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Trust training

I’ve passed another load of training, much more interesting this time.

Trusts and their uses in Wills:

The overriding need to obtain detailed (recorded) instructions:

A person drafting a will must be sure that the testator has a clear idea of the assets that his will intends to distribute. The test for capacity found in Banks v Goodfellow (1870), includes amongst other issues, as part of the judgement of Cockburn CJ, the requirement that the testator knows the full extent of the property that he is disposing as well as the claims by possible beneficiaries to which he ought to give effect.

The requirements of Banks v Goodfellow means that when taking instructions the will writer must consider how best to ensure that the will that he is drafting will reflect and meet the testator’s intentions while protecting the interests of the beneficiaries.

In particular in order to protect the interests of minor beneficiaries or possibly where testators fear that instances of divorce, bankruptcy, disability or the inability of individuals to manage their own affairs merit consideration the will writer needs to address arrangements to protect the testator’s bounty as distributed by the will that they have responsibility for drafting.

In the present era of general increased willingness to litigate, disappointed beneficiaries can turn to the courts as an ally. Whereas on the one hand the cost of any such litigation will be expensive for the would-be litigant, on the other hand there has been a general increase in asset values, especially the matrimonial property. This has tended to provoke, at least in the first instance, challenges to wills where the challenger thinks that the will does not provide a sufficiently large share of the testator’s bounty. Where trustees propose to be involved in litigation they should apply to the courts for approval as failure to do so may result in the trustees being personally liable for the costs, Re Beddoe [1893]. The application process is known as a Beddoe application.

Current will writing thinking has developed to consider using trusts more often than might have been in the case even 20 years ago. No one can present to a consumer as a knowledgeable experienced will writer practitioner unless they have a good working knowledge of the way in which trusts operate, taxed and has a good grasp on the protection that trusts can afford in pursuit of the testator’s objectives.

A will is not made invalid simply because the testator appears to have been motivated by frivolous or bad motives or by spite.

Using a trust can overcome difficulties in conflicting circumstances that may be foreseen by the testator as possibly existing after he has died, giving responsibility to those persons who with a clear understanding of the testator’s wishes are best placed to carry out his wishes. These persons are known to us as trustees. They are not required to prove the will; that is the function of the executors. They may be the same persons. An executor may renounce their right to prove the will yet continue to act as a trustee, once the will has been proved and the estate assets have been transferred into the trust(s).

Trust law distinguishes between;

i) a power conferred on a trustee, which permits them to act and
ii) a duty imposed on trustees, which obliges them to act.

There is also a third form of power, which the trustees have a duty to act on, but a choice on how they may act. An example is “my trustees shall pay the income to A, B or C.” This is known as a discretionary duty and features in the instructions given to the trustees of a discretionary trusts as shall be seen later. It is worth lingering on this instruction to note that changing “shall” to “may” crucially alters the sense and the outcome of the instruction to potential beneficiaries. The example is included to demonstrate the care that is required when drafting and reading trusts (whether lifetime or will trusts).

Who should be chosen to act as trustees?

The decision as to who should act as trustee may depend upon the type of trust that is to be considered. Trusts for minors are often managed by parents, guardians, close relatives, etc.. Discretionary trusts require a more detailed understanding of how trusts work and often the testator can be encouraged to consider including amongst the number of trustees appointed (maximum of 4) a person with practical, legal and/or business experience. The trustee becomes the legal owner of the assets held in the trust and must make returns to HMRC whenever the need arises.

Trustees who are appointed because of their experience are allowed to charge for their time, advice and expertise. Trustees must act unanimously unless the trust includes for a majority decision. Generally unanimity is to be preferred as a dissenting voice can wreak havoc amongst the most settled minds and persons appointed to serve as non-professional trustees should be clearly informed at their nomination and appointment of the testator’s wishes and their individual responsibilities. If they are unable to understand the importance of agreement amongst trustees it is better by far that they are not appointed and another person who understands the testator’s motives better is considered. If the right persons cannot be found then using trusts may not solve the testator’s concerns and the testator should reconsider his approach or even his aims.

There is always an opportunity to appoint a professional trustee. But the testator should be warned that leaving the distribution of his assets in the hands of a professional, who is bound to keep one eye out on his professional indemnity policy as well as his time sheets, may not actually produce the best result, which family members might resolve more effectively. However whichever route is chosen it is imperative that the testator understands all aspects of the decision to set up a trust within his will and to appoint individuals as trustees. There is no better way to create inter-familial strife within a recently bereaved family than to create complicated trusts in wills. The testator and the putative trustees should be provided with a thorough brief and importantly a linking service ensuring that proper advice is made available to the trustees called upon to operate the trust.

Trusts are founded on certainty:

To begin at the beginning – for a trust to be effective its terms must be certain. The judicial view of the traditional elements that govern whether a declaration of trust has sufficient certainty are found in Knight v Knight (1840). The “three certainties”, which apply to lifetime and will trusts, are mentioned, they are:

1) Certainty of intention,
2) Certainty of subject matter, and
3) Certainty of objects.

