Equity and Trusts – Problem Question
James has died recently, and has left a properly executed will in respect of his estate. There are a number of provisions in this will, including a substantial financial legacy to his sister, a trust over James’ leasehold estate for which the trustee has since died, a trust of ?100,000 for the purpose of benefitting James’ friends’ dependants completing studies, a gift of his collection of coins and mints, and a gift of Jack Daniels whiskey and some money to his niece. Each of these provisions of the will present certain problems. The provisions will be addressed individually in order to assess their status, and determine who will actually get what under James’ will.
The first provision, then, is a gift of ?100,000 to his “beloved sister” Emily, with an obligation on Emily to use a “reasonable amount” to look after James’ step-daughter, Mary. This would appear to create a trust over a portion, but not all, of the ?100,000 in question. As identified in the seminal case of Milroy v Lord (1862), a trust can be created either where a person declares himself or herself a trustee over property the legal title of which he or she holds, for the benefit of (that is, beneficial ownership lies with) another; or where a person transfers his property to trustees on trust. It is established, however, that a trust obligation can only subsist in relation to specific trust property. James’ clear intention here to create a trust will not, on its own, be sufficient to benefit his step-daughter if it cannot be ascertained exactly what the trust property was intended to be.
This brings us to a fundamental requisite of valid trusts; the so-called three certainties, identified by Lord Langdale in Knight v Knight (1840), when he was Master of the Roll. The three certainties that must be present are certainty of words (or intention), certainty of subject matter and certainty of objects. In relation to certainty of intention, one must consider James’ wording. He does not specifically mention a “trust”. This may not be fatal to the successful establishment of one, however, as his “absolute confidence” that his sister will use some of the money for the specified purpose would probably qualify as “precatory words”; which would be sufficient. In Re Adams and Kensington Vestry (1884), the words used in a similar provision were “in full confidence that [the testator’s wife] would do what was right as to the disposal [of the trust property] between his children”. Cotton J, in the Court of Appeal, suggested precatory words alone were insufficient, but a valid trust may be created in the wider context of the will. Again, James’ words would appear to qualify as he has created other trusts.
There may also be a problem with this provision in relation to the specific subject matter of the trust. Trust property must be clearly defined, otherwise the trust will fail for lack of certainty. Here, James has asked that a “reasonable amount” be used for the upbringing of his step-daughter. The court may be prepared to define a “reasonable amount”, however, following such cases as Re Golay’s Will Trusts (1965). Here, the wording provided for a “reasonable income” for the legatee, and Ungoed-Thomas J considered the term to be sufficiently objective to be capable of quantification. It seems this provision will be valid if two conditions are met; namely James’ use of precatory words are considered sufficient in the context to create a trust, which seems likely, and the court is prepared to define “reasonable amount” as the subject matter of the trust which, again, seems likely.
The second provision in James’ will relates to his leasehold estate in Blackacre, which he wishes to pass to his nephew John, whom he desires to use the rent for the estate for either James’ children who John thinks are most deserving, or for John’s own children. There are a number of interesting, and potentially problematic, aspects of this provision. The first is that it relates to a trust over land. Under the Law of Property Act 1925, there are further formalities that must be observed when creating a trust over land. The trust will only be validly constituted if legal title to the trust property is effectively transferred to the trustee, John. Section 52 of the LPA 1925 states that any conveyance of land must be effected by deed. Mere writing (such as in James’ will) or an oral transfer, or even physical possession of the land will be insufficient. An assignment of title to a testator’s leasehold estate to an intended beneficiary’s mother was held invalid because it was not done by deed in Richards v Delbridge (1874). It seems that this trust would have failed for this reason.
The trustee, John, however, died without distributing any of the rent from the leasehold property. The trust has therefore failed for two reasons (the trustee’s death and the absence of a proper assignment of legal title to the trustee). What, then, happens to the leasehold estate? It will become a resulting trust. The beneficial interest “results” back to the settlor or his successors, and the trustee holds on bare trust for that party. This is known as an Automatic Resulting Trust (ART). In probate terms, the interest will revert to James’ estate and will be distributed in accordance either with other provisions of his will, or with the intestacy rules.
