LECTURE TWO HANDOUT

Reading:
Watt Equity and Trusts Law Directions Chap 2
Pearce and Barr Trusts and Equitable Obligations Chap 2 & 16
Watt G Cases and Materials on Equity and Trusts chap 2
ORIGINS OF THE TRUST
The origins of the trust can be found in a device called a use which
dates back even before the Norman Conquest of 1066. Land would be
conveyed by one party (A) to (B) for the use of (C). The use actually
derives from the common law. At first the use was primarily used for
temporary absences. The crusades is an example (they would go away
and fight wars and then come back and could claim property).
During the 13th Century the practice of conveying land by use was
increasingly used for more permanent arrangements. A landowner
might convey land by an ordinary common law conveyance to persons
called feoffees to uses directing them to hold the land for the benefit of
other persons, the cestuis que use who might even include the feoffer
himself.
However after early doubts the common law had ceased to recognise
the use and would only recognise the legal landholder.
From the 14th century the Chancellor began to intervene and compel
the feoffees to uses to carry out the directions given to them.
Statute of Uses 1535 which effectively abolished the uses. It also
meant that for a period of time there was no division between
equitable and legal title.
The Chancellor at about the middle of the 17th century or perhaps
earlier had began to circumnavigate the statue. At some point the
terminology of the use was dropped and the word trust was used
instead.
In order to avoid the pitfalls of the statute of Uses the basic wording
became unto and to the use of B and his heirs in trust for C and his
heirs.
In this way the trust was enforce by equity and dual ownership in
property was restored. The interest of C, the cestui que trust, could
only be defeated by a bona fide purchaser of the legal estate for value

without notice of C interest and so the modern form of equitable

ownership and the modern trust was conceived.
Definitions of a trust to get us started.
The essence of a trust is the imposition of an equitable obligation on a
person who is the legal owner of property (a trustee) which requires
that person to act in good conscience when dealing with that property
in favour of any person (the beneficiary) who has a beneficial interest
recognised by equity in the property. The trustee is said to hold the
property on trust for the beneficiary. There are four significant
elements to the trust: that it is equitable, that it provides the
beneficiary with rights in property, that it also imposes obligations on
the trustee, and that those obligations are fiduciary in nature. Hudson
p47
The trust concept eludes precise definition; most authors prefer to
describe it. A trust is a relationship recognised by equity which arises
where property is vested in a person/persons called trustees.
(Hanbury & Martins Modern Equity)
Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12
confirmed the main modern types of trust LEADING CASE
DEFINING WHAT IS A TRUST
(i) Equity operates on the conscience of the owner of the legal
interest. In the case of a trust, the conscience of the legal owner
requires him to carry out the purposes for which the property was
vested in him (express or implied trust) or which the law imposes on
him by reason of his unconscionable conduct (constructive trust).
All that is necessary to establish the relation of trustee and cestui que
trust (beneficiary) is to prove that the legal title was vested in the
plaintiff and the equitable title in the defendant. (Hardoon v Belilios
[1901] AC 12322)
The trustee holds the legal title but is compelled by equity to hold the
property for the benefit of others.
Hague Convention on the Law Applicable to Trusts (English law Recognition of Trusts Act 1987) - definition by reference to
characteristics of a trust:
For the purposes of this Convention, the term trust refers to the
legal relationship created - inter vivos or on death - by a person, the
settlor, when assets have been placed under the control of a trustee
for the benefit of a beneficiary or for a specified purpose.
What does this mean?

So what you have is:First Owner= Legal Owner= Trustee

= manager and administrator= obligations of a fiduciary nature
Second Owner= Equitable Owner= Beneficiary= has the enjoyment
and benefits of the property.

Settlor
Transfer of Legal title
Trustee
(Absolute Owner)
(Legal title)
(Has both legal and
equitable ownership which he separates)
(Personal obligations in
respect of the
trust property
Transfer of
Equitable Title

THIS TRIANGLE IS ALSO KNOWN

AS MAGIC TRIANGLE
Beneficiary

The absolute owner of property called the settlor passes the legal title
in that property to a person called the trustee to hold that property on
trust for the benefit of another person called the beneficiary in
accordance with the terms set out by the settlor.