Certainty of intention:

Certainty of intention refers to what the putative settlor, or testator, did or said which amounts to a declaration of trust over his property. The maxim “equity looks to intention, not form” applies to any declaration of trust. For this reason even a very informal declaration of trust of personalty is possible, see Paul v Constance (1977), in which a man who told his cohabitant that she could share his bank account indicated the intention of creating a trust. On the other hand formal writing is required to create an interest, including a trust, over land, section 53(1) Law of Property Act 1925.

To determine whether a trust is created will depend upon construing the will to infer the testator’s intention. Uncertainty can arise as there are ways for a testator to deal with his property which may on the surface appear to be a trust, but which are in fact not held to be a trust. Trusts may be created without the use of the word “trust”. Conversely the use of the word trust does not necessarily create a trust, Tito v Waddell (No.2) [1997]. A “precatory” expression, one that is based on the hope or desire or suggestion or request that the testator will dispose of the property in a certain way is not enough to create a trust.

Not very helpful you might think. Where there is a doubt the courts will look hard at the testator’s intention. The case of Comiskey v Bowring-Hanbury [1905] is instructive. A testator gave to his wife “the whole of my real and personal estate…..…in full confidence that……….at her death she will devise it to such of my nieces as she may think fit and in default of any disposition of her thereof by her will…………..I hereby direct that all of my estate and property acquired by her under this my will shall at her death be divided among the surviving said nieces.”

A majority in the House of Lords held that the testator intended to make a gift to his wife, but with a giftover to his nieces upon the death of his wife. The gift to his wife was not therefore an absolute gift. The nieces’ inheritance was protected and the wife was not free to make her own disposition of the property received to her own choice of beneficiaries – she was bound by the terms of her husband’s gift.

The cost of taking the question to the House of Lords (the highest court in the land at the time) would have been immense. It is not reported but likely that the nieces’ inheritance could have been much reduced as a result. Unless prior approval had been obtained from the court for the estate to bear the costs the trustees would have had to pay the costs personally.

It is therefore imperative that any will embodying gifts, which contain room for doubt, for example in the case of a minor or where there is a known impediment to the beneficiary taking absolutely, that the will writer makes clear instruction notes as to whether the testator intended an absolute gift or otherwise planned that a trust be set up to deal with the gifted property.
Words used that are taken from an existing precedent that has previously been held to create a trust are likely themselves to create a trust. If it is held that the words used do not create a trust the donee would take beneficially. Care is therefore needed.

The intention of the testator to create a trust must be genuine and not a “sham”. For example if the testator intended to create an arrangement to deceive creditors, including potential creditors, such as a Local Authority, or HMRC. Bearing in mind that a will is ambulatory, in that it only takes effect on death, it is unlikely that will writers need to be exercised very often by the creation of sham will trusts. On the other hand an adviser giving advice to a putative settlor about a lifetime trust should be very much on guard to ensure that a trust is not being set up with the intention of sheltering or hiding assets from a third party. Where the courts find that a trust has been created with this intention they have available well-tried means to overturn the trust arrangement, for example section 423 Insolvency Act 1986 and the Matrimonial Causes Act 1973.

Certainty of subject-matter:

The subject matter to transfer into a trust may be chattels or money or land. It may also be a chose in action; an archaic phrase with legal meaning for example a covenant or a debt owed to the settlor. A cheque is a chose in action, as can be a right to inherit under a will. Whatever the form the subject matter must be reasonably certain.

Examples of testamentary gifts that have failed as they have been held to lack certainty are “the bulk of my estate” Palmer v Simmonds (1854) – the word bulk lacks definition. “The remaining part of what is left” Sprange v Barnard (1789); “all my other houses” Boyce v Boyce (1849). Also attempts to rewrite the legislation and to oust the courts are doomed to fail, for example where a widow was left “such minimal part of the estate as she might be entitled to under English law for maintenance purposes”, Anthony v Donges [1998]. Certainty of the subject-matter should be checked carefully to ensure clear definitions apply to describe the property; jewellery, paintings, chattels generally. There are numerous examples to be found in any informed treatise on the certainty of subject-matter where the testator’s intention has failed due to poor attention to detail by the draftsman. SWW does not want any member to find himself included!

But the courts will act with greater leniency where the subject-matter of the property to be transferred into the trust is to be decided at the discretion of the trustees themselves. A gift directing executors to allow a beneficiary to enjoy “one of my flats during her lifetime and to receive a reasonable income from my other flats” was upheld as valid, Re Golay’s Will Trusts [1965]. The executors could select the flat and “reasonable income” was held to be sufficiently clear for the trustees to act upon.

Whereas the word “reasonable” is difficult to quantify in isolation the court was satisfied that when the trustees acting in relation to the beneficiary’s circumstances the trustees had a fiduciary duty to act in the best interests of that beneficiary and would be able to do so. The case provides another example where the instruction taker needs to engage with the testator in order to make sure that certainty can be found in the resulting draft prepared. In the event of a dispute that is to be heard the court will want to examine the instruction notes and details of correspondence that have taken place and held on the case file.

If there are no notes a will writer without sufficient evidence could be found negligent.

