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Discretionary Trusts: A Brief Overview

Trust is amongst the different business structure form in any nation, which can be selected by the individuals for carrying on their business. The trustee of a trust is under an obligation to hold the property or the assets for the benefit of others, who are known as the beneficiaries of the trust. There are different key characteristics of this business structure as the formation of trust includes drawing up a formal trust deed covering the details of the way in which the trust being formed would be managed and operated. The setting up of trusts is an expensive process and so are its operations. Further, there is also a need for the trustee to undertake the administrative tasks of the trust formally on annual basis. The trustee, as a person, is given the lawful duty of the trust’s operations.

There are different types of trusts which can be opted for and one of these is a discretionary trust, which is also known as the family trust. Discretionary trusts are set up for holding the assets of the family or for undertaking the family’s business. When it comes to the discretionary trusts, the trustees are required to take a proper approach. This is with particular reference to the case of Re Baden’s Deed Trusts (No 2) where different tests were given by the Lords for certainty of objects of the discretionary trusts. In the following parts, a discussion has been carried to analyse the best approach for the trustees in this context, with reference to the quoted case.

This was an English trusts law case which was related to the situations where the trust had to be deemed as uncertain. This verdict was followed from the case of McPhail v Doulton in which the House of Lords confirmed the intentions of the settler as being of utmost significance. The facts of the two case was the same and this could be established from the Lords remanding the case to the Court of Appeal for deciding the use of legal principles which had been set out in McPhail v Doulton.

In Re Baden’s Deed Trusts (No 2), Bertram Baden settled a trust for the company’s dependants, employees and relatives, and the name of this company was Matthew Hall & Co Ltd. It had been provided that the net income of the trust fund had to be applied by the trustee in the manner they deemed fit and in absolute discretion for the dependants, employees and relatives in the grants. In McPhail v Doulton, it was held by the House of Lords that the trust would be deemed as a valid one where it could be stated in a certain manner that the hypothetical claimant was or was not a part of the different classes of beneficiaries. This case was returned to the lower courts for determining where the trust in fact was actually enforceable. It was held that the House of Lords had overruled the verdict given in the case of IRC v. Broadway Cottages Trust, in such a manner that the rule given under the case of Re Gulbenkian, could be applied in an equal manner to the trusts with regards to the powers; i.e., that a trust would be valid only when it can be stated in a certain manner that a particular person was or was not a member in the class of beneficiaries, which led to the clause being valid as a trust. And on this, an appeal was made by the executors.

Re Baden’s Deed Trusts

It was held by the Court of Appeal, upon the dismissal of the appeal, that in order to apply the ruling of Re Gulbenkian, particularly the test given in this case with regards to the discretionary trust, there were evidential and conceptual differences. In case the claiming party could not present the evidence with regards to them being a beneficiary, they would simply not be a beneficiary. However, there was a lack of inherent conceptual uncertainty with regards to wordings of relatives or dependants which made the clause valid. Even though the three judges held that he trust had been valid, but different reasons were given by these three. It was held by Stamp LJ that the trust had to be deemed as a valid one, as the court could determine at any time who the dependants of this case were; further, a relative could easily be restricted to a feasible description of the ‘next of kin’.  

Sachs LJ was of the view that the test only required clarity with regards to the concept. He stated that the court could never be defeated through the uncertainty of evidence. Upon the class of people to be benefitted gets certain conceptually, it becomes a question of fact, which has to be determined on evidence regarding the postulant on inquiry being proved within it and if the same is not proved, than the person is not in it. Megaw LJ was of the view that the test would be deemed to have been satisfied with regards to a minimum of one major number of objects where it can be certainly stated that the same fell within the trust, even when in the matter of the substantial number of other people, where they could be for even some fancy reasons be considered. In such a case the answer had to be that it was not established that they were in or not and not that they were outside the trust. And the certainty test would thus be fulfilled where the conceptual certainty could be established completely.  

The main point from which this entire concept is born is that there is a need for the objects to have certainty in order for a valid trust to be formed. In this regard, the leading authority is that given in McPhail v Doulton by the House of Lords. This case provides that there is a need to be able to tell if a particular person holds the object of trust or the power, or not. And hence, this is an “is or is not” test. Even though this test is the starting point of this case, the key difficulty relates to the manner in which this particular test had to be applied and this is the reason why there were different approaches adopted in Re Baden’s Deed Trusts (No 2).

