TOPIC 4: TRUST STRUCTURES

This topic covers a number of things:

 Certainty of object (important)

 Distinction between fixed trusts and discretionary trusts
 The different rights of beneficiaries and objects
 The classification of powers

Modern trust structures v older trust structures

Lord Walker in Schmidt v Rosewood Trust:

Since the 1930’s settlements have changed to a degree which would have astonished 19 th century
judges.

Taxation considerations: ‘increasingly stringent anti-avoidance measures encouraged legal advisers

to devise forms of settlement under which the true intended beneficiaries were not clearly identified
in the settlement. Indeed their interests or expectations were often barely perceptible. Rarely did a
beneficiary take an indefeasibly vested interest with an ascertainable market value. Tax avoidance is
therefore one element which has strongly influenced the forms of settlements;’

The beneficiary principle

“There must be some person in whose favour the court can enforce the trust. Charitable purposes
are the only exception to the need for certain objects” - Morice v Bishop of Durham

 A trust must be for the benefit of either persons or charitable purposes

 Except for charitable trusts, every trust must have a definite object: Morice v The Bishop of
Durham
 A trust must be in favour of a:
a) Definite (fixed private trust)
b) Ascertainable or capable of ascertainment (fixed/discretionary private trust)
c) A recognised charitable purpose (charitable trust)

Test for charitable purposes

TRUSTS AND POWERS

Classification

Some important terms

Fixed trust (older style of trusts): a trust where the interests of the beneficiaries are ‘fixed,’ i.e. they
are pre-determined by the settlor. There is no discretion to distribute them. The children, wife etc.
are beneficiaries

 Obligation
 No discretion
 List-certainty – definite or ascertainable class of beneficiaries (IRC v Broadway, McPhail v
Doulton)
  Not necessary that all objects be ascertained when the trust commences, as long as they are
described with sufficient precision for an exhaustive list to be made at the date upon which
they are entitled to their estate
 Beneficiaries have equitable proprietary interest in trust property
 Beneficiaries may enforce administration and distribution of trust property
 E.g. a testator leaves his property to his wife and sister as trustees to hold on trust as
follows:
I. The house is to be sold and the proceeds distributed between the four children in equal
shares

Discretionary trust: interests of the objects of the trust are at the absolute discretion of the trustee,
i.e. interests of children, wife etc. will not be fixed, some may get nothing. The children are ‘objects’
NOT beneficiaries.

 Trust power/trust with a power/exhaustive discretionary trust/discretionary trust – note

that all of these terms mean the same thing. The trustee has discretion in terms of how to
distribute BUT has an obligation to actually distribute
 Obligation
 Discretion
 Criterion certainty – must be possible to determine with certainty whether any particular
claimant is or is not within the class of objects (McPhail v Doulton)
 ‘Administrative unworkability’ -
 Beneficiaries have a ‘mere expectancy’ (also equitable chose in action) and only acquire
proprietary interest after the trustee exercises power in favour of a beneficiary
 Beneficiaries have a right to enforce proper administration of trust
 E.g. A leaves his property to T as trustee to hold on trust as follows:
I. The house is to be sold and the proceeds distributed between the testator’s four children
in the absolute discretion of the trustee

Non-trust type/mere power: strictly speaking these do not create trusts unless the power is
conferred on a trustee

 No obligation
 Criterion certainty (as above)
 Possibly also capriciousness test -
 Donee has 2 discretions:
i. Whether to distribute the property or not
ii. How to divide property between beneficiaries
 ‘a gift over in default of appointment’ is usually a mere power
 Rule against perpetuality
 If power given to donee (not trustee), there is no obligation to exercise or even consider the
power, the Court can only intervene if there is wrongful exercise of the power
 If power given to trustee, the Court considers his responsibilities to be greater
- Trustee still under no obligation to exercise the power, it is permissive and not
mandatory
- However, he does have certain responsibilities as a result of his fiduciary nature
- ‘Any trustee would surely 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.’ – McPhail v Doulton
Trusts vs. Powers

First note:

1. Trust powers – powers coupled with an obligation to exercise the power/ power coupled
with a duty. Trustee cannot hang on to property. They have to distribute it – aka. exhaustive
discretionary trust
2. Mere powers – no attached obligations; discretion whether to distribute property at all.
Donee will not be in breach of trust if they do not make a distribution at all – aka. Non-
exhaustive discretionary trust. Donee may not even be in a trust relationship!

Consider the following example - A leaves his property to T as trustee to hold on trust as follows:

I. The house is to be sold and the proceeds distributed between the testator’s four children in
the absolute discretion of the trustee
 Establishes a discretionary trust/power
II. $10,000 is to be held on trust for X
 Establishes a fixed interest trust
III. The trustee may, at her absolute discretion, distribute any or all of the remaining property to
the middle child (W). In default of appointment the residue is to be held for children Y and Z
jointly.
 This contains NO obligation to distribute to W. T has a power to appoint to W, but if the
power is not exercised, the property goes to Y and Z. This a mere power as opposed to trust
powers (permissive, a power held by T to decide whether or not to do something, although
he has authority/permission to do it, c.f. discretion, where T has to do something)
 Key thing to look for is a defaulting clause, which would mean that the aforementioned
power is likely to be permissive but not mandatory.)