The third provision in James’ will relates to ?100,000 which he has given to Mark in order that Mark can invest it and use the income to help “any of [James’] friends’ dependants complete law degrees. This will meet the requirements of an express trust in terms of its certainty of subject matter. The ?100,000 is a specific sum of money that is to be made the subject of the trust. In this instance, however, we must consider the nature of purposes in the context of trusts. The law of trusts allows individuals to devote their property to the carrying out of specific purposes. There are, however, a number of restrictions on how this can be done. Purposes often involve both trusts and contractual obligations to carry out some action. The general starting point in this discussion is that unless it is a charitable purpose, the law in England does not generally allow the simple transfer of property on trust to carry out a particular purpose. Using Penner’s example, “?10,000 on trust to oppose UK entry into the common European currency” would be likely to fail.[1]
In order to assess whether James’ provision to Mark of ?100,000 for the designated purpose is valid, the “beneficiary principle” must be considered. This states that for a trust to be valid, it must be for the benefit of ascertainable individuals. This provision is not a pure purpose trust, which would fail under English law, but rather it is for the benefit of certain individuals. In Morice v Bishop of Durham (1805), Sir William Grant, then Master of the Rolls, said “there can be no trust, over the exercise of which this Court will not assume a control; for an uncontrollable power of disposition would be ownership, and not trust … There must be somebody, in whose favour the court can decree performance.” In this case, as mentioned, there are a particular group of potential beneficiaries of the trust; it is not simply “for the general advancement of legal studies”, for example. Although the beneficiary principle would appear to be met, then, it is a corollary of the requirement of certainty of objects, to which we now turn.
For a trust to be valid, the objects of the trust (that is, the beneficiaries), must be certain. In other words the trust must be expressed in such a way as to enable the trustees, or in their default, the court, to identify who exactly the beneficiaries are. The trust of ?100,000 to Mark is characteristic of a discretionary, rather than a fixed, trust, meaning that the precise benefit to specific individuals is not defined by James. Rather, Mark will exercise discretion as to who, from the group of possible beneficiaries, will benefit. In McPhail v Doulton (1971), the House of Lords stated that the test for certainty of objects in trusts such as this one should be similar to the test for objects of powers. It should, in other words, be possible to say of any given individual that he or she is, or is not, part of the specified class of beneficiaries. Subsequently, in Re Baden’s Deed Trusts (No 2) (1972), the Court of Appeal stated that when this test is applied, a discretionary trust will be valid so long as the beneficiaries can be identified with “conceptual certainty”.
How does this apply to the present case? The discretionary trust relates to “any of my friends’ dependants”. This is of course, subjective. Who is, or is not, James’ friend? And who qualifies as a dependant of those friends? An early test for this problem was the so-called “complete list” test, which was applied in IRC v Broadway Cottages Trust (1955). Jenkins LJ stated that “a trust for such members of a given class of objects as the trustees shall select is void for uncertainty, unless the whole range of objects eligible for selection is ascertained or capable of ascertainment.”[2] Clearly, in the present case, it is unlikely that an exhaustive list of the potential beneficiaries will be able to be compiled. The test was, however, criticised in subsequent cases as failing to deal adequately with developing discretionary trusts that covered larger groups of potential beneficiaries. In McPhail v Doulton (mentioned above, in which the purported discretionary trust was very similar to the present one), the complete list test was discarded in favour of the “is or is not” test.
Unfortunately for the present trust, however, it would most likely still be invalid on the basis of administrative unworkability. Again, this concept arose in McPhail v Doulton, when Lord Wilberforce stated that there may be classes where “the meaning of the words used is clear but the definition of the beneficiaries is so wide as to not form “anything like a class” so that the trust is administratively unworkable…”[3] Given the potential size of the class of beneficiaries here (depending of course on James’ popularity), this trust would probably fail.
The fourth provision relates to James’ collection of coins and mints which he gives on trust in order that any of his colleagues who wish to do so to purchase them at half price. The rest are to go to James’ sister, Lora. The first issue here is the identity of James’ trustees. He has not specified who will be the trustee(s) in this case. This is not, however, a significant problem as it is well established that trusts will not fail for want of a trustee. This applies either where no trustee is specified (as is apparently the case here), or where the specified trustee is unwilling to accept this responsibility. If no willing trustee can be found, Public Trustee will be appointed as a last resort. Provision for this office was made in the Public Trustee Act 1906 (section 2(3)). Alternatively the court may appoint a trust corporation to administer the trust pursuant to section 42 of the Trustee Act 1925. This first issue with the present trust, then, presents no real problem.
The trust property is James’ “valuable collection of coins and mints”. This is unproblematic, assuming that the collection can be physically located. It should be relatively clear what forms part of the collection and what does not. The requirement for certainty of subject matter will therefore be met. The class of beneficiaries is expressed as being James’ colleagues. This is not a discretionary trust in the same way as the one discussed earlier, as the trustees have no discretion as to who will benefit from the trust. Rather it is the potential beneficiaries who may exercise their discretion to purchase items from the collection. The equitable maxim that “equity treats as done that which ought to be done” would apply a constructive trust here, if there was a specifically enforceable contract to sell the property to the beneficiaries. There is not, however, as the potential beneficiaries have not yet decided to accept.