Therefore there are three legal capacities that make up an express

trust which are:The settlor: The person who creates the trust (particularly apparent
when setting up an express trust. More difficult to identify when
implied by the courts in a constructive trusts). Before he can establish
a trust he must own both legal and equitable title to the property,
otherwise there will be no trust. This means that you cannot set up a
trust on property which you are going to acquire in the future. The
settlor must transfer the property to the trustee to make it effective.
Once this trust has been established you cannot revoke it (unless a
clause is inserted allowing you to revoke it).
The trustee: Trustee becomes the legal owner of the property.
The beneficiary: Subject to the terms of the trust are entitled to
property/chattel/income. They dont have to do anything and own the
property in personam.
This threesome creates a magic triangle of settlor, trustee and
beneficiary.
The core of the trust is the interaction of personal rights and claims
between these persons in relation to the trust property.
The important feature of the trust is that the trustee holds the property
in rem but not in personam. The trustee cannot assert personal,
beneficial ownership in the trust property. Rather it is the beneficiary
who has the beneficial title in the property. They own the property in
personam.
The trustee(s) owe equitable obligations to the beneficiaries to obey
the terms of the trust.
The trustee(s) obligations are fiduciary in nature (thus requiring the
utmost good faith and prohibiting any conflict of interest).
NOTE
It should be noted at this stage that the precise details and terms of
the trust are vital to the understanding of the management,
administration and beneficial entitlement of the trust. The details of
the trust will be a key theme later on and over the years has created
much litigation between the parties.
Characteristics of a trust
a) the assets constitute a separate fund and are not a part of the
trustee's own estate;
b) title to the trust assets stands in the name of the trustee or in the
name of another person on behalf of the trustee;

c) the trustee has the power and the duty, in respect of which he is
accountable, to manage, employ or dispose of the assets in
accordance with the terms of the trust and the special duties imposed
upon him by law.
Types of trusts
The Law of Property Act s 53(2) suggests that there are four types of
trusts:
1. Express (has been set up deliberately with an intention to create
a trust)
2. Resulting,
3. Implied or
4. Constructive trusts.
Perhaps a more useful distinction is between express trusts and
implied by operation of law.
The most significant feature that distinguishes an express trust from a
trust implied by operation of law is that it is created expressly or
deliberately by the settlor.
I will briefly outline these types of trusts and then return to them in
more detail later on and in particular we return straight away to look at
the express trust.

TYPES OF EXPRESS TRUSTS

1. Express trusts
The most common type of trust is the express trust:
arises from the intentional acts of a right holder.
the right holder must comply with all the necessary substantial
and procedural requirements for the creation of the trust to be
successful (analogous to successful formation of a contract)
reflects a principle of freedom of trust similar to the succession
law principle of freedom of testamentary disposition
a settlor can, within the limits of the law, divide up the interests
in the trust rights any way he chooses, providing different kinds
of interest in, and different fractions of the value of, the trust
rights for different beneficiaries or different charitable purposes.

2. Discretionary and fixed trusts

The terminology of fixed trusts and discretionary trusts classifies trusts
by a criterion of dispositive control by the trustee.

