trusts & trustees 2007 molloy 75 95

Author: a-h

Post on 07-Jul-2018

213 views

Category:

Documents


0 download

Embed Size (px)

TRANSCRIPT

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    1/21

    Trusts & Trustees , 2007, Vol. 13, No. 3   75

    Trustee duties to beneficiaries in the exerciseof dispositive discretion: the legal framework 

    Anthony Molloy QC*

    ‘I like not that a Man should be ambitious of a Trust,

    when he can get nothing but Trouble by it.’

    Uvedale v Ettrick  (1682) 2 Cas in Ch 130, 131;

    22 ER 880, 881 (Lord Nottingham).

    Trustees’ first duty: know the deed

    Familiarity

    Even if it is unlikely to be as much fun: indiscriminate,hasty and thoughtless acceptance of trusteeship is almost

    as certain a road to woe as indiscriminate, hasty and

    thoughtless acceptance of an opportunity for a casual

    flirtatious encounter. Yet almost as many otherwise

    sensible professional practitioners still do the former as

    politicians do the latter. Many a trustee, repenting at

    leisure, rues that a Lord Nottingham was not there to tap

    him on the shoulder, and warn him off acceptance of the

    flattering invitation. It is all about unremitting duty, and

    about unremitting recrimination for breach of that duty.

    The first duty of the trustee is close acquaintance

    with the trust deed, and with any relevant contextual

    material. Many who take up trusteeship regard this as

    rather a quaint requirement. They completely ignore

    the deed. These unhappy men and women play a

    valuable role in society, and are much to be encouraged:

    because the value of trust litigation is that it distributes

    the fund or estate equitably among the members of 

    the Bar, and ensures that as little of it as possible is

    squandered on beneficiaries.

    Second duty: think the deed

    through—no valid dispositive discretionwithout actual, or conceptual, clarity of beneficiary identity

    Validity

    The second, closely-related, duty is to consider whether

    or not the settlor has described his beneficiaries, or the

    class of them, unambiguously.

    The court always will seek to discern the settlor’s

    intention, and to ensure that it is implemented,1 or, as

    least, not thwarted. But unless it be convinced that the

    settlor has made it clear who his intended beneficiaries

    are to be, the court will not be able to control the

    administration of the trust estate for their benefit. In

    that case there will be no trust at all2 on the terms of the

    deed. So, on appeal from the Master of the Rolls in

    Morice v Bishop of Durham,3 Lord Eldon LC held:

    ‘As it is a maxim, that the execution of a trust shall be

    under the control of the Court, it must be of such a

    nature, that it can be under that control; so that the

    administration of it can be reviewed by the Court; or,

    if the trustee dies, the Court itself can execute the trust:

    a trust therefore, which, in case of maladministration

    could be reformed; and a due administration directed;

    and then,   unless the subject and the objects can be 

    ascertained , upon principles, familiar in other cases,

    it must be decided, that the Court can neither

    reform maladministration, nor direct a due

    administration.’

    As the Lord Chancellor pointed out during the

    argument of the case, there will be only a resulting

    trust for the settlor: to whom, or to whose estate, the

    trust estate must be returned  intact , and not paid out to

    anyone else.4

    No validity means no power. It means no discretion.

    If the trustee makes a disposition in any event, it will be

    unauthorized and void. It will also be repayable by the

    trustee to the settlor or to the settlor’s estate.

    Difficulty

    The problem here is not to be confused with mere

    difficulty in tracking beneficiaries down, which does

    not defeat the trust: Re Hain ’s Settlement .5 Provided the

    beneficiaries are identified, or the class is conceptually 

    *    Anthony Molloy QC Shortland Chambers, 13/70 Shortland Street, PO Box 4338, Auckland 1140, New Zealand.

    1 See under the section of this article named ‘Taking the settlor’s intentionseriously is a key to the taking of that sensible approach’ subsequently as tothe requirement that sensible effect be given to the settlor’s intention.

    2   Morice v Bishop of Durham  (1805) 10 Ves Jr 522, 539–540.3 (1805) 10 Ves Jr 522, 539–540.4 (1805) 10 Ves Jr 522, 527.5 [1961] 1 WLR 440; McPhail v Doulton   [1971] AC 424, 457 (HL).

      The Author (2007). Published by Oxford University Press. All rights reserved.

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    2/21

    certain, the court always will give directions to the

    trustee6 who encounters problems finding beneficiaries.

    Test where the trust is fixed, and there is

    no discretionNor is the problem of the conceptual clarity of the class

    of potential beneficiaries of a discretionary power to be

    confused with the  fixed trust  requirements for certainty 

    of objects. Where the trust is fixed, and the trustee has

    no discretion as to objects, it will be valid only if the

    whole class   is ascertainable.

    If an intended trustee apprehends that the fixed class

    might not be ascertainable, he should require the settlor

    to obtain an order from the court approving the validity 

    of the deed. Failing such an order, he should reject the

    trusteeship.

    Criterion for validity when the deed confersa simple power, or where it imposes a trustwith a power of selection

    Once the element of discretion in the selection of 

    beneficiaries is introduced, there is no need to be able to

    ascertain every possible recipient as long as the position

    falls within the conclusion reached by the majority of the

    House of Lords in   McPhail v Doulton ,7 which Lord

    Wilberforce expressed thus:

    ‘the test for the validity of trust powers ought to be

    similar to that accepted by this House in   In Re Gulbenkian ’s Settlements   [1970] AC 508 for powers,

    namely, that the trust is valid if it can be said with

    certainty that  any given individual is or is not a member 

    of the class ’.

    Linguistic or semantic ambiguity in descriptionof beneficiary or of beneficiaries

    Broad as the test is, it does not mean that anything goes.

    In  McPhail v Doulton 8 Lord Wilberforce, concluded

    his judgment with a discussion of the potential sources

    of invalidating ambiguity. His Lordship referred firstto linguistic or semantic ambiguity in the description

    of the beneficiaries, or as to the class of beneficiaries.

    He explained that linguistic or semantic ambiguity,

    which the court cannot resolve, makes the trust void.

    Earlier in his reasons,9 Lord Wilberforce had cited,

    and applied to trusts, remarks of Upjohn LJ in respect of 

    powers, in   In Re Gulbenkian ’s Settlements, Whishaw v 

    Stephen s,10 that, if a deed:

    ‘directs trustees to make some specified provision for

    ‘‘John Smith’’, then to give legal effect to that provision

    it must be possible to identify ‘‘John Smith’’. If the

    donor knows three John Smiths, then by the most

    elementary principles of law, neither the trustees nor the

    court in their place can give effect to that provision;

    neither the trustees nor the court can guess at it. It must

    fail for uncertainty, unless of course admissible evidence

    is available to point to a particular John Smith as the

    object of the donor’s bounty.’

    Conceptual uncertainty

    In  McPhail v Doulton 11 Lord Wilberforce referred also

    to conceptual uncertainty as to the class: which,

    like linguistic or semantic uncertainty, makes the trust

    unworkable and therefore void. His Lordship had in

    mind the:

    ‘. . .case where the meaning of the words used is clear

    but the definition of beneficiaries is so hopelessly wide

    as not to form ‘‘anything like a class’’ so that the trust is

    administratively unworkable or, in Lord Eldon’s words,

    one that cannot be executed (Morice v Bishop of   

    Durham, 10 Ves Jr 522, 527).’

    Light on meaning of conceptual uncertaintyas to the class

    Uncertainty as to the class is as fatal as uncertainty as to

    the individual.

    ‘All the residents of Great London’: problematic 

    Elaborating on their Lordships’ decision in

    McPhail v Doulton ,12 that a trust is invalid for

    conceptual uncertainty unless it can be said with

    certainty that   any given individual is or is not 

    a member of the class , Lord Wilberforce said that

    ‘‘‘all the residents of Greater London’’ will serve’ as

    an example of a conceptually uncertain, and therefore

    void, class of trust beneficiaries.13

    6 See Re Gulbenkian’s Settlement, Wishaw v Stephens  [1970] AC 508, 523, perLord Upjohn: ‘mere difficulty is nothing to the point. If the trustees feeldifficulty or even doubt upon the point the Court of Chancery is availableto solve it for them.’

    7 [1971] AC 424, 456 (HL), on appeal from In re Baden’s Deed Trusts, Baden v Smith  [1969] 2 Ch 388.

    8 [1971] AC 424, 457.

    9 [1971] AC 424, 455.10 [1970] AC 508, 523–525.11 [1971] AC 424, 457.12 [1971] AC 424.13 [1971] AC 424, 456.

    76   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    3/21

    Templeman J took this up in   Re Mainsty ’s 

    Settlement ,14 in which His Lordship held that:

    ‘The objection to the capricious exercise of a power may 

    well extend to the creation of a capricious power.