Remember the distinction between ‘bare’ or ‘mere powers’ and ‘trust powers’. The above examples
are all demonstrations of where powers are held by a trustee. Note that a bare power can be given
to a person who is not a trustee

Example – A leaves all his property to wife, and then provides that his sister during her lifetime may
appoint any of the property to his children.

 The wife owns the property

 The sister is not a trustee (no trust here);
 She is a holder (donee) of a power, the power over the disposition of the property. She has
an enforceable personal obligation (equitable) to direct the property as provided by A
 As a non-fiduciary holder of power, the sister does not need to exercise or even give mind to
the power

Powers are broken down into categories

 General power – power to distribute to anyone in the world

 Hybrid (or intermediate) power – power to distribute to anyone except for certain, named
(or class of) people
 Special power – a defined class of objects who are entitled to benefit
 Trust Power (discretionary trusts) Mere Power

General Power Invalid  Valid.

1. Fail administrative workability test:
‘anyone in the world’
2. Contrary to fiduciary obligations
under the trust power because by
self-appointing under general
power, trustee will be in breach of
profits and conflicts rule
Hybrid Power  Invalid
 Fails administrative workability test:
‘anyone in the world except A, B and
C’ is too wide to enforce: Re Hays
 Donee can treat property as his
own.
 Valid.
 Criterion certainty applies.
 Administrative workability is
irrelevant because the court
cannot be called upon to
administer a mere power by acting
on it.

Special Power  Valid.  Valid.

 Criterion certainty applies.  Criterion certainty applies.
 Administrative workability applies.  Administrative workability applies

We need to be able to identify what type of power we have and whether it is valid.

Bare power examples

1. “I leave my property to my wife, who may distribute it as she pleases”

 The wife receives the property, with a general power to distribute to anyone in the world
(effectively given ownership), there is no trust here

2. “I leave my property to my wife as trustee. She may distribute it as she pleases”

 The wife is a trustee, by implication she cannot distribute to herself (she is fiduciary). There
is an expectation she would hold the property subject to her fiduciary obligations – this is a
hybrid power, can distribute to anyone in the world except herself

3. “I leave my property to my trustee. My wife may appoint the property to anyone except my
brother Fred. In default of appointment the property is to be held for my children.
 Hybrid power held by wife (has a power as donee, not the trustee), default clause in favour
of children (fixed).

4. “I leave my property to my trustee. My wife may appoint the property to my children. In

default of appointment, the property is to be held for my grandchildren.
 Main class (children) who are the objects of the trust, this is an attempt to create a group of
people who are entitled to benefit (special power)

Validity of powers

It is very important to identify if the power is a bare power or a trust power.

  Bare powers can be for a general, hybrid or special class and will be valid. They can be held
by a trustee or a non-fiduciary donee
 Trust powers will only be valid if for a special class i.e. group of people, the Court will not
give trust rights to all the world. So, if there is a TRUST and the trustee has a discretion for
how to distribute, there must be a class of people from which the trustee chooses.

2004 Exam

1. I appoint my union comrade Frank as my executor and trustee, and leave him my house in
Northcote.
 Trust established, fixed trust

2. Half the rent earned on the house shall be appointed to such old comrades of mine as Frank
sees fit to select.
 Trust with discretion (trust power), valid because in favour of special class (‘such old
comrades of mine)

3. Frank may give the other half of the rent to such people as he thinks appropriate, including
to my successors in the leadership of the union, but not to anyone who was ever a strike
breaker.
 Permissive power, hybrid, power to distribute to all the world except certain, named people
(anyone who was ever a strike breaker)

4. Five years after my death, or earlier if he so decides and the union leadership agrees, Frank
shall sell the house and hold the proceeds of sale on trust for all the train-drivers
commencing employment in that year.

 Fixed trust established

Rights of beneficiaries/objects

Kennon v Spry explains that objects have a right to consideration for distribution and a right to due
administration - this is not property in the general sense

 Objects vs beneficiaries: difference in rights, beneficiaries have equitable property rights to

the trust assets
 Objects have no proprietary interest in the trust property, i.e. no equitable property right to
the assets
 Beneficiaries can deal with their EPR rights: sell, give or leave in their will
 Objects have no proprietary interest capable of assignment (expectancy)
 Objects (under a trust power) have a chose in action against the trustee to require
consideration of discretion.