In the present context, a further requirement of a valid trust is worth considering; namely that where a settlor wishes to create a trust over which a third party is trustee, the legal or beneficial title to the subject matter of the trust must be effectively transferred to the trustee. James’ words here refer to his “trustees”. In Choithram (T) International SA v Pagarani (2001), it was held that where it is intended that there be a body of trustees, it will be sufficient to transfer title to one member of that body. The rules of effective transfer of title vary according to the type of property in question, and are most lenient in relation to chattels (which cover the collection here). Title may be transferred either by deed or gift, or delivery of possession. It is likely that the will, if correctly executed, will be sufficient for this transfer.
There is, in trust law, a rule against perpetuities. This states that gifts of property must vest within a certain period of time. James’ sister is due to inherit the remainder of the collection at some point in the future, but this is not defined. The perpetuity period is “a life in being plus twenty-one years”.[4] This limits the period of time in which the remainder of the collection must vest in Lora.
The final provision in James’ will relates to 20 bottles of Jack Daniels whiskey that is stored in his cellar, and ?500 from his City Bank plc savings account, which he gifts to his niece, Emily. This is, on the face of it, unproblematic. It would appear to meet the requisite standards of certainty in relation to words (or intention), subject matter, and objects. The wording clearly creates a testamentary gift. Assuming James has only one niece called Emily, the intended beneficiary will be clearly identifiable. Ostensibly, also, the subject matter of the trust should be sufficiently certain. The problem, however, relates to the fact that in James’ cellar there are 40 bottles of Jack Daniels; and in the relevant savings account, there is ?1000. The testamentary gift therefore relates only to half of these items.
It is clear that a trust cannot exist in abstract. It must relate to specific assets or else it will fail. By way of example, in Hemmens v Wilson Browne (a firm) (1995), an agreement allowing a person to call for a payment of a specified sum at any time did not create a valid trust because no specific property had been identified as the subject matter of the obligation. There “was no identifiable fund to which any trust could attach.”[5] In the present case, there is no conceptual uncertainty as to the intended trust property, however, as it explicitly relates to bottles of whiskey and money. The problem arises, however, because the property is unascertained. In Re London Wine Co (Shippers) Limited (1975), a customer order for a consignment of wine was unable to create a trust over specific bottles in the seller’s warehouse because the specific property could not be ascertained. The customer’s specific order had not been appropriated from the general stock.
This would suggest that the gift to Emily would fail for similar reasons. The Privy Council confirmed the approach in Re Goldcorp Exchange Limited (In Receivership) (1995) in relation to gold bullion. Again, specific orders had not been appropriated from the general stock so the trust failed. This is not conclusive, however, as an alternative approach occasionally adopted by the courts should be considered. In Hunter v Moss (1994), an oral declaration of trust was made over 5% of the issued share capital of a private company in which the settlor owned 950 shares. The court held that this was not void because the specific shares had not been segregated from the remainder of the shares. This decision, although it might help on the successful implementation of Emily’s trust, has been criticised as being inconsistent with the earlier Privy Council decision. One justification for following the decision in Hunter was offered in Re Harvard Securities Limited (In Liquidation) (1997) as being that Hunter related to shares and not chattels. In the present context then, it seems that the trust over the money in the account might be valid, but that over the whiskey may not be.
BIBLIOGRAPHY
Statutes
Law of Property Act 1925
Public Trustee Act 1906
Trustee Act 1925
Cases
Choithram (T) International SA v Pagarani [2001] 2 All ER 492
Hemmens v Wilson Browne [1995] Ch 223
Hunter v Moss [1994] 1 WLR 452
IRC v Broadway Cottages Trust [1955] Ch 20, CA
Knight v Knight (1840) 3 Beav 148
McPhail v Doulton [1971] AC 424
Milroy v Lord (1862) 4 De GF & J 264
Morice v Bishop of Durham (1805) 10 Ves 522
Re Adams and Kensington Vestry LR (1884) 27 Ch D 394
Re Baden’s Deed Trusts (No 2) [1972] Ch 607
Re Golay’s Will Trusts [1965] 2 All ER 660
Re Goldcorp Exchange Limited (In Receivership) [1995] 1 AC 74
Re Harvard Securities Limited [1997] 2 BCLC 369
Re London Wine Co (Shippers) Limited (1975) 126 NLJ 977
Richards v Delbridge (1874) LR 18 Eq 11
Secondary sources
Martin, J.E. (2001) Hanbury and Martin – Modern Equity, 16th Edition (London: Sweet & Maxwell)
Pearce, R. and Stevens, J. (2006) The Law of Trusts and Equitable Obligations, 4th Edition (Oxford: OUP)
Penner, J.E. (2004) The Law of Trusts, 4th Edition (London: LexisNexis)
