Equity and Trusts Problem Questions

The first step we should attend to briefly is to define what a trust is. Simply put, a trust is a relationship under the law of equity[1] that arises when one person (the settlor) vests the legal title in another person (the trustee) for the benefit of a third-party called a beneficiary. The trustee holds the legal title and the beneficiary-(ies) possess the equitable title and as such the trustee owes them a duty to carry out the duties as defined by the settlor[2]. The most basic species of trust is an express private trust; this is a “trust which is declared intentionally by the settlor[3]. There is no fixed mechanism or form of words for creating such a trust because “equity looks to intent rather than the form[4]; see Paul-v-Constance[5]. Hudson (p.72) speaks of “exposing” a trust which demonstrates that it exists by law and is not created by the courts retrospectively. Express trusts can be established during the life of the settlor or as in this case, via instructions placed in their will.[6]

There are two basic sets of requirements for valid trusts; the first is that there needs to be three basic certainties as per Knight-v-Knight[7]; defined as certainty of intention, subject matter and object – if any one fails then there is no trust. The first of these requires that there was a certainty of intention by the purported settlor “that the person receiving the property is under a mandatory legal obligation to carry out the wishes of the settlor[8]. Secondly and only logically, it must be certain what the subject of the trust is i.e. the property. Finally, there must be certainty of object i.e. there needs to be someone with equitable ownership to enforce the trust, see Re Endacott[9]. The second basic requirement is that the trust must be constituted i.e. the legal title must pass to the trustee(s). This should not be an issue here because as executors Edward and Sandra would have already acquired legal title of all Alice’s estate[10].

DISPOSITION A

Alice’s disposition is potentially void as a trust due, firstly to uncertainty of intention; the disposition does not suggest Alice intends to impose a legal obligation on Edward to carry out her wishes. Rather it potentially suggests she was imposing on him a “power”. In essence, trusts impose an obligation to act and powers authorise people to carry out certain tasks with a lower level of compulsion.[11] The task we have is to decide what Alice intended and according to Dixton (p.67) “it is very easy to confuse trusts and powers, especially since most power are given to people who are otherwise trustees”. Edwards (p.80) advises that to differentiate between them is “a matter of construction for the courts, based on identifying the intention from…the language and the document as a whole” He further suggests that a significant indicator would be “existence of a gift in default of appointment” and wide discretion. Applying this to our facts, we see that Alice grants him ₤10,000 to buy a small memento for “such of my relatives as have not received anything under the other provisions” and after doing this “to keep what is left”. It is submitted that this does not meet the necessary level of certainty, especially as Edward keeps what is left over, it is merely a power; a power of appointment[12], outside of a trust instrument[13].To impose a trust situation in this case would be to ignore the warning in Re Hamilton to “take the will you have to construe and see what it means, and if you come to the conclusion that no trust was intended then say so. The next issue is what kind of powers these are and what level of compulsion exists on Edward to carry out the tasks. This could be a personal power[14] or a fiduciary power and this will turn on whether he was given the power in his capacity as a son or executor. Wilkie (p.52) says if it is a personal power he could distribute “spitefully, or capriciously, or even go to sleep and forget about exercising the power at all”.

You could argue that Alice gave the power to her son in his capacity as a son; and so considering the remainder goes to him then it is all but an absolute gift. He could just buy a few relatives key-rings as mementoes and be done with it. The beneficiaries would have no equitable interest in any property as its quantum is unknowable. The second view you could argue is that he has to exercise the power in his capacity as executor and so he has a higher level of onus upon him. It is submitted that as such, this power of appointment would be what is known as a hybrid or intermediate power[15] in that he is authorised to distribute it to a certain category of objects, relatives, excluding those who have already benefited. The level of compulsion or onus is debatable. In Re Hays Settlements[16], it was held that he just cannot ignore this power to appoint randomly, he must make efforts to complete it. And in McPhail-v-Doulton[17] the leading case in this area it was said he “must act in a responsible manner according to its purpose” and “make survey of the range of objects that” will enable him to carry out his fiduciary duties.Wilkie (p.52) says that there is much lessor onus is on a donee[18] of a power to locate those who may be objects. However, other commentators, see Penner (58+) say the onus depends on the type of power as well as who has been granted it.

However, even with ‘powers’, the subjects and objects need to be ascertained and Alice has simply defined “small memento of me” and “relatives” minus those who benefited from the will; these are problematic. Firstly, the subject matter is conceptually uncertain[19]; as per Palmer-v-Simmonds[20] and so potentially void; what is ‘small’ and what is a ‘memento’[21]. Secondly, “relatives” could be taken to be anyone with a common ancestor and as you work back far enough this could include almost anyone. However, in Re Badens Deed Trusts (No.2)[22], relatives was equated to next-of-kin and held to be conceptually certain; a strange decision considering how rigid the court has been on conceptual uncertainty. Furthermore in McPhail, the test to ascertain objects for a power was decided as the ‘is or is not’ test described by Wilberforce as, “can it be said with certainty that any given individual is or is not a member of the class? Thus it appears possible that we could, if necessary, reach a legal definition of the objects although the problem is the subject of the power.