Certainty for fixed-interest trust

 The test for certainty under a fixed interest trust is list certainty (McPhail).
 List-certainty – there is a definite or ascertainable class of beneficiaries
 Not necessary that all objects be ascertained when the trust commences, as long as they are
described with sufficient precision for an exhaustive list to be made at the date upon which
they are entitled to their estate
  E.g. A sets up trust for descendants, money to be distributed in 2032 (20 years), it is not fatal
to the trust that those people may not have been born, as long as at the time the trust is to
arise, a list of people is capable of being made

Certainty for bare powers

The test for bare powers is ‘criterion certainty’; under a bare power, the list certainty issue test does
not apply (Re Gulbenkian’s Settlement)

Re Gulbenkian’s Settlement [1968] 1 Ch. 126 [OLD TEST!!]

The trustees shall at their absolute discretion pay any or all of the trust income to…

 Any person by who G may be employed;

 Any person in whose house or in whose company or under whose care or with whom he
may be from time to time residing

The parties agreed that the clause created a bare power. Counsel argued that possible uncertainty
rested in the meaning of ‘residing’, persons ‘with whom’ he was residing, persons in ‘whose
company’ he was residing and persons ‘under whose care or control’ he was residing. Court decided
the necessary test for certainty by asking what the obligations were.

Obligations on donee vs. trustee with power

The Court found that if the donee wants to exercise power, he

 must be able to know if a certain person is within the class. And, once the power has been
exercised, the court must be able to know with certainty if the exercise of the power was
proper.
 Note that if the donee of the power is not a trustee, then the court cannot make the donee
exercise the power or consider it (since there is no fiduciary obligation), but it will prevent
the wrongful exercise of the power.

Where the power is given to trustees,

 Along with criterion certainty, the trustees must also consider whether or not to exercise
the power. This is because the power has been given to them in a fiduciary capacity, and
they cannot ignore it
 As well as the duty to consider the power, the exercise of the power must be within the right
class. So, the trustees must be able to know who is in the group
 Trustees are given an absolute discretion. If they decide in good faith at appropriate times to
give none of the income to any of the beneficiaries the Court cannot pronounce their
reasons to be bad. If they decide to give some or all of the income to a particular beneficiary
the court will not review their decision.

Held

Court found that ‘residing’ was able to defined with sufficient certainty. Gave an example that ‘their
old friends’, is something which cannot be given an objective definition
Conclusion - Test of ‘Criterion Certainty’

 We must be able to know, of any given person, if they are within the class or not.
 It is insufficient to merely find someone who can be identified within the class, if there are
also some people who cannot clearly be stated to fall within the class or not
 The policy behind this is that the Court needs to prevent improper exercise of power. The
Court cannot compel the trustee to exercise power, but the takers in default need to be able
to restrain trustees from exercising the power in favour of someone outside the group.

Certainty applied to bare powers

 General power – to anyone in the world except for the trustee, this is already sufficiently
certain
 Hybrid power – to anyone in the world except for X, Y and Z. A hybrid power is certain if the
excluded class (i.e. X, Y and Z) is sufficiently certain
 Special power – to X. A special class will be certain only if you can say, of any given person, if
they were within the class or outside the class.

Certainty for trust powers

McPhail made some key points in relation to trust powers and mere powers. The case:

 Found that criterion certainty test applies to both trust and mere powers
 Confirmed Lord Upjohn’s view in Gulbenkian that the trust is valid if it can be said with
certainty that any given individual is or isn’t a member of the class
 A wider and more comprehensive range of inquiry is called for in the case of trust powers
than mere powers
 If the trustees do not exercise their trust power, the Court will. The Court will do so in the
manner best calculated to give effect to the settlor’s intentions. A discretionary trust may be
executed according to its merits and otherwise than by equal division.

McPhail v Doulton (Re Baden’s Deed Trusts )

This case considered the test of certainty for trust powers. It considered what the test should be by
looking at the obligations on the holder of the trust power. B was a chairman and managing direct of
a company (MH). The company had some 1,300 employees. B established a trust fund by deed. One
clause of the trust deed provided that:

“…the trustees shall apply the net income of the fund in making at their absolute discretion grants to
or for the benefit of any of the officers and employees or ex officers or ex-employees of the
company or to any relatives or dependants of such persons…” There were 11,000 potential objects
under this trust.

At first instance Goff J held that the instrument created a mere power which was not void for
uncertainty. The CoA agreed with this and addressed the issue of when competing interpretation of
a provision are evenly balanced (i.e. in this case a seemingly mandatory ‘shall apply’ is followed by
‘absolute discretion’.) They found that the Court should prefer the one producing validity rather than
invalidity. The case went all the way to the HOL
Held

Given the width of the class of objects, the validity of the trust was in question; there was dispute as
to whether it was a discretionary power at all. The HOL unanimously reversed the CoA, and found
that the disposition was a discretionary trust. A 3:2 majority assimilated the certainty of objects test
for discretionary trusts to that for mere powers.

Lord Wilberforce (Viscount Dilhorne and Lord Reid agreeing) emphasised the similarities between a
trustee’s role in exercising a mere power and in exercising a trust power. Showed that trust power is
closer to a bare power, than a fixed interest trust (i.e. instead of list certainty, we should have
criterion certainty). The trustee is a fiduciary; the question to ask is “What would you expect a
trustee to do to decide on the exercise of a power?”

