Introduction
A trust is said to arise when a person, the trustee, holds property for the benefit of other persons known as beneficiaries, such that the real benefit of the property so held accrues to the beneficiaries, not the trustee.[1]A trust is a creation of equity where legal rights are transferred from one person, known as the settlor, to another to hold for the benefit of others. Discretionary trusts are those trusts where the trustee has the power to decide how the capital or income should be distributed among the beneficiaries.
Elements of a Trust
Where a trust has been created, courts look for three elements when deciding whether or not the trust is valid. These elements are known as certainties and include certainty of intention, thecertainty of subject matter,r and certainty of objects.[2]The requirement for the three certainties was set out in the case of Knight v Knight[,3] where it was held that a trust would be binding in equity if the three certaintihadave been proved.[4]The certainty of intention means that the settlor or the person who created the trust must have intended to create the trust. The certainty of the subject matter means that the property referred to in the trust must be sufficiently identified. The certainty of objects means that the trust has to specify the beneficiaries of the trust. Where the beneficiaries of the trust cannot be ascertained, the trust would be declared void due to theuncertainty of objects, and the property that was the subject matter of the trust would go back to the donor.[5]
Scope of the Paper
This paper focuses on thecertainty of objects and how courts have developed the tests to determine whether or not the object of a trust is clear. The paper uses the case of Re Baden’s Deed Trusts (No. 2)[6] where the three judges hearing the matter set out three different tests to determine the certainty of objects of a discretionary trust. Through the use of this case and reference to other court decisions and secondary literature, the paper makes a recommendation on the best test that trusteescan apply in discretionary trusts.
The Decision in Re Baden’s Deed Trusts
Facts and Decision of the Court
The facts of Re Baden’s case are that the settlor, Mr. Bertram Bade,n created a trust for his relatives, dependents, ts and employees of his company. Mr. Bertram had stated that the trustees had absolute discretion to apply the net income of the trust fundas they thought fit for the relatives, dependents,nts, and the employees. The question before the court was whether there was certainty of the object since the trust merely mentioned employees and relatives. The court held that the test of determining the certainty of objects was similar to that of powers. This meant that a trust would be held to be valid if it can be saidwith certainty that an individual is or is not a member of the class of beneficiaries.[7]The court went ahead to state that a trust will not fail just because the trustee cannot come up with a list of all the members of the class or the beneficiaries. The Court followed the decision in McPhail v Doulto,n[8] which had expanded the certainty of objects in trusts to be at the same level as the certainty of objects in a power.
The decision of the court in McPhail v Doulton, which was applied in Re Baden’s Deed Trusts (No. 2), was a departure from the initial position on the test of determining the certainty of objects in a trust.[9]The initial test had been set out in IRC V Broadway Cottages Trust,t[10] where the court held that a trust would be considered invalid uthe trustee could makeo make a list of all the beneficiaries at the time when the trust came into effect.[11]This meant that where a trustee could not come up with an exhaustive list of all the beneficiaries, then the court would invalidate the trust. This position was, however, changed when the court in McPhail v Doulton held that what was important was that the words used to define the class should be clear enough to enable the trustee to determine whether or not an individual is a member of the class.[12]
Conceptual Versus Evidential Uncertainty
One of the significant outcomes of the decision in Re Baden’s Deed Trusts (No. 2) is the court’s distinction between conceptual and evidential uncertainty. According to the decision of the court, conceptual uncertainty refers to any ambiguity in the wordsused by the settlor or testator to define the class of objects.[13] Where there is conceptual uncertainty, the trust will be declared void. [14] Evidential uncertainty, on the other hand, refers to the difficulty that arises in proving whether or not a person falls within the class referred to in the trust. In a discretionary trust, the existence of an evidential uncertainty does not invalidate the trust.[15]
A Discussion of the Three Tests Set Out in the Case
The Three Tests
The test followed by the judges in Re Baden’s Deed Trusts (No. 2)had been developed by Lord Wilberforce in McPhail v Doulton.[16]The test was that a trust is valid if it can be stated with certainty that a certain person is or is not part of the class of beneficiaries. The three judges in Re Baden’s case, however, adopted three different interpretations of the test. According to Sachs LJ, the test required the concepts used to define the class to be sufficiently certain.[17]He stated that once the class of individuals to benefit from the trust is conceptually certain, whether or not any claimant is a member of the class becomes a question of fact to be determined by evidence.[18]This meant that as long as the concepts can be considered to be certain, any evidential challenges experienced in applying the concepts would not invalidate the trust.[19]Any questions as to whether or not a person was a beneficiary belonging to the class were issues of fact which could be decided based on the evidence adduced.
