#10977 - Certainty Of Object - Trusts

Certainty of object

• Certainty of object is necessary so that it is clear who has standing to seek performance of a trust, and the trustee knows who to account to

1. Trust structure

• Fixed interest trust

  • This is a trust in which the beneficiaries and their shares in the trust property are specified at the time of creation of the trust

    • E.g Paul v Constance – C held for himself and Mrs Paul in equal shares. Hunter v Moss – Moss held 5% for Hunter

  • Trustee must exhaust trust property

  • No discretion as to beneficiary

  • Where shares are not specified, presume the beneficiaries are entitled to equal shares

• Power of appointment

  • The discretion in a discretionary trust is called a power of appointment

    • Mechanism that allows us to create a discretionary trust. The donee of the power has power to ‘appoint’ the property

    • This power can be given to a trustee, or someone else

• Exhaustive discretionary trust (trust power) - imperative

  • Trustee must exhaust trust property

  • The holder is under an obligation to appoint the property, but has a power to select who to appoint it to among the beneficiaries

  • Example

    • S transfers to T on trust to appoint it within 5 years to such of S's children as T sees fit

    • Compare to bare PoA:

      • S gives T land on trust to hold for such of T's children as T sees fit, and in default of appointment for the Red Cross

      • T has a PoA to such children/child as T sees fit

      • T is under no obligation to appoint to one of T's children so the power is bare power

• Non-exhaustive discretionary trust (bare power) - permissive

  • The trustee has the power to appoint, but is still under no obligation to exercise the power. The power is permissive, not mandatory

    • Nevertheless the trustees responsibilities concerning the power are somewhat greater than the responsibilities faced by a non-trustee.

  • Where there is a taker in default specified, this renders the first part of the clause a mere power

  • The mere power (if invalid) can be struck out so long as it does not affect the taker in default provision

• Use of modern trusts

  • Unit trusts for investment

  • Superannuation trusts

  • Discretionary trusts for income splitting/tax minimisation

2. Choosing whether it is a trust power or bare power

   • It is a question of construction, is there an obligation to exhaust the fund?

     • Gift over in default of appointment indicates a bare power

       • The fact that the donor of the power expressly allowed for its non-use shows that no obligation to exercise the power was imposed

       • “The rest in residue” (residuary clause) is NOT a gift over in default of appointment

         1. Does not automatically convert the mere power into a trust power

       • But absence of gift doesn't automatically indicate trust power

     • Language used

       • Find in the words a sense that an obligation is being imposed for requiring the power to be exercised

       • Best way to do this – stronger the language used, more likely it is a trust

       • Weaker the language – more likely mere power

       • Nevertheless it is not determinative

       • It is permissible to contrast language used in other provisions of the trust deed or will to construe the meaning

       • NB the word “shall” is ambiguous, unsure if it denotes a mere or trust power. Discussion required.

     • Time limit

       • If it has to be done within 2 years, it has to be done

       • That is not conclusive

       • Not conclusive if followed by a gift over in default of appointment (which IS conclusive)

3. Exhaustive/Non-exhaustive: Classifying powers of appointment Examples

• We can classify PoA according to the class of object described

  • General: discretion to choose anyone in the world

    • Trust power: invalid, fails for administrative workability Re Hays per Megarry J and also because self-appointment would be in breach of the profits and conflicts rule

    • Bare power: valid, unless capricious

  • Special: discretion to choose amongst a specific class of objects

    • Trust power: valid if the class meets criterion certainty McPhail

    • Bare power: valid, unless capricious

  • Hybrid: discretion to choose anyone in the world, except a specific class

    • Trust power: invalid, fails for administrative workability Re Hays per Megarry J

    • Bare power: valid, unless capricious Re Manisty’s

      • UK approach: hybrid mere powers always valid Re Hays

      • Some states: hybrid mere powers only valid if intervivos

    • You apply the certainty test to the excluded group

4. Degree of certainty required – Trust power (exhaustive discretionary trust): criterion certainty (are they inside or outside of the trust?) McPhail v Doulton; Re Gulbenkian’s Settlements