1. Know the permissible area of selection i.e. amongst who can you select?
2. Consider responsibly, in individual cases, whether a contemplated beneficiary was within the
power i.e. thinking about someone in particular;
3. Whether, in relation to other possible claimants, a particular grant was appropriate i.e. can
you give the money to this particular individual?

What would you expect from trustee of trust power?

It was contended that a trustee would surely never be required to prepare a complete list of names.
We can expect the trustee to:

1. Examine the field, by class and category;

2. He might need to make careful and diligent inquiries (depending on how much money was
involved) as to the make-up and needs of particular categories and the people in them; and
3. Decide upon certain priorities or proportions, and then select individuals according to their
needs or qualifications.

In short, if a trustee has discretion, they have to understand their task, but are not required to
prepare a complete list of names

Conclusion - Establishing the test

The distinction between the test for trust powers and bare powers is the extent of the survey which
the trustee is required to carry out. The test should be similar to the test from Gulbenkian:

 The trust will be valid if it can be said with certainty that any given individual is or is not a
member of the class; BUT
 the trust will not be valid if the definition of beneficiaries is so “hopelessly wide as not to
form ‘anything like a class’ so that the trust is administratively unworkable” –
administratively workable test (McPhail)

Two stages in determining the validity of a trust power

1. ‘Criterion test’
2. ‘Administratively workable test’

McPhail v Doulton (continued)

First applied the criterion certainty test, the issue was whether the term ‘relatives and dependents’
can be defined? This question was sent back to the CoA to decide, they said yes.

A second issue was raised, what if it is hard to find the relatives? The Court said that this is an
evidentiary matter, and does not affect the validity of the trust.

Comparing powers and trusts

The test for validity of mere powers is criterion certainty:

 We must be able to say whether any given individual is in or out of the specified class.
 There must be a class which can be defined objectively by the Court.
 There is no obligation to list all members

For trust powers the same initial validity test applies (criterion certainty)

 Lord Wilberforce in McPhail also added a further limitation about ‘administrative

workability’.
 Note that a trust power must be exercised, whereas a mere power doesn’t need to be.

So what does ‘administrative unworkability’ mean? Three explanations have been offered:

1. The class is so broad that the trustee has no objective criteria to make the decision between
objects e.g. all the residents of greater London
2. The trust will not exist if the number of people are so great that too many people would
have locus standii to complain of the trustee’s actions (since the trust power gives the
objects the right to force the trustee’s obligation to consider)
3. The task is practically impossible for the trustee, given the size of the trust fund (e.g. only
$5,000 to distribute, and trust object is residents of greater London)

Re Manisty’s Settlement, Re Hays Settlement

Both cases address the question: are their powers affected by McPhail? i.e. Does admin workability
affect the law as it refers to bare powers? Judges say bare powers still governed by Gulbenkian,
‘admin workability’ applies to trust powers only.

Re Manisty’s Settlement

This case concerned a trust for certain beneficiaries. It was provided that “every person who is for
the time being a member of the excepted class shall be excluded from the class of beneficiaries”.
The original excepted class was the settlor, his wife or anyone who settled property on the trust. A
clause also authorised the trustees, if they include at least one trustee who is not a beneficiary, to:

i) delete any person or corporation from the beneficiaries,

ii) to add any person, corporation or class to the excepted class, and
iii) at their absolute discretion to exercise the power to declare that anybody, corporation or
charity (other than those in the excepted class or a trustee) be included in the class of
beneficiaries

This was an example of a hybrid bare power – valid if excluded class is sufficiently certain. One of the
issues raised was: do we need to apply the admin workability test?
Held

Templeman J there is nothing wrong with hybrid bare powers. Admin unworkability is a test for
trusts powers, not bare powers, where the Court has a much more limited function. He makes an
interesting point that the only difference between an intermediate power and a special power for
present purposes is that for a special power the settlor might later regret that the trustees can’t
choose to benefit people outside the ambit of the power (e.g. adopted children, widows etc.) An
intermediate power will “arm he trustees with a weapon which will enable them to consider all
developments, and all future mishaps and disasters”

However, he added that bare powers may fail if they are capricious (so nonsensical or so arbitrary
that we don’t understand why such a class has been included). The Court may intervene where the
trustees act for reasons which are “irrational, perverse or irrelevant to any sensible expectation of
the settlor” e.g. if a settlor chose a beneficiary by height or complexion or by the irrelevant fact that
he was a resident of Greater London. These might all fail for being capricious, since the settlor could
have no sensible intention to benefit “an accidental conglomeration of persons”. This is especially
the case if those named persons have “no discernible link with the settlor,” it’s so arbitrary and
wilful that we don’t know why they are a class – this was a single judge decision but has nevertheless
supported.

The conclusion was that the hybrid power was valid.