Megaw LJ, on the other hand, stated that what is required is that it should be possible to state that a large number of the objects of the trust fall within the class. The Judge further stated that anyone who was not considered as a beneficiary would not be said to be outside the trust, but it would be that there is no proof that they are in the trust. Stamp LJ held that what was necessary was to be able to say whether or not a person belongs to the class. He further stated that this did not mean that the complete list of the objects belonging to the class had to be ascertainable.
The Judges’ Interpretation of the word ‘Relatives.’
The application of the three tests by the Judges in Re Baden’s Deed Trusts (No. 2), where the words ‘relatives and dependants’ had been used, ed led to the conclusion that the words were certain enough to satisfy the conceptual certainty test.[20]The three different approaches taken by the Judges in Re Baden’s Deed Trusts (No. 2), as discussed above, however, gave varying interpretations of the conceptual certainty test. Stamp LJ applied the test strictly by holding that what was necessary is for the trustees toascertain whether or not a person belongs to the class.[21]Based on this interpretation, Stamp LJ interpreted the word ‘relatives’ to mean the statutory next of kin. This interpretation made it possible for a trustee to decide the beneficiaries who were entitled to claim under the trust because there are only a few relatives considered to be next of kin.
Megaw LJ and Sachs LJ, on the other hand, took a broader approach when determining the meaning of ‘relatives’ as used in the trust in Re Baden’s Deed Trusts (No. 2). They stated that it referred to anyone sharing an ancestor.[22]This approach is problematic as it would be difficult for the trustee and the court to test a person’s claim based on sharing a common ancestor. They further sought to clarify the issue by stating that where a trustee cannot conclusively determine whether a person is or is not a member of the class of beneficiaries, the burden of proving that one is a member will rest on the claimant.[23]If the person claiming to be a beneficiary cannot prove his or her claim, then the trustee can exclude them from the list of beneficiaries. Megaw LJ further added the requirement that it should be possible to state that a large number of the objects of the trust fall within the class. This means that a trust may be held to be void where only a few beneficiaries can be said to fall within the class described in the trust,t even where there is conceptual certainty. The additional requirement by Megaw LJ means that the words used should be capable of being interpreted in a way that covers as many beneficiaries as possible. This additional requirement, however, does not clarify the test developed in McPhail v Doulton but rather complicates its application.
Best Way Forward for Trustees
The test fordetermining the certainty of the objects of a trust was established in McPhail v Doultonwhere it was held that a trust is valid if it can be stated with certainty that a certain person is or is not part of the class of beneficiaries.[24]In Re Baden’s Deed Trusts (No. 2), the three Judges gave different interpretations of the conceptual certainty test. Sachs LJ interpreted the test to mean that the concepts used to define the class must be sufficiently certain. He further went on to state that once the class is conceptually certain, the question whether a claimant was or was not a member of the class becomes a question of fact. Sachs's view suggests that once the trustee has confirmed that the class is certain, it is for the claimants to convince the trustee that they are dependents or beneficiaries who can benefit from the trust. Any person who fails to convince the trustee is not a member of the class. The issue with this approach is the fact that it leads to numerous cases as more claimants seek to be heard by the court to adduce evidence that they are part of the class.
Megaw LJ interpreted it to mean that what is required is that it should be possible to state that a large number of the objects of the trust fall within the class.[25]Thisis also referred to as the substantial number approach. The issue with this approach is that it seems to be a variant of toutdatedted complete list approachas was held in IRC V Broadway Cottages Trust.Such a requirement would take away the gains made by the decision in McPhail v Doulton.[26]Sometimes the intention of the settlor might have been to have as few beneficiaries as possible. The requirement for a substantial number of beneficiaries or members of the class would dilute the intention of the settlor, as it would seem to suggest that the trustee has to look for possible beneficiaries to meet the requirement.
