The ruling in the House of Lords Essay

Beneficiaries were first defined as subjects of a fixed trust, discretionary trust, or power of appointment by the House of Lords decision in Re Gulbenkian’s Settlements and McPhail v. Doulton. In reality, many other cases have sought to interpret trusts and power from the House of Lords’ point of view. The most widely used meaning of “trust” is found in Halsbury’s Laws of Trusts, which states that it refers to “any disposition of property of whatever nature by any instrument. whereby trusts are constituted to regulate the enjoyment of the settled property among the persons or classes of persons nominated by the settlor.” The “power of appointment” is given to the settlor in respect to the designation of the property and its possession to the new owner. On the other hand, the ’beneficiaries’ are defined as individuals who have the entitlement of enjoying assets or remuneration of the trust usually either a natural person or a company.

Beneficiary as an Object of a Fixed Trust

A fixed trust is a recognised form of living trust for an estate organisation. Such a trust is labeled as a nondiscretionary trust or directory trust. The settlor is empowered to devise mechanisms of controlling both assets and money. The instruments are used for the gain of the pre-determined individuals or specific classes of persons entitled in equity to a fixed share of the trusts. In other words, the trustees acquire actual and particular instructions thus, do not have an option with respect to the beneficiaries’ identities and how much they receive. In some situations, when a financial institution acts as the trustee, their discretion is limited to guarantee their adherence to the defined wishes. They thus cannot change either the number of beneficiaries or the list of benefits set to be received. Therefore, the recipients have the authority to call for the allocated asset to them at any specific times.

In the determination of fixed trusts for the beneficiaries, two categories have been identified in the provision of trust property namely; bare trust and unit trust. In respect to a bare trust, the recipient has the entitlement to both capital and income which he/she may call either one or both to be remitted into their name. In this case, it is identified as a simple trust necessitating that any particular income received out of it ought to be dispersed in the same period the tax is earned. In other scenarios, individuals setting up the bare trusts gives up the legal title thus tax is not imposed on them making it the most tax-efficient manner of transferring property to their recipients. For example, where children are entitled to assets but they cannot be registered as the owners legally. In these circumstances, either the guardians or the parents enlist the property in their names hence make suitable decisions in regard to it. However, the asset remains under the name of the child beneficiary. Ideally, the income created out of the trust’s assets as dividends, rent, and interests is taxed in the hands of the recipients.

Moreover, in other circumstances, fixed assets are in the form of unit trust. The beneficiaries have the benefit of owning units of the trust specifying their rights and possession concerning the property. The procedures regarding the unit trust are documented in the unit trust deed which agrees to the trustee supervising trust property either one or more of the beneficiaries. Unit trusts undertake a vast kind of investments such as securities, cash equivalents, and mortgages which are most common. It is worth noting that, beneficiaries’ ownership can be reassigned without difficulty in the following ways namely; selling, issuing or transferring more or/and different types of the unit trusts. In this instance, the diverse forms of units include trusts that are based on conventional terms, capital only, income only, voting alone, or any combination that is available. It is evident that unit trusts are more applicable where more than one family or group of investors in business together.

In the scenario where a court of law has to make a ruling regarding fixed trusts, it should do so with certainty identifying the intended beneficiaries and trustees. Furthermore, the court should, therefore, establish an exact share of what each recipient should have in case there are more than one beneficiaries. In circumstances where the identity and number of beneficiaries are unknown, the court ought to start a strict investigation for the fixed assets to ascertain the specific entitled members of the trust. The concept behind the efforts of enforcing the fixed trust is referred to as ’complete list’ test. In IRC v Broadway Cottages, the Court of Appeal held that in fixed trusts linguistic and evidential certainty is essential to the beneficiaries. The ruling enforces the fulfilment of the ’complete list’ test to have the legitimate number of beneficiaries. In these situations, the analysis follows a conceptual sense to arrive at the full list of the known recipients entitled to the trust. On the other hand, it supports that the court caters for unsettled shares to the absent recipients by paying into an escrow account in lieu of their claim.

The recipients of the fixed trusts benefit in situations where trustees are untrustworthy hence resulting to financial institutions for assistance. Moreover, the beneficiaries have an assured entitlement to both capital and income in which various individuals are allotted a different proportion of units. Besides that, fixed trusts make the sure existence of fewer conflicts among the beneficiaries since the trust deed has categorically specified the payment amounts regarding percentages. On the contrary, due to their rigidity individuals receive only the quantities specified irrespective of their need. The trustee is not allowed to determine actual requirements such as health and education which should be prioritised.