Fixed: trustee has no choice about how to distribute the trust property.
This is predetermined by the settlor. No one else has any say. It is the
trustees duty to ensure correct distribution takes place.
Contingent/ defeasible falls within fixed trust. Where the trustee
does not distribute to the beneficiary upon a certain event.
Discretionary: trustee has power of choice over distribution of trust
property.
Discretions may be shaped in various ways, but the typical case is one
in which there are a class of persons or charitable purposes to whom
the trustee may distribute the trust funds in such shares as he, at his
discretion, decides. This means that he can choose to distribute the
assets evenly, or in unequal shares but giving some to all, or only to
one or a few of those in the class.
A trust can include both discretionary and fixed elements.
3. The bare trust
A bare trust is just the most minimal kind of fixed trust, under which
a trustee has no discretion. Under a bare trust, the trustee simply
holds the legal title to the trust rights and does the bidding of the
beneficiary.
4. The protective trust
A protective trust is a clause inserted into a trust preventing the
beneficiary from transferring their interests. Alternatively the clause
could cut the beneficiary off if they become bankrupt in order to
protect the trust.
5. Testamentary and inter vivos trusts
A testamentary trust is an express trust that is set out in a persons
will, and comes into operation when the testator dies and his will is
executed by his executors. By contrast, an inter vivos (among the
living) trust is one that is created by a settlor when alive.
A testamentary trust is subject to compliance of formalities for proper
creation of will. If will is not properly created the testamentary trust
may not be properly created.
6. Secret and half secret trusts.
The settlor may not want his full intentions declared in his will. He can
avoid expressly stating in the will the true beneficiary by a secret or
half secret trust.

7. Purpose trusts: private and public or charitable purpose

trusts
All express trusts are for purposes in the sense that a settlor creates a
trust with some purpose or motive. As we have seen, the central case
of the express trust is one in which assets are transferred to a trustee
on terms which carve up the value of the assets in various ways
amongst the different beneficiaries.
Purpose trust = assets are not merely carved up amongst the
beneficiaries, but are devoted to the carrying out of some purpose.
This causes some difficulties because there are no beneficiaries of the
trust in the way there are in normal trust:
If a settlor tries to create a purpose trust, it will fail at the outset
because there is no one to enforce the purpose trust.
There is, however, a very significant and economically important
exception to this principle the charitable trust or public trust. A
settlor can create a trust to carry out a charitable purpose, e.g. to
assist the poor, and such a trust is valid.
Truly tiny class of exceptions, which are all testamentary; trusts for the
provision and upkeep of graves and monuments, trusts for the care of
the testators animals; and trusts for private masses for the better
repose of the testators soul.

TRUSTS ARISING BY OPERATION OF LAW

A court can make various orders, creating new rights and duties. The
law also recognises, of course, certain rights and duties that may arise
because subjects of the law effectively act to create such rights.

1. Constructive trusts
A constructive trust may arise by operation of law in certain factual
circumstances;
Contrast to express trusts (using the criterion of consent) - express
trust arises because the settler consents to, or intends to, create the
trust. A constructive trust, on the other hand, does not depend (or does
not depend wholly) on the consent of the settlor or any other person
involved in the transaction.

2. Resulting trusts
A resulting trust is one where the interest in the trust assets jumps
back to the person who provided trust assets to the trustee.
Traditionally there are two cases that are classified as resulting trusts:

(i) When a person providing assets receives a benefit under a trust

because of an evidentiary presumption presumed intention
resulting trusts (PIRT).
(ii) The second case is one where a trust fails, in whole or in part

TRUSTS, POWERS AND DISCRETIONARY TRUSTS

Comparisons with other legal relationships
1. Comparison with other legal relationships.
Trusts and Contracts
The normal remedy for breach of contract is damages. The contract
does not usually give the buyer beneficial ownership of the property to
be purchased.
A trust- the beneficiaries already have the beneficial title to the
property; the beneficiary can follow the trust property into the hands of
third parties (Foskitt v McKeown [2001] 1 AC 102 HL) Group of
purchasers decided to buy a share of land, develop it, and then sell the
apartments. M set up the scheme and enticed others to participate. M
used the money to pay for several things, including his life insurance
policy, but there was no land purchased. He then committed suicide.
The people who entered into the scheme decided to claim against the
life insurance policy. Court held that M was a trustee for the money
and had breached his fiduciary duty. The victims were able to trace
the money from M to the life insurance policy and to the relatives and
were therefore able to recover some money from the relatives.
However the distinction is not always as sharp in practice.
Effect of Contracts (Rights of Third Parties) Act 1999 s 1
1 Right of third party to enforce contractual term.
(1)Subject to the provisions of this Act, a person who is not a party to
a contract (a third party) may in his own right enforce a term of
the contract if
(a) the contract expressly provides that he may, or
(b)subject to subsection (2), the term purports to confer a
benefit on him.
(2)Subsection (1)(b) does not apply if on a proper construction of the
contract it appears that the parties did not intend the term to be
enforceable by the third party.