    A power to benefit ‘‘residents of Greater London’’ [in aprivate, non-charitable, trust] is capricious because the

    terms of the power negative any sensible intention on

    the part of the settlor. If the settlor intended and expected 

    the trustees would have regard to persons with some claim

    on his bounty or some interest in an institution favoured 

    by the settlor, or if the settlor had any other sensible 

    intention or expectation, he would not have required the 

    trustees to consider only an accidental conglomeration of  

     persons who have no discernible link with the settlor or 

    with any institution. A capricious power negatives a sensible 

    consideration by the trustees of the exercise of the power .’

    Thus, whether or not Lord Wilberforce’s exampleproves to be correct, if a settlor ever decides to test it,

    may depend on the existence or on the absence of 

    express or implied criteria.15

    He and Templeman J were of course speaking of 

    private trusts. A charitable trust for the relief of poverty 

    among the residents of Greater London might be a

    different matter.

    ‘Object of benevolence and liberality’, also problematic 

    In Morice v Bishop of Durham16 a trust for ‘such objects

    of benevolence and liberality as the trustee in his own

    discretion shall most approve’ was held uncertain,

    and invalid. Referring to this case in   Re Mainsty ’s 

    Settlement 17 Templeman J held that:

    ‘In a trust where the objects are described by vague

    adjectives such as ‘benevolent’ and ‘liberal’ the trust breaks

    the rule that the trustees and the court must be able to

    determine with certainty whether a particular individual or

    a particular object is within the ambit of the power.’

    ‘Equally between ‘‘my old friends’’’: problematic for the

    non-discretionary Trust

    In  In Re Gulbenkian’s Settlements, Whishaw v Stephens 18

    Lord Upjohn postulated a non-discretionary direction:

    ‘that a fund or the income of a fund should be  equally 

    divided  between members of a class. That class must be

    defined as the individual; the   court cannot guess at it .

    Suppose the donor directs that a fund be divided equally 

    between ‘‘my old friends’’, then unless there is some

    admissible evidence that the donor has given some

    special ‘‘dictionary’’ meaning to that phrase whichenables the trustees to identify the class with sufficient

    certainty, it is plainly bad as being too uncertain.

    Suppose that there appeared before the trustees (or the

    court) two or three individuals who plainly satisfied the

    test of being among ‘‘my old friends’’, the trustees could

    not consistently with the donor’s intentions accept them

    as claiming the whole or any defined part of the fund.

    They cannot claim the whole fund for they can show no

    title to it unless they prove they are the only members of 

    the class, which of course they cannot do, and so, too,

    by parity of reasoning, they cannot claim any defined

    part of the fund and there is no authority in the trustees

    or the court to make any distribution among a smallerclass than that pointed out by the donor. The principle

    is, in my opinion, that the donor must make his

    intentions sufficiently plain as to the object of his trust

    and the court cannot give effect to it by misinterpreting

    his intentions by dividing the fund merely among those

    present. Secondly, and perhaps it is the more hallowed

    principle, the Court of Chancery, which acts in default

    of trustees, must know with sufficient certainty the

    objects of the beneficence of the donor so as to execute

    the trust.’

    ‘Between such of ‘‘my old friends’’ as my trustees shall select’:equally problematic 

    Lord Upjohn then considered, and found equally 

    wanting, a discretionary  variation on the ‘my old friends’

    example:19

    ‘Then, suppose the donor does not direct an equal

    division of his property among the class, but   gives 

    a power of selection to his trustees among the class ;

    exactly the same principles must apply. The trustees

    have a duty to select the donees of the donor’s bounty 

    from among the class designated by the donor; he has

    not entrusted them with any power to select the donees

    merely from among known claimants who are within

    the class, for that is constituting a narrower class and the

    donor has given them no power to do this.’

    In the absence of any ‘dictionary’ provided by the settlor

    in the deed, the spectrum from ‘old friendship’, through

    mere ‘friendship’ and ‘old but no-longer friendship’,

    to ‘mere acquaintanceship’, could be so broad as to

    defeat attempts to encapsulate the settlor’s intention;

    14 [1974] Ch 17, 27.15 Hayton   et al ,   Underhill & Hayton Law of Trusts and Trustees   (2006)

    17th edn 122.16 (1805) 10 Ves Jun. 522.17 [1974] Ch 17, 24.18 [1970] AC 508, 523–524. Cited and applied by Lord Wilberforce in

    McPhail v Doulton  [1971] AC 424, 455. 19 [1970] AC 508, 524.

    Trusts & Trustees , 2007, Vol. 13, No. 3   77

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    4/21

    and the trust accordingly would be void for want of that

    certainty.

    It is not sufficient there may be some who can be

    identified as having been old friends of the settlor on any 

    test. Until it is clear what the concept meant   to the settlor , there is no test that reveals whether   any   given

    person is or is not an old friend for the purposes of the

    instrument creating the trust.

    However ‘relatives’ likely to be valid 

    Shared ancestry is not bedevilled by the problems of the

    ‘friendship’ spectrum. In his speech in   McPhail v 

    Doulton ,20 Lord Wilberforce—hesitantly, lest his exam-

    ple ‘may prejudice future cases’—suggested that

    ‘a discretionary trust for ‘‘relatives’’, even of a living

    person’ would not be void for conceptual uncertainty or

    administrative unworkability.21 It is comparatively straightforward to ascertain lines of marriage or blood

    relationship.

    Caution: ‘next-of-kin’ not a synonym for ‘relatives’ 

    In Antill-Pockley v Perpetual Trustee Company Limited 22

    however the argument that ‘next-of-kin’ just meant

    ‘relatives’ was rejected in favour of its strict meaning of 

    those nearest in blood relation. The class comprised any 

    wife, child, grandchild or next of kin of an unmarried,

    childless, propositus, who had a sister alive. The

    purported appointment to a nephew, the sister’s son,

    was invalid: the sister was the sole next-of-kin.

    Massive potential width of class not to bemistaken for conceptual uncertainty

    ‘Is or is not’ test not applicable unless there is a discernible class

    The ‘is or is not’ test is very generous, but it cannot be

    applied at all unless a class can be identified. So it is

    vitally important that the very generosity of the ‘is or

    is not’ test, referred to under ‘Criterion for validity when

    the deed confers a simple power, or where it imposes a

    trust with a power of selection’ earlier, does not lull the

    trustee into glossing over certainty issues. Those issuesco-exist with that generosity; and the consequences of 

    overlooking them can be very expensive for the trustee.

    At the same time, the trustee must not conclude from

    the breadth of description of a class that the settlor has

    shot himself in the foot. In   Re Mainsty ’s Settlement 23

    Templeman J held that   In Re Gulbenkian ’s Settlements 

    and   McPhail v Doulton   teach that ‘a power cannot be

    uncertain merely because it is wide in ambit’.

    But the means of expressing that class can be very wide indeed 

    The deed in   Re Mainsty ’s Settlement 24 empowered the

    trustees to add, to the defined class of beneficiaries,

    anyone in the world   except the trustees, the settlor, his

    wife, and the other members for the time being of a

    defined excepted class.

    Templeman J pointed out that this was not a general

    power exercisable in favour of anyone; nor a special

    power exercisable in favour of a class; but an

    intermediate power: one exercisable in favour of 

    anyone in the world with certain, and few, exceptions.

    But, for all its width, the power was not capricious,because, while a: ‘capricious power negatives a sensible 

    consideration by the trustees of the exercise of the 

     power . . . a wide power, be it special or intermediate,

    does not negative or prohibit a sensible approach by 

    the trustees to the consideration and exercise of their 

     powers ’.25

    That is to say, the context of this power—to add

    anyone in the world to the class of original beneficiaries

    specified in the trust deed—was a family settlement: the

    original beneficiaries of which were the settlor, his

    spouse, his issue, his siblings and their issue.

    On any ‘sensible approach by the trustees to theconsideration and exercise of their powers’ it was

    only going to be members of the family; persons

    [and possibly companies] closely associated with the

    original named beneficiaries; or, possibly, charities for

    which any of them wished to have benefits provided:

    who would require any serious consideration by the

    trustees.

    There was accordingly no conceptual uncertainty 

    within Lord Wilberforce’s discussion cited under

    ‘Conceptual uncertainty’ earlier. That is, by virtue of 

    the context in which the very wide intermediate

    power being considered by Templeman J was located,the power was not one in which the definition of the

    class of beneficiaries was so hopelessly wide as to have

    made the trust administratively unworkable; or one

    unable to be executed by the court, as Lord Eldon had

    put it in the passage cited under ‘Validity’ earlier from

    Morice v Bishop of Durham.2620 [1971] AC 424, 456.21 Hayton   et al ,   Underhill & Hayton Law of Trusts and Trustees   (2006)

    17th edn 8.54, 8.55.22 (1974) 132 CLR 140 (High Court of Australia).23 [1974] Ch 17, 24.

    24 [1974] Ch 17, 24.25   Re Mainsty’s Settlement  [1974] Ch 17, 27.26 (1805) 10 Ves Jr 522, 539.