Beneficiary as an Object of a Discretionary Trust

In the same way, discretionary trust involves the settlor not having a fixed number of beneficiaries or trust interest amounts. In these circumstances, the entitlement of beneficiaries to either income, or to capital, or both is not ascertainable with immediate effect. As a matter of fact, discretionary trust gives the trustee the authority to make decisions regarding which beneficiaries will profit from the trust. Moreover, it further permits them to resolve to the extent of benefits to be allocated to the recipients. The distribution of benefits should relate to trust’s income and capital thus having an entirely exhaustive discretionary trust. On the other hand, non-exhaustive discretionary trust consists of the trustee’s mandate to whether to exercise all the powers conferred upon them regarding the subject matter of discretion. Thus, the beneficiaries have neither assigned nor determinable interests in the assets of the trust since they are at the disposal of the trustee. However, it is worth noting that discretionary trust instruments provide the power to exclude or add beneficiaries from the trust hence allowing a greater flexibility among the trustees to cope with changing circumstance such as changes in the revenue statutes.

By research, the most common forms of discretionary trusts include; family trust and hybrid trust. Family trusts are set up in a manner that the trustee holds the trust asset on behalf or for the named individual or individuals who are entitled to a particular capital. In other words, they become the primary beneficiaries of various trust deeds. In the case of Whaley v Whaley [2011] - England and Whales which the court held that the assets in the family trust should be held to account concerning the division even after the couple divorced. Ideally, the family trust is established to keep together the family’s assets. In other circumstances, the trust is used in the conduct of family businesses and for taxation purposes. Moreover, it is used as a tool of protection regarding properties against liabilities of any members of the family in the case of insolvency or bankruptcy. Therefore, the trust acts as an instrument of transiting assets to future generations in the family.

Moreover, hybrid trust is a combination of the best aspects of discretionary trust and the best elements of unit trust to create a single flexible structure. In other words, the trust is encompassed of both discretionary beneficiaries and unitholders. This means that the discretionary beneficiaries are distributed income at the discretion of the trustee, and the unitholders are entitled to some of the benefits such as income fixed in their favour per the trust deed. On the other hand, benefits such as capital will only come along their way at the discretion of the trustee after distribution to the discretionary beneficiaries. Thus, the hybrid discretionary trust is essential in improving capital growth and income-generating assets of any given entity. Also, it has no formal audit requirements and legislative framework which provides the trustee with total control of the activities. Correspondingly, it is not limited to the manner in which different incomes are distributed. Therefore, the trustee can allocate one kind of income to an individual and another type of income to another person.

The beneficiaries of the discretionary trust have the right to be regarded as potential receivers of the benefits concerning the trust property. In the same way, they ought to compel the exercise of discretion by the trustee frequently concerning the distribution of the property. Ideally, the potential beneficiaries have their privileges protected by the court of law to ensure that the discretion is appropriately, reasonably, and fairly exercised. In ASIC v Carey also known as ’Re Richstar Enterprise,’ it was established that when a discretionary trust is under a trustee’s control, it is almost certain that the beneficiaries will get distributions regarding income and capital. In certain occasions, beneficiaries effectively controlled the discretionary trust and subsequently specific trust’s assets making them eligible to equitable interests of the property. Indeed, the beneficiaries’ interests are entirely speculative and out of little expectations rather than being proprietary interests.

The discretionary trust benefits the beneficiaries in that the entity’s income can be split amongst them hence used as a strategy to minimise taxes. Moreover, the trust’s assets are protected through the splitting of income of an entity and channelling it to separate individuals for instance in a family. In other cases, discretionary trust purchases shares in companies, interests in businesses, and investment properties hence the income resulting from the above held within the trust. As a result, the income earned can be distributed among several beneficiaries such that, dividends are rewarded to one recipient whereas rental income may be paid to another. On the contrary, the occurrence of losses leads to them being trapped within the trust hence affecting discretionary beneficiaries. In addition, the recipients do not have an entitlement to capital and income as the trustee possesses the powers of discretion.