(3)The third party must be expressly identified in the contract by

name, as a member of a class or as answering a particular
description but need not be in existence when the contract is
entered into.
(4)This section does not confer a right on a third party to enforce a
term of a contract otherwise than subject to and in accordance with
any other relevant terms of the contract.
(5)For the purpose of exercising his right to enforce a term of the
contract, there shall be available to the third party any remedy that
would have been available to him in an action for breach of
contract if he had been a party to the contract (and the rules
relating to damages, injunctions, specific performance and other
relief shall apply accordingly).
(6)Where a term of a contract excludes or limits liability in relation to
any matter references in this Act to the third party enforcing the
term shall be construed as references to his availing himself of the
exclusion or limitation.
(7)In this Act, in relation to a term of a contract which is enforceable
by a third party
The following case is an example of how the decision would be
different today if the act had been in force.
EXAMPLE: Two fathers enter agreement to pay money to couple once
married. The couple cannot enforce the contract because they were
not party to the contract. Had this been under a trust, the
beneficiaries could have enforced the agreement because they would
have had equitable title in the property.
Beswick v Beswick [1968] AC 58, [1967] All ER 1197 (Merchant
agreed to sell business to nephew on agreement that nephew would
provide income to Merchant and to Merchants wife following his death.
Following death of merchant, nephew made one payment to wife and
then stopped. Wife sued nephew to enforce the terms, as the
beneficiary and she sued as her husbands representative. The court
held that she could not enforce the agreement as a beneficiary
because she was not a party to the agreement. However, the court
allowed her to enforce the agreement as her husbands representative.)
Barclays Bank v Quistclose Investments 1970 AC 567 W22 (Roll
Razer Limited, declared a dividend in relation to profits that they had
made. They did not have any money to pay the dividend so they
borrowed the money from Quistclose in order to pay out dividend. The
money was transferred into a separate account for the purpose of
paying out the dividend. It was meant to be paid on the 24th of July,
however they still hadnt paid it a month later when they went into

voluntary liquidation. Barclays was a creditor and wanted the money

left in the account. Quistclose argued that it was their money because
it was given for the sole purpose of being used as a dividend, it was
held in a separate account from the other assets. HOL held that it was
being held under a constructive trust and Quistclose was entitled to its
money back. This is now known as a Quistclose Trust. The important
factor here was the segregation of the money from the other assets.)
Re London Wine Co [1986] PCC 121 W40 (There was a large wine
cellar with various bottles earmarked for various companies, who had
already paid for the wine. Those companies argued that those bottles
earmarked for them and paid for by them should be theirs. The court
held that it would have only made a difference had those bottles
actually been separated labelled and in a separate corner, then it
would have been as though London Wine was holding them for other
companies. However, as they had not been segregated they were not
considered to be held on trust.)
Twinsectra v Yardley [2002] 2 AC 164 (Yardley borrowed money
from Twinsectra on the basis that it would be used for a particular
purpose only (buying property). This was a crucial term of the
agreement. There were two middle men in the chain between the
agreement. Yardley had a solicitor acting for him named Leech. He
also had another solicitor named Sim. Twinsectra was only delaing
with Sim. Yardley only used a portion of the money for property and
the rest for something else. Twinsectra got an undertaking from Sim
that Sim would hold the money until it was used to purchase property
by Yardley. Sim got a similar undertaking from Leech and passed the
money to Leech. Leech then got an undertaking from Yardley and
passed the money to Yardley. Yardley defaulted on the loan and
Twinsectra sued everyone. xxxxxxxxxx)
Trusts and Debts
Re Kayford Ltd [1975] 1 WLR 279 (Kayford was a small mail older
company which realized they were becoming insolvent. They took
legal advise and based on that advise, they set up a separate account
for customers paying for goods and called in a customer trust account.
Creditors claimed that account was a part of the general pool to be
distributed to creditors. Customers argued and said no it was for them.
Court held that there was no doubt that this was a trust set up, based
on the intentions of the parties.)
Barclays Bank v Quistclose Investments 1970 AC 567 W22
(Borrowed money. Based on how it was borrowed it was considered to
be a trust.)