The view of Stamp LJ, when carefully analysed presets that the is or is not test given in McPhail v Doulton had to be construed as the ability of being able to tell in a certain manner if a particular individual is an object of the trust or is not one. Where there is any person with regards to whom it remains unclear regarding the person being an object or not, the trust would not be deemed as uncertain of objects. In simple terms, there is a need to have the ability of putting each and every individual, in a yes or a no marked box. Where a person has to be marked in a ‘Do not know’ box, than the trust would fail. Even though this seems to be a harsh approach, the judges believed that the facts had to be interpreted properly where relative had to mean the next of kin, was a fishy approach.

Critical Analysis

However, a very casual and a more of lenient approach were adopted by Sachs LJ. He was of the view that the test given under McPhail v Doulton could only be applied to the conceptual uncertainty and not to the evidential uncertainty. To put it more simply, where the court was aware of all of the fact as is known to the God with regards to the universe, it had to be able to provide that the particular person was an object of trust. Where there is a problem or difficulty in establishing that the individual is an object, then the same is not to be deemed as a problem. So, where a trust was using the wordings that any person, who have the person X some money on a particularly specified date, it would be deemed as uncertain in an evidentiary manner; however, the same would not be deemed as uncertain in a conceptual manner. If not impossible, it would be extremely difficult for any person to establish that the money which they had given to the settlor some fifty years back. Though, this would allow the trust to be theoretically certain at the very least. It would ultimately come down to the use of burden of proof for getting around the problem. So long as there is a theoretical possibility for the people to establish that they are the objects than it would be deemed as fine. The real burden of proof lies with such individuals who think that they are the objects for showing that in case the name of a person does in the do not know box, they would be assumed to not be the objects of the trust.

Megaw LJ was of the view that the test given in the case of McPhail v Doulton was enough to satisfy that a particular number of people were objects of the trust, in a definite manner.

Out of the approaches given by the three judges, the best one seems to be that of Sachs LJ. This is because this approach proves to be pragmatic and sensible in an overall manner. The reason for this is that this approach does not invalidate the conceptually certain trusts, in such cases where there is a difficulty in identifying all of the beneficiaries in an exact manner. The interpretation of Megaw LJ cannot be deemed as the best way forward as his interpretation is not something which had been adopted by the House of Lords in the case of McPhail v Doulton. The interpretation of Stamp LJ was the harshest one and is completely based on the semantic games being played by the parties, in order to stay away from this harshness, particularly for treating the term relatives as an ambiguous one, and meaning it as next of kin.

Sachs LJ was highly annoyed by the fact that this particular case had stretched for twelve years already, before the same could reach the Court of Appeal. He wanted to end the dispute once and for all and in this regard, he applied his own ‘is or is not’ test where the burden had to fall on such people who claimed to be failing within the class, for establishing that they actually were a part of that class. Where this could not be established, the judge took the view that they failed to fall in that particular class. This allowed the ‘is or is not’ test to be applied in a literal and logical manner. This is the reason why he was ready to adapt the law in such a manner so that a proper and encouraging result was attained.

Best Way Forward

In the same manner, Megaw LJ had been motivated in a similar manner for resolving the litigation which was returned to an earlier overruled case of Re Allen for examining that the only requirement was that there had to be sufficient number of significant people who fell within the class, in order for the trust to be valid. However, this was simply a lack of proper respect to the doctrine of precent and it failed to adhere to the ‘is or is not’ test. This was not carried out in the approach of Stamp LJ who avoided all of such jurisprudential disputes by establishing that the particular word which created the problem, i.e., the term relatives, could be deemed as certain.

This however is not the problem which is related to equity. Instead, there were different judicial approaches which could have been raised in any of the branches of the common law. Hence, there was no requirement of making reference to the conscience in this case. What was needed was for the judges to make attempts to resolve the practical problem which was raised in this case and thus, adopting a creative approach with regards to the law.  