The advice to Edward is pretty clear; as a trust this fails and so based on Curtis v Rippon[23], he could take the entire amount of ₤20,000 seeing that the amounts to be given to relatives are uncertain and so the absolute gift to him takes effect over the failed trust. However, if viewed as a power, he may be under compulsion to distribute some of the ₤20,000 buying small mementos for relatives once he complies with the above; although, in practice few would be willing, or able, to compel him to execute this power.

DISPOSITION B

Does the phrase “fullest trust and confidence” indicates certainty of intention to create a trust? In Re-Adams-and-Kensington-Vestry[24] a husband gave property to his wife in “in full confidence that she will do what is right”, yet this was held to only impose a moral obligation upon her. However, in Comiskey-v-Bowring-Hanbury[25] the phrase “in full confidence” was held to impose a trust. The similarity in these cases is superficial and it is apparent that each was judged on its individual merits and potential settlor’s intentions. Hence, the mechanical application of phrase simply turns the law on its head. It is much more insightful to follow Re Hamilton comments listed above in part A and use common sense. Applying this, it is submitted there is potentially a certainty of intention, but we also need to examine the other certainties.

On ‘certainty of subject’; it is trite law that, as per Re-London-Wine-Co[26] that trust property must be ascertainable. In that case un-segregated wine voided certainty. This was supported in Re-Goldcorp-Exchange-Ltd[27] . Mustill[28] said “rights in property, whether equitable, cannot exist in the air… it can only exist in relation to property which is specifically ascertained”, i.e. physical segregation is necessary[29]. However we are not dealing with a situation exactly similar to Re-London-Wine. Under a will, the executor takes full title to the property on the death and according to Martin(p.60) the “equitable ownership is in suspense” – the trust has not yet been constituted whereas it allegedly had in London-Wine. All the executors need to do is to walk down to the cellar and physically segregate fifty bottles of wine and identify them as trust property and transfer legal title from Edward/Sandra, as executors, to Edward personally. It is obvious Alison knew what was in her wine cellar so the property she is referring to really was not a specific 50 bottles of wine, but 50 of the 80 wine bottles I know I have in my cellar. How else could she describe them if they were homogeneous, was an 80 year old woman close to death meant to go down to her cellar and move bottles around?

However, it is the “old friends”, the potential objects of this trust, which poses more serious problems. The phrase “my old friends” is conceptually uncertain[30]; both words are subjective; what is a ‘friend’ and what is ‘old’? With the knowledge that this would be a fixed trust if the three certainties were present; i.e. each beneficiary entitled to an “equal” share then IRC-v-Broadway-Cottages-Trust[31] states that all the beneficiaries must be able to be listed and there is no room for any conceptual uncertainty. The disposition states that Edward should cure any uncertainty and his word is “final”. However, this is not likely to be accepted by the courts. In Re-Tucks-Settlement-Trusts the court allowed a Rabbi, as per the trust document, to cure an issue of uncertainty i.e. whether someone was of “Jewish blood”[32]. However, the Rabbi was acting in his capacity as expert on the Jewish faith and evidencing the meaning of the words not defining them. You could make a good argument that Edward could define his mother’s old friends just like the Rabbi defined Jewish blood, but it would go against current legal and academic opinion so as a trust it would likely fail.

However, the advice in this case might be that this could be treated like above, as a power. This is because, as a power Edward could use the “is or is not test” rather than the “complete list” test and so circumvent this issue and give Edward much more leeway to carry out his mother’s intentions. Remember the preference of the courts will be to see Alice’s wishes carried out rather than not.

DISPOSITION C

There is clearly an intention to create a trust with the subject matter of ₤20,000, because it is stated. It is further obvious that it is a discretionary trust[33]; this is a type of express trust where the trustee has what is called ‘dispositive discretion ’ i.e. an ability to decide the quantum of trust property, if any, goes to each beneficiary[34]. It is important to note the difference between this and a fixed trust; in a fixed trust the beneficiaries have a severable equitable claim on the property because they can usually calculate what they are entitled to. In a discretionary trust the trustees can exercise discretion; and in this case the basis of this discretion is those “they find most deserving.”

The real issue is who exactly are the objects of the trust; that are subject to this discretion?[35] We are given no names but rather a class description “such of the first 300 people to have crossed the Victoria Bridge on the 24th of October 2008”. Such descriptors in theory pose no problems. However, if we assume that this date has passed[36], then we are presented with a difficult evidential problem. It is important to point out that the names of the 300 people who were first over Victoria Bridge is a fact; they are an absolute certainty; it is just the trustees don’t know who they are yet. Hence, it is not an issue of ‘conceptual certainty’ as to the class descriptor; it is not like “old friends”. The issue is one of evidential uncertainty in that the trustees do not have enough evidence to write down a complete list. The courts have grappled with this problem but it is now clear from McPhail-v-Doulton that previous requirements for a complete list, like for fixed trusts, are no longer valid. The test now is the “is or is not” test as outlined above. Hence, the trustees do not need to know the 300 people who crossed the bridge, they only need to meet the test set by Wilberforce in McPhail; “can it be said with certainty that any given individual is or is not a member of that class”. The issue now is could anyone do this with sufficient certainty. It would not be enough to show you crossed the bridge on the day but that you were one of the first three hundred to do so[37]. This turns on facts we don’t have; considering the coverage of police cameras in London it is likely there is one focused on Victoria Bridge so this might help candidates prove their claim. To conclude this section, the advice is whoever can prove with sufficient certainty that they fall within the class, and then they will become beneficiaries of the trust. However, if no one can prove then the trust will fail for lack of certainty of objects and the ₤20,000 result back to Alice’s estate.

