The Beneficiary Principle

A. THE BENEFICIARY PRINCIPLE

  • General rule- a trust generally needs human beneficiaries unless it’s a Charitable Trust or a trust for purposes.
  • Nothing do with certainty of object which is conceptual
  • Companies count as human beneficiaries
  • Someone needs the locus standi to enforce the trust in court and hold trustees accountable

1. The beneficiary principle

Morice v Bishop of Durham (1804) 9 Ves Jun 399

  • Facts: Bishop of Durham created a trust and the trust deed said the trust was for objects that the trustee should approve in their own absolute discretion
  • No conceptual certainty
  • Sir WilliamGrant- there can’t be a trust over which the court can’t exercise control as an uncontrollable disposition is ownership not a trust.
    • Beneficiary controls trust as they are true owners. No beneficiaries=no one to bring trustee to court
  • Principle: private trusts need human beneficiaries
  • Doesn’t apply to Charitable Trusts-
    • Charities Act 2006: gives you a list of purposes that are charitable, public benefit test must be satisfied i.e. a trust won’t be charitable if it doesn’t serve for the public benefit. Attorney General or Charity Commission monitor and therefore can enforce such trusts.

2. Anomalous cases

  • Trusts of imperfect obligation as the trustees aren’t obliged to carry out the trustsin the absence of anyone able to apply to the court to enforce the trust
    • Trusts are subject to the rules against inalienability and so must be restricted directly or indirect to the common law perpetuity period
    • Exception created by courts to the principle that they wont treat words creating a trust as if only creating a power( IRC v Broadway Cottages)
  • Significant exception to the no purpose trusts rule:
    • Charitable trusts
    • Testamentary trusts- trusts (Re Endacott):

Re Endacott [1960] Ch 252

  • Principle: anomalous cases are not to be extended, where testamentary trusts infringing the beneficiary principle have been held valid as concessions to human sentiment only apply in the following examples:
A-     Maintenance of particular animals

o   Pettingall vPettingall (1842) 11 LJ Ch 176

o   Re Dean (1889) 41 Ch D 552

  • Hounds and horses
  • Construction and maintenance of graves and funeral monuments

o   Musset v Bingle [1976] WN 170

o   Re Hooper

Leahy v A-G for NSW [1959] AC 457

  • Leading case on applying beneficiary principle to unincorporated associations.
  • Gift in question was of large estate calledElmslea- ‘upon trust for such order of nuns of the catholic church or Christian brothers as my executor and trustees shall select.’
    • Wide power of selection allowed trustees to select nuns that weren’t charitable under law- saved by application of New South Wales statute which restricted the power of selection to charitable objects. But for the statute, the gift would have failed
    • It’s ok as long as the trust purpose/objects are charitable.

3. The rule in Re Denley’s

‘Purpose Trusts’, the performance of which enures to the benefit of persons.

  • In Re Denley’s Goff J upheld a trust of a corporate settlor’s land ‘to be maintained and used as and for the purposes of a recreation or sports ground primarily for the benefit of employees of the company and secondarily for the benefit of such other person (if any) as the trustees may allow to use the same.”
    • Re Denley’s trusts not subject to the strict rule against alienability.
    • Such trusts typically involve a large fluctuating class of beneficiaries never intended to have, and never capable of having absolute ownership of the trust property, and only having a positive right to the performance of the trustees duties in the form prescribed by the settlor.
      • What about if there is a small class???
        • St Andrew’s Trust 1905- a trust fund set up for the education of 7 children of a deceased clergyman. Once their formal education was over Kekewich J held this to be an absolute gift with the reference to education merely expressing  the motive of the gift
          • He applied the well established and difficult to rebut presumption of construction- (Sanderson’s Trust): ‘If a gross sum be given, or if the whole income of property be given, and a special purpose be assigned for this gift this court regards the gift as absolute and the purpose merely as the motive of the gift, and therefore holds that the gift takes effect as to the whole sum or the whole income as the case may be.’

The case where the limits of the beneficiary principle were pushed but be hesitant to say that it’s an anomalous trust case