    78   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    5/21

    Third duty: ascertain whether distribution is imperative; or fullydiscretionary

    Trusts and powers share the test of objectcertainty

    The same certainty of objects test serves both powers

    and trust powers.27

    Apart from that, and apart also from:

    ‘the fact that an individual’s interest or right is

    non-assignable, there are other practical similarities

    between the positions of the two types of object. Either

    has the negative power to block a family arrangement

    or similar transaction proposed to be effected under

    the rule in Saunders v Vautier  (1841) 4 Beav 115 (unless

    in the case of a power the trustees are specially 

    authorised to release, that is to say extinguish, it).

    Both have a right to have their claims properly 

    considered by the trustees.’28

    Trusts and powers nonetheless not identical

    Nonetheless, ‘assimilation of the validity test does

    not involve the complete assimilation of trust powers

    with powers.’29 It is accordingly important that the

    trustee understand the difference between trust powers

    and powers because they give rise to different trustee

    obligations, which the trustee is duty-bound to recog-

    nize and apply in her care and disposition of the trustestate for the benefit of the beneficiaries.

    Telling the difference

    It is a matter of construction whether the power is a

    mere power or a trust power and the use of  

    inappropriate language is not decisive.30

    Mere power 

    A mere, or bare, power to distribute to, or among,

    a defined class, with a gift over in default of exercise,

    is a permission or a faculty.31

    (i)   No duty to exercise the power : The person in whom it

    is vested is under no duty  to exercise it; and, normally,32

    the court neither will compel him to do so, nor will

    exercise it in his stead.33 because to do so, when the

    settlor intended to leave it up to the trustee, generally 

    would defeat the intention of the settlor.34

    If the trustee fails to exercise it, the fund goes to those

    entitled under the trusts in default of its exercise.35

    It follows that—even if it is clear, and its members are all

    ascertained and are of full age and legal capacity—the

    class, to or among which the trustee is entitled to

    appoint, cannot compel the trustee to exercise it in their

    collective favour.36

    (ii)   But a duty to consider whether to exercise it : But

    none of this is to be taken to mean that the holder of the

    mere power has no duties, or that the court has no teeth

    to deal with him. A trustee vested with a mere power is

    under a fiduciary   duty to consider  whether, or in whatway, he should exercise it.37

    As Harman J put it in   Re Gestetner Settlement,

    Barnett v Blumka ,38 the holders of a mere power:

    ‘are bound, as I see it, to consider at all times during

    which the trust is to continue whether or no they are to

    distribute any and if so what part of the fund and, if so,

    to whom they should distribute it. To that extent, I have

    no doubt that there is a duty on these trustees: a

    member of the specified class might, if he could show 

    that the trustees had deliberately refused to consider any 

    question at all as to the want or suitability of any member of the class, procure their removal; but there is

    not . . .any duty, as I see it, on the trustees to distribute

    the whole of either income or capital among the

    members of the specified class; and if the whole of 

    the members could join together, they could still,

    as I understand it, not divide the fund between them;

    because there is a class in default of appointment, and

    the document on its face shows that there is no

    obligation on the trustees to do more than consider—

    from time to time I suppose—the merits of such

    persons of the specified class as are known to them and,

    if they think fit, to give them something. The settlor had

    good reason, I have no doubt, to trust the personswhom he appointed trustees; but I cannot see here that

    27 See section of this article ‘Criterion for validity when the need confers asimple power, or where it imposes a trust with power of selection,’ earlier.

    28   Schmidt v Rosewood Trust Ltd  [2003] 2 AC 709, at para 41.29   Re Baden’s Deed Trusts, McPhail v Doulton   [1971] AC 424, 456,  per  Lord

    Wilberforce.30   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 523  per 

    Lord Upjohn, with whom Lords Hodson and Guest agreed.31   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 523.32   Re Baden’s Deed Trusts, McPhail v Doulton   [1971] AC 424, 456,  per  Lord

    Wilberforce, in whose reasons the other majority judges concurred.

    33   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 524 per   Lord Upjohn.

    34   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 525 per   Lord Upjohn.

    35   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 525 per   Lord Upjohn.

    36   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 525 per   Lord Upjohn.

    37   Re Baden’s Deed Trusts, McPhail v Doulton   [1971] AC 424, 456,  per  LordWilberforce, in whose reasons the other majority judges concurred.

    38 [1953] Ch 672, 688.

    Trusts & Trustees , 2007, Vol. 13, No. 3   79

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    6/21

    there is such a duty as makes it essential for these

    trustees, before parting with any income or capital, to

    survey the whole field, and to consider whether A is

    more deserving of bounty than B. That is a task which

    was and which must have been known to the settlor tobe impossible, having regard to the ramifications of the

    persons who might become members of this class.’

    In a passage in his reasons in  Re Mainsty ’s Settlement 39

    Templeman J appears to have held that that was it. That,

    in respect of a mere power:

    exercisable by the trustees at their absolute discretion,

    the only ‘control’ exercisable by the court is the removal

    of the trustees, and the only ‘due administration’ which

    can be ‘directed’ is an order requiring the trustees to

    consider the exercise of the power, and in particular a

    request from a person within the ambit of the power.40

    In   Mettoy Pension Trustees Ltd v Evans ,41 Warner

    J referred to a number of authorities that had not

    been cited to Templeman J, and the Privy Council has

    said that His Lordship took ‘a broader view [than

    Templeman J] of the court’s power to intervene in the

    case of a fiduciary dispositive power’.42

    (iii)  And a duty not to exercise it capriciously, irrationally,

    or perversely : So, for instance, a trustee acting capriciously 

    would be in breach of that duty, and the court would

    intervene to head him off, or to require redress.43 The

    court did the latter in  Wilson v Turner ,44 where trustees

    who held a mere power to apply income for the

    maintenance of children, paid the whole of it to their

    father,  without any inquiry   into, or regard for, whether

    he needed it for the purpose: which he did not. They 

    were held to have failed to exercise the discretion, to

    have acted capriciously: and the entire amount was

    recoverable from the father’s estate. If it had not been

    recoverable, the trustees may well have had to restore it

    to the trust estate from their own pockets.45

    However, Warner J and the Privy Council were a little

    unfair to Templeman J, for, in Re Mainsty ’s Settlement ,46

    he had expressly held that:

    ‘The court may also be persuaded to intervene if the

    trustees act ‘capriciously,’ that is to say, act for reasons

    which I apprehend could be said to be irrational,

    perverse or irrelevant to any sensible expectation of the

    settlor; for example, if they chose a beneficiary by heightor complexion or by the irrelevant fact that he was a

    resident of Greater London.’

    (iv)  Plus a duty not to exercise it excessively : The court

    will restrain the trustee from any other improper

    exercise of a mere power.47 For example, those entitled

    to the fund in default of exercise would be entitled to

    apply for an order that the trustees   refrain from

    exercising the mere power excessively : ie outside the

    terms on which, or the beneficiaries for which, it was

    conferred; and the court will intervene to protect

    them.48 Again, with respect to Warner J and the Privy 

    Council, Templeman J had held expressly that:

    ‘reasonable trustees will endeavour, no doubt, to give

    effect to the intention of the settlor in making the

    settlement, and will derive that intention not from the

    terms of the power necessarily or exclusively, but from

    all the terms of the settlement, the surrounding

    circumstances and their individual knowledge acquired

    or inherited.’49

    Which is to say that a trustee would act unreasonably,

    and would be restrained by the court, if he was to

    purport to exercise the power for purposes foreign to

    the settlor’s intention as so determined.

    Trust power 

    Where the deed creates a trust to distribute to, or

    among, a defined class, with merely a power of selection

    within that class, the trustee  must  exercise the power: it

    being neither merely facultative, nor permissive, as in

    the case of a bare power. ‘The outstanding point of 

    difference is of course that under a discretionary trust of 

    income distribution of income (within a reasonable

    time) is mandatory, the trustees’ discretion being

    limited to the choice of the recipients and the sharesin which they are to take’.50

    Since the trustee is under a   duty   to exercise a trust

    power, the court will do so if she refuses.5139 [1974] Ch 17, 27–28.40 [1974] Ch 17, 28.41 [1990] 1 WLR 1587, 1617–1618.42   Schmidt v Rosewood Trust Ltd  [2003] 2 AC 709 at para 42   per   the Privy 

    Council approving of Warner J.43   Re Baden’s Deed Trusts, McPhail v Doulton   [1971] AC 424, 456,  per  Lord

    Wilberforce, in whose reasons the other majority judges concurred.44 (1883) 22 Ch Div 521 (CA).45 As in   Wong v Burt   [2005] 1 NZLR 91 (CA) cited under ‘Consequential

    excessive and fraudulent exercise’ subsequently.46 [1974] Ch 17, 26.

    47   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 525  per Lord Upjohn, with whom Lords Hodson and Guest agreed.

    48 Re Gulbenkian’s Settlements, Whishaw v Stephens [1970] AC 508, 525 per Lord Upjohn;   Re Baden’s Deed Trusts, McPhail v Doulton  [1971] AC 424,456,  per   Lord Wilberforce.

