LWB234 Murray McCarthy Week Two CAPACITY AND THE THREE CERTAINTIES
Has an express Trust been created between X and Y??
There are 4 broad requirements necessary for the valid creation of an EXPRESS TRUST.
ELEMENT 1: DOES THE TRUSTEE HAVE TITLE TO THE TRUST PROPERY?
The trust must be completely constituted and the statutory requirements of writing for the creation of trusts must have been observed. Here……assume will is validly created and completely constituted (ie signed by testator in presence of two witnesses present at same time: s.9 Sucession Act
ELEMENT 2: CAPACITY: WHO MAY BE SETTLOR, TRUSTEE AND BENEFICIARY?
1. Capacity of the SETTLOR to Create a Trust
Capacity to Create a Trust Post Mortem: A person who has the capacity to make a will, may create a trust by will: Succession Act (Qld) s8.
Capacity to Create a Trust Inter Vivos: As far as inter vivos trusts are concerned, the position is similar to that relating to capacity to contract.
a) Infants A Trust rust set up by an infant will be binding her unless repudiates on or shortly after reaching the age of 18 (the age of majority): Edwards v Carter. A person is deemed to have full legal capacity upon attaining the age of 18: s.5 Age of Majority Act
b) Insane Persons The principles are the same as those which apply to the capacity of an insane person to make a contract: Wright v Gibbons (No. 2) .
c) Corporations If a corporation has power to alienate its property, then it may vest its property in a trustee. A corporation has the same capacity as an individual to create a trust provided it has power to do so in its memorandum of association: Re Thompson's Settlement Trusts; Thompson v Alexander
2. Capacity of Beneficiaries Anyone who can hold an interest in property may be a beneficiary, including a corporation.
3. Capacity of Trustees
Individuals: Any person who is capable of holding property may be a trustee BUT persons under a disability will be unable to discharge effectively the duties and powers attached to the office: s12(1) Trusts Act 1973.
Corporations: A corporation may be a trustee: A-G v Landerfield; Trusts Act (Qld) s5.
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The Crown: The Crown may be a trustee if it chooses: Civilian War Claimants Association Ltd v R. but cannot be compelled to accept: Re Mason
ELEMENT 3: ARE THERE THE 3 CERTAINTIES?
To be valid, an express trust must have the necessary certainty of intention to create it, the subject matter of the trust and the objects or beneficiaries: Knight v Knight.
1. Certainty of Intention The settlor must manifest an intention to create a trust. This intention distinguishes creation of a trust from other legal relationships. i) Intention to create trust essential: distinguish creation of other obligations Distinguish revocable mandate - An intention to create a trust must be distinguished from an intention to confer nothing more than a revocable mandate upon a trustee to act as agent for the settlor: Comptroller of Stamps (Vic) v Howard- Smith
Agent for sale: Distinguish Trust and Debt - Money received in the course of a commercial transaction will not, ordinarily, give rise to a trust in favour of the party placing the money unless the circumstances are sufficient to cast obligations of a fiduciary nature on the recipient. - An agent for sale will not necessarily hold the proceeds of sale on trust for his or her principal: Cohen v Cohen; Walker v Corboy ii) Equity looks to the intent not the form No need to use words like trust or trustee when creating a trust Subject to the requirements of writing, no formal or technical words or expressions are necessary to create a trust provided the requisite intention is present: Richards v Delbridge
Trident v McNiece Brothers - traditionally reluctant but now easier to infer intention to create a trust - Courts can look at all circumstances of the transaction, including commercial necessity. - Intention will be inferred if 3rd party is to be benefited and if the trust is the best way
Re Armstrong - Income for sons upon death, they get principal – he died. - No particular form of words required - focus on intention. - Bank manager conversation particularly relevant iii) Precatory Words Precatory words give rise to no more than a mere moral obligation UNLESS the instrument, read as a whole, leads the court to conclude that the imposition of a trust obligation was intended Precatory words include “understanding, request, recommendation, hope, belief, desire, wish etc Words like “ I direct, I require” are mandatory.
Re Williams - Man left estate to wife “absolutely in the fullest trust and confidence that she will carry out my wishes”. - Found NO clear intention to impose trust.
Mussoorie Bank v Raynor - Left estate to wife confident she would act justly to children - Held no intention – only words of moral obligation
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Express trust cannot be created contrary to the intention of the settlor An express trust cannot be created contrary to the real intentions of the settlor. Even though the word "trust" is used or the donor is appointed "trustee", it might be possible to show that there was no intention to create a trust Dominant intention is subjective intention NOT objective intention.