Re Denley’s Trust Deed [1969] 1 Ch 379

  • Facts: A company set up a trust for the maintenance of sports ground, for the benefit of its employees and any others that the trustees may allow to use.
  • If case decided nowadays it might be a charitable trust instead
    • The money was given for the maintenance of the sports ground. The question arises it looks like a purposes trust
    • First ProblemThis isn’t  Lord Robert Goff, but Reginald Goff J- held that this trust was valid (no wonder he didn’t become a lord). His reasoning was that the beneficiary principle exists to invalidate abstract or impersonal trusts
      • He said that here, there is a group of humans who have a locus standi to sue the trustees for any breach of the trust, this is valid and therefore the purpose of maintenance of the sports ground is secondary as the employees have locus standi.
      • Goff’s interpretation of the settlors words, is it accurate- NO from an objective point of view he’s got it wrong
    • Second problem; if we say that Goff was right, that the purpose was secondary, then essentially we are saying that the money could be used for something else, so long as the employees can come together and enforce their Saunders v Vautier right, he’s saying the money is for them. But that’s not what Goff has in mind; all he’s really saying is that they can sue.
      • But is this what the beneficiary principle is about? Is it only about locus standi to sue only?
  • Maybe there’s an argument that says since there are so many beneficiaries, maybe in practice it means nothing to say they own the trust property because it is unlikely/ practically impossible for them to exercise their Saunders v Vautier rights. If they’re not the true owners what’s left?- locus standi
  • NB: In this case there was a perpetuity period; it wasn’t set up to last forever.

Justice Goff:

  • Quoted Viscount Simmonds in Leahy- a gift can be made to persons but it cannot be made to a purpose or an object: a trust may be created for the benefit of persons as cestuis que trusts but not for a purpose or object unless the purpose or object be charitable. For a purpose or object cannot sue, but if it be charitable, the AG can sue to enforce it.
  • Where then the trust though expressed as a purpose, is directly or indirectly for the benefit of an individual or individuals it seems to me that its in general outside the mischief of the beneficiary principle.
  • Argued that the trust in the present case was limited in point of time so as to avoid any infringement of the rule against perpetuities so doesn’t offend against beneficiary principle and unless it be void for uncertainty, it is a valid trust.
  • In this case the court can execute the trust both negatively by restraining any improper disposition or use of the land, and positively by ordering trustees to allow the employees and such any other persons (if any) to use the land for the purpose of a recreation or sports ground.

4. Sanderson trusts and trusts limited by a purpose

Re Sanderson’s Trust (1857) 3 K&J 497

  • Principle: this is a principle of construction, a means by which a court construe the words of thesettlor:
    • If a trust is set up for the benefit of beneficiaries plus a purpose then the court will construe that to be an absolute gift to the beneficiaries, if the court can interpret the purpose as merely being the motive of the gift, which renders the purpose optional.

Re Osoba [1979] 2 All ER 393

  • Testator gave money to his widow to hold for the purpose of: 1- maintenance and training of their daughter up until she goes to university, 2- maintenance of aged mother, 3 and herself.
  • And the court said, the trust was valid and all three women owned the trust property absolutely because the purpose which is maintenance, were merely the motive for the gift, it was merely a wish.

Re Bowes [1896] 1 Ch 507

  • Tricky- not a lot of people agree with it
  • A trustwas created over £5000 for the purposes of planting trees for shelter on an estate.CoA said the estate owners own the money absolutely and so could do whatever they wanted with the money as planting trees was only a motive
    • Question here- are we just thwarting what the settlor intended?
  • Because the Sanderson trust cases are set up in a situation where there are only a few beneficiaries and its more personal , there is more weight to the view that the settlor could have well intended that they benefit rather than the trust be invalid completely. It’s more likely that that interpretation would count.

An enforcer principle?

DJ Hayton ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 LQR 96

P Matthews ‘From Obligation to Property, And Back Again’ in DJ Hayton (ed) Extending the Boundaries of Trusts and Similar Ring Fenced Funds (2002)

The Basic Rule

  • A trust must be directly or indirectly for the benefit of persons- someone has to have the appropriate locus standi to enforce the trust in court and hold the trustees accountable
  • There seem to be exemptions however to this basic rule
    • Charitable trusts
    • Enforcer principle

An Enforcer Principle?= fills a gap in the trusts ‘market’ by enacting legislation validating non-charitable purpose trusts so long as the trust instrument appoints an enforcer ( who could be the settlor or an independent or related 3rd party.)

  • This principle mainly recognized in other jurisdictions however an English court won’t hold a foreign jurisdiction trust to be invalid simply because it uses the enforcer principle.
  • Thus the trustee must have legal beneficial ownership of the trust property but subject to fiduciary and equitable duties owed to the enforcer.
  • It doesn’t matter that the enforcer only has a power and not a duty to enforce the trustee’s obligations: a beneficiary is in exactly the same position.

Does the law allow private purpose trusts or should it?

  • Hayton 2001: argues that the casesshould be read toreveal an enforcer principlerather than a beneficiary principle in such cases.
    • An enforcer principle would allow a settlor to create a private purpose trust so long as the trust revealed a person or class of persons who could enforce the trust against the trustee e.g. employees who factually benefited from the trust in Re Denley’s, OR the settlor named a particular individual as one who should have standing to enforce the trust.
  • Several difficulties with this view in so far as itcan be genuinely treated asthe creation of a true private purpose trust.
    • No one could insist the enforcer exercise his power to make the trustee apply the money to the purpose. The extent of the trustees duty is the extent to which that duty will be enforced against him by the enforcer- if the enforcer has no interest in seeing the purpose carried out he could easily cut a deal with the trustee to split the money between themselves in the same way that beneficiaries could consent t a distribution of trust funds that would otherwise be a breach of trust.
    • The purpose trust with enforcer mechanism described by Hayton= while within the law doesn’t deliver a true purpose trust, rather enable the settlor to give his trustee a power to apply property to purposes and a power to another to MAKE him exercise that power.
  • Enforcer as a holder of personal power could either choose to exercise this power or not, release the power or cut a deal.