Re Hay’s Settlement [1982] 1 WLR 202

This case considered some of the issues argued in Manisty. The case involved a power of
appointment and a discretionary trust of income:

1. Power of appointment – the trustees were to hold the trust fund on trust for “such persons
or purposes” as the trustees should appoint (basically anyone) except certain persons:
settlor, husband, present or former trustees (another hybrid power)
2. An attempted exercise of power by establishing a new trust with a trust power to appoint
income to any person or charity as trustees thought fit

The essential question related to the power of appointment, whether such a power for trustees to
appoint to anyone in the world except a handful of specified persons is valid. Such a power will be
perfectly valid if given to a person who is not in a fiduciary position (no need to consider it), but the
difficulty arises when given to trustees. Is admin workability relevant to bare powers? Court said no,
agreed with Templeman J in Manisty, ‘admin workability’ only applies to trust powers.

Judge then went on to discuss capriciousness. If a former mayor of London council was establishing a
bare power in favour of the residents of greater London, then that wouldn’t be capricious because
he would have good reason to benefit that group. But if someone who has never been to London
and has no connection with it tried to do so, then it would seem nonsensical to the point of being
capricious.

 The criticism of this is: why should it matter? So what if someone wants to benefit a group
which he has no particular association with? We can have a general power for all the world,
but can’t have hybrid power for a ‘random group’?
Deciding uncertainty

R v District Auditor No 3 Audity District of West Yorkshire Metropolitan County Council [1986] RVR 24

The West Yorkshire Metropolitan City Council became aware that under legislation, after 1 st April
1985 they would no longer able to incur expenditure in the interests of their area without consent
from the Secretary of State. Therefore with the unspent money left over from the 1984/5 period,
they created a trust for the benefit of “some or all of the inhabitants of the West Yorkshire County in
one or more of the following ways:

1) To provide financial assistance for and towards the economic development of the… County…
with the object of relieving unemployment and poverty
2) To provided assistance for groups and bodies concerned with the youth and community
problems within West Yorkshire
3) To provide assistant and encouragement for ethnic and other minority groups within West
Yorkshire
4) To inform all interested and/or influential persons or bodies of the consequences of the
proposed abolition of West Yorkshire Metropolitan City Council and other… Councils…”

The amount proposed to be transferred was 400,000 pounds. It was argued that this was a sham to
avoid the need to obtain consent from the Secretary of State to incur expenses after 1985.

Held

Initially this was a question as to whether this was a charitable trust, which would allow it to succeed
on the basis of Manchester City Council v Greater Manchester City Council. However, at least one of
the purposes of the trust was not charitable, and therefore this case could be distinguished. It was
argued that this was an express private trust to distribute among the inhabitants of West Yorkshire
County.

Two of the three certainties were present here, but there was an issue with the third (was there
certainty as to the objects of the trust?) The beneficiaries were all or some of the ‘inhabitants’ of
West Yorkshire. There were approximately 2.5 million inhabitants, is the trust workable? The Court
agreed that while the class was certain, the number of potential beneficiaries was “unworkable.”
The class was “far too large.” Reaffirmed Lord Wilberforce judgement in McPhail in deciding
certainty of object:

1) Linguistic/semantic certainty – is the language used to define the class of persons sufficiently
precise or accurate? E.g. ‘my old friends’, ‘dependents or relatives’, ‘deserving’ etc.
 A class is semantically certain if terms used have precise boundaries of meaning
 A class is uncertain if it cannot be said with certainty whether the claimant is a member
of the class or not
 Semantic uncertainty will render a disposition of power void, and the trustee holds the
property subject to a resulting trust in favour of the settlor
2) Evidential certainty – how difficult is it to ascertain the existence of whereabouts of
members of the class? Is it too hard to find them?
 Difficulty in finding will not invalidate the power
 3) Administrative workability – the meaning of the words might be clear, but is the definition of
the beneficiaries so hopelessly wide as not to form “anything like a class” such that the trust
is administratively unworkable? It was suggested that “all the residents of Greater London”
would be administratively unworkable, while “relatives” is fine.
 Administrative workability only applies to trust powers
 If the power is unworkable, it is fatal to the validity of the trust

The third point was the problem in this case, the Court agreed with Lord Wilberforce judgement and
example. It was concluded that the trust cannot take effect as an express private trust because it
was administratively unworkable (class is far too large). It is not capricious because the Council had
reason to benefit inhabitants.

Case study: Re Blyth

…the Public Trustee shall stand possessed of my Residuary Estate Upon trust to distribute and divide
the same in such manner as in his uncontrolled discretion he shall think fit among such Organizations
as in the Public Trustee's opinion are working for the elimination of war and also among such
Organizations as in the Public Trustee's opinion are formed for the purpose of raising the standard of
life throughout the world

Revision question

“I bequeath to my trustee the sum of $10,000, which she shall be at liberty to appoint to
whomsoever she shall select, according to her absolute discretion, except for current or former
members or employees of the government. In default of such appointment my trustee shall hold
the moneys upon trust for members in good standing of the Carlton Anarchist Collective.”