There are a number of other issues which should be covered briefly for Edward and Sandra. Assuming the three certainties are present, then the trust is properly constituted (as the potential trustees they are also executors and have legal title). To be a trustee you need to have reached the age of 18; we are not told Sandra’s age but presumably she complies with this. The trust is defined to be for 21 years i.e. 21 years after Alice’s death and this is permissible under Section 13 of the Perpetuities and Accumulations Act 1964. However, it is worth pointing out to Edward and Sandra that the trust is unlikely to last as long as 21 years. Although the beneficiaries would have no rights severally because as Penner (p.85) describes them they are “mere postulants, seeking the trustees largesse”; they could have rights jointly because it is an exhaustive trust[38] i.e. Alice appears to have instructed them to spend all the 20K and there are no devices to return unspent money to the estate. As such the beneficiaries may have rights jointly to petition the court to simply give them the trust property, see Martin (p.211) which presumably they would have agreed to divide equally[39].

References Bibliography

Burn, E, Trusts & Trustees Cases & Materials 6th Edition, Oxford University Press.

Dixon, M, 2005, Equity and Trusts Q & A, Cavendish Publishing.

Edwards, K, 2000, Essential Equity and Trusts, Routledge.

Duddington, J, 2007, Equity and Trusts Law Express, Pearson.

Hudson, A, 2005, Equity & Trusts, Routledge Cavendish.

Mohamed, R, 2004, Cases & Materials on Trusts, Routledge Cavendish.

Martin, J, 2005,Hanbury & Martin, Modern Equity 17th Edition, Sweet & Maxwell.

Penner, J, 2005, The Law of Trusts Core Text 4th Edition, OUP.

Wilkie, M, 2008, Equity and Trusts Blackstones Q & A 2008/2009, OUP.

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Footnotes

[1] Space precludes a discussion on the fundamentals of equitable law see Duddington(p.2+).

[2] A trust is an onerous obligation and should not, and will not, be imposed casually by the courts if any doubt exists; especially as the courts may ultimately be called to adjudicate upon its operation

[3] Hudson(p.38)

[4] Re Williams 1897

[5] On the other hand you can use the word “trust”, as per Tito v Waddell (no2) and this might not create one.

[6] They are often known as ‘testamentary trusts’; but not substantially different to inter vivos trusts.

[7] 1840

[8] Dixon(p.61)

[9] 1960

[10] We are told the will is valid and that is all we need to concern ourselves about with that matter.

[11] Martin(p.171)

[12] appointment in this sense means the power to give or to appoint the property to someone.

[13] Powers can operate „inside“or „outside“, those outside are known as bare powers i.e. less encumbered by the obligatory nature of the trustees duty.

[14] Beware of terminological problems with these phrases, see Wilkie(p.51)

[15] See Mohamed(p.118)

[16] 1982

[17] 1982 see Burn(p.84) for a discussion of the case and test.

[18] The person who is authorised to exercise a power.

[19] see Disposition B and C for more details and Duddington(P.15,16)

[20] 1854

[21] see below for more detail

[22] 1973

[23] 1820

[24] 1884

[25] 1905

[26] 1986 PCC 121

[27] 1985

[28] Quoted in Penner(p.205)

[29] It is worth noting the ruling in Hunter v Moss which appears to run contrary to this albeit with intangibles.

[30] Penner(p.197+) In Re Gibbards Will Trusts 1967 and RE Barlows Will Trusts 1979 “friends” was held certain but the former has been overruled and the latter referred to different legal circumstances.

[31] 1955

[32] see Duddington(p.20)

[33] see Dixon(p.65+)

[34] See Martin(p.104+), see also Edwards(p.77) for concise analysis.

[35] I am interpreting the will as meaning there is a potential class size of 300 and over these discretion is exercised.

[36] It is not 100% clear from the rubric that his date has passed, although the use of “to have crossed” clearly infers it.

[37] A suggestion of administrative un-workability might arise here

[38] It is interesting to note that discretionary trusts presents theoretical problems in that you can ask the question ‚who holds the equitable rights to the property?’ without beneficiaries who enforce the terms of the trust; there is an obvious risk that trustees can become slack in their duties. See Penner(p84+)

[39] Space precludes a detailed analysis of these issues

Bill Carlson