However…

  • Matthews 2002: considers the nature of the enforcer’s rights if we take this sort of arrangement as advertised, and we really accept that the enforcer has no interest direct or indirect in the trust property, and has only a power to enforce an obligation the trustee undertakes to carry out the purpose.
    • Matthews persuasively contends- such a right-duty relationship between enforcer and trustee can on the principles of English  law be only personal between them i.e. it must be seen as a contractual not a trust relationship
      • A settlor can by creating a trust give beneficial interests in the property that run with the trust property and hence would bind successor trustees to non bona fide purchaser 3rd parties who receive the property in breach of trust, a settlor has no power to bin property merely with personal rights that do not give an interest in the property itself.
      • Matthews on the positive obligation of the trustee to the enforcer
        • While the initial trust agreement between settlor, trustee and enforcer can create personal rights and duties as a matter of contract, because the enforcer unlike an object of a trust or power HAS NO INTEREST in the trust property, his rights do not run with the trust property.
          • So= he could require the original trustee to carry out the purpose by bringing an action for breach of contract if he didn’t, BUT his enforcement right couldn’t bind successor trustees much less 3rd party recipients of the trust property transferred in breach of trust.
          • If this is right= then we find there’s no basis in English law for a true private purpose trust.
          • If the enforcer principle mechanism does work as advertised so that positive obligations can be imposed upon property, then simply by USING the device of the enforcer, private purpose trusts can be employed to make positive obligations run with land, and centuries of case law could be overturned in a trice.
        • True private purpose trusts can only be created if the law is changed so as to give some public force to the purpose trust so that trust property is governed not merely by the private rights of individuals .

The enforcer

What does it take to be a beneficiary?

  • Is it because they have locus standi or is it because they’re the true owner? There is a debate about this: in order to control or enforce a trust does the person that enforces the trust, need to be a beneficiary with proprietary interest or does he merely need to be an enforcer, i.e someone who sint the beneficiary. The enforcer if hes a valid person holding office- is somene who can hodl the trustee to account but doesn’t have beneficial interest in the property. If this idea is valid then charitable trusts wouldn’t eb considered as an exception of the general rule but would be considered a general rule. Another consequence of the enforcer idea is that purposes trusts can be valid e.g if I make a trust to scrub my pet tortoise then trustee would be liable

Two separate issues) read two articles at the top

The two articles seem to be taking past each other. Talking about two different things. Two distinct points

  1. Should English law recognise the enforcer principle when it relates to offshore jurisdictions?
    • Off shore jurisdictions are like Jersey , Isle of Man, Bermuda etc. – they’re called this because they’re small tax friendly havens, jurisdictions that specialise in offering corporate, commercial or investment specialist services to non-resident companies.  These jurisdictions are money minded. Recognise enforcer principle.
    • English assets in those jurisdictions- should English law recognise the enforcer principle when it relates to off-shore jurisdictions. Hayton argues we are flexible enough to accept it, Matthews thinks we shouldn’t
  2. In English law, do we (we don’t), and ought we to accept the enforcer principle?
    • Hayton says we ought to if the settlor is the enforcer
    • Matthews says this isn’t a trust. If we allow this it might be contractual but it isn’t a trust, the essence of a trust is that there is a beneficial owner, owner of the beneficial equitable interest. As proof of this point he says that beneficiaries have S v V rights, enforcers don’t. We can’t say a trust exists if no one owns the rights
  • Penner says this is a problem what if the enforcer and the trustee come together and decide to run away with the money
  • This idea would be valid only if we look at it as a power, money given to a trustee for purpose and money given to anther for a prupose= valid. We understand powers.

B. THE RULE IN SAUNDERS v VAUTIER

  • The case holds that if a beneficiary of full capacity has a vested and not a contingent interest in the trust property, then he can call for a transfer of legal title from the trustees, irrespective of any material purpose that the settlor might have in mind.

 

  • As a matter of property law an absolutely entitled beneficiary can do whatever he wants with the property, and any restriction on his enjoyment is inconsistent with the absolute nature of his interest.
    • The settlor can’t oust this principle even by express declaration.
    • Applies in discretionary trusts.

