Creating a Valid Trust: Three Certainties, Formalities

Answer:

Introduction: In order to create a valid trust, it is necessary to have three certainties of trust, formalities, and perfect constitution. A trust will be perfectly constituted where the rights, which are to form the subject matter of the trust, are vested in the intended trustee. In Knight v Knight[1] Lord Langdale, a private express trust cannot be created unless three certainties are present; these are certainty of intention, certainty of subject matter and certainty of beneficiaries. Settlors specify the number of beneficiaries to create fixed trust, for example a trust in favour of ‘my children’.

 In Vandervell v IRC[2], Vandervell’s bank held the legal title to shares on a resulting trust for him and, upon his instructions, transferred them to the Royal College of Surgeons (RCS). The IRC argued that (1) Vandervell had made a valid transfer of the stock to the RCS, despite disposing of his equitable interest without writing, and (2) he had a beneficial interest in the option to purchase, which was extremely valuable.

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Consequently Vandervell had substantially increased his tax liability.

As to (1), it was held that an instruction to transfer the legal title out of a trust completely did not amount to a disposition of an equitable interest, so s. 53(1)(c) of the LPA 1925 did not bite. For (2) -- and this is the really twisted thinking -- because Vandervell did not intend to make an outright gift of the benfits that would follow from the exercise of the option to purchase the company stock, he must have intended the trust company to apply those benefits for somebody else.

Certainty of intention: Intention is important to create a valid trust. Technical words are not required. The question is whether, on the proper construction of the words are used, the settlor or testator has shown an intention to create a trust and conversely, the use of the word trust does not conclusively indicate the existence of a trust. A precatory expression of hope or desire, or suggestion or request, is not sufficient.

Certainty of subject matter:

Testamentary gifts have failed where they concerned “the bulk of my estate,” or “such parts of my estate as she shall not have sold” or “remaining part of what is left” or all of my other houses”. In , the CA held that a declaration of trust of 50 shares from a holding of 950 did not fail for uncertainty of subject matter.

Certainty of beneficiaries:

A trust may fail for uncertain beneficiaries. Therefore, the trustees need to be able to identify who the beneficiaries should be, certainty of objects. The requirement for the existence of identified beneficiaries is called the ‘beneficiary Principle’. The ‘beneficiary Principle’ states that a valid trust must be for the benefit of ascertainable individuals- the trust must have beneficiaries. In consequence, equity will not countenance a trust to carry out a purpose since the benefits of carrying out a purpose are not owed to any specific individuals. Hence, the principle is also framed as the ‘no purpose trust’ rule.

The ‘beneficiary Principle’ states that a valid trust must be for the benefit of ascertainable individuals- the trust must have beneficiaries. The first objection may be seen in a celebrated dictum of Sir William Grant M.R. in Morice v Bishop of Durham[4]. Every trust has an obligation. [Margaret wilkie & Rosalind, Equity & Trusts, (2004 -2005), Press. pg 19]

This rule similar to ‘privity’ rule of contract law; only parties of the contract may enforce it; even though some third party may benefit from the performance of a contract, that factual benefit alone gives him no interest under the contract, and thus no right to enforce it.

In Re Astor’s Settlement Trust[5], Lord Astor purported to create a trust for ‘the maintenance of good understanding between nations and preservation of the independence and integrity of newspapers.’[Ramjohn M. Unlocking Trusts, (2005) Pg 228]. The court held that the trust was void for uncertainty on the ground that the means by which the trustees were to attain the stated aims were un specified and the person who was entitled, as of right, to enforce the trust was unnamed. In the other words, a trust creates rights in favour of the beneficiaries and imposes correlative duties on the trustees. If there were no persons with the power to enforce such rights, then equally there can be no duties imposed on trustees.

In IRC v Broadway Cottages Trust[6], it was held that for a trust to be valid the trustees must be able to draw up complete list of the beneficiaries. They had to overcome any conceptual or evidential uncertainties that might arise and locate all the beneficiaries, since otherwise the trust fund could not be properly distributed.

It has been recognised, however in Re Gulbenkian[7] and McPhail v Doulton[8] that this test is very appropriate for fixed trusts, but creates unfair and unjust results for discretionary trusts. The nature of a discretionary trust is that allows the trustees to make a reasonable choice between the beneficiaries, and the strict application of the test would be defeat the trust and settlers intention where the majority of the beneficiaries were clearly identified and located but some of them were not. Although the trustee would be able to make a reasonable selection, the ‘complete list’ test would invalid the trust. Lord Wilberforce recognised this as unsatisfactory while giving judgment in McPhail v Doulton:

When settlors create discretionary trust, the trustees are required to exercise their discretion to select the beneficiaries from among a class of objects and/or determine the quantum of interest that the beneficiaries may enjoy. The modern test for certainty of objects in respect of discretionary trusts is known as the ‘individual ascertain ability’ test, or the ‘is or is not’ test, or the ‘any given postulant’ test. This test was laid down by the House of Lords in McPhail v Doulton (sub nom Re Baden) and Re Gulbenkian[9].