CSD v Jolliffe - usually don’t overturn finding of fact of trial judge - factually no intention, therefore no trust - HC majority agreed with trial judge that here was an intention to get around accounts legislation, not to create a trust - Isaac J dissented stating 1. Were acts of person sufficient to create a trust? held yes 2. if you find objective intention, is subjective intention admissible to counter objective intention? held no, because (a) once trust created, beyond recall, valid trust cannot be recantored on. (b) parol evidence rule – no parol evidence to get around written evidence (c) person not able to set up evidence of illegal conduct to defeat a law and avoid natural consequences of their acts note lecture on illegality – Nelson v Nelson if language clear and nothing to indicate otherwise, courts willing to infer trust if you support intention with acts e.g. consulting beneficiaries, handing over passbooks, creating separate accounts, then more likely to infer trust
Kauter v Hilton - absence of intention fatal - acts supporting trust were present – consulting, handing over passbooks - intention enforced only to the extent that it is clear, so look at (a) intention (b) terms of the trust.
Effect of absence of necessary intention Where there is no intention to create a trust, there will simply be no trust, and the result may be that the person holding the property takes it absolutely. In other circumstances it will simply be conferral of authority eg., a mandate or bare power.
2. Certainty of Subject Matter i) What property can be trust property? Subject to a few limited exceptions, any property, real or personal, legal or equitable, may be the subject of a trust: Trusts Act (Qld) s5. ii) Identification of property and Specification of Quantum Identification of Subject Matter of the Trust - Property must be identified with certainty otherwise trust will fail
The Mussoorie Bank Ltd v Raynor - Subject matter was she had to divide estate when no longer required by her - Held this was not certain, therefore trust filed.
Specification of Quantum (Fixed Trusts only) - In a fixed trust the quantum of the beneficiary's interests must also be specified: - If the trust is discretionary, not fixed, it is not necessary to specify the precise quantum of the interests of the beneficiaries provided the mode of distribution is certain. - Expressions which fail to define quantum include
Page 3 LWB234 Murray McCarthy - “the remaining part which he does not want”, “the bulk of my estate”, “blue chip securities”.
Boyce v Boyce - “house to trustee for wife for life and then to Maria :whichever she may think proper to choose: and the other to Charlotte”” - Maria died without making selection Held - mechanism making subject matter certain failed, therefore trust failed - Charlotte’s entitlement remained uncertain
Objective Criteria - Where the words used are capable of being interpreted with certainty by the court the gift may be saved. - A court may construe words in their context, for example, some objective criteria for calculating the quantum may be implied and the trust will not fail for uncertainty: Re Golay - court would use objective criteria to calculate quantum - ‘reasonable income’ was left – on its face uncertain - court assesses what is reasonable in the circumstances - words like ‘reward’ will not be enforced by the courts.
Effect of Subject Matter being Uncertain Where the subject matter is uncertain, there will once again simply be no trust at all. If the property is specified but the quantum is not, a resulting trust will arise, unless the trustees are given a discretion to determine the quantum of the beneficiary's interests, in which case a valid discretionary trust will be created.
3. Certainty of Objects (Beneficiaries) i) Trusts for Persons
Fixed Private Trusts - The test for certainty of objects of a fixed private trust is the list certainty rule : Kinslea v Caldwell. - However, a trust is not uncertain merely because the actual persons entitled to the trust property cannot be known in advance of the date of distribution (provided no perpetuity is involved) it is sufficient if the provisions of the trust ensure that upon the date of distribution the beneficiaries are capable of ascertainment with certainty: Kinslea v Caldwell - Further the possibility that there may be no such beneficiary at the date of distribution will not invalidate the trust: Re Hain's Settlement
Discretionary Private Trusts - The class of objects of a discretionary trust must be defined with sufficient certainty to satisfy the criterion certainty rule ie., whether it can be said that a given individual is or is not a member of the range of objects: McPhail v Doulton - Further there may be an additional "loose class" administrative workability requirement. - An example of a trust which failed for want of certainty was Perpetual Trustee Co Ltd v John Fairfax & Sons Pty Ltd ii) Trusts for Purposes
Public Trusts: Charitable Trusts - In the case of public trusts a different standard of certainty operates and essentially the trust will be held to be valid if the purpose is a charitable one as recognised by law.
The Effect of Uncertainty of Object If a particular trust fails for uncertainty of the objects of the so called trust, a resulting trust arises by
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CERTAINTY OF OBJECTS – Fixed v Discretionary
1. For A, B and C in equal shares 2. For the family of A equally In 1 & 2, the settlor has defined the quantum that each object is to take (not given any discretion) - they are called FIXED TRUSTS
3. For A, B and C in such shares as the trustee may think fit 4. For the family of A in such shares as the trustee may think fit 3 & 4 give the trustee a discretion to decide how big a share each beneficiary can take – called DISCRETIONARY TRUSTS (from the wording of the settlor’s disposition, you can’t tell what the beneficiaries are going to get).
5. A trust for the relief of property in Brisbane Purpose trust – public trusts as a basic rule are only valid if the objects are charitable.