    49   Re Mainsty’s Settlement  [1974] Ch 17, 26.50   Schmidt v Rosewood Trust Ltd  [2003] 2 AC 709, at para 40.51   Schmidt v Rosewood Trust Ltd  [2003] 2 AC 709, at para 40.

    80   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    7/21

    If those entitled to be considered as beneficiaries of 

    such a discretionary power are all of full age and legal

    capacity, they are entitled to compel the trustee to pay 

    the fund over to them, unless the fund is income and the

    trustee has power to accumulate for the future.52

    Otherwise:

    ‘the court, if called upon to execute the trust power,

    will do so in the manner best calculated to give effect to

    the settlor’s or testator’s intentions. It may do so by 

    appointing new trustees, or by authorising or directing

    representative persons of the classes of beneficiaries to

    prepare a scheme of distribution, should the proper

    basis for distribution appear, by itself directing the

    trustees so to distribute.’53

    This discussion limited to establishing the distinguishing characteristics of mere powers and of trust powers

    The concern of the discussion, under this heading, of 

    beneficiary rights and of trustee duties, has been to

    illuminate the differences, and their importance,

    between trust powers and mere powers. A trustee

    cannot properly consider how to operate her dispositive

    powers without knowing what manner of powers they 

    are. It will be necessary, later in this article, to consider

    some of the duties in greater depth.

    Fourth duty to beneficiaries, if trust  isvalid: get in the trust estate

    Validate and commence the trust

    It is not the deed by which the trust is constituted,

    but the trustee’s getting-in of the trust estate. So, once

    the trustee is satisfied that the deed defines the

    beneficiaries, or the class of beneficiaries, unambigu-

    ously: it is imperative that the trust estate be got into the

    trustee’s name, and invested.

    The beneficiaries have the right to expect that the

    trustee will attend to this; and the trustee has a duty tosee to it. Without property of which to dispose, any 

    purported exercise of the dispositive discretions will be

    mere flatus.

    An intended trustee who is so dilatory that the settlor

    dies before the property is brought under the trust,

    may find himself facing an action by the intended

    beneficiaries whose prospects he has thus frustrated.

    Trustees’ fifth duty to thebeneficiaries: survey them andascertain those with a ‘real andpractical interest’ and ‘a realprospect of benefit’

    Identify all those with a ‘real and practicalinterest’ and ‘a real prospect of benefit’

    In his 2003 Withers Lecture,   The Trustees ’   duty to 

     provide information to Beneficiaries , Mr Justice Lightman

    maintained convincingly that the trustees’ objective at

    this stage must be to identify: ‘all the beneficiaries who

    have a real and practical  (as opposed to merely theoretical )

    interest in the due administration of the trust and a 

     prospect of benefit thereunder ’.

    On what basis is that identification to be made?

    An extremely wide class requires a sensibleand informed approach rather than a pointlesslywide survey

    The class in Re Gestetner Settlement, Barnett v Blumka 54

    was extremely wide: embracing family; ex-employeesof any of the family; the widow or widower of any such

    ex-employee; charitable institutions; and past and

    present directors and employees—and the widows or

    widowers of any of them—of Gestetner Ltd or of any 

    other company on the board of which any Gestetner

    director was for the time being sitting. All in all ‘a class

    which, it is admitted, is not one ascertainable at any 

    given time, being a fluctuating body’.55

    For the purposes of considering the validity of a

    mere power vested in the trustees, Harman J held

    that it nonetheless sufficed, to validate the power, that

    ‘there is no difficulty, as has been admitted, in ascertaining 

    whether any given postulant is a member of the specified 

    class . Of course, if that could not he ascertained the

    matter would be quite different, but of John Doe or

    Richard Roe it can be postulated easily enough whether

    he is or is not eligible to receive the settlor’s bounty.

    There being no uncertainty in that sense,  I am reluctant 

    to introduce a notion of uncertainty in the other sense, by 

    52   Re Gulbenkian’s Settlements, Whishaw v Stephen s [1970] AC 508, 523  per Lord Upjohn, with whom Lords Hodson and Guest agreed. In   Schmidt v Rosewood Trust Ltd  [2003] 2 AC 709, at para 40, the Privy Council referredto this, and said: ‘But the possibility of such a collective disposition will berare, and on his own the object of a discretionary trust has no more of anassignable or transmissible interest than the object of a mere power.’

    53   Re Baden’s Deed Trusts, McPhail v Doulton   [1971] AC 424, 456,  per  LordWilberforce, in whose reasons the other majority judges concurred.

    54 [1953] Ch 672, 688 (Harman J).55 [1953] Ch 672, 683.

    Trusts & Trustees , 2007, Vol. 13, No. 3   81

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    8/21

    saying that the trustees must worry their heads to survey 

    the world from China to Peru, when there are perfectly 

    good objects of the class in England ’.56

    Harman J’s good sense in this, and other, aspects of his

    reasons, was referred to by, and clearly influenced,Templeman J in  Re Mainsty ’s Settlement , in which His

    Lordship held that: ‘a wide power, be it special or

    intermediate, does not negative or prohibit a   sensible 

    approach by the trustees to the consideration and

    exercise of their powers.’57

    The Privy Council cited this approvingly in the

    reasons for its advice in  Schmidt v Rosewood Trust Ltd .58

    And in  McPhail v Doulton 59 Lord Wilberforce made it

    clear that, once the trustee can see that there is

    conceptual certainty—ie, that any given individual is,

    or is not, a member of the class of beneficiaries intended

    by the settlor—there is no need for that trustee to have

    compiled, or to have been able to compile, ‘a complete

    list of all possible objects’.

    Taking the settlor’s intention seriously is a key tothe taking of that sensible approach

    In Re Gestetner Settlement, Barnett v Blumka 60 Harman J

    made a point so obvious that—like actually bothering to

    read the trust deed—it is easily overlooked. The learned

     judge continued:

    ‘Consequently, I am not minded to upset thescheme   put forward by the settlor   on the ground

    indicated, namely, that of uncertainty.   There is no 

    uncertainty in so far as it is quite certain whether 

     particular individuals are objects of the power.   What is

    not certain is how many objects there are; and it does

    not seem to me that such an uncertainty will invalidate a

    trust worded in this way. I accordingly declare the trust

    valid.’

    In   Re Mainsty ’s Settlement ,61 Templeman J observed

    that:

    ‘Reasonable trustees will endeavour, no doubt, to give 

    effect to the intention of the settlor   in making thesettlement and will derive that intention not from the

    terms of the power necessarily or exclusively, but from

    all the terms of the settlement, the surrounding

    circumstances and their individual knowledge acquired

    or inherited.’

    Applying the ‘is or is not’ test to the same effect as

    Harman J in the above passage, Templeman J, likewise,

    found no call: ‘to strike down a power which  a settlor,disposing of his own property under skilled advice, wishes 

    to confer  on his trustees’.62

    Although the ‘is or is not’ test governs bothtrusts and mere powers, the inquiry is notquite identical in each case

    In  McPhail v Doulton 63 Lord Wilberforce made a point

    that may require the tailoring of the survey to the nature

    of the power in question:

    ‘Such distinction as there is [between trust powers and

    mere powers] would seem to lie in the extent of thesurvey which the trustee is required to carry out: if he

    has to   [ie a trust] 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 [mere] power to make grants. But just as, in the

    case of a power, it is possible to underestimate the

    fiduciary obligation of the trustee to whom it is given,

    so, in the case of a trust (trust power), the  danger lies in 

    overstating what the trustee requires to know or to inquire 

    into before he can properly execute his trust.   The

    difference may be one of degree rather than of principle:

    in the well-known words of Sir George Farwell,  Farwell 

    on Powers , 3rd ed (1916), p. 10, trusts and powersare often blended, and the mixture may vary in its

    ingredients.’

    This passage was cited, and described, by the Privy 

    Council in   Schmidt v Rosewood Trust Ltd 64 as having

    given:

    ‘a very clear and eminently realistic account of both

    the points of difference and the similarities between

    a discretionary trust and a fiduciary dispositive power.

    The outstanding point of difference is of course that

    under a discretionary trust of income distribution

    of income (within a reasonable time) is mandatory,the trustees’ discretion being limited to the choice

    of the recipients and the shares in which they are

    to take.’

    56 [1953] Ch 672, 688–689.57   Re Mainsty’s Settlement  [1974] Ch 17, 27.58 [2003] 2 AC 709, para 42.59 [1971] AC 424, 456.60 [1953] Ch 672, 689.61 [1974] Ch 17, 26.

    62 [1974] Ch 17, 29.63 [1971] AC 424, 449.64 [2003] 2 AC 709, at para 40.

    82   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    9/21

    Trustees’ sixth duty: having identifiedthose with a ‘real and practicalinterest’ and ‘a real prospect

    of benefit’, tell them thatthey are potential beneficiaries

    No need to tell the beneficiaries that they arebeneficiaries?