When it comes to the trustees, the best way forward for them with regards to the proper approach in context of discretionary trusts, this very case proves to be an important lesson. As was done in this case by the judges, there is a need to adopt a creative approach in order to resolve any issue. When it comes to the certainty of objects in a trust form of business structure, the trustees have to adopt the most pragmatic approach, which was the one given by Sachs LJ. If a strict approach, as was given by Stamp LJ is adopted, it would prove particularly difficult due to its harsh interpretation. Also, it is difficult to put every person in two boxes. Hence, it would be helpful where Sachs LJ’s approach is adopted where the burden of proof would pose on the person claiming to be a member.  And so, when such an issue is raised in the future with regards to the certainty of objects, there is a need to adopt the pragmatic approach given by Sach LJ. And instead of opting for harsh interpretation of relative as the next of kin, there is a need to adopt the pragmatic approach.

Conclusion

On the basis of the discussion which has been carried in the previous parts, it becomes very clear that the case of Re Baden’s Deed Trusts (No 2) is a substantial case in the English trust law history as the same provides clarity on the approach which has to be adopted when it comes to the certainty of objects in a discretionary trust. This case presented three different viewpoints which could be adopted for bringing clarity to the person being a beneficiary or not and being an object of the trust or not. The three judges had different views, where one adopted a strict approach, one a very sensible approach and one aligned with the ruling given in a previous case. As the third judge’s verdict was not properly aligned with the previous judgment and the judgment of the first judge was very harsh, where reliance was placed on playing semantic games, there is a need for the trustees to adopt the most sensible approach, where the burden of proof lies on the person claiming to be the object of the discretionary trust. This was due to the fact that the judges did not know each and every aspect like a God. And so, just because of evidential uncertainty, the conceptual certainty could not be denied. So, such people who fall in the ‘do not know box’ had to show that they were indeed the objects of the discretionary trust.

Primary Sources


Cases

IRC v. Broadway Cottages Trust [1955] Ch. 20 (CA)

McPhail v Doulton [1971] AC 424

Re Allen decd. [1953] Ch. 810

Re Baden’s Deed Trusts (No 2) [1973] Ch. 9

Re Gulbenkian [1970] AC 508

Secondary Sources


Books

Atkins S, Equity and Trusts (2nd edn, Routledge 2015)

Bray J, Key Cases: Equity & Trusts (2nd edn, Routledge 2013)

Clements R and Abass A, Equity & Trusts: Text, Cases, and Materials (4th edn, Oxford University Press 2015)

Davies PS, Virgo G and Burn E, Equity & Trusts: Text, Cases, and Materials (2nd edn, Oxford University Press 2016)

Hepburn S, Principles of Equity & Trusts (Aus) 2/e (2nd edn, Routledge 2013)

Hudson A, Principles of Equity and Trusts (Routledge 2016)

McDonald I, Equity and Trusts (5th edn, Oxford University Press 2016)

Moffat G, Bean G and Probert R, Trusts Law: Text and Materials (5th edn, Cambridge University Press 2009)

Penner J, The Law of Trusts (10th edn, Oxford University Press 2016)

Ramjohn M, Text, Cases and Materials on Equity and Trusts (4th edn, Routledge, 2008)

Riches J, Equity and Trusts: A Problem-Based Approach (Routledge 2016)

Stokes D, ‎Nicholas Wilson and Nick Wilson, Small Business Management and Entrepreneurship (6th edn, Cengage Learning EMEA 2010)

Watt G, Trusts and Equity (7th edn, Oxford University Press 2016)

Webb C and Akkouh A, Trusts Law (3rd edn, Palgrave Macmillan 2013)

Wilson S, Todd & Wilson's Textbook on Trusts & Equity (12th edn, Oxford University Press 2015)

Journal articles

Creighton P, ‘Certainty of Objects of Trusts and Powers: The Impact of McPhail v Doulton in Australia’ (2000) 22(93) Sydney Law Review.

Websites and blogs

Klinck DR, ‘A "Semantic" Criticism’ (2017) <https://commonlaw.uottawa.ca/ottawa-law-review/sites/commonlaw.uottawa.ca.ottawa-law-review/files/24_20ottawalrev3771988.pdf > accessed on 25 October 2017

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