If the trust is a fixed private trust (as in 1 &2), the trustee has to know who the beneficiaries are (i.e. list certainty is needed). It’s not so easy to draw up a list of family of A, because we’re not sure what the word “family” means – does it mean parents and children, or does it include grandparents etc. If you can’t draw up a list, then you can’t distribute to the beneficiaries equally – the trust will fail because the objects are not sufficiently certain.
There are three types of certainty problems:
1. Conceptual uncertainty As with the word “family” above, or “friends” We don’t know with certainty how to define the words the settlor used This also arises with matters of degree – “a trust for all my tall friends” If a fixed or discretionary trust is conceptually uncertain, the trust will fail. What if the disposition said “I give this property on trust to X, to distribute to all the people who X thinks are my friends…”? Is it conceptually certain? If it was a trust for “all my friends” it would be conceptually uncertain, but if it’s to who X thinks? It won’t solve the problem. The Ct has to make an objective decision about whether the trustee has done what they were obliged to do, and it can’t do that if there are no guiding principles – if it is conceptually uncertain. Any sort of trust will fail with conceptual uncertainty
2. Evidential uncertainty It would be difficult to find the evidence to prove that a particular person is the sort of person that was described in the settlor’s position. If you said “a trust for all the legitimate and illegitimate children of Joe” – there is absolute conceptual certainty, but it would be very hard to produce the evidence to decide whether a person is in that group or not. If it’s to all the children of Joe equally, that’s a fixed trust and it is conceptually certain, but we have an evidential certainty problem, will the trust be valid? For fixed trusts, you need list certainty – but this cannot be drawn up here because there isn’t the evidence. Therefore, if it’s a fixed trust, the trust will fail. (Nowadays you probably could find this sort of evidence with the advances in science). If it’s a discretionary trust, “for Joe’s children…in amounts to be decided at the discretion of the trustee”, it is a valid trust. The Ct decided that if it was a discretionary trust, they could at least tell whether the trustee had done something wrong. Evidential uncertainty will NOT cause a discretionary trust to fail – in practice, it will limit who gets what, but in theory, the Cts won’t worry about it.
Page 5 LWB234 Murray McCarthy Evidential uncertainty will cause a fixed trust to fail.
3. ‘Whereabouts’ uncertainty Often confused with evidential certainty. E.g. if I set up a trust for my four children, fixed or discretionary, then that trust is conceptually certain. If I name them, there is no evidence problem. But when I die, whoever I’ve nominated as my trustee, may have no idea where my children are. There is a problem with finding the beneficiaries. Will the trust fail? A discretionary trust will not fail – the trustee won’t distribute property to those he/she can’t find, but doctrinally it will be a valid trust. A fixed trust will be valid even if the beneficiaries can’t be found. In practice, the trustee will hold the assets while investigation takes place. The people named will have a property interest in the trust assets.
For certainty of objects – there is one requirement for fixed trust and another for discretionary. For fixed you need both conceptual and evidentiary certainty. For discretionary you need conceptual certainty. If the trust fails because the objects are uncertain, the consequences are not the same as they are for failure because intention’s not certain or the subject matter is not certain. If the objects are not certain, but everything else is, a resulting trust will result (back to the settlor).
ELEMENT 4: THERE MUST BE NO OTHER VITIATING FACTOR
There must be no other vitiating factor, for example illegality, which prevents the creation of a valid trust (this will be considered later)
TRUST OBJECTS: DISCRETIONARY TRUSTS AND POWERS OF APPOINTMENT
Discretionary Trusts Popular because of its flexibility Fixed trust - the trustee has to distribute the assets and they have to distribute in a defined manner (no discretion). Discretionary trust - the trustee has to distribute but they have a discretion about who gets how much.
A POWER is an authority to do something, but you don’t have to do it. So you could have a power to distribute to beneficiaries, but no obligation to exercise that power.
The old test with trusts was LIST CERTAINTY, whereas the test for powers was CRITERION CERTAINTY you had to know who the class was that you were allowed to distribute to, if you decided that you would distribute.
List certainty had good reasons for its imposition: Broadway Cottages - With a fixed trust the beneficiaries could all get together and terminate the trust because they could together say they owned the beneficial interest (although they couldn’t tell the trustee what to do, they could terminate the trust if they all agreed). - That would also be true for a discretionary trust if you had list certainty. That ability to terminate the trust was seen as a major controlling power that the beneficiaries had over the trustee/s. - Secondly, if you had a fixed trust, and the trustee was misbehaving, the Ct knew exactly how to read
Page 6 LWB234 Murray McCarthy the trust. With a discretionary trust where the trustee was misbehaving, the Ct would exercise by saying equality is equity, and divide it up equally (but not possible without a list). The Ct can’t impose the trust without list certainty. - Thirdly, the fact that the Ct may never have to exercise the trust, would never be a problem because they had other options (appoint other trustees etc). - Fourthly, if the trustee could not list all the beneficiaries, then the trustee couldn’t properly exercise the discretion to consider who to distribute to. - Fifthly, if you just considered a more limited class of people you knew were within the discretionary trust group, you weren’t doing what the settlor had asked you to do (it was limiting).