The test is very appropriate for fixed trusts, but creates unfair and unjust results for discretionary trusts. Although the trustee would be able to make a reasonable selection, the ‘complete list’ test would invalid the trust. Lord Wilberforce recognised this as unsatisfactory while giving judgment in McPhail v Doulton (1971):

   ‘The basis for the Broadway Cottages principle is stated that to be that a trust cannot be valid unless, if need be, it can be executed by the court and ... the court can only execute it by ordering an equal distribution in which every beneficiary shares.’

A new test has been adopted for power and discretionary trusts. This test means that ‘the power will be valid if it can be said with certainty whether any given individual is or is not a member of the class and the power does not simply fail because it is impossible to ascertain every member of the class according to in McPhail v Doulton. In case of Re Hay’s Settlement Trusts[10] the trust may be valid although identify of all the objects is not known. In the case of wide-ranging discretionary trust and the trustee has applied his mind to the ‘size of the problem’ should he then consider in individual cases whether, in relation to other possible claimants, a particular grant is appropriate.

In Re Barlow’s Will Trusts[11], the testatrix, by her will, directed her executor to sell her collection of valuable paintings subject to the provision that ‘any member of my family and any friends of mine’ be allowed to purchase any of the paintings at a catalogue price complied in 1970. The executors applied to the court to ascertain whether the direction was void for uncertainty and guidance as to the appropriate method for identifying members of the testatrix’s family. [Hanbury & Martin, Modern Equity, 17^th Edition, (2005),  Pg 95]

The Court held that the direction as to ‘friends’ was valid, for the properties were to be distributed in specie and quantum of the gifts did not very with the class. Despite the expression ‘friends’ being conceptually uncertain, the transfer by will amount to a series of individual gifts to persons who satisfied a specific description. The court also gave a guideline on the identification of friend’s family. These are as follows:

1. The relationship with the testatrix was required to be a long standing,
2. The relationship must have been social as opposed to business or professional’,
3. When circumstances permitted, they met frequently. The expression ‘family’ meant a blood relationship with the testatrix.

A “friend” was a person who had a relationship of long standing with the testatrix, which was a social as opposed to a business or professional relationship, and who had met her frequently when circumstance permitted

For the benefit of all assiduous lawyers working within the European Union’ are conceptually or sufficiently certain and it is possible to make a complete list of lawyers. However, the list will be too large, so it is possible to fail the trust. The court was prepared to assume that ‘inhabitant’ was sufficiently certain, but held the trust void for administrative unworkability as a class was far too large.

In Re Denley’s Settlement Trusts[12], Goff J upheld a trust under which a piece of land was to be used as a recreation ground for the employees of a particular company. Goff J regarded the Subsequent commentary on the case has tended to treat the case as merely one of a particular kind of discretionary trust according to Re Grant’s Will Trusts [13], or as a trust for persons with the purpose being treated merely as a “superadded” direction or motive for the gift Re Lipinski’s Will Trusts [14]. Thus, the case appears to have been read to deny that it represents a true departure from the beneficiary principle.

In Re Lipinski’s will Trusts[15] however; Oliver j followed the principle of Re Denley’s Trust Deed by finding that although a trust for the erection of buildings of the hull Judeans (Maccabi) Association was expressed as a purpose trust. It was in fact for the benefit of ascertainable individuals, namely, the members of the club, and he therefore held the trust to be valid.

It was argued that because the testator had made the gift in memory of his late wife, this tented to perpetuity and precluded the association members for the time being from enjoying the gift beneficially. Oliver J rejected this argument. Applying the principle of Re Lipinski’s Will Trusts to this disposition therefore, it might well not fail for certainty of objects.

In Re Endacott[16], a testator transferred his residuary estate to the Devon Parish Council ‘for the purposes of providing some useful memorial to myself’. The trust was failed for uncertainty of objects.

In Pettingall v pettingall [17], the testator’s executor was given a fund in order to spend ₤ 50 per annum for the benefit of the testator’s black mare. On her death, any surplus funds were to be taken by the executor. The court held that in the view of the willingness of the executor to carry out the testator’s wishes, a valid trust in favour of the animal was created. The residuary legatees were interested not in the validly of the gift in its failure. In Re Dean[18], the testators directed his trustees to use ₤ 750 per annum for the maintenance of his horses and hounds should they live so long. It was held that the trust was valid.