    The holder of a power is duty-bound to consider from

    time to time whether to exercise it. In the absence of any 

    instructions in the instrument that confers the power,

    the manner in which she must approach the making of 

    that decision is entirely within her discretion.65

    If she does exercise it, then at least the beneficiaries

    favoured by that exercise will be aware of the existence

    of the power, and of the fact that they have rights to beconsidered for its exercise.

    But if she does not exercise it for some time after the

    trust has been created, what then? Say the settlor dies

    before the trustee exercises the power; say that there is

    no protector, or at least none that has been informed of 

    their appointment; say that no accountants have been

    appointed to prepare annual accounts and have been

    made aware of their appointment; and say that the

    default beneficiaries have not been made aware of it

    either.

    The trustee then may be the only person alive who

    knows the trust exists. Say she decides never to exercise

    the power: who is to bring her to account? Is she obliged

    to inform members of the class that the power and the

    trust fund exist? Would it be sufficient if she was to have

    advised the default beneficiaries: even though it is clearly 

    in their interest (unless they are also the potential

    beneficiaries of the exercise of the power) to stand by in

    the hope that the power would never be exercised:

    leaving them with the entire fund undiminished by any 

    distributions?

    Until 2003, few trustees might have seen anything

    controversial in the part that I have italicised in thefollowing passage from the reasons for judgment of 

    Templeman J in  Re Mainsty ’s Settlement :66

    ‘The court cannot insist on any particular consideration

    being given by the trustees to the exercise of the power.

    If a settlor creates a power exercisable in favour of his

    issue, his relations and the employees of his company,

    the trustees may in practice for many years hold regular

    meetings, study the terms of the power and the other

    provisions of the settlement, examine the accounts and

    either   decide not to exercise the power  or to exercise it

    only in favour, for example, of the children of the

    settlor.  During that period the existence of the power may not be disclosed to any relation or employee   and the

    trustees may not seek or receive any information

    concerning the circumstances of any relation or

    employee.   In my judgment it cannot be said that the 

    trustees in those circumstances have committed a breach of  

    trust and that they ought to have advertised the power or 

    looked beyond the persons who are most likely to be the 

    objects of the bounty of the settlor .’

    Potential for conflict between settlorand trustee

    In his 2003 Withers Lecture,   The Trustees ’   duty to  provide information to Beneficiaries , Mr Justice

    Lightman—who cited that judgment but did not refer

    to this passage—made a strong case that a trustee in

    those circumstances has a duty to advise potential

    beneficiaries that the power exists, and that they are

    within its scope.

    His Lordship was under no illusion that this view 

    would be popular with settlors or with trustees:

    ‘Must a beneficiary (and in particular a beneficiary on

    his attaining full age of 18 years) be informed by trustees

    of a settlement of his entitlement under the trust and

    the extent of his entitlement in all circumstances

    notwithstanding the damage which such disclosure

    may do to him? There are two sides to the argument.

    It is a recurrent experience of mankind that, if a person

    of too young an age knows that he is amply provided

    for, this may distract him from getting on with his daily 

    life and discourage him from taking all necessary steps

    to provide for himself or equip himself to do so.

    The incentive to be self-supporting can be diluted and

    there may be a risk of a lack of appreciation of the value

    of money and hard work.

    On the other hand it may also be fair that a child should

    know the identity of any settlor and the extent of any provision made for him, whether the provision

    (present and past) made for him is the generous act of 

    his parents or someone else, and accordingly the extent

    of his debt to his parents and the settlor, and the

    prospect and extent of provision in the future.

    By reason of the strong views held by them executors

    and trustees can be placed under considerable pressure

    by well meaning and well intentioned parents to

    say nothing or as little as possible on this topic.

    The executors and trustees may likewise consider that65 See Sub-paragraph (ii) under ‘Mere power’ above.66 [1974] Ch 17, 27.

    Trusts & Trustees , 2007, Vol. 13, No. 3   83

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    10/21

    the best interest of the beneficiary may require them to

    say nothing.

    The question raised is how far it is open to the trustees

    to take this course and how far to do so exposes them to

    the risk of proceedings?’

    Beneficiary principle is at the root of the trust

    To answer this question in respect of a trust, it must

    be recalled that a supposed trust with no one to enforce

    it is no trust at all.

    A charitable trust—a trust for public purposes—is

    enforceable by the Attorney-General on behalf of the

     parens patriae 67 and in the interests of the public. But it

    is oxymoronic to speak of a private trust without a

    beneficiary. There can be no such thing. This is the

    ‘beneficiary principle’. It was famously stated by the

    Master of the Rolls at first instance in  Morice v Bishop of  Durham:68 ‘Every other [ie private, non-charitable] trust

    must have a definite object. There must be somebody in

    whose favour the court can decree performance.’

    The estate of a supposed trust without a beneficiary 

    is simply undisposed of. It is held on a resulting trust

    for the settlor, as Lord Eldon put it on appeal in the

    same case:69

    ‘If a testator expressly says, he gives upon trust, and says

    no more, it has long been established, that the next of 

    kin will take. Then, if he proceeds to express the trust,

    but does not sufficiently express it, or expresses a trust,that cannot be executed, it is exactly the same as if he

    had said, he gave upon trust, and stopped there; . . . .

    There is no difficulty upon that.’

    That is to say, for a trust to be valid, there must be

    somebody who—as the Privy Council has held in

    Schmidt v Rosewood Trust Ltd ,70—can invoke ‘the

    court’s inherent jurisdiction to supervise, and if 

    necessary to intervene in, the administration of trusts’.

    Their Lordships pointed out that the right to invoke this 

     jurisdiction extends to the  ‘object of a discretion  (including 

    a mere power )’.

    Further, as will appear,71

    a discretionary beneficiary has a right to make a case to the trustee that a payment,

    application or distribution be made to the beneficiary.

    Without such submissions trustees often may be unable

    to make fully-informed distribution decisions: a state of 

    affairs unlikely to win the approval of the court.

    Trustee accordingly bound, as a matter of 

    good faith, to disclose to a sui juris beneficiarytheir interest in the trust estate

    A beneficiary can neither be an enforcer, nor can she

    exercise her right of making a case to the trustees, if she

    does not know that she is one. If the beneficiary does not

    know, there is no-one to invoke the court’s jurisdiction to

    supervise, and that jurisdiction accordingly is nullified so

    far as that trust is concerned. A trustee responsible for

    keeping the beneficiary in the dark as to the existence of 

    the trust, or of the beneficiary’s rights under it, therefore

    must be in breach of duty to the beneficiary.

    The applicable duty is that of good faith. ProfessorHayton expresses it cogently:

    ‘At the core of the trust concept is a duty of confidence

    imposed upon a trustee in respect of particular property 

    and positively enforceable in a Court of Equity by a

    person.

    . . .

    [T]he fundamental interrelated core duties to disclose

    information and to account to the beneficiaries for the

    trustees’ stewardship of the trust property, so as to be

    liable for losses or profits in relation thereto, cannot be

    excluded.

    . . .

    The duty to act in good faith (ie honestly and

    consciously) in respect of any trust matter cannot,

    of course, be excluded. To do so would be to make a

    nonsense of the trust relationship as an obligation of 

    confidence. It would make the trustees a law unto

    themselves free from the jurisdiction of the court and

    the court will not recognize this if the trustees were

    intended to be trustees and not absolute owners.

    Similarly, an exemption from liability for breach of 

    the duty to act in good faith cannot have effect, because

    that would empty the area of obligation so as to leave no

    room for any obligation.’72

    So, in his Withers Lecture,  The Trustees ’  duty to provide information to Beneficiaries , Lightman J must have been

    correct—to observe73 that, unlike a Will, a private inter

    vivos trust instrument:

    ‘is a private document which does not have to be

    registered and its very existence may be known only to

    67 Professor Pound,   The Spirit of the Common Law   (1921) 68 wrote: Atcommon law the king is  parens patriae , father of his country, which is butthe medieval mode of putting what we mean today when we say that thestate is the guardian of social interests.

    68 (1804) 9 Ves 399, 405.69   Morice v Bishop of Durham  (1805) 10 Ves Jr 522, 527.70 [2003] 2 AC 709, para 51.71 Under ‘Ask them: they have a right to have their requests considered’.

    72 Hayton, The Irreducible Core Content of Trusteeship  in Oakley (ed)  Trends in Contemporary Trust Law  (1966) 47, 57.

    73 Approving Professor Hayton in  Underhill & Hayton on Trusts and Trustees (2003) 16th edn, 674.

    84   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    11/21

    the settlor and the trustee or trustees and accordingly 

    the settlor alone if the settlor assumes the office of sole

    trustee.   . . . Unless the trustees are under a duty to

    disclose the trust to the beneficiaries, the very existence

    of the trust may be unknowable as well as unknown tothose alone who can enforce it and hold the trustees to

    account. There is in the circumstances the overriding

    need to impose on trustees the obligation to disclose the

    existence of the trust and its provisions to those entitled

    to enforce it.’