Where uncertainty exists no trust is created, sometimes with far-reaching consequences. The share on which beneficiaries hold must be certain, unless the trustees are given the discretion to make a determination themselves, as they are in a discretionary trust. If the trust lacks certainty the trust is bound to fail, in which case the court will decide whether the trust property is held on a resulting trust for the settlor or testator. This was the result of the court’s decision in Boyce v Boyce (1849): because the decision was required to be made by a beneficiary who unfortunately died before making the choice of flat. The result was embarrassing as the property had to be distributed in an altogether different manner to that wished by the testator. Equity might conceivably have come to the rescue by the application of the maxim “equity is equality” as it did in Burrough v Philcox (1840). In the instant case that was not possible. The court itself could decide the proper division of trust assets as it did in the appeal court, see McPhail v Doulton [1971] – an expensive way to settle the matter, which might easily have been avoided had more careful attention been given to the drafting.

In a commercial context purchasers who pay for goods but are disappointed because the company falls into receivership may seek to claim priority over general creditors. Unless the court is prepared to hold that the consumers’ claim is sufficiently well identified it is unlikely that the consumer will succeed as the court will be unable to distinguish their interest from the bulk of the creditors’ interests for an example read Re London Wine Company [1986]. Where goods had been segregated for customers the court was prepared to allocate the goods against the consumer’s deposits, even though to do so potentially created a danger of overriding the provisions of the insolvency legislation.

The moral must be to draft carefully to avoid creating uncertainty, which may only be possible to unravel by the matter being heard in court. At a cost of possibly as much as £30,000 per day (average E&W High Court costs)!

As a footnote where the court considers that the property in question may be the subject of a “secret trust” (Ottaway v Norman [1972]) or a trust “arising under mutual wills” (Re Dale (deceased) [1993]), or the constructive trust of a family home (Gissing v Gissing) [1971]) any uncertainty as to the precise quantum of the property involved may not be fatal to the court finding for a trust.

Certainty of Objects:

We find from our study of the unfortunate Mr Vandervell in his court battles (Re Vandervell’s Trusts (No.2) [1974] that his attempt to remove the trust income from his tax return and so avoid paying personally a large amount of unexpected and unwanted tax on the income failed because of uncertainty. In that case the court held that to avoid the unwanted result the arrangements as drafted should have named persons who were to benefit from the arrangement – other than him. In his case the lack of ascertainable beneficiaries led to an expensive defeat.

In a trust with fixed interests it has always been the case that the trust will be void unless it is possible to determine every beneficiary.

With a discretionary trust the rule of certainty requires that the beneficiaries must be capable of identification to the extent that the trustees can perform their duties.

In a fixed trust there can be successive interests for individual beneficiaries such as a trust for A for life followed on A’s death for the benefit of B absolutely. If the fixed trust is to benefit a class the share of each class member must be identified. The contrast is made to a discretionary trust where the trustees are given a discretion to determine the beneficiary from within the allowed beneficiaries and the share that each beneficiary may take – hence discretionary. Whereas the fixed trust cannot be administered unless the trustees know precisely who the beneficiaries are and their individual share or entitlement.

The fixed interest trust requires a much stricter definition for the trustees to use and if that is not provided the trust will fail for uncertainty.

For fixed trusts the test to be applied to determine whether the trust is sufficiently certain as developed by the courts is called the “list principle”; ie: are the trustees able to draw up a list of each and every beneficiary? IRC v Broadway Cottages [1955]. If the class of beneficiaries is made too large the trust will fail for administrative unworkability, Re Baden Deeds Trust (No.2) [1972].

In a discretionary trust, as distinct from the fixed trust, the beneficiary does not have a right to the trust fund except that the trustees (unanimously or by majority) exercise their discretion in favour of an individual beneficiary. This is a valuable consideration for the testator who although he wishes for a person to benefit from his bounty does not want his estate to fall into “wrong hands”. For example where a distribution of trust property to the putative beneficiary cannot be prevented from falling into the hands of a trustee in bankruptcy, an ex-spouse or an avaricious local authority any one of whom might be laying claim to the beneficiary’s assets, which will include a potential inheritance.

The discretionary trust must be conceptually certain; the words used to describe a class of beneficiaries must be precisely defined and administratively identifiable, McPhail v Doulton [1970]. In other words it must be quite clear that a person considered to be a beneficiary of a discretionary trust qualifies using the definition of a beneficiary as found in the trust document. If there is any doubt the trust may fail. If no beneficiaries can be found who qualify as beneficiaries the trust will fail and “result” to the settlor or the fall back into estate and be distributed as part of the residue. To overcome this wrong result discretionary trusts will often use “charity” as the ultimate beneficiary as a gift to charity cannot fail.

Final comment:

Throughout we have been looking at some practical aspects of using trusts incorporated with the fundamental importance of certainty of trust terms, both as lifetime settlements and in wills. This subject is wide and its boundaries are continuously expanded by new cases from the courts. Wide reading is recommended and the Society of Will Writers is always looking out for books and articles that members find easy to read and informative, together with examples where they have used trusts to good effect in their daily round.

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