 There is no obligation here, read this with the default clause – indicates that it is a
permissive bare power (as opposed to mandatory).
 This is a hybrid clause, there is an excluded class.
 The clause can be valid provided that we have certainty of the excluded class, there is no
need for a list. Excluded class = current or former members of employees of the government
 Conclusion: criterion certain, hybrid bare power
 The power does not have to be carried out, but it does have to be considered because they
are trustee! (Fiduciary duty to at least consider). What happens if not exercised?
 Default clause - no discretion present, therefore it is a fixed-interest trust.
 Must have list certainty for the beneficiaries: who is a member of good standing of the
Carlton Anarchist Collective? Is it possible to make a list of this class? If yes, then valid.

Further examples

Lempens v Reid (2009) 2 ASTLR 373

This case concerned a testamentary trust. The testator had had overseas students stay with him for
varying periods of time over some years. He left a gift of half of the residue in the estate to “such of
them my friends who resided with me from overseas.” There was a question of whether this was
certain or not.

Held
Firstly it is a fixed trust, therefore list certainty is required. Was it possible to make a list of this
class? Evidence demonstrated that overseas students had stayed with him for varying lengths of
time. The ones that could be contacted did not consider that they should benefit.

Lempens v Gulbenkian

In Gulbenkian ‘my old friends’ was used as an example of an uncertain term, in this case the Court
was of the view that Courts have been prepared to allow the word ‘friends’ to be sufficiently certain,
at least in relation to exercise of a bare power or for a grant of an option – Re Barlow

In Gulbenkian ‘residing’ was able to be sufficiently defined, in this case, ‘residing’ caused difficulty.
They found that ‘reside’ is subjective and ambiguous, the type of relationship and length of stay
indicated by the word is unclear.

Therefore it was found that the gift failed for conceptual uncertainty. The Court said that it would
also have failed for evidential reasons as inquiries had failed to identify anyone who fits the class

Summary: three tests for certainty

Fixed interest trusts

1. List certainty

Trust powers

1. Can one say of any given person that s/he is, or is not, a member of the class of objects
(criterion certainty)?
2. If no, consider whether semantic uncertainty or evidential uncertainty.
3. If semantic uncertainty, then void.
4. If criterion certainty satisfied, or only evidential uncertainty, consider whether power
‘administratively workable’.
5. If ‘administratively unworkable’, then void.

Bare powers

1. Can one say of any given person that s/he is, or is not, a member of the class of objects
(criterion certainty)?
2. If no, consider whether semantic uncertainty or evidential uncertainty.
3. If semantic uncertainty, then void.
4. If only evidential uncertainty, then not void.
5. If ‘capricious’ then void

Exercise of power or discretion

 A ‘bare power’ and a ‘trust power’ both contain a discretion to be exercised.

 A trustee has a (fiduciary) duty to consider whether or not to exercise a discretionary/mere
power.
 A trustee can be controlled if:
- It is a mere power and he exercises it improperly
 - It is a trust power, the Court will compel the trustee to carry it out in a proper manner
and within a reasonable time
- He acts in bad faith/with an ulterior motive,
- Takes into account irrelevant matters (capricious) or fails to take into account relevant
matters,
- Fails to give any real and genuine consideration to the discretion
- Does not turn his or her mind to the question or fails to understand that a discretion
exists (Turner)
 A non-fiduciary (donee of power) can ignore it completely. Non-fiduciaries are only
controlled by the concept of fraud on a power.

Fiduciary’s discretion

 Fiduciaries are also controlled by the need to consider their discretion and the proper
purposes test
 Karger v Paul requires fiduciary to act with three fundamental considerations in mind:
1) Exercised in good faith. This equals acting honestly. Acting honestly but negligently or
‘blundering carelessness’ is sufficient to still be good faith;
2) Must give real and genuine consideration; and
3) Must act in accordance with the purposes for which the power was conferred

Karger v Paul

A settlor appointed her husband S and her solicitor P to act as trustees of a discretionary trust, she
also authorized that the trustees had the discretion to transfer all or part of the fund to S. Upon the
death of S, the trustees had a duty to pay the residue to the settlor’s cousin K. After the settlor died,
S told P that he needed money for his business, and wanted to transfer the estate capital to himself.
S told P that K was financially sound. Acting on this, P exercised his discretion in favour of S and
appointed the entire estate to him.

K found out and was very annoyed. K brought proceedings against P (and S) arguing that the
discretion had been improperly exercised and that the trustees had not given the discretion real and
genuine consideration.

Held

What we require from trustees when exercising discretion is (as above). The onus of proving bad
faith is on the person alleging it. The Court found that S had a proper purpose.

What about a real and genuine consideration? As long as the trustee understood the nature of the
task, then this is enough, there is no requirement of ‘natural justice’, i.e. S and P didn’t need to
consult K, or inform her that she was to be affected, there is no need to give K a chance to respond.
The fact that S acted upon the general knowledge of the circumstances didn’t mean that he or P had
not given real and genuine consideration to the exercise of discretion.

