Establishing Certainty of Objects in Trusts

Introduction

The nineteenth century case of Knight v Knight famously provides that, in order to be valid, a private express trust must demonstrate the so-called ‘three certainties’ – only then will a court recognise the trust as binding in equity, and so enforce its terms in order to provide for a beneficiary.  The rules on the first two certainties are relatively straightforward: there must be certainty of intention, which in substance means that that the settlor must have made it clear that he intended (rather than hoped or expected) that the trust property would be used in a certain way; and there must also be certainty of subject matter, whereby the court is able to identify the exact property that is to be the subject of the trust. The third test, for certainty of objects, is more complex and has undoubtedly caused the most legal wrangling and debate over previous decades.  At its heart is the proposition that a court should be able to identify the exact person or persons who will form the beneficiary or beneficiaries of the trust.  This is obviously crucial, since the function of a trust arrangement is to confer a benefit on defined individuals.  However, the matter is often complicated by vague, uncertain or wide categories of beneficiaries.  This essay will argue that, nevertheless, the separate tests deployed by the courts to establish certainty of objects in both fixed and discretionary trusts has functioned well in recent decades, promoting fair and equitable outcomes where possible.

The beneficiary principle

A brief explanation of the beneficiary principle, which operates alongside (and complements) the law on certainty of objects, is a useful starting point in critically evaluating the operation of the law.  Whereas the law on certainty of objects tells us whether or not there are beneficiaries who are ascertainable to a court, the overarching beneficiary principle states as an equitable principle that all trusts require ascertainable beneficiaries. On the one hand, this means that there must be a beneficiary in whose favour the trust can be exercised by the court.  Indeed, there is general agreement in case law on the invalidity of trusts that are constituted in order to achieve an abstract purpose and which may therefore confer no benefit on identifiable human beneficiaries; whereas trusts that identify specific individuals as beneficiaries will be deemed valid.  Within this argument, there has been a good deal of debate, as typified by the approach in Leahy v Attorney-General of NSW on the one hand and Re Denly on the other. The more modern approach typified by the latter – in which it was held that a trust constituted for the benefit of a class of employees, in other that they should be able to use certain sporting facilities – is typical of the increasingly enlightened approach taken by the judiciary.  However, the next sections will show that the question of who the beneficiaries are (in other words, the certainty of objects pillar) has caused some controversy, especially with respect to discretionary trusts.

Certainty of objects – fixed trusts

The question of certainty of objects may occur in the context of either a fixed or a discretionary trust.  The difference between the two is crucial: fixed trusts are constituted for the benefit of pre-determined individuals or classes of individuals in which each is entitled in equity to a fixed share; in contrast, in a discretionary trust it is within the gift of the trustees to allocate the distribution of trust property among a defined class of beneficiaries, or even on occasion to decide on the membership of a class of potential beneficiaries. Where fixed trusts are concerned, a court should be able to rule with certainty as to who are the intended trustees and beneficiaries.  Usually, a fixed trust establishes successive interests for the benefit of more than one individual, such as where A is entitled for life and then B absolutely.  It is therefore imperative that a court should be able to identify exactly what share each individual should take. Therefore, the trust may not be carried out properly if the number and identity of beneficiaries is unknown.  In practice, a strict test is required for fixed trusts where it must be possible to identify each constituent member of a class.

Indeed, the Court of Appeal confirmed in the case of IRC v Broadway Cottages that in fixed trusts linguistic and evidential certainty as to beneficiaries are both essential.  This means that the court applies a so-called ‘complete list’ test, to fulfil which it must be able to draw up a complete list of the beneficiaries. The evidence suggests that the courts have been willing to take a measured, accommodating approach in such situations.  In Re Wynn a judge refused to enforce an arrangement purporting to give the trustees the power to overrule any objection that might be raised by the beneficiaries in a dispute between the two entities.  The court was unwilling to accept the idea that its jurisdiction would effectively have been subsumed to the decisions made by the trustees.  However, this strict approach stands in contrast to other cases such as Re Tuck, in which it was accepted that a third party could rule on an expression that appeared on the face of it to be lacking in conceptual certainty.  In fact, the third party (the Chief Rabbi) was able to adjudicate on the concept of a ‘suitable wife’, whose presence was a precondition of the trust, though this could equally have applied to a trustee rather than an external specialist.