Trustees and Personal Representatives

Personal representative has all the powers of the person who has died.
Their role is to collect all the assets and pay all the debts and then
transfer the money to whomever is going to be responsible once that
has been done. Normally people appoint the same person to be a
personal representative and a trustee.
Attenborough & Son v Solomon [1913] AC 76 (Testator appointed
two people to be both personal representatives and trustees. Property
was transferred to the various beneficiaries. The personal
representative pledged some of the chattels to a broker without
consulting the trustee. The issue was whether he had a right to do
this. And that depended on whether he was a personal representative
or a trustee. It was found because he was a trustee that action was
inappropriate and the other trustees could take action against him.)

Comparisons between Trusts, Powers and Discretionary Trusts

Comparison with Powers
Trusts are obligatory in nature- in other words the trustee must carry
out the instructions of the settlor.
Power is discretionary in nature. A donee (the person given the
power to exercise) can choose to exercise the power or not. It is his
choice.
Pitt v Holt [2013] UKSC 26 (Trustees on legal advice which was
wrong gave money out. One of the consequences was that the trust
suffered a loss. The question was whether it was a power or a trust
because that would determine whether they were personally liable.
Court held based on the facts it was a power. Because its a power,
whether they exercise it or not, they will not be liable.)
If the donee of a power under a will predeceases the testator the
power lapses. Whereas a trust does not fail due the lack of a trustee.
Brown v Higgs (1803) 8 Ves
Trustees are under a duty to hold the trust property for the
beneficiaries in accordance with the terms of the trust. The
beneficiaries under a trust are the owners in equity of the trust

property. Whereas objects (persons) of a power own nothing, unless

and until the donee of the power makes an appointment in their favour.
Vestey v IRC [1980] AC 1148 (Was whether or not IRC could claim
under a trust of a particular beneficiary. All depended whether or not
the beneficiary had entitlement to the property under a trust or
whether the property was set up under a power and then the
beneficiary would have no entitled to property until it was vested in
him.)
Whether a trust or a power has been created depends very much on
the construction of the language used in the instrument.
Comparison between a Power and a Discretionary Trust
The distinction between powers and trusts is complicated by the fact
that a trust may give trustees considerable discretion under the trust
instrument.
A trustee may be given a discretion to select beneficiaries from a
specified class, or to determine the proportions in which specified
beneficiaries are to take. This is the basis of a discretionary trust.
Under such a trust no member of a class of the discretionary
beneficiaries has an interest in a specific part of the trust property until
the discretion of the trustees.
The trustees throughout are under a duty to perform the trust
If the trustees fail to exercise their discretion under the terms of the
trust they can be compelled to do so. McPhail v Doulton [1971] AC
424 [also known as Re Baden Wills Trust No 1] (First case in saga of
three cases with regards to Baden Wills Trust. The main issue was that
there was a large number of would be beneficiaries under the trust
(employees and ex-employees). Another issue was whether it was a
trust or a power. And if it was a trust the trustees didnt distribute the
money when they were supposed to.)
It should be noted that within an instrument there can be a fixed trust,
a discretionary trusts and powers.
Power of Appointments (Power of appointment is where you appoint
someone to receive the benefit NOT appointing someone to do
something)
A power is purely discretionary in substance and those holding the
power at the most need only consider whether or not to exercise it