These arguments for list certainty weren’t accepted in McPhail v. Doulton. This was the case that put a new slant on discretionary trusts. The Cts moved from list certainty to conceptual certainty for discretionary trusts. Re Baden - The case was about a trust that was set up by Mr B and he set it up the discretionary trust for a very large class comprising all the employees and ex-employees of a particular coy and their dependents and their relations. - The H of L had to decide whether this disposition was valid. - The coy also got in on the act and argued that it was a power, not a trust. - If this was a power rather than a trust, then the assets would not have to be distributed by the coy (it could decide whether it would or not and how much) and arguably the coy could keep the funds. Held: - The Ct held it was a trust. - They looked at the testator’s intention to decide that what was intended was a trust (that a distribution had to be made) and then they looked at whether the trust was valid. - Wilberforce L gave majority judgment and had to answer the arguments whether we should go for list certainty or whether we should amalgamate the certainty tests for trusts and powers and only require conceptual/criterion certainty. He decided conceptual certainty was enough. - If it’s a discretionary trust, people might complain that the trustee is not distributing. If you have conceptual certainty for a class then when someone appears out of the woodwork to complain, you can decide whether they are a beneficiary entitled to complain. Even though you can’t draw up a list of those who are entitled to complain, there will be a class of people who are entitled to complain who will then control the trustee. (When they come to the Ct, the Ct can then decide whether they are entitled to control the trustee). - People might also complain that the trustee has distributed to the wrong people. To decide whether the trustee has distributed to the wrong people, you don’t have to draw up a list of all the right people, you just have to be able to say that of the people who got the assets, that was the wrong person or people. - If the trustee wouldn’t act, or acted so badly that the Ct had to execute the trust, there was nothing that compelled the Ct to divide equally amongst all the potential beneficiaries. It could appoint a new trustee or some other option. - For all the above reasons, the Ct opted for conceptual certainty for discretionary trusts.
The way a disposition may be worded: If you said “I leave this property to X and I authorise X to distribute to a particular class”, then the test that would apply in determining whether that power was valid, would be conceptual certainty. By and large that disposition would be valid. On the other hand, if the settlor’s disposition said “I leave this money to X with a duty to distribute to… - list certainty”. That tiny distinction, even though the words don’t really reflect the settlor’s intention, would have a different consequence on the validity of the disposition and the Ct wasn’t prepared to wear that anomaly. So, criterion certainty was the conclusion. The way the Ct defined criterion certainty was that you had to be able to say of any particular person, that that person is or is not within the class of beneficiaries defined by the settlor.
Criterion certainty is now ‘the’ test that applies to discretionary trusts. However, the H of L didn’t decide whether Mr B’s trust was valid or not. Rather, they sent it back to the lower Ct to decide, by applying the new test, whether it was. The Ct of Appeal decision in Re Baden (No. 2) tried to apply the test. Wilberforce L said in the first case that a disposition was sufficiently certain (it had criterion certainty) if you could say that that person is or is not within the defined class. This was a trust for employees,
Page 7 LWB234 Murray McCarthy ex-employees, dependents and relatives. The Ct of Appeal thought that you could say that employees, ex-employees, dependents etc is or is not in the class. The is or is not did not create a problem. It was the relatives that created a problem. Sachs LJ said that relative means anyone who’s descended from a common ancestor. This is a huge group and it is not clear that someone is in or is not in the class. Sachs said “or not” does not matter, you have to be able to say of a reasonable no. of people, that those people are in the class. And you could do that with the word ‘relative’, even though there might be many. McGor LJ said much the same thing. Stamp LJ took a different view and said that the trustees have a duty to consider who to distribute to and how much to given them, as well as just a duty to distribute to the right people. If they think about who to distribute to, then they have to know who’s in the class – if a person is or is not in a class. And he said you can’t do that if you define relatives as descended from a common ancestor. He defined relatives differently, as next of kin. He too thought the discretionary trust was valid because by using ‘next of kin’ you could say whether a person is or is not in the class. The is or is not test has been reduced to an is test. You have to know that a person is in the group or class before you distribute to them. The end result of going down that route is to focus on just one of the things that a trustee of a discretionary trust has to do, it focuses only on misfeasance (giving things out to the wrong people) and it ignores the other duty that trustees of a discretionary trust have to do, and that’s to consider what the priorities are in distributing the property. According to Stamp, unless you know the class, you can’t consider the priorities properly. Discretionary trusts only require conceptual certainty which comes from Re Baden
McPhail v. Doulton - Wilberforce L justified “criterion certainty” and then said “there may be a case where the meaning of the words is clear but the definition of the beneficiaries is so hopelessly wide, as to not form anything like a class, so that the trust is administratively unworkable or cannot be executed”. - Even if it’s conceptually certain “all the residents of greater London”, the class may be so wide that the trust is administratively unworkable. Is administrative workability/loose class now a requirement in addition to conceptual certainty???