    Extent of disclosure required of trustee: allcandidates for the exercise of the discretionto be informed of the possibility

    The learned judge likewise reflected what is surely the

    proper course when he continued by holding that:

    ‘Candidates for the exercise of the discretion in theirfavour should be informed not least so as to be afforded

    the opportunity to make representations on their behalf 

    and enable the trustees to make a fully informed

    decision. If the settlor has selected an individual as a

    possible beneficiary, the trustees should let him know 

    and have his say unless the trustees can  properly  decide

    blind to exclude him from benefit ignoring his possible

    claim.’74

    So there is no call for advertising to the whole of a wide

    class, but only to those who the trustee regards as likely,

    rather than merely theoretically possible, beneficiaries.

    This is consistent with:

      Templeman J’s finding, in   Re Mainsty ’s Settlement ,

    that ‘a wide power . . . does not negative or prohibit a

    sensible approach by the trustees to the consideration

    and exercise of their powers’.75 On that approach,

    and where there is a power of selection expressed in

    the widest terms,76 the context is likely to suggest the

    range of potential beneficiaries to whom disclosure

    should be made.

      The reasons of the Privy Council in   Schmidt v 

    Rosewood Trust Ltd .77 In particular, their Lordships’

    decision that:‘Especially when there are issues as to personal

    or commercial confidentiality, the court may have

    to balance the competing interests of different

    beneficiaries, the trustees themselves, and third parties.

    Disclosure may have to be limited and safeguards may 

    have to be put in place. Evaluation of the claims of a

    beneficiary (and especially of a discretionary object)

    may be an important part of the balancing exercise

    which the court has to perform on the materials placedbefore it.  In many cases the court may have no difficulty 

    concluding that an applicant with no more than a 

    theoretical possibility of benefit ought not to be granted 

    any relief   .’

    What about potential beneficiaries undera mere power?

    Because the holder of the power is under no duty to

    exercise it at all, potential beneficiaries under a mere

    power—having ‘no more than a theoretical possibility 

    of benefit’, within the passage just cited—in some

    circumstances may be considered as having a lesser rightto this disclosure.

    The same could not be said of the beneficiaries in

    default of exercise. They are entitled to apply to the

    court to restrain the holder of the power from improper

    exercise.78 Those default beneficiaries accordingly are

    potential enforcers, because it is they who are entitled to

    the fund save insofar as it may have been disposed of 

    under the power. The trustee holding a mere power

    accordingly would appear to be under an obligation to

    make sensible disclosure to them.

    However, unless the class of discretionary benefici-

    aries is identically the same as the class of defaultbeneficiaries, it will not at all be in the interests of the

    latter to have the trustee give any consideration to

    exercising the discretion, and thereby impinge upon the

    fund that otherwise will pass on default.

    So communication by the trustee to the default

    beneficiaries alone, to the exclusion of the discretionary 

    beneficiaries of a mere power, may not suffice to

    discharge the duty of good faith that lies on the trustee

    on Lightman J’s theory.

    Effect of contrary provision in the trust deed

    Under ‘Extent of disclosure required of trustee:

    all candidates for the exercise of the discretion to be

    informed of the possibility’, above it has appeared, by 

    reference to   Schmidt v Rosewood Trust Ltd ,79 that the

    disclosure obligation is not owed to the whole

    theoretically possible class. But it is owed to those who74 Cf ‘Ask them: they have a right to have their requests considered’

    subsequently.75   Re Mainsty’s Settlement   [1974] Ch 17, 27.76 See ‘But the means of expressing that class can be very wide instead earlier.77 [2003] 2 AC 709, para 67.

    78 See ‘Mere power’ mentioned above.79 [2003] 2 AC 709, para 67.

    Trusts & Trustees , 2007, Vol. 13, No. 3   85

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    12/21

    are likely beneficiaries, and who are of full legal capacity 

    [and possibly, where there is power to pay to the parents

    or guardians of underage beneficiaries, it may be owed

    to the parents or guardians]. It is a reflection of the duty 

    of good faith, which is to say, the duty to act in theinterests of the beneficiaries; and it is not to be

    dispensed with merely because of pressure from

    settlors.80 In  Armitage v Nurse ,81 Millett LJ held that:

    It is the duty of a trustee to manage the trust properly 

    and deal with it in the interest of the beneficiaries. If he

    acts in a way which he does not honestly believe is in

    their   interests, he is acting dishonestly. It does not

    matter whether he stands or thinks he stands to gain

    personally from his actions.

    In some circumstances, the considerations82 seen by 

    Lightman J as appearing to militate against disclosuremay justify good faith non-disclosure, to a likely 

    beneficiary, provided that the trustee accountability 

    considerations underlying the ‘beneficiary principle’ are

    not undermined; and provided further that it can

    reasonably be said to be in the interests of that likely 

    beneficiary that he remain unaware for the time being

    of his rights to make a case to the trustees for provision.

    For example, if there are other discretionary bene-

    ficiaries who are aware of the existence of the trust

    because, say, they have received distributions from it,

    it might be possible for a trustee to consider that the

    knowledge of those other beneficiaries will serve toensure his accountability for the benefit of the potential

    discretionary beneficiary from whom disclosure is to be

    withheld until, say, he has demonstrably recovered from

    an expensive drug habit.

    Otherwise, as Lightman J suggests:

    A trust may authorise enforcement by a person other

    than a beneficiary eg the settlor or a protector, but such

    a right can only be conferred   in addition to , but not

    instead of, the core rights of the beneficiaries, which are

    inherent in their interests.

    . . .

    [The settlor] cannot create a trust, but deprive

    beneficiaries of the incidental rights essential for the

    constitution of a valid trust. So far as the law does admit

    of exceptions, those exceptions should be narrowly 

    drawn and clearly justified by countervailing interests.

    The trustee’s seventh duty: havingidentified and advised the likelypotential beneficiaries, seek to

    understand, and actually consider,their circumstances

    Having told them that they are potentialbeneficiaries, classify them, and find outhow are they placed, and who needs what

    When the object of the exercise is to leave matters to the

    trustees’ discretion, the terms of the power will seldom

    prescribe how they must exercise a discretionary 

    distributive power. Nonetheless, there are things that

    the trustee must do. In   McPhail v Doulton 83 Lord

    Wilberforce held that a trustee must ‘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.

    Correspondingly 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?

    In  Liley v Hey ,84 there was a trust to:

    distribute amongst certain families, according to their

    circumstances, as, in the opinion of the said trustees,

    they may need such assistance, whose names are

    hereinafter mentioned: viz—William Copley,

    Kirkburton, weaver; Charles Lockwood, ditto, ditto;

    William Davy, sen., ditto, spinner; Betty Heywood,

    ditto; and twenty other persons, named and described in

    like manner, making in the whole twenty-four persons.

    The Vice Chancellor held:

    I cannot decide any thing with respect to the interests of 

    the persons named in this trust, without knowing what

    80 Cf the remarks of Lightman J in his Withers Lecture, cited under ‘Potentialfor conflict between settlor and trustee’ earlier, and the duty not to be thesettlor’s lapdog considered under ‘Potential for conflict between settler andtrustee’ below.

    81 [1998] Ch 241, 251.82 Cited under ‘Potential for conflict between settler and trustee earlier’.

    83 [1971] AC 424, 449.84 (1842) 1 Hare 580.

    86   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    13/21

    the facts of the case are, with regard to them, and their

    children, and other descendants.

    The Defendants must make such inquiries as will elicit

    the facts necessary to enable me to apply the will to the

    circumstances of the case, if the circumstances shouldadmit of such application.

    Ask them: they have a right to havetheir requests considered85

    In re Gestetner Settlement ,86 Harman J held that the

    trustees

    are bound, as I see it, to consider at all times during

    which the trust is to continue whether or no they are to

    distribute any and if so what part of the fund and, if so,

    to whom they should distribute it.

    To that extent, I have no doubt that there is a duty on

    these trustees:

    a member of the specified class might, if he could show 

    that the trustees had deliberately refused to consider any 

    question at all as to the want or suitability of any 

    member of the class, procure their removal; but . . .there

    is no obligation on the trustees to do more than

    consider—from time to time, I suppose—the merits of 

    such persons of the specified class as are known to them

    and, if they think fit, to give them something.

    The settlor had good reason, I have no doubt, to trust

    the persons whom he appointed trustees; but I cannot

    see here that there is such a duty as makes it essentialfor these trustees, before parting with any income or

    capital, to survey the whole field, and to consider

    whether A is more deserving of bounty than B. That is a

    task which was and which must have been known to the

    settlor to be impossible, having regard to the ramifica-

    tions of the persons who might become members of this

    class.