We can conclude from Karger that:

  The presence of some errors is not fatal to proper purposes. However, if the gap in errors
was sufficiently extensive we might be able to create an inference that the trustee was not
in a position to give real and genuine consideration.
 The Court can examine evidence to decide whether or not there has been a failure by the
trustees to exercise the three fundamental considerations above. In ascertaining this, the
Court can look at evidence of inquiries made by the trustees, information they had, and
reasons for, and manner of, their exercising of their discretion
 BUT the Court can’t do this for the independent purpose of disputing the exercise of
discretion on the grounds that the exercise fell short of what was appropriate and sufficient
 Altruism is not expected here, if trustee given discretion to benefit himself, not fatal to
proper purposes if he does so
 This is a fairly low standard; Court realized that if they set the standard of discretion too
high, many people would refuse the office of trustee (since most trustees are unpaid).

Exercise of discretion

Turner v Turner

Settlor established a trust; the trustees were his father, his sister-in-law and her husband. None of
the trustees were familiar with trusts or understood their duties as trustees. Two of them thought
that any duties under the trust would only arise if something happened to the settlor, in which case
they would be responsible for looking after the interests of the settlor’s family. The settlor made
decisions about the trust based on legal advice, he did not consult the trustees. All the trustees did
was sign documents when asked by the settlor, they didn’t read the documents nor were the
documents explained to them. Basically the trustees had no idea what their duties/obligations were.

Held

It was held to be plain on the evidence that the trustees did not in anyway ‘consider’ in the course of
signing the three deeds in question (as required by Karger). They didn’t know they had any
discretion, nor did they read or understand the effect of the documents or make any decisions. They
merely signed when requested and never applied their minds at all to the exercise of the discretion
entrusted to them. The trustees had failed the Karger v Paul test.

Also see Dunstone regarding the circumstances of this case

Note that

 The standard of discretion for a non-fiduciary is lower than that of a fiduciary.

 For non-fiduciaries the Court only ask ‘was it exercised for proper purposes, and was it
within the power,’ i.e. only concepts of fraud will defeat exercise.
 For a fiduciary trustee, Karger v Paul is appropriate test.

What if someone can’t decide, but just rolls a dice to decide? Does this satisfy the Karger v Paul test?

 Lecturer feels that rolling a dice is abrogating a trustee’s power to make the decision. This is
the opposite of real and genuine consideration (capriciousness or being irresponsible)
 The counter-argument is that the trustee has made a real and genuine consideration, and
decided that all the objects have an equal chance

Specific applications of Karger

Dunstone v Irving

This case demonstrates that Karger is a very low threshold test. It concerned two members (also
trustees) of a superannuation fund. A dispute arose after D left the business that he and I had jointly
operated. D wanted to roll over his entitlements into another superannuation fund, he claimed he
was entitled to about $1.3 million of a $2.1 million fund. I claimed, among other things, that the fund
should be divided equally.

One question asked: was any discretion properly exercised under the trust deed?

Held

There were several meetings and phone conversations between the parties. One party couldn’t find
his trust deed. Two question of law were raised:

1. Were the trustees unable to exercise any discretion in the trust deed because they were
unaware of its terms? The evidence suggested that D did not have regard to the relevant
article of the deed, it was argued that there any purported exercise of the discretion under
that article must be annulled (per Turner).

The Court noted that Turner was an exceptional case, the trustee’s involvement and understanding
of the trust was extremely limited. It was held that the central issue is not the failure to read or
understand the documents, but rather the failure to consider whether to exercise the power. The
Court found that it was not fatal to the question of consideration whether D knew of the terms of
the relevant article. The process of discussion and negotiation was deemed a sufficient
consideration of their power (even if they didn’t know the precise source) of this power.

2. Can the court look behind the exercise of discretion to examine and review it? It was argued
that D had acted in his own interests at all times and had not acted upon real and genuine
considerations. Furthermore it was argued that D held a predetermined view as to his
entitlement, and thus was acting for an improper purpose

From Karger, the exercise of a discretion will not be reviewed or examined by the courts as long as
the ‘essential component parts’ of the exercise are present i.e. good faith, real and genuine
consideration, and for proper purposes. The exception is that the validity of the trustee’s reasons
will be examined and reviewed if the trustees choose to state their reasons for their exercise of
discretion.

The Court concluded that there was no improper exercise, it would be impossible for the trust to
operate if either trustee (both being members of the fund) did not take part in the decisions from
which he benefited.

Curwen v VanBreck [2010]

Vic CoA. There was a long standing family feud; a discretionary trust was set up by two people, who
had two daughters. One of the daughters is in control of the trust, the other one is on the outer.

The object of the discretionary trust applied for access to the trust documents. The trustee stalled
for a while, and then exercised her discretion to exclude the object from the specified class (with a
few days notice). This was a legitimate power in the trust. The son argued that this was done solely
for the purpose of denying him access to the documents, which they alleged was an improper
purpose. The power to exclude beneficiaries shouldn’t be done to exclude beneficiaries.