One case that has used the administrative workability requirement to make a trust valid: Ex parte West Yorkshire Metropolitan County Council - was a trust for all the residents of a the County of West Yorkshire. - The Ct decided that the trust was administrative unworkable.
Justification for this is that under a discretionary trust, the trustee musn’t distribute to the wrong people (criterion certainty is meant to solve that problem). The only legitimate reason for adding this requirement is that it focuses on the other obligation of the trustee. It focuses on the priority of the distribution – administrative workability probably means no more than that you have to know what the settlor intended you to do with this money. If it was money for the greater residents of London – who do you prefer, younger people, older people, unemployed…? There is no way that the trustee can exercise that priority discretion unless you add something else to that class. E.g. all the residents of greater London to make the tube function more efficiently – something to make it more administratively workable.
Certainty of Objects Application Firstly show certainty of intention, certainty of subject matter, certainty of objects As far as the objects are concerned, decide whether it’s a fixed trust or a discretionary trust. Then apply the relevant certainty test.
If it’s a fixed trust, list certainty – if you have to draw up a list, the description has to be conceptually certain and the evidence has to be available to draw up the list (both conceptual and evidential certainty).
Page 8 LWB234 Murray McCarthy If it’s a discretionary trust – only need conceptual certainty – that person ‘is’ within the class: Re Baden Query about administrative workability: McPhail v. Doulton If the trust fails because the objects are not certain, there will be an automatic resulting trust to the settlor.
Trusts and Powers There was an assertion in McPhail that the disposition that the testator made might have been a power. A lot of the argument focused on whether it was a power or a trust. The certainty test for trusts and powers is exactly the same. Why then do we distinguish? It has to do with the rights of the beneficiaries (objects of the powers) Critical distinction b/w a trust and a power is that a trust has to be exercised and a power does not have to be exercised. The trustee has a trust power or a mere power. A trust power is no different from saying that property is held on trust.
The only time it’s important to distinguish b/w trust powers and mere powers is in the following instance: “ I give this property to my solicitor to hold on trust to distribute to my dependents in the manner determined by my sister.” If it’s a trust, it’s a discretionary trust (b/c we don’t know how much the beneficiaries are going to get) where the trustee doesn’t exercise the discretion, the sister does. If the sister has to exercise that power, then people don’t like calling it a trust, because she doesn’t hold the property. But she has to choose or the property will be dealt with otherwise. Discretionary trust is the sort of trust where the amount the beneficiaries get depends on someone exercising a discretion. It will still be discretionary where the trustee is not exercising their discretion but someone else is appointed to exercise their discretion. E.g. I leave my property to my solicitor on trust for my children to be distributed in shares determined by my wife.
To determine whether it’s a trust power, look to the intention of the settlor – if in the above example, it is obvious that he wanted the children to benefit, then the property must be distributed and it must be distributed to the children. The wife then has a trust power and is obligated to exercise it. I leave my house to my solicitor on trust for my children, in shares to be determined by my wife. But is she does not then to my eldest son. It’s quite clear that the wife can determine the shares if she wants, if she doesn’t, it all goes to the eldest son. Therefore the wife has a mere power.
1. What is a Power of Appointment? A power of appointment (“power”) is the right or authority given to some person (the donee of the power) by the absolute owner (the donor of the power) to deal with or dispose of (appoint) the beneficial ownership of property (which belongs to the testator or settlor) to persons who may or may not include themself (the objects of the power). For example: "I leave all my property real and personal to my husband John for life and after his death to such of our children as he may by will appoint."
2. What is the Distinction between Trusts and Powers? Generally, a power is permissive - it authorises someone to do something. There may be a discretion as to (either or both) whether to exercise the power and as to who the objects are to be. It is not necessary that the donee of the power has property vested in his or her name.
A fixed trust is imperative - it must be carried out according to its terms by the trustee and the property is vested in the person with the obligation to act in relation to the property. The interests of the beneficiaries are determined by the settlor or testator and are not dependant upon the discretion of the trustees. A discretionary trust, however, combines the imperative aspect of fixed trusts and the discretionary aspect of powers.
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3. Why Create a Power? There are many reasons why a power may be created. The discretion gives flexibility by allowing for adjustments to distributions to be made after considering changes to the law, especially taxation laws and the circumstances of the objects eg bankruptcy or incapacity.
4. The Three Types of Powers - General, Hybrid and Special
Powers of appointment can be classified in accordance with the range of objects in favour of whom they may be exercised. It is a matter of construction which type of power was intended.