The flexibility of the ‘complete list’ test has proved to be very sensible, because it allows the court to make every effort to enforce the trust.  Most importantly, it does vitiate a trust if the exact whereabouts of some of the potential members of a class is not known, as long as it is possible to arrive at a complete list of beneficiaries in a conceptual sense.  The shares owing to absent beneficiaries may be paid into an escrow account in lieu of their claim or, failing that, conclusive proof of their entitlement under the trust. Further, a so-called Benjamin Order will permit trustees to distribute the trust property to the known beneficiaries pending the emergence of any absent beneficiaries, provided that the former will undertake to compensate the latter parri passu according to their appropriate share in the event of their reappearance.  Alternatively, the trustees may publish an advertisement in the London Gazette (and the appropriate forum in any other countries or jurisdictions, if relevant) to give unknown beneficiaries constructive notice of their entitlement. This is an excellent way of ensuring an equitable outcome for the known beneficiaries – who it would surely be wrong to disinherit on the basis of an absence of others, over whom they have no control – while giving absent beneficiaries notice of their rights.  This system for fixed trusts has operated well since IRC v Broadway Cottages and, as the more recent case of Re Tuck shows, the courts have used their licence to promote equitable outcomes.  However, the category of discretionary trusts has proved more contentious, though, as the next section will explain, the courts have adopted an equally sensible and flexible approach to their operation in recent decades.

Certainty of objects – discretionary trusts

The original position in discretionary trusts was that the court would echo the IRC v Broadway Cottages approach by relying on the ‘complete list’ test.  However, in McPhail v Dalton this was reconstituted by Lord Wilberforce.  In the immediate case, a deed was drawn up in order to provide monetary benefit to members of staff of a company as well as the relatives and dependants of such people.  However, it was not possible for the court to draw up a complete list of all the members of the class: this meant that under the conventional test the trust would have failed.  However, Lord Wilberforce ruled that the operative question in such cases was one of whether a court could say with certainty that a given individual was a member of a class: on the facts, this was satisfied, and the arrangement was enforced by the court. Therefore, the question was one of conceptual rather than evidential uncertainty.  Providing that a given description of beneficiaries is clear in a conceptual sense, the arrangement will not fail because it might be difficult to work out whether a given person satisfies the description.   In each case the exact words must be scrutinised to work out whether the test is fulfilled.  Once the class is determined as being conceptually certain then the matter of a beneficiary’s inclusion is a question of fact, rather than law. Provided that the class is conceptually certain, it will not prejudice the trust if the geographical location or continued existence of a beneficiary is not known to the court and/or the trustees.

It appears that in recent decades the test laid out in McPhail v Dalton has functioned effectively, allowing the courts a measure of flexibility but still vitiating arrangements that are clearly conceptually uncertain.  Quite rightly, certain categories of beneficiaries have been disallowed on the basis that they are clearly not conceptually certain. In Re Barlow’s Will Trusts,the court ruled that ‘friends’ was not sufficiently certain because it would not be possible for a court to adjudicate on such a concept, given its subjectivity.  The decision avoided the ridiculous prospect that such potential beneficiaries could prostrate themselves before a court emphasising their attachment to the settlor in order to enrich themselves.  On the other hand, family ties (such as children, siblings, and so on) are rightly identified as conceptually certain because the members can be identified with recourse to a straightforward family tree.  Elsewhere, the courts have refused to enforce trusts that are practically, or administratively, unworkable – such as those trusts purporting to nominate a class of individuals that