Re Hays Settlement Trusts [1982] 1 WLR 202 (Issue was whether

it was a power or a discretionary trust. Trust fund was set up for such
persons as the trustees shall appoint to be benefited from this fund.
The benefit was between these persons or to any charity. The court
held that this was a power and that the trustee could decide whether
to exercise the power or not.)
Powers and Pensions
Mettoy Pension Trustees v Evans 1990 1 WLR 1587: They
decided not to appoint. Even in a power you can get into political or
public policy arguments.
The issue of whether the request is a power or a trust is not always
easy to identify
Burroughs v Philcox 1840 (Testator said to dispose of all his real and
personal and estate among his nephews, nieces and children, or to one
of them or to all of them, as my survivor child shall think proper. Court
decided that there was an intention to create a trust. Therefore the
court held that the funds should be distributed equally between the
beneficiaries. This decision was made purely on the wording of the
trust.)
NB Some debate whether this today would be considered a
discretionary trust or fixed trust
Re Weekes [1897] 1 Ch 289 (Testator gave to husband power of
appointment in relation to dispose of all such property by will amongst
their children in accordance with the power granted to him. The
husband died before he could make any appointments. The court held
that it was a power of appointment and that he did not have to
appoint. Therefore as it was only a power, the fund went under the
intestacy rules, which under the facts of this question was not to the
children. This was because it was purely a power of appointment.)
Where there is a power there should be a default clause saying it goes
to someone. Where there is no such clause it is not easy to tell.
Schmidt v Rosewood Trust Ltd [2003] UKPC 26 P40-42 The court
will intervene where there is a power (One of the would be
beneficiaries under the fund was unhappy about how the fund was
being managed and demanded disclosure of all the accounts and

administration of the account. The donees managing the account said

that he was not entitled because it was a power and not a trust. The
court said that even though it was a power they had the discretion to
make the donee give the beneficiary the information he requested.)
Comparison between a bare power and a fiduciary power
A donee of a power who is not a trustee will be exercising a bare
power.
In such a situation the power gives the following:
The power confers unfettered discretion on the donee. The discretion is
absolute.
The donee cannot be compelled to exercise the power. The court will
only intervene where the power is not exercised within its terms i.e.
fraudulently or excessively
Whereas someone who also has a fiduciary duty such as a trustee will
be exercising a fiduciary power.
Re Hays Settlement Trusts [1982] 1 WLR 202
That a trustee does not have to exercise a power and will not be
compelled to do so by the court, but that a trustee who holds a power
must periodically consider whether or not to exercise the power. If the
power is actually exercised the trustee must ensure that he or she acts
in accordance with the terms of the power, and must consider both the
range of potential beneficiaries and whether each individual
appointment is appropriate.
Who can exercise the bare power?
A bare power can only be exercised by the donee.
Whereas a power given to trustees is prima facie given to them by
virtue of their office and can there be exercised by a newly appointed
trustee.
General, Special and Intermediate (Hybrid) Powers
Powers are classified either as general power, special power, or
intermediate power.
General power
This is where the done has an absolute discretion to choose or not
choose the beneficiary this type of power is unusual
Example- A gift to A for life with the remainder to whomsoever he shall
appoint

Special power
This is where the choice of appointees is restricted by the terms of the
power
Example to appoint in favour of ones own children or from employees
of a company This is where he has a class to choose from
Intermediate (Hybrid) Power
Where the appointment is by exception. By this I mean that the power
expressly excludes particular persons. This is where the power might
exclude particular people who might otherwise come into the class
Re Park there was a class but excluded settlor and his wife
Re Manistys Settlement [1974] 1 Ch 17: In order to be a member
of the class you had to be alive.
Note this classification is not exhaustive and there is clearly an
overlap.
Rights of the objects of a power of appointment.
Until the appointment is made possible beneficiaries have no rights in
the property.
Re Brookes Settlement Trusts [1939] Ch 993 (Trust set up by wife
to allow the trustees to appoint within a class of people and one of
those would be beneficiaries, before the appointment had been made,
he had transferred his possible share to a third party. He then changed
his mind. The issue was whether he could change his mind. Court
held that he could because he hadnt actually received anything from
the fund because he had not been appointed. He could not give what
he did not have.)
Failure to exercise the power
Re Weekes (supra) (Where there is a power to appoint and there is a
failure to do so it will go under the default position in the will or under
the intestacy rules.)
Burrough v Philcox (supra) (The court used their discretion and
distributed it among the possible beneficiaries equally. On the basis it
was probably a discretionary trust but they dont actually say so.
Depending on how you read the class the court may distribute among
the would be beneficiaries. The court held that it was all about the
intention of the testator.)