There are 3 classes of powers of appointment. These are:
GENERAL powers of Appointment A general power of appointment is a power to appoint to anyone at all, including the donee. For example "to such persons as John shall appoint."
SPECIAL powers of Appointment A special power of appointment is a power to appoint property to specified persons or defined classes. For example, "to such of our children as John shall choose."
HYBRID powers of Appointment A hybrid (intermediate) power is the power to appoint to a class defined by exclusion. The range of possible objects is defined as being anyone at all except named persons or classes. For example "to such person or persons as John shall determine except X, Y and Z." You should note that a hybrid power is akin to a special power rather than a general power. The same rules generally apply to both special and hybrid powers.
5. Distinguishing General Powers from Special and Hybrid Powers
For practical purposes the donee of a general power is the full beneficial owner With a general power of appointment there can be no question of a trust or trust-like duties arising because the object is the whole world potentially and there are no specific parties who may call upon equity to intervene. For all practical purposes, the donee of the power is the beneficial owner of the property as there is power to appoint to himself or herself: Tatham v Huxtable General powers are valid as mere powers and cannot give rise to any question of a trust or trust power. There is no obligation to make an appointment. However if a general power is clearly intended to give rise to a trust it will fail.
Unless express contrary intention a power given to a trustee or fiduciary is a special power or hybrid power Where the power is conferred on someone who is also a trustee or otherwise subject to fiduciary obligations, in the absence of any contrary intention expressed in the instrument the trustee will not be able to exercise the power for his or her own benefit. The power will be a special or hybrid power and not a general power: see Horan v James
6. The Sub-classifications of Special and Hybrid Powers: Mere and Trust Powers
Where the power is a special or hybrid power, the question arises as to whether the donor intended that the donee be under a duty to exercise it or not.
Page 10 LWB234 Murray McCarthy A special power or a hybrid power may be a mere power (bare power/power collateral) or a trust power (power in the nature of a trust/power coupled with a duty).
Mere Powers A mere power involves a non obligatory power to appoint among a class. Further, unless the mere power is given to a trustee, there is no duty to consider whether to exercise it: see generally Re Gulbenkian's Settlement Trust. (NB! what is said about trust powers in that case is not the law. McPhail v Doulton overruled it.)
Trust Powers (Discretionary Trusts) A trust power involves an obligation on the donee to appoint (exercise the power) among the class. This feature is in common with a trust. If the donee fails or refuses to exercise the power the court will exercise it in his or her place.
If property is vested in the donee of the power he or she will be a trustee and there will be a discretionary trust. Where the property is not vested in the donee of the power the donee cannot be a trustee but he or she will owe duties analogous to fiduciary duties: McPhail v Doulton.
7. What are the Rules of Construction to Distinguish Trust Powers and Mere Powers?
Question of Construction of Intention The distinction between trust powers and mere powers is a question of construction of the language of the instrument conferring the power - Did the donor intend (or can they be presumed to intend) that there was to be a duty on the donee to make a selection?: Re Scarisbrook's Will Trusts
Use of the word "trust" is not conclusive In some cases the language will clearly impose a duty to exercise the power. In such cases the power will be a trust power. However, the use of the word "trust" will not turn what is intended to be a mere power into a trust power. The intention of the donee is paramount.
If a gift over exists the power must be a mere power but is not automatically a trust power if there is no gift over If there is an express gift over in default of appointment, the power must be a mere power. However, where there is no gift over, the provision is not automatically a trust power because it will not be a trust power unless there is an intention that there is a duty on the donee to exercise it. There must be an intention that some or all of the members of the class will benefit in any event depending on the selection by the donee: Re Week's Settlement [1897] 1 Ch 289 at 292 per Romer J.
8. The Consequences of Classification as Mere Power or Trust Power
Obligations of donees relating to the exercise of the power
Donees of Mere Powers
No Obligation to exercise mere power and generally no obligation to consider Where the power is a mere power the donee is not obliged to exercise it and has no duty even to consider exercising it. If the mere power is given to a trustee then there is a duty to consider whether to exercise it from time to time: Re Gullbenkian at 518 per Lord Reid; Mettoy Pension Trustees v Evans [1990] 1 WLR 1587. If the property is vested in the trustee then they will be trustee of a discretionary trust; but the objects have very limited rights more so than objects under discretionary trusts where thetrustees have a trust power. Traditionally only trust powers vested in trustees have been called discretionary trusts.
If mere power is exercised only those within the class can be appointed and no fraud on the power can be committed
Page 11 LWB234 Murray McCarthy If the donee does exercise the power he or she must appoint within the class designated. If a donee purports to exercise outside the class of objects, the excessive execution will be severed from the proper execution if that is possible: Re McLean Further the donee must not commit a fraud on the power: McPhail v Doulton
If the mere power is not exercised the gift over takes effect In the event that the power of appointment is not exercised by the trustee, if there is a gift over in default of appointment it will take effect. If there is no gift over the fund will result to the donor or his or her estate.
