremely advantageous for holding benefit for large 8

Re Eden [1957] 2 All E.R. 430. [2003] EWHC 1010 (Ch). 10 Davies P S and Virgo G, Equity & Trust Text, Cases and Materials (1st edn, OUP 2013) 9

numbers of people such as making non-charitable grants to employees of a enormous company. The case of Gartside v Inland Revenue Commissioners [1968]11 emphasises on the discretionary trust stating that a potential beneficiary has an interest in the fund only when the trustee has discretion on his/her favour. This is an advantage because there will be no beneficiary to be taxed on his mere potential to benefit under a discretionary trust, therefore an individual is only taxed on actual entitlements. Originally, there was no distinction between fixed trust and discretionary trust, thus complete list test was used for both.12 However, the House of Lord in the key case of McPhail soon after refused the complete list test and recognised the ‘is or is not’ test as more suitable test which was developed in the Gulbenkian case (relating to power) is extended to discretionary trust. This demonstrates the diversity of tests that exist in the law of trust. In his judgment, Lord Wilberforce said that the complete list test was inflexible for discretionary trusts since it rarely identifies with the settlor as intentions. Indeed, he felt that in many cases, the settlor himself would not intend on equal division amongst many beneficiaries as the trust property would then become so thinly disbursed, it would essentially render the trust worthless.13 McPhail v Doulton is concerned with distinction of trusts and powers. As in this case, two issues were addressed; what is required of trustees in discretionary trust and what happens in a discretionary trust if the trustee fails to exercise his/her discretion. Lord Wilberforce stated, trustees must examine the field by class and category, make diligent and careful enquires, decide upon principles and proportions, select individuals according to their needs and qualifications and finally duty is to make a wider and more systematic survey than in a power.14 Despite the best effort from the House of Lords, some issues were surrounding on how to interpret and apply the ‘is or is not’ test to conceptual and evidential uncertainty. This led to the decision made in Re Baden’s Deed Trusts, where three judges put forward different interpretation to what satisfy the test.15 It is important to note, that conceptual uncertainty relates the to the description of the class beneficiaries, while evidential uncertainty is about proving whether the person is intended to be the member of that class. According to Stamp LJ, a stricter test should be adopted such as going back to complete list test because it is crucial to establish whether the individual is or is not a member of class, thus a class of ‘don’t knows’ is simply prohibited. On the other hand, Sachs LJ said the issue is whether the class is ‘conceptually’ certain and not evidential certainty. In Baden, the courts had to consider the wide definition of relatives and dependents and whether it is suitably certain to form a class of beneficiaries. It was held that both words result in uncertainty due to the ‘…almost infinite expansion…’16 of relatives. Therefore, it places great burden of proof on individual claiming to be part of the class. This may create difficulties for administration of the trust. However, Megaw LJ stated that the test needs both conceptual and evidential certainty. He added that as long as one person who is suitable for both will succeed as there is a person to administer the trust to. This provides the trustees more detail about the width of the class. 11

[1968] AC 553, HL. IRC v Broadway Cottages Trust [1955] Ch 20. 13 McPhail v Doulton [1971] AC 424, 451. 14 Ibid, 424, 451. 15 [1973] Ch 9. 16 Sachs LJ citing Lord Evershed MR in Re Scarisbrick [1951] Ch 622. 12

It must be noted that the tests for certainty of objects are too diverse as stated by Lord Wilberforce in McPhail that the class of beneficiaries are‘…so hopelessly wide…’17 that it may be difficult to form ‘anything like a class’ thus, the trust is administratively unworkable. For instance, to ‘all the residents of Greater London’, the issue with this is that the trustee cannot exercise the discretion as its simply too wide and create evidential problems. In practice, this was proven in Re Harding, where a trust form for ‘black community of Heringey, Islington and Tower Hamlet’ was not identified and therefore, administratively unworkable.18 The concept of power is well illustrated in Re Gulbenkian’s Settlement [1970]19 . Calouste Gulbenkian, a well-known American oil entrepreneur made a will in 1929, under which the trustee had a power to use income to support his son. The court held that the power was not void for uncertainty as if it can be said with certainty whether a certain individual is or is not a member of the class, in that case the power is valid.20 However, when a trustee exercises his appointed power, he must do it in a sensibly manner. As Re Hay’s Settlement Trust, ‘intermediate power’ was valid and the appointment was not effective as trustees delegated their power of appointment. It led to three rules that a trustee must consider, whether or not he should exercise his power, the range of objects of the power and his suitability of individual appointments. In conclusion, the courts have established a wide range of cases to illustrate how the tests for certainty of objects have applied in practice. Although it is clear that the law relating to fixed trusts is far more consistent than in discretionary trusts or power. between fixed trust and discretionary trust, thus complete list test was used for both.21 The test for certainty of object cannot be the same for power and all types of trust because the court refused the complete list test and recognised the ‘is or is not’ test as more suitable test for power and discretionary trust. As illustrated in Re Hay’s Settlement Trust, trust may not be created for the benefit of the entire world as it may not be valid, but it may be as a power. Word Count: 2001 Bibliography Cases • • • • • • • 17

IRC v Broadway Cottages Trust [1955] Ch 20 Knight v Knight (1840) 3 Beav 172 McPhail v Doulton [1971] AC 424 Morice v Bishop of Durham [1805] 10 Ves. 522 Tackaberry v Hollis [2007] EWHC 2633 (Ch) OT computers Ltd v First National Tricity Finance Ltd [2003] EWHC 1010 (Ch) Gartside v Inland Revenue Commissioners [1968] AC 553, HL

McPhail v Doulton [1971] AC 424. Re Harding [2008] Ch 235. 19 [1970] AC 508, HL. 20 [1970] AC 508, HL. 21 IRC v Broadway Cottages Trust [1955] Ch 20. 18

• • • • • • Book • • • • • • •

Re Endacott [1959] 3 All E.R. 562 at 568 Re Gulbenkian’s Settlements [1970] AC 508 Re Eden [1957] 2 All E.R. 430 Re Scarisbrick [1951] Ch 622 Re Harding [2008] Ch 235 Re Gulbenkian’s Settlement [1970] AC 508, HL

Davies P S and Virgo G, Equity & Trust Text, Cases and Materials (1st edn, OUP 2013) Michael H & Lara M, Equity & Trusts (2nd edn, OUP 2009) Virgo G, The principle of equity & trusts (3rd edn, OUP 2018) Watt G, Trusts & equity (8th edn, OUP 2018) Penner J, The Law of Trusts (11th edn, OUP 2019) Hudson A, Equity and trusts (9th edn, OUP 2017) Atkins S, Equity and trusts (2nd edn, OUP 2016)...