In Re Kelly[19], the court took the view that lives in being were required to be human lives. In any event, the court is entitled to take judicial notice of the lifetime of animals. In Re Haines, The Times, 7^th November 1952, the court took notice that a cat could not live for no longer than 21 years. In Re Thompson[20], the Pettingall principle was unjustifiably extend to uphold a trust form the promotion and furtherance of fox hunting. A trust for the building of a memorial or monument in memory of an individual is not charitable, but may exist as a valid purpose trust if the trustees express a desire to perform the task.

In Mussett v Bingle,[21] a testator bequeathed ₤ 300 to his executors to be used to erect a monument to the testator’s wife’s first husband. The court held that the gift was valid. Similarly, a gift for the maintenance of a specific grave or particular graves may be valid as private purpose trusts but additionally the donor is required to restrict the gift within the perpetuity period, otherwise the gift may be invalidated. In Re Hooper [22], a bequest to trustees on trust to provide ‘so far as they can legally do so’ for the care and upkeep of specified graves in churchyard was upheld as a private trust. The perpetuity period was satisfied by the phase ‘so far as they can legally do so’.

Conclusion:

Theoretically, according to general rule all four stages required to transfer to be completed before the trust was upheld but practically this principle is relaxed now. To honour the intention of settlor and protect unconscionability, equity use the maxim that equity will perfect an imperfect gift and equity regards, as done that which ought to be done.

Bibliography:

• Hanbury & Martin, Modern Equity, 17^th Edition, (2005), London: Sweet & Maxwell, Pg 95-116
• Penner, J. E. The Law of Trusts, 4^th Edition, (2004), London: Butterworths, Pg 103- 137
• Ramjohn M. Unlocking Trusts, 1^st Edition, (2005), Hodder & Stoughton, Pg 25-45, 227-236

4)         Margaret wilkie & Rosalind, Equity & Trusts, (2004 -2005), Oxford University Press. pg 18-36

[1]              (1840) All ER, 3 Beav  148, Ramjohn M. Unlocking Trusts, (2005), Pg 25

[2]              [1967] 2 AC 291, HL

[3]              (1994) 1 WLR 452, Margaret wilkie & Rosalind, Pg 25-45

[4]          (1804), 9 Ves 399, ER 656, Ramjohn M. Unlocking Trusts, (2005), Pg 228

[5]              (1952) All. ER 1067 Ch 534, Penner, J. E. The Law of Trusts,  (2005), Pg 25-45

[6]              (1955) HL, Ch 20 Ramjohn M. Unlocking Trusts, (2005) Pg 37, 38, 42-44

[7]              (1970) AC 508, Penner, J. E. The Law of Trusts, 4^th Edition(2005), Hodder & Stoughton, Pg 25-45

[8]              (1971) AC 424, Ramjohn M. Unlocking Trusts, 1st Edition, (2005) 39, 42, 115, 122

[9]              (1970)  AC 424, Margaret wilkie & Rosalind, Equity & Trusts, (2004 -2005),

[10]            [1982] 1 WLR Penner, J. E. The Law of Trusts, (2004), Pg 103- 137

[11]            (1979) 1 All ER 296 Hanbury & Martin, Modern Equity, 17^th Edition, (2005),  Pg 95-116

[12]            (1969), WLR 457, 1 Ch 373, Ramjohn M. Unlocking Trusts,(2005) pg 233, 243

[13]            [1979] ALL ER 359, Ramjohn M. Unlocking Trusts,(2005) pg 240

[14]            [1976] W.L.R 522, Ch 253, Hanbury & Martin, Modern Equity, 17^th Edition, (2005)

[15]            [1976] W.L. R  457, Ch 235, Hanbury & Martin, Modern Equity, 17^th Edition, (2005)

[16]            (1960) W.L.R. 799 Ch 232, Penner, J. E. The Law of Trusts, (2004), Pg 103- 137

[17]            (1842) 11 Lj Ch 176, Hanbury & Martin, Modern Equity, (2005), Pg 95-116

[18]            (1889) All ER, 41 Ch D 552, Margaret wilkie & Rosalind, Equity & Trusts, (2004 -2005), 23

[19]            [1932], IR 255, Margaret wilkie & Rosalind, Equity & Trusts, (2004 -2005) pg 19

[20]            [1934] CA, Ch 342, Hanbury & Martin, Modern Equity, (2005),  Pg 95-116

[21]            [1876] WN. 170, Penner, J. E. The Law of Trusts, (2004), pg. 280

[22]            [1932] WLR. 327 1 Ch 38, Ramjohn M. Unlocking Trusts, 1^st Edition, (2005), pg. 232 & 235