Trust Power
Donee of a trust power has a duty to exercise it A donee under a trust power is under a duty to exercise the power and if they fail or refuse to do so, the court may exercise it in their place or replace the trustee or require the trustee to exercise it.
If court exercises discretion the aim is to best serve the intentions of the settlor In those cases where the court has to exercise the discretion to distribute the property, it will usually act on the principle that equality is equity, and divide the property equally: Burrough v Philcox eg family settlements. However, the court is not obliged to apply that principle and may exercise the discretion otherwise than by equal division, for example in the case of pension funds for the benefit of company employees: McPhail v Doulton The court strives to execute the power in the manner best calculated to give effect to the settlor's intentions: McPhail v Doulton
If property is vested in the donee of a trust power then he or she is trustee of a discretionary trust Where the property to be appointed is vested in a donee of the power as trustee they will be a trustee of that property. This is a discretionary trust, eg., McPhail v Doulton
8.2 Rights of Objects
Objects of Mere Powers
If the mere power is not exercised the objects have no claim against either the donee or the property If the donee does not exercise the power, the objects of it have no claim against him or her as the donee owes no duty to them. Nor do the objects have any right against the property.
If the mere power is not exercised the objects have no right to apply to court As the objects have no rights in respect of the property they cannot apply to the court to have the property distributed. If the donee of the power is a fiduciary they have a right to require the donee to consider.
Objects of Trust Powers
Object of trust power has a right to apply to court in relation to the exercise of the donee's discretion The objects of a trust power can apply to the court if the donee does not exercise his or her discretion at all or exercises it improperly, but cannot demand any part of the fund: Gartside v IRC The interest of an object of a discretionary trust or trust power is similar to the rights of the objects of a mere power which is given to trustees in their capacity as trustees: Vestey v I.R. Commissioners and to a residuary beneficiary under an unadministered estate: CSD v Livingstone. By contrast a beneficiary under a fixed trust has more extensive rights and, an equitable interest of a proprietary nature in the assets of the trust: Baker v Archer-Shee
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8.3 Requirements as to certainty of objects
Power void unless certain at time it becomes operative Unless the class of potential beneficiaries is sufficiently certain at the time the provision comes into operation, (if created by deed the date specified therein and if created by will the date of death) the power may be rendered void: Re Gulbenkian The issue here is: With what degree of certainty must a donor describe the objects of a power?
Historically trust powers required list certainty whereas mere powers could have criterion certainty Historically the requirements of certainty for the description of objects of trust powers has been more stringent than that required for the objects of mere powers. This was because in a trust power the trustee is under a duty to make a selection and it was considered that a proper selection could not be made unless all possible objects were listed: see Re Gulbenkian Further if the donee did not exercise the power the court would, usually by distributing equally amongst all beneficiaries so if all beneficiaries could not be listed the court would not be able to exercise its discretion in the usual way. So in the case of trust powers there had to be list certainty - the trustee must have been able to compile a list of all the members of the class of objects: IRC v Broadway Cottages Trust. However, in the case of mere powers only criterion certainty was required - the class must have been defined with sufficient clarity such that the court could determine in respect of any given individual whether or not they were a member of the class of objects. The law was reviewed in the important cases of Re Gulbenkian's Settlement Trusts and Re Baden's Deed Trusts; McPhail v Doulton. You will see that the tests of certainty are now the same - the test of criterion certainty applies to both trust powers and mere powers. However, there still remains some question as to whether there is an additional requirement that the definition of beneficiaries is not so wide as to not form anything like a class so that the trust is administratively unworkable - this is known as the "loose class" requirement.
Test of certainty for Mere Powers In Re Gulbenkian's Settlement Trusts the House of Lords held that the test for certainty of objects for a mere power was the test of criterion certainty - one must be able to say with certainty whether any given individual was or was not a member of the class. It is not necessary to be able to draw up a list of all members of the class. If conceptual certainty (criterion certainty) exists mere evidentiary uncertainty will not invalidate the power: Re Gulbenkian.
Trust Powers: Criterion Certainty In McPhail v Doulton the House of Lords held that the test of conceptual certainty for trust powers is the same as that applied by the House in Re Gulbenkian for mere powers viz. criterion certainty. If a trust power is conceptually certain, mere evidentiary uncertainty will not invalidate it: Re Baden. The Court of Appeal in New South Wales accepted the authority of McPhail v Doulton in Horan v James Further McPhail v Doulton was referred to with apparent approval by 3 members of the High Court of Australia in Registrar of Accident Compensation Tribunal v Commissioner of Taxation You should note that Lord Wilberforce at 456 - 457 was careful to point out that an assimilation of the certainty tests for trust powers and mere powers does not involve a complete assimilation of trust powers with mere powers, and the distinctions mentioned earlier between powers trust and mere powers remain.