Rule doesn’t apply

  • Where the beneficiary only has a contingent interest, i.e. specified event has to happen first before entitlement under the trust arises
  • Where there is a fluctuating body of beneficiaries from time to time within a class, even where the likelihood of another ben being born before the fund is exhausted is remote.
  • Where other persons have an interest in the accumulations of income which the beneficiaries would like to stop.

The rule doesn’t give bens the right to control the tee in the exercise of any discretion conferred upon him by statute or the trust instrument.

Saunders v Vautier (1841) 4 Beav 115

  • A fluctuating class can never enforce the rights given under this case
    • Where a beneficiary has a true interest he is absolutely entitled the trust property that can’t be taken away from him, so Vautier didn’t have to wait for the trust.
    • Sui Juris (legal age and sound mind)
    • A settlor cannot say no even under an express declaration. Gist of the trust is ownership of the trust property. Only if he’s the beneficial owner can he call for it.

Stephenson v Barclays Bank [1975] 1 WLR 88

  • Justice Walton extended Saunders v Vautier principle to discretionary trusts, beneficiaries who hold between theme the entirety of the beneficial interest, they can if they’re sui juris collect the trust property and the trust property will go to them as joint tenants.
  • Saunders v Vautier rights don’t force the trustees penance e.g. the beneficiary can’t override the trust and still keep the trust in existence
  • Beneficiary can’t use the rules to invest in certain things
  • Further establishes that if several beneficiaries are together absolutely entitled as co-owners of the trust property, then the rule applies to each of them separately, provided that each beneficiary’s share can be severed from the trust fund without harm to the remainder.

Also note the Trusts of Land and Appointment of Trustees Act 1996, ss 19-21

  • If beneficiaries are not happy with the trustees they have, they can force them to retire.

C. THE RULES ON PERPETUITIES (in outline only)

  • Need to know the rules

With the exception of charitable trusts, equity does not allow a settlor to use the trust mechanism to tie up property in perpetuity. This is a concern where there is endowment capital, i.e. where capital must be set aside and be kept intact with only the income being used. Two rules prevent the settlor from tying up property forever: the rule against remoteness of vesting and the rule against inalienability. These are collectively referred to as the perpetuity rules and although they share certain concepts they are mutually exclusive: the rule against remoteness of vesting applies to trusts for people and the rule against inalienability applies to trusts for non-charitable purposes.

  • A trust cannot last forever, a trust is measured by human life.

The issue: The issue: rich people have an ego complex, they want to control the property for a long as possible even when they’re dead, the dead hand principle- they want to rule from the grave.

Creates problems for market liquidity because their property isn’t as marketable

1. The rule against remoteness of vesting

The property must ultimately go to the persons within a certain amount of time, you can’t wait too long

  • You must show that the trust will end i.e. that it will be given to someone in X number of years or else it will be void. All of this section doesn’t apply to charities.

 This rule applies only to trusts for persons.

a) At common law

A trust is void if it is possible for a person to acquire a vested interest outside the perpetuity period,

i.e. a life in being plus 21 years unless some other period is specified.

 

  • Common law rule= Life in Being + 21years- thiscan be express or inferred from the facts
    • Royal lives clause- life of a royal family plus 21. More common way is that its implied
  • There must be a life that is an anchor for the perpetuity period

b) Perpetuities and Accumulations Act 2009

after April 6th 2010: up to 125 years (apply to NCPs)

Perpetuity period: s 5

  • If you don’t comply with either rule, the trust is void from the outset. S7 relaxed this.

Wait and see rule: s 7

  • If there is ambiguity the trust still continues we wait and see until we are sure.

2. The rule against inalienability

This rule applies only to non-charitable purpose trusts.

A trust is void if it is possible that by the end of the perpetuity period there will not be some person with a vested interest who is entitled to dispose of the trust income: Re Hooper [1932] 1 Ch 38

Relates to trusts of purposes-

S18 says it doesn’t apply to Non-charitable Purpose trusts (NCPs)

Do the two rules apply to a case like Re Denley’s if it came today?

  • If it’s a trust for human beings then the rule for vesting, and wait and see rule would apply
  • The question is what do we do? Given the tendency t uphold trusts rather than not to- it would probably be seen as a trust for humans, but this is a suggestion
  • But it comes down to the point of is Re Denley’s, for humans or charitable purposes?
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2 Comments

  1. Hatti
    January 3, 2017 / 2:07 pm

    In a problem question dealing with a purpose trust, do you still need to run through formalities, certainties and constitution?

    • Raiine
      January 9, 2017 / 8:42 pm

      Hi, it depends on the question, I wouldn’t go into great detail if that isn’t the focus of the question I would just briefly mention a line or two to indicate that you know they exist and how they apply to the problem scenario you have. Depending on how the question is phrased, focus more on answering the question that has been set 🙂 I found that the Q&A revision guides were very helpful as they provided flowcharts and mind-maps on how to deal with trusts questions.

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