    Trustees might be treading dangerous ground to

    purport to decide issues of ‘want’ or of ‘suitability’ of 

    beneficiaries without actually asking them. As

    Templeman J held, citing Harman J, in   Re Mainsty ’s 

    Settlement :87

    If a person within the ambit of the power is aware of 

    its existence he can require the trustees to consider

    exercising the power and in particular to consider a

    request on his part for the power to be exercised in his

    favour. The trustees must consider this request, and if 

    they decline to do so or can be proved to have omitted

    to do so, then the aggrieved person may apply to the

    court which may remove the trustees and appoint

    others in their place.

    . . .

    [T]he trustees . . .cannot be obliged to take any form of 

    action, save to consider the exercise of the power and a

    request from a person who is within the ambit of the

    power. In practice, requests to trustees . . . are unlikely to

    come from anyone who has no claim on the bounty of 

    the settlor. In practice, requests to trustees armed with a

    special power in favour, for example, of issue, relations

    and employees of a company are unlikely to come from

    anyone who has no claim on the bounty of the settlor,

    or has no plausible grounds for being given a benefit

    from property derived from the settlor.

    Trustees’ eighth duty: to makethe selection  within the power conferred by the deed 

    The general principle of law88

    It has been suggested that administrative law sets the

    pace on discretionary powers, and that it is ‘‘time for

    private law to catch up with public law in this respect.89

    But the true position is that administrative law itself 

    merely reflects an overarching general legal principle,

    and that, since ‘Equity follows the law, but not slavishly nor always’,90 one would expect to—and one does—find

    that it does so in this sphere also.

    In   Equitable Life Assurance Society v Hyman ,91

    Lord Cooke made his speech:

    starting from the principle that no legal discretion,

    however widely worded (here, by article 65(1), the

    directors may apportion bonuses ‘on such principles,

    and by such methods, as they may from time to time

    determine’), can be exercised for purposes contrary to

    those of the instrument for which it is conferred.

    As Lord Woolf MR pointed out in his judgment in the

    Court of Appeal in this case [2000] 2 WLR 798, 806, thisprinciple is common to administrative law (eg  Padfield v 

    Minister of Agriculture, Fisheries and Food    [1968]

    AC 997) and sundry fields of private law (eg  Howard 

    Smith Ltd v Ampol Petroleum Ltd   [1974] AC 821).

    85 See also the extra-judicial view of Lightman J under ‘Extent of disclosurerequired of trustee: all candidates for the exercise of the discretion to beinformed of the possibility’ earlier.

    86 [1953] Ch 672, 688.87 [1974] Ch 17, 25, 26.

    88 Cf   Wong v Burt   [2005] 1 NZLR 91 para [27] (CA) cited under‘Consequential excessive and fraudulent exercise’ subsequently.

    89   Re Smiths City Group Superannuation Plan Trust Deed, Craddock v Crowhen (1995) 1 NZSC 40,331, 49,337 (Tipping J).

    90  Graf v Hope Building Corp  254 NY 1, 9 (1930)  per   Cardozo J (dissenting:New York Court of Appeals).

    91 [2000] 3 WLR 529, 540–541 (HL).

    Trusts & Trustees , 2007, Vol. 13, No. 3   87

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    14/21

    In an administrative law context, violation of the

    principle may result in no more than invalidity; in a

    contractual context, it may result in a breach of contract,

    which should be rectified.

    Lord Cooke’s chosen private law illustration involved afiduciary power. In   Howard Smith Ltd v Ampol 

    Petroleum Ltd ,92 the Privy Council was concerned with

    the directors’ power to issue company shares:

    Thus, and this is not disputed, the issue was clearly intra

    vires the directors. But, intra vires though the issue may 

    have been, the directors’ power under this article is a

    fiduciary power: and it remains the case that an exercise

    of such a power though formally valid, may be attacked

    on the ground that it was not exercised for the purpose

    for which it was granted.

    Select rationally, not capriciously

    It is therefore clear that, having discharged all of her

    duties thus far, it is not now open to the trustee to throw 

    up her hands; say ‘this is all too hard’; and throw a dart,

    or use some off-the-wall criterion, to actually make the

    selection.

    So, in   Re Mainsty ’s Settlement ,93 Templeman J said

    that the court will hold them answerable:

    if the trustees act ‘capriciously,’ that is to say, act for

    reasons which I apprehend could be said to be

    irrational, perverse or irrelevant to any sensibleexpectation of the settlor; for example, if they chose a

    beneficiary by height or complexion or by the irrelevant

    fact that he was a resident of Greater London.

    Which is nothing more than a colourful rephrasing of 

    Lord Cooke’s phrase: ‘for purposes contrary to those of 

    the instrument for which it is conferred.’

    Confer no benefits outside the class

    Any distribution for the benefit of persons not entitled

    to receive it will be a payment in breach of trust for

    which, if he cannot recover it from the recipient,the trustee will be personally liable to reimburse the trust

    estate.

    The classic statement is that of Millett LJ in  Armitage 

    v Nurse :94

    So a deliberate breach of trust is not necessarily 

    fraudulent. Hence the remark famously attributed to

    Selwyn LJ by Sir Nathaniel Lindley MR in the course of 

    argument in   Perrins v Bellamy   [1899] 1 Ch 797, 798:

    ‘My old master, the late Selwyn LJ, used to say,‘‘The main duty of a trustee is to commit judicious

    breaches of trust.’’ ’ The expression ‘actual fraud’ in

    clause 15 is not used to describe the common law tort of 

    deceit. As the judge appreciated it simply means

    dishonesty. I accept the formulation put forward by 

    Mr Hill on behalf of the respondents which (as I have

    slightly modified it) is that it:

    ‘. . .connotes at the minimum an intention on the part

    of the trustee to pursue a particular course of action,

    either knowing that it is contrary to the interests of the

    beneficiaries or being recklessly indifferent whether it is

    contrary to their interests or not.’

    It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he

    acts in a way which he does not honestly believe is in

    their interests then he is acting dishonestly. It does not

    matter whether he stands or thinks he stands to gain

    personally from his actions. A trustee who acts with the

    intention of benefiting persons who are not the objects

    of the trust is not the less dishonest because he does not

    intend to benefit himself.

    Authority must exist in substance, and cannotbe claimed as a matter of form

    The first way in which the trustee risks making adistribution to persons not entitled to receive it—for

    which the trustee unable to recover it from the recipient

    will be liable personally to reimburse the trust estate—is

    by neglecting to consider whether the proposed payee is

    certainly within the class of potential beneficiaries. It is a

    fraud on the power to make a payment not within its

    scope. In its determination whether a payment was

    made within, or in fraud of, the power, equity regards

    the substance not the form: looking through an

    ostensible payee to the real one.

     A testamentary lacuna

    Wong v Burt 95 is a recent example. The will in question

    provided for the income of the estate to be paid to

    the testator’s wife for life; then to his two daughters

    for their lives. On the death of the daughters, the

    estate was to be distributed among the children of one of 

    those daughters. The other daughter’s children were

    92 [1974] AC 821, 834 (PC).93 [1974] Ch 17, 26. See also  Re Baden’s Deed Trusts, McPhail v Doulton 

    [1971] AC 424, 449, per   Lord Wilberforce; and  Re Lofthouse  (1885) 29 ChD 921, 930 where Cotton LJ equates ‘perversity’ with ‘dishonesty’.

    94 [1998] Ch 241, 251. Followed in   Taylor & ors v Midland Bank Trust Company Ltd & ors   [2002] WTLR 95, 103–104 (Rattee J), 113–114(Buxton LJ), and 118–119 (Stuart-Smith LJ, dissenting) (CA). 95 [2005] 1 NZLR 91; [2005] WTLR 291 (CA).

    88   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    15/21

    cut out of the final distribution because of a family 

    falling-out.

    But while the will had provided for them to be the

    ultimate beneficiaries, it made no provision for the two

    children of the former daughter to be substituted asbeneficiaries of their mother’s share of the intermediate

    income if she was to have died before the distribution

    date.

    And die prematurely their mother did: disinheriting

    the two young96 children from the income from their

    grandfather’s estate while their late mother’s sister

    remained alive.

    Clause 6 of the will empowered the trustees to pay the

    widow:

    ‘. . .such sum or sums as they in their absolute

    discretion may think fit if they shall consider it

    necessary, desirable or expedient so to do by reason of 

    the state of my wife’s health or her desire to travel or to

    acquire a home or by reason of before [sic: a fall?] in the

    purchasing power of money or for any other reasons

    whatsoever whether similar or dissimilar to the

    foregoing’.97

    The testator’s widow was one of the trustees. She

    regarded the lack of provision for stirpital substitution

    of this daughter’s two teenage children as unfair.

    Trustees anxious to please the testator’s widow 

    The trustees considered that the above provisionempowered them to redress the perceived unfairness

    by distributing $250,000 to the widow: to enable her to

    execute her wish to advance it to her family trust, of 

    which the two relevant children were beneficiaries.

    Paying the wong beneficiary 

    After having obtained legal advice that this course of 

    action was available—albeit challengeable by the surviv-

    ing daughter in whom the total income was vested for

    life—the trustees proceeded with the distribution to the

    testator’s widow.