   • Can you say of any given person that s/he is, or is not, a member of the class of objects (criterion certainty)? If not, consider whether this is due to semantic or evidential certainty

   1. Semantic certainty: if not, trust is void and property reverts to estate

      • The class must be described whereby the meaning of the words is clear (understandable in English)

      • Certain

        • “Organisations working for the elimination of war” Re Blyth

        • “Relatives” Re Baden – can attempt to give it meaning (Justice Sacks thought the term meant blood relative)

        • “Dependents” (used often in trust deeds – Sachs LJ, often used in statute without definition – Re Baden)

        • “Employers” (Re Gulbenkian)

      • Uncertain

        • Semantic uncertainty can arise when the words an inherently subjective in nature e.g. “My old friends” unless there is evidence of the special meaning for the settlor which would enable the trustees to identify members of the class Re Gulbenkian

        • Friends (difficult to attribute a certain meaning – Re Baden)

        • Reside (Lempens v Reid)

        • Organisations formed for the purpose of raising the standard of living throughout the world (Re Blyth)

        • Two semi-uncertain terms create uncertainty (“my friends who resided with me overseas” Lempens v Reid

   2. Evidential certainty – provisions not invalidated by this alone, not void, court will need to give directions

      • Need to be able to say whether or not someone falls within the class Re Baden per Sachs LJ

      • The fact that we can’t be certain when looking at the clause how they will prove it doesn’t matter Gulbenkian

        • i.e. the fact we might have to go to court and get an order Re Baden

        • Mere difficulty In tracing/discovering those entitles doesn’t invalidate trust. Distinguih conceptual uncertainty from difficulty of ascertainment Lempens v Reid

      • Can undertake enquiries, even if they consume the fund Lempens v Reid

      • Uncertain if there is a failure to identify a single person who falls in the class Lempens

   3. Administrative Workability (McPhail per Lord Wilberforce – obiter) - void

      • Trust is unworkable if the class “so hopelessly wide as to be incapable of forming anything like a class” R v District Auditor

        • E.g. “Greater London” - 2.5 million people was unworkable District Auditor

      • Donee of power needs to be able to undertake an adequate survey of the class in order to properly exercise the power

      • Doesn’t apply to mere powers, only trust powers Re Manisty’s settlement

5. Mere power (non-exhaustive discretionary trust) - Capriciousness

   • May invalidate a mere power where the terms are such that the trustee cannot sensibly exercise the power (Re Manistry)

   • Terms are “Irrational, perverse of irrelevant” Re Manisty

   • E.g chose beneficiary by height or complexion

   • Megari J in Re Hays said courts should be very slow to knock out a clause on basis of its possible capriciousness as because the power never needs to be exercised, doesn’t seem much of a problem.

6. Fixed interest: List certainty Test McPhail v Doulton

• Highest obligation. No discretion to pay anyone else, must know exactly who to pay

• Must be capable of forming a list of objects when the time comes for distribution example

  • The list does not need to be compiled at commencement of the trust. Instead the Bs must be able to be described sufficiently so that a list can be compiled at time of distribution. This means that unborn children can be beneficiaries Re Bowles

  • E.g. Grandchildren is certain but future employees isn’t

7. Consequences of classification

Proprietary interests of potential objects

• Beneficiaries under a fixed interest trust have equitable property rights in the subject matter of the trust = standing

• Objects of a discretionary trust have no property rights until an appointment is made in their favour

  • Prior to appointment object cannot

    • be taxed on basis of trust

    • assign interest to anyone else (Kennon v Spry)

• The objects of a mere power would normally be considered to have no proprietary interest in the property

  • If the power is not exercised at all, ownership of the property depends on whether or not there is an express gift over in default

  • If there is an express taker in default, that taker has a vested interest in the property, which interest is divested if the power of appointment is...