Distinguishing between Discretionary Trust Powers and Mere Powers (Part 1)

Distinguishing between Discretionary Trust Powers and Mere Powers

This essay analyses a fundamental requirement of English law for the creation of valid Express Private Trusts: the imperative to ascertain with certainty the objects or beneficiaries of a Trust, without which a purported Trust would be deemed void in a Court of Equity.

Linked to this equitable principle is the correlative need to distinguish a Trust power from a mere power or hybrid power in giving effect to the rights and obligations of parties involved in litigation.

One might argue that such a distinction between an discretionary trust power and a mere power may be one that goes beyond a matter of degree, since only the former is obligatory for a trustee to exercise.

The Certainty of objects rule ascertaining the existence of beneficiaries of an express private Trust remains a fundamental equitable principle, historically invoked in the Court of Chancery to enforce both Discretionary trusts and powers, thereby ensuring that the property rights of beneficiaries under them are upheld.

The problems involved in applying the Complete list test to Discretionary Trust powers

Prior to the seminal case of McPhail v Doulton [1971] AC 424 heard in the House of Lords, the relevant test for determining the rights of objects under a Fixed Trust and Discretionary Trust was the same:

The Complete list test, laid down in IRC v Broadway Cottages [1955] Ch 20.

The rationale underpinning the application of the Complete list test for both types of Trust powers was premised on the idea that:

it would enable the Court of Equity to distribute property rights in the event trustees failed to do so in breach of Trust (Virgo 2020, p. 99).

The underlying assumption reflected in the Equitable maxim: “Equity is Equality’ was presumably evinced in the equal distribution of property rights among all objects, regardless of whether they were beneficiaries under a fixed or discretionary Trust.

Such a conception of a just allocation of property rights associated with an equal distribution of property rights was soon doubted by judges such as Lord Wilberforce in McPhail v Doulton [1971] AC 424,

since ‘it would rarely accord with the intention of the settlor,’ (Virgo 2020, p. 99) who may have intended for some of his or her beneficiaries of a power of appointment to have benefited more than others in a legacy.

Justifying the application of the any ‘given postulant’ test rather than the principle of equality to validate Discretionary Trusts

McPhail v Doulton itself had to with the validity of a trust deed directing that a settlor would transfer to trustees some shares in a company constituting a fund for the benefit of the staff of that company, their relatives and dependants.

The question of whether clause 9(a) in the deed constituted a trust or power and the relevant test for determining its validity arose for a judicial determination of the House of Lords.

Lord Wilberforce in McPhail opined:

As a matter of reason, to hold a principle of equal division applies to trusts such as the present is certainly paradoxical.”

“Equal division is surely the last thing the settlor ever intended; equal division among all may, and probably would, produce a result beneficial to no one’ McPhail v Doulton [1971] AC 424.

Lord Wilberforce thus rejected the proposition that the ‘execution of a trust is impossible unless there can be equal division’;

His Lordship in recognizing the impracticality involved in applying the complete list test to a ‘potentially very large class of beneficiaries’—

went on to restate the test for certainty of objects in relation to discretionary trusts by positing the ‘is or is not test’, otherwise known as the any given postulant test.

His Lordship reasoned:

”a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know.

He would examine the field, by class and category;

might indeed make diligent and careful inquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them;

decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications.

If he acts in this manner, can it really be said that he is not carrying out the trust?”

To Lord Wilberforce, therefore, it seemed a trust should not necessarily be deemed invalid merely because of the size of its potential class and sheer difficulty of ascertaining each and every object of the trust with certainty.

Rather, the fact that a trustee was conferred a trust power by the Settlor rather than a mere power would not alter the fact that —

he or she was a trustee imbued with fiduciary duties or responsibilities that would be susceptible to the control of the court.

The point is that such fiduciary obligations assumed by trustees to act loyally and in the best interests of beneficiaries would not be a matter to be taken lightly by any Trustee.

As Lord Wilberforce elucidated :

‘‘Any trustee would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power and whether, in relation to other possible claimants, a particular grant was appropriate” (McPhail v Doulton [1971] AC 424)

Does a qualitative distinction exist between Discretionary Trust Powers and Mere Powers?