    In her turn, the widow advanced it to her family trust.During her lifetime she partially forgave the advance in

    increments: presumably to avoid the gift duty that

    would have been payable if she was to have forgiven it all

    at once. She forgave the balance under her own will.

    The learned trial judge rejected the challenge by the

    surviving daughter, who had been deprived of the right

    to the life income on the $250,000. His Honour took the

    view that the payment had enabled the widow to redress

    the unfairness that evidently distressed her, while

    conserving her own personal assets; and that it was

    authorized by the clause that I have cited.

    Misreading the authorities

    In the Court of Appeal, the trustees sought98 to uphold

    this by reference to the authorities that have upheld

    applications of capital, under powers of advancement, to

    enable beneficiaries to provide for charities which they 

    felt morally obliged to support.99

    On the apparent facts, that argument had no prospect

    of success.

    First, the widow seems to have had only a life interest in

    income. She appears to have had only a life interest, rather

    than a contingent or reversionary interest in capital100 the

    vesting of which could have been advanced. Clause 6accordingly was not a power of advancement101 at all.

    It gave the widow a mere expectancy, rather than any 

    capital interest.

    Secondly, and even were that not so, powers of 

    advancement are fiduciary powers.102 They cannot be

    exercised without the trustees first having weighed the

    benefit to the proposed recipient against the rights of the

    parties out of whose present or future interests in capital

    the advancement is to be carved.103 It seems that the

    trustees were advised that they ‘had to take into account

    the interests of all beneficiaries’.104 That advice was clearly 

    right in the circumstances. The trustees appear to have

    disregarded it on the basis that they did not expect any 

    challenge from the sister whose interest would be affected.

    Consequential excessive and fraudulent exercise

    The real issue was whether the trial judge had failed to

    recognize that the trustees’ purported exercise of the

    bare power in the relevant clause of the will had been

    excessive. The Court of Appeal had no doubt that it had

    been; that it was therefore void as a fraud on the power;

    and accordingly was recoverable from the trustees

    personally:The Court of Appeal held that:

    [27]The notion of a fraud on a power itself rests on the

    fundamental juristic principle that any form of 

    96   Wong v Burt  [2003] 3 NZLR 526 para [8] (Young J, at trial).97 [2005] 1 NZLR 91 para [10].

    98 [2005] 1 NZLR 91 para [23].99   Re Clore’s Settlement Trusts  [1966] 1 WLR 955.

    100   Wong v Burt  [2003] 3 NZLR 526 para [8] (Young J, at trial).101 As described by Lord Radcliffe in   Pilkington v Inland Revenue 

    Commissioners  [1964] AC 612, 633.102   Re Paulings Settlement Trusts   [1964] Ch 303 (CA).103 Ibid 333 per  Willmer LJ.104   Wong v Burt   [2005] 1 NZLR 91 para[37].

    Trusts & Trustees , 2007, Vol. 13, No. 3   89

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    16/21

    authority may only be exercised for the purposes

    conferred, and in accordance with its terms. This

    principle is one of general application.105

    . . .

    [30]. . .

    it is necessary to recall that the   sine qua non which makes the exercise of a discretion or power

    ‘improper’ is the improper intention of the person

    exercising it. The central principle is that if the power is

    exercised with the intention of benefiting some

    nonobject of the discretionary power, whether that

    person is the person exercising it, or anybody else for

    that matter, the exercise is void. If, on the other hand,

    there is no such improper intention, even though the

    exercise does in fact benefit a non-object, it is valid. See

    Vatcher v Paull  [1915] AC 372at 378 per Lord Parker

    (PC Jersey).

    [31]In the case of a discretionary power to be exercised

    in favour of one of its objects, but in the ‘hope’ that therecipient will benefit a non-object, the validity of such

    an exercise will depend upon whether the recipient had

    legal and moral freedom of action (Birley v Birley  (1858)

    25 Beav 299; 53 ER 651.

    [32]The case law in this area is difficult, not so much for

    the underlying principles, which seem plain enough,

    but in their application to often quite complex estates,

    or inter-related transactions. Assume, for instance,

    a case in which a discretionary power is exercisable in

    favour of an adult male (X) who states that, if it is in fact

    exercised in his favour, he will give part of the relevant

    fund to his parents, Y and Z, who are not objects of the

    discretionary power. If the true intention of the

    appointment is to benefit the parents, the exercise is

    invalid. If that is not the case, but X is under some

    distinct pressure to benefit Y and Z, the exercise would

    also be invalid (re Dick   [1953] Ch 343). On the other

    hand, if X has genuine freedom of action and wishes to

    give Y and Z a benefit, then it appears that the exercise

    of the power would be good (re Marsden ’s Trusts  (1859)

    4 Drew 594; 62 ER 228). . . .

    [33] As to the effect of a finding of a fraud on a power,

    it has long been held that where a power is successfully 

    impugned, its exercise is totally invalid (Re Cohen 

    [1911] 1 Ch 37), unless the improper element in theappointment can be severed from the remainder of 

    that appointment (Topham v Duke of Portland   (1858)

    1 De GJ & S. 517; 46 ER 205).

    [41]The evidence in the case in this respect is well

    documented and quite clear. . . . Thus it was that a

    scheme was settled by Mrs Wong [the testator’s

    widow], with the trustees, and after taking legal advice,

    which had the overt and pre-determined idea that the

    trustees would utilise clause 6 of the will to avoid

    the effect of clause 5 of the will, in the circumstances

    which had arisen. This exercise was not undertaken

    as a distinct, or separate advance to Mrs Wong or

    in the ‘hope’ that Estelle Wong would benefit anonobject.

    The exercise was already constrained by a

    pre-considered course of action which also avoided

    Mrs Estelle Wong having to resort to any assets

    under her control or direction to assist her

    grandchildren.

    [42]In our view, this deliberate, and pre-conceived,

    device amounted to a fraud on the power. If Mrs Estelle

    Wong had simply been advanced the money out of the

    estate and had then exercised genuine freedom of action

    to benefit the children (as for instance by setting up a

    trust for them), that would not have been unlawful.

    But what was knowingly erected was a deliberate schemeto subvert the terms of the will. What was overlooked

    was that the property was vested in those entitled in

    default of the exercise of the power, subject to its being

    divested by a proper exercise of the power in clause 6,

    and the steps in fact taken gave rise to a fraud on those

    entitled in default.

    Court-identified victim of the fraud not the only one

    The children who stood to take what, if anything,

    was left at the death of the successful claimant daughter,

    do not appear to have been the only victims   of the 

     fraud . They were partly that, and were partly victims of 

    the failure of the draftsman of the will to take account of 

    the familiar fact that some mothers die earlier than

    most. They accordingly had lost the income stream the

    benefit of which they previously had enjoyed via their

    late mother, as well as the chance of a capital sum in

    remainder.

    The other victim  of the fraud  had been the testator’s

    claimant daughter.

    By her sister’s untimely death, and thanks to that

    drafting oversight, it was she who had become entitled,

    for her lifetime, to the whole of the income of the

    estate. The unauthorized $250,000 reduction in thecapital of the estate must have significantly reduced her

    income.

    Distribution to unauthorized persons is voidfor all purposes, and not only as against otherbeneficiaries

    Because a distribution to an unauthorized recipient is

    fraudulent and void, the court cannot uphold it even if 

    the victims want it to do so.105 Cf para ‘The general principle of law’ earlier.

    90   Trusts & Trustees , 2007, Vol. 13, No. 3

    Trustee duties to beneficiaries

  • 8/18/2019 Trusts & Trustees 2007 Molloy 75 95

    17/21

    The Steve Hart Family Trust was at the centre

    of   Ramsden v Federal Commissioner of Taxation .106

    Clause 3 of the deed evidencing the terms of the trust

    provided that:

    (b) The Trustees may at any time prior to the

    expiration of each Accounting Period until the Vesting

    Day determine with respect to all or any part or parts of 

    the net income of the Trust Fund for such Accounting

    Period to do all or any of the following:—

    i To pay apply or set aside the same for any one or more

    of the General Beneficiaries living or in existence at the

    time of determination;

    ii to accumulate the same;

    iii to pay apply or set aside for such charitable purposes

    as the Trustees may think fit.

    . . .

    (e). . .

    the Trustees shall hold so much of the netincome of the Trust Fund for each Accounting Period as

    shall not be the subject of a determination effectively 

    made at or prior to the end of such Accounting Period

    pursuant to paragraph (b) of this Clause in Trust

    successively for the persons described in paragraphs (a),

    (b) and (c) of Clause 4 hereof as though the last day of 

    such Accounting Period were the Vesting Day.

    Clause 4(a) described Steven Hart, Troy Hart, Philip

    Hart and Tamara Petersen (now Ramsden): the last

    three of whom were the applicants.

    The trustee of the trust was Steve Hart Family 

    Holdings Pty Ltd. In the year ended 30 June 1996,a meeting of its directors had resolved that