Release of the Power

The donor can in certain circumstances release his power to distribute.
If the release takes place that is the end of the power and it will go
under the default position. You cannot change your mind once the
release has been done because the release is permanent.
Advantages of release: There may be tax advantages if power is
released (may benefit objects under power).
Re Wills Trusts Deeds [1964] Ch 219 (Trustees wanted to release
the power and the power was to distribute as they thought fit between
the beneficiaries who were relatives of the testator or charities. The
default position was the charities)
Re Courage Groups Pension Schemes [1987] 1 WLR 495
Re Mills [1930] 1 Ch 654 CA (Testator appointed his own brother as
the donee. Under the terms of the power, the brother could distribute
to the children of the father. The brother made some power of
appointments and then released the power by deed. Under the default
position in the will, he got the rest. The brother was successful in
preventing them from getting the rest of the estate.)
Form of release: You can pay the entire trust fund into the chancery
court. Or the donee or trustee can make a deed of release and that
deed will make the power void and come to an end. Or if the donee or
beneficiary act inconsistently with the power under the trust.
Foakes v Jackson [1900] 1 Ch 802 (There was a power held by
husband and wife and then by survivor to distribute amount
beneficiaries. Both the beneficiaries and the husband and wife agreed
together that the fund would go to a particular beneficiary under the
power. Later one of the beneficiaries disagreed.)
Fiduciary powers:
Re Wills Trusts Deeds [1964] Ch 219 (J Buckley said firstly that
where it is a mere power and nothing else (there is no trustee it is a
donee and there is not trust connected to the power) in that situation
the power can simply be released.// Where there is a power and the
default position is a trust, the power does not destroy the trust as well.
You are simply releasing the power. But the default position will
remain.)
Re Courage Groups Pension Schemes [1987] 1 WLR 495
(Where the power is held under a fiduciary duty, you cannot release
the power. In this case there was a pension scheme where they had
the power to distribute within the pension fund. Some of the trustees
were the owners of the company and they saw this as an opportunity
to get their hands on the pension fund and the default position was
that some of the money would go back into the company assets. The

court held that because it was a trust the power could not be
released.)
Re Mills [1930] 1 Ch 654 CA (Testator appointed his own brother as
the donee. Under the terms of the power, the brother could distribute
to the children of the father. The brother made some power of
appointments and then released the power by deed. Under the default
position in the will, he got the rest. The brother was successful in
preventing them from getting the rest of the estate.)
Powers within trusts
How to invest (s.3 Trustee Act 2000)
Sale of the trust property (s.16 Trustee Act 1925
Accumulate income
Power to make payments of income as maintenance (s. 31 of the
Trustee Act 1925)
Power to make advances of capita sums (s.32 Trustee Act 1925
Discretionary Trusts
1. Definition
Mettoy Pensions Trustees Ltd v Evans [1990] 1 W.L.R. 158; [1991]
2 AER 513
Cases where someone, usually but not necessarily the trustee, is
under a duty to select from among a class of beneficiaries those who
are to receive, and the proportions in which they are to receive,
income or capital of the trust property. Warner J at p.1614
2. Function and Advantages of Discretionary Trusts
Benefits:
Tax
Fiscal advantages
Flexibility always depends on what is stated in the will but it
enables the trustees to distribute the trust for the benefit of
those beneficiaries which may need more help than others
Control over beneficiaries There can be requirements put in, in
terms of what is expected of the beneficiaries
Protection against creditors Where there are potential
beneficiaries who are not very good with their money, it protects
creditors from getting at the money before the money vests
Provision for large numbers/indeterminate beneficiaries - useful
where you have large number of beneficiaries as was the case in
McPhail v Doulton [1971] AC 424