Held

The Court held that the person alleging improper purpose has the burden of proof. The trustee is not
required to give reasons. The trustee was not examined on this issue at trial; no one put this issue to
her at court. This was a tactical decision to prevent them from being landed with the burden of
proof. There was no direct evidence of improper purpose, only circumstantial evidence that the
exclusion came after the request for access of documents. Without direct evidence of the state of
mind of the trustee, the claim failed.

Note

 If it is known that there are multiple purposes behind the exercise of power, and one of the
joint purposes is an improper purpose, then the exercise would fail the Karger test
 If it had been proved that the trustee in exercising the discretion had the purpose of
preventing the beneficiaries seeing the documents, then this clearly would have been an
improper purpose
 Close timeline between request and exclusion was not sufficient

This case shows that beneficiaries have a very difficult task in challenging a trustee’s exercise of
discretion

Formation of opinion vs. exercising discretion

Finch v Telstra Super

HC seems to suggest that a change in the law is required. F was born a male but had gender
reassignment surgery and began work with Telstra. After a few years, F was extremely unsatisfied
and distressed about the move he made from male to female, and went back to assuming the
persona of a male and as far as possible reversing the surgery. As a consequence he became highly
depressed and left Telstra. He worked for short periods at Foxtel and Qantas, during each of which
he took 2 weeks sick leave.

As a result of his employment with them, F was a member of the Telstra superannuation fund. He
applied for a total, permanent invalidity pension with them. Superannuation trusts commonly have
an option for payment of disability benefits. Under a typical clause, the trustee will usually be
required to form the opinion that e.g. the employee ‘is unlikely to ever engage in any gainful work’
for which the member is in the time being reasonably qualified. The trustees excluded F on the basis
that he failed this clause.

At trial it was held that the trustee had failed the Karger test of real and genuine consideration, with
respect to the key question of whether F was unlikely ever to engage in gainful work. The strength of
the medical opinion in F’s favour should’ve prompted Telstra to make further inquiries into three
matters (F’s last months with Telstra; F’s employment thereafter with Foxtel and Qantas; and a
statement by F to the CEO of T that his employment with Qantas was “a real job”.
On appeal, they found that the trustee had satisfied the Karger test and that F did not satisfy a
condition in the Deed.

Held

HC appeal, had the trial judge correctly decided that the trustee had failed the Karger test of real
and genuine consideration? The Court felt that this wasn’t really a Karger test situation. They stated
that this wasn’t the type of decision that would be regarded as discretionary. The Court stated that
where an inquiry involves ‘identification and evaluation of factual matters’, the term ‘discretion’ may
not be appropriate. The trustees did not have to exercise discretion, but had to consider whether to
reach 2 opinions:

1. Had he ceased to be an employee? This is clearly a question of fact and does not involve
discretion
2. Was he unlikely to ever engage in any gainful work? This question was in a different area
than a family trust, the trustee has to form an opinion which requires him to consider
various matters.

Judges considered how superannuation funds (large corporations with vast assets - more like
deferred pay – an earned component) are different to family trusts (small and private - total
voluntary windfall - beneficiaries are usually volunteers). Without Karger v Paul principles it might be
difficult to attract people to hold the gratuitous office of trustee. In superannuation, employees are
beneficiaries not objects, they are not in truth discretionary trusts. ; compulsory nature; legitimate
expectations that decisions will be sound.

HC agreed with the trial judge in deciding that the trustees had failed to make enough inquiries.
They did not decide if new principles should be adopted instead of the Karger test.

Note

 Although the Court said that the trustees had not met the Karger v Paul test, they were
really saying that they were not comfortable with that particular test; it may need to be
reviewed within the superannuation context.
 Karger as applicable to super funds requires properly formed consideration. If the
consideration is not properly informed, it is not genuine. The duty of the trustees to properly
inform themselves is more intense in superannuation trusts in the form of the Deed than in
trusts of the Karger type. There seems to an extra consideration required.
 The formation of an opinion by the T about the likelihood that F would ever engage in
‘gainful work’ was not a mere discretionary decision. In the Deed there was a power to take
into account information, evidence and advice the T may consider relevant, that power was
coupled with a duty to do so.
 Therefore, a failure to seek relevant information in order to resolve conflicting bodies of
material or knowingly excluding relevant information from consideration would be a breach
of duty (it would also be a lack of genuine consideration).

So, if we use Karger in superannuation cases, we need to add an extra consideration:

 There is a higher standard on the trustee to be properly informed (this duty is more intense
in a form of a deed than in a Karger type trust.
  In order to be properly informed, the trustee must consider the relevant evidence and make
enquiries. The power to take other information into account is coupled with a duty to do so.
 Failing to do so would be a breach of duty. In considering whether the trustee has breached
his duty, the court will look at how he exercised the power

Revision 2004 Exam

Question 1 about Frank

 If no default clause in bare power, look for residue clause

 If no residue clause, and the bare power is not exercised, T will hold the trust property on a
resulting trust for distribution under the rules of intestacy