Beneficiary as an Object of Power

The beneficiaries through the power of appointment allow the power holder to apportion the recipients’ benefits of interest, and powers of appointment over the given assets. In other words, it is the right to transfer ownership of any given asset to the new owner. The various parties involved in the process of power designation include; the donor who refers to the settlor in respect to the trust. Ideally, they are the original owners of the assets. Moreover, the donee receives the power of appointment which is exercisable through the naming of the new holder of the property. In addition, there are objects of power who represent the vast number of potential new holders of the trust property until the donee selects any of them. The selected new owners of the property are referred to as appointees who take up the title from the donors themselves. If the donee fails to exercise their powers of appointment efficiently, the gift-in-default clause states that individuals who take up the property are referred to as default takers. The property subjected to the power of appointment is denoted as the appointive property.

The powers of appointment are categorised into two forms namely; a general power of appointment and special power of appointment. The donor generates a broad power of appointment without placement of specific restrictions and conditions on the donee’s implementation of their power. In such cases where it is open, the donee is permitted to assign the power to any individual including themselves unless the power is exercisable only by will. In the restriction of the power, the donor need not use a particular language instead they should just not have any obstructions stated. Moreover, the holder of the general power of appointment has a vast power hence has no limitations to allot the property to any specific individuals. In the case of Pearson v Pearson, the court held that ’the donee is for all practical reasons in the position of being a beneficial owner of the property.’ In fact, the law is apparent in the case where the donee either appoints another individual to own the property by deed, or by will where the title to the property shifts from the donor to the appointee without surpassing the estate of the donee.

On the other hand, special power of appointment stipulates particular groups or individuals as favourites of the donee. Thus, they become objects of either the power or the conditions that implement the power regarding given factors. In these circumstances, neither the donee, their estates, their creditors nor their estates can the special power be exercised in their favour. Therefore, the holder’s power is limited to choosing amongst the donor’s children. Besides that, the special power allows flexibility while implementing dispositive requirements for a given estate plan. It worth noting that, the special power of appointment may be either exclusive or non-exclusive. In case the power is exclusive, the holder has the mandate to eliminate either one or more objects of power. In other words, the decision lies with the donee to apportion the trust’s property to a single member of the entity while rejecting the rest. Conversely, in the event that the special power is non-exclusive a considerable share of the appointive property is allotted to each permissible appointee.

In other cases, the nature of the power is dependent on whether the holder is either a trustee or a non-trustee. When the power is conferred to a trustee, it is regarded as fiduciary or mere fiduciary power in which the trustee is enabled to effect the trust. On the other hand, when a settlor or nun-trustee is conferred non-fiduciary power its purpose is not effective at all. In the rule in Re Hastings-Bass Lord Walker held that there were misconceptions about the judgment. The trustee’s grounds on the exercise of power had failed to account for the appropriate factors hence resulting to breach of the fiduciary duty. Lord Walker, therefore, concluded that; breach by the trustees constituted to breach of fiduciary duty.

In the creation of a trust, validity must consider ensuring it is enforceable. In such occasions, specific requirements should be satisfied namely; the certainty of words and intention, the certainty of subject matter, and certainty of beneficiaries/objects. First, the certainty of words emphasises that they must show that the trustee’s desire for the property is to be held on trust. Therefore, trust is intended to eliminate the danger that the beneficiary has the legal capability to take the property for themselves. Moreover, under the certainty of the subject matter, it identifies that the property ought to be ascertainable in regard to the interests of the recipients. Furthermore, there should be certainty of the objects hence the trustees should identify the beneficiaries of the trust. In the situation beneficiaries are absent, most trust deeds have outlined the mandate to add new beneficiaries.

Conclusion

In brief, it is evident that beneficiaries are objects of a fixed trust, a discretionary trust or power of appointment. In fixed trust, instruments are used for the gain of the pre-determined individuals or specific classes of persons entitled in equity to a fixed share of the trusts. In this case, there are two categories which have been identified in relation to the provision of attached trust property namely; bare trust and unit trust. On the other hand, discretionary trust involves the settlor not having a set number of beneficiaries or trust interest amounts. The most common forms of discretionary trusts include; family trust and hybrid trust. In various situations, the power of appointment is used to permit the power holder to apportion the recipients’ benefits of interest, and powers of appointment over the given assets. To this end, the enforceability of trusts should be valid by ensuring certainty of words and intention, the certainty of subject matter, and certainty of beneficiaries.

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