3. Types of Discretionary Trust

a) Exhaustive - This is the default position, it means that the income
must be distributed every year.
An exhaustive discretionary trust is one where the trustees have to
distribute the income each year.
Re Gourjus WT. [1943] Ch 24 (Widow was entitled ot income from
the husbands estate but she was living in the part of France during the
war, which was allied to Germany. She was therefore technically an
enemy of the state during the war, which meant any income she would
be entitled to would pass to the state. Court held it was a discretionary
trust and because of the wording it had to be distributed everyyear
and since it could not be distributed because of the war, it meant that
the income did not get to her, therefore went under the default
position, which on the facts of this case, went to the state.)
Re Lockers ST [1977] 1 WLR 1323 (There was a trust set up and
originally there was just a power. After two years it was a discretionary
trust and the trustees did not distribute the income. The court said yes
the income should have been distributed and they used their discretion
to allow the trustees to distribute the trust as necessary.
Demonstrates that the courts can intervene and use their discretion)
b) Non-exhaustive This is where trustees do not have to distribute
the income as it falls due very rare can only occur where there is
an express intention in the trust itself to say that the trust is a nonexhaustive trust (will be deemed to be an exhaustive trust where there
is no such mention) however where it is a non-exhaustive trust it is
very similar to a power of appointment. In a non-exhaustive
discretionary trust you do not have to distribute the income and you
can accumulate it.
Here the trustees have the choice whether to distribute the income or
not.
McPhail V Doulton (supra) Example of a non-exhaustive trust.
4. The Duties of the Trustees
In relation to discretionary trustees they have a duty to ensure to know
who the class of people are that they may or may not decide to
distribute too. They have a duty to surview the potential beneficiaries
in the class.
Re Lockers ST [1977] 1 WLR 1323 (example of ensuring that the right
class of people are distributed to. Trust was set up and the settlor,
had one class of people. Many years later he added more people to
the trust. One of the problems was that the trustees did not distribute
the money in relation to the income. The issue was whether the
money could be distributed and if so, who would it be distributed to.
The court used their discretion and said that the ones who were in the

class were the ones of the first list. The later beneficiaries who were
added later on were not in the class.)
McPhail v Doulton [1971] supra (The situation here was that it could
go to employees or ex-employees. It was said that the first thing you
have to do is work out who is in the class of beneficiaries.)
The duty not to make an allocation outside the class of potential
beneficiaries.
5. Certainty of Objects in Discretionary Trusts
See lecture handout 4 on the three certainties
McPhail v Doulton (supra)
6. Rights of the Beneficiaries
Rights are very similar ot powers of appointment. They are not
entitled to funds until vested in them.
Has the discretionary beneficiary a proprietary right in the fund?
Gartside v IRC [1968] AC 553
Although it is clear that the beneficiaries have more than a mere
speculative hope the beneficiaries do not have a beneficial proprietary
interest until the moment that the trustees exercise their discretion in
the favour of the beneficiary.
Sainsbury v IRC [1970] Ch 712
Re Weirs Settlement Trusts [1969] 1 Ch 657
Re Smith [1928] Ch 915
The principle in Saunders v Vautier 41 E.R. 482 (There was a will
where the testator left his estate to his three children when they
reached the age of 25. When the youngest was 21 and the oldest both
over 25. The beneficiaries all agreed to change the terms of the trust
to distribute the will. The beneficiaries when they are above the age of
18 and all in agreement may change the terms of the trust.) This is
known as the rule of Saunders v Vautier.
7. Intervention by the Courts
According to Lord Wilberforce in McPhail v Doulton (supra) the court
can ensure that the trust is enforced by the following means:
a) Appointing new trustees b) By authorising or directing
representative persons to the classes of beneficiaries to prepare a

scheme of distribution c) Where the proper basis for distribution

appears by itself in directing the trustees so to distribute