Stamp LJ's view was that the test required the trustee to be in a position where he can ascertainwhether or not a person belongs to the class. This is considered to be the strict approach. The test requires the trustee to classify all claimants as being in or outside the class of beneficiaries. This means that clarity and precisionares required in defining the class of the objects.[27]They, however, tried to limit their broad application by requiring a claimant to prove that they are part of the class of beneficiaries envisioned by the settlor.
The position taken by Sachs LJ and Megaw LJ seems to expand the conceptual certainty test,t which may give trustees a hard time deciding the people who belong to the class of beneficiaries intended by the settlor.[28]The test, as developed by Megaw L, J, seems to suggest that although a complete list is not mandatory, a substantial list of the beneficiaries is a requirement for a trust to be held valid.[29]This view deviates from the initial test and further complicates the process of determining the validity of a trust.
Conclusion
It seems, therefore, that the test established by Stamp LJ that the trustee must be in a position where he can ascertain whether or not a person belongs to the class is more appropriate. This is because the test ensures that once conceptual certainty has been proved, all the trustee has to do is to decide whether or not a certain person belongs to the class of beneficiaries envisioned by the settlor when creating the trust. This test eliminates any loopholes that may lead to different interpretations of the conceptual certainty test and also makes it easy for the courts to administer a trust. All the court or the trustee has to do is determine whether or not each of the claimants falls within the class of beneficiaries.
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[1]Alastair H, Advanced equity and trusts (University of London 2007) 11.
[2]Nicola J, Certainty of beneficiaries in Jersey and the first principles of trust law (University of Leicester 2016) 6.
[3] [1840] 49 ER 58
[4]Glanville Williams, ‘The three certainties’ [2011] Modern Law Review 20, 21.
[5]Dennis K, ‘Mcphail v Doulton and certainty of objects: A “semantic” criticism’ [2016] Ottawa Law Review 377, 378.
[6][1973] Ch. 9
[7]Peter C, ‘Certainty of objects of trusts and powers: The impact of MacPhail v Doulton in Australia’ [2010] Sydney Law Review 93, 94.
[8] [1971] AC 424
[9]Graham Moffat, Bean Gerry and Dewar John, Trusts law text and materials (Cambridge University Press 2015) 213.
[10] [1955] Ch 20
[11]Harvey Cohen, ‘Certainly uncertain: The discretionary trust’ [2012] Current Legal Problems 133.
[12]TaiwoAdewale, Equity and trusts (National University of Nigeria, 2017) 34.
[13]Austin R, Discretionary trusts: Conceptual uncertainty and practical sense (University of Sydney 2013) 6.
[14]TaiwoAdewale, Equity and trusts (National University of Nigeria, 2017) 35.
[15]Moffat Graham, Bean Gerry and Dewar John, Trusts law text and materials (Cambridge University Press 2015) 213, 215.
[16]Nicola(n 2) 5.
[17]Chartered Institute of Legal Executives, Equity and trusts (Chartered Institute of Legal Executives 2013) 4.
[18]Ibid.
[19]Peter (n 4) 94.
[20]Radfor,d Ma,ry and Hen, son Catherine, The elements of a trust (Georgia State University College of Law 2010) 15.
[21]Cohen Harvey, ‘Certainly uncertain: The discretionary trust’ [2012] Current Legal Problems 133, 136.
[22]PeterCreighton, ‘Certainty of objects of trusts and powers: The impact of MacPhail v Doulton in Australia’ [2010] Sydney Law Review 93, 96.
[23]Dennis (n 5) 380.
[24]Alastair Hudson, Equity and trusts law (University of Southampton, 2013) 9.
[25]Davie,s Pau,l and Vir, G. O. Graham, Equity and trusts: Text, cases and materials (Oxford University Press, ess 2013) 54.
[26]Peter Creighton, ‘Certainty of objects of trusts and powers: The impact of MacPhail v Doulton in Australia’ [2010] Sydney Law Review 93.
[27],Webb, Charlie, and Akkoum, Trusts Law (Macmillan Education, 2015) 57.
[28]NicholasJie, Equity and trusts (LexisNexis 2013) 32.
[29]Ibid.