From the perspective of Lord Wilberforce, the distinction between a trust power and a mere power could not rationally be justified by requiring a test which prescribed an onerous compilation of a complete list of names of beneficiaries on the one hand, and a contemplation of whether a postulant fell within a class of beneficiaries on the other.

Rather, the qualitative distinction between the two powers would lie in:

‘the extent of the survey which the trustee is required to carry out:

if he has to distribute the whole of a fund’s income, he must necessarily make a wider and more systematic survey than if his duty is expressed in terms of a power to make grants” ( Per Lord Wilberforce McPhail v Doulton [1971] AC 424)

Post McPhail v Doulton, one might question whether there been an assimilation of the tests for certainty of objects for both discretionary trusts and mere powers to the extent that —

the distinction between the trustee’s exercise of her discretion to appoint property under a discretionary trust and mere power is only one of degree?

And yet, cases such as Re Hay’s Settlement’s Trust[1982] 1 W.L.R. 202 remind us of an underlying assumption that the requirement of administrative workability (Note: R v District Auditor , Ex.p. West Yorkshire MCC (1986)) extends only to discretionary trusts, rather than to fiduciary powers; while ‘fiduciary powers are subject to the non-capricious requirement’ ( Hayton and Mitchell 2015, p. 160).

Such was Lord Templeman J’s view in Re Manisty’s Settlement Trusts [1974] Ch.17 when he opined that a fiduciary power may be void if ‘the terms of the power negative any sensible intention on the part of the settlor.’

Further, Prof. Penner argues that it is incorrect to hold that the distinction between a discretionary trust power and a mere power lies in ‘the extent of the survey taken, since with mere powers…’ —

‘the interests of the objects of the power must be weighed against those who would take in default of appointment.‘ ( Penner 2016, p.93)

As Prof. Penner notes, with mere powers of appointment to a large class of objects ‘there will always be those who take in default of appointment who have an interest in monitoring the trustees for misuse of the power’—

while with discretionary trusts there is no person with an equivalent interest in property (Penner 2016, p. 97)

Prof. Jamie Glister further clarifies the rights of a beneficiary under a discretionary trust:

“the right of the object is simply to require the trustees perform their obligation to allocate the fund after surveying the range of objects’ (Hanbury and Martin 2018, p.98);

While Penner explains the rights of those in default of a power of appointment:

“Those entitled in default of appointment will have the only rights to ensure that the power is not improperly exercised.’ The interests of objects of a special power ‘are in competition not only with each other,

but primarily with those in default of appointment, who are generally regarded not only as the primary objects of the settlor’s bounty (Vatcher v Paull 1915), but also as the persons in whom the property is vested, subject, of course to defeat by the exercise of the power of appointment ( Re Brooks’ Settlement Trusts 1939) (Penner 2016, p. 97)

One might argue that such an analysis distinguishing objects of discretionary trusts from those of powers of appointment goes to the very heart of the McPhail type trust which characterizes beneficiaries under a large discretionary trust —-

as merely postulants without any proprietary rights in property, who ‘may have little more real incentive to enforce the trust than does the object of the mere power’ (Penner 2016, p.97);

A distinction without a difference, perhaps?

PJ

References:

Graham Virgo, The Principles of Equity and Trusts, Oxford, 2020.

Ben McFarlane and Charles Mitchell, Hayton and Mitchell: Text, Cases and Materials on the Law of Trusts and Equitable Remedies, 14th ed., 2015, Sweet and Maxwell.

James Penner, The Law of Trusts, Oxford University Press, 2016.

Jamie Glister, James Lee, Hanbury and Martin: Modern Equity, Sweet and Maxwell 2018.

McPhail v Doulton [1971] AC 424

IRC v Broadway Cottages [1955] Ch 20

Re Hay’s Settlement’s Trust[1982] 1 W.L.R. 202

R v District Auditor , Ex.p. West Yorkshire MCC [1986] RVR 24

Re Manisty’s Settlement Trusts [1974] Ch.17