Is there an additional loose class requirement of administrative workability? In McPhail v Doulton Lord Wilberforce at page 457 questioned whether it was necessary for certainty that the definition of beneficiaries is not so hopelessly wide so as to not form anything like a class with the effect that the trust was administratively unworkable - this has become known as the "loose class" requirement. He gives the example of a power to appoint amongst "all the residents of Greater London"
Page 13 LWB234 Murray McCarthy as possibly being administrably unworkable. This is similar to a remark made by Lord Reid in Re Gulbenkian in relation to mere powers at 788. The loose class requirement was discussed in Re Manisty's Settlement by Templeman J. However, unless in very extreme cases, it is arguable that the additional requirement will have little practical effect: Horan v James.
Does the loose class requirement apply to both trust powers and mere powers? In Blousten v I.R.C. Buckley LJ thought that the loose class requirement applied to mere powers. However in Re Manisty's Settlement, Templeman J refused to import this requirement into the area of mere powers. The view that the loose class requirement for administrative workability cannot apply to mere powers has received widespread acceptance by the text writers.
Is there any difference between the tests of certainty for hybrid powers and special powers? The tests for certainty relating to special powers also apply to hybrid powers. Provided that the definition of the excepted class was certain within the meaning of the criterion certainty test, the power will be valid: Re Manisty's Settlement
8.4 Testamentary Dispositions - delegation of will making powers In Queensland s64 Succession Act 1981 provides: 64. Certain powers and trusts not invalid as delegation of will-making power. A power to appoint or a trust to distribute property, created by will, is not void as a delegation of the testator's power to make a will if the same power or trust would be valid if created by an instrument made inter vivos. Therefore in Queensland if a power would be valid if it were in a deed intervivos, it will be valid in a will - the criterion certainty test applies. In other jurisdictions, for example New South Wales, the general law prevails: Horan v James
The general law: rule against delegation of will making powers There is a rule of law that a person cannot allow another to make a will for them - they cannot delegate their testamentary powers to another. This means that he or she alone can dispose of property by will: Houston v Burns [1918] AC 337 at 342-343 per Lord Haldane. He said: “a testator ... cannot leave it to another person to make such a disposition for him unless he has passed the beneficial interest to that person to dispose of as his own. He may, indeed, provide that a special class of persons ... are to take in such shares as a third person may determine, but that is only because he had disposed of the beneficial interest in favour of that class as his beneficiaries”. This area is confusing because in Australia in jurisdictions other than in Queensland, different rules have developed with respect to powers contained in wills as opposed to deeds intervivos. The Australian approach has received much academic criticism. The English cases do not draw such a distinction: Re Beatty [1990] 3 All ER 844 at 847-848. Hoffman J at 848 interpreted the authorities cited to support the antidelegation rule as meaning no more than “a gift which is expressed in language too vague to be enforced cannot be rescued by giving the executor a power of choice”. A similar approach has been adopted in Canada: Re Nicholls (1987) 34 DLR (4th) 321. Some powers in wills may infringe the rule if they do not amount to a disposition of the property by the testator but instead effectively allow the donee of the power to dispose of the testator's property: Tatham v Huxtable (1950) 81 CLR 639. See generally, Syndberg, “The Status and Authority of the Decision in Tatham v Huxtable” (1974) 48 ALJ 527.
General Powers in Wills do not infringe rule against delegation of will making power A general power of appointment will not infringe this rule because it is "equivalent" to a bequest of full ownership. The donor has disposed of the property completely and the donee is for all practical purposes, the beneficial owner of the property: Tatham v Huxtable per Latham CJ; Kitto J at 655.
Special/Hybrid powers may infringe the rule against delegation of will making power If the clause is a special power and the class is confined to charitable objects it will be valid: Tatham v
Page 14 LWB234 Murray McCarthy Huxtable . If the class is sufficiently certain, so that it can be said that the testator has chosen the beneficiaries special powers are probably valid even without a gift over: Tatham v Huxtable As to hybrid powers, Kitto J noted at 656 that a hybrid power could be included in a will pending requisite certainty, but Fullager J at 648-649 considered that a hybrid power would always infringe the anti-delegation rule. Special powers are valid and hybrid powers may be valid where there has been an effective disposition, for example if there is a gift over in default of appointment: Lutheran Church of Australia South Australia District Incorporation v Farmers' Co-Operative Executors and Trustees Ltd and Ors Therefore, in Australia the validity of hybrid powers in wills is questionable due to the non-delegation rule. These decisions were applied in the New South Wales decision of Horan v James to invalidate a hybrid trust power on the basis that it infringed the testamentary non-delegation rule even though it fulfilled the criterion certainty tes. The Australian situation as set out above, where no legislative provision validates the power (eg: s64 Succession Act 1981 (Qld), was confirmed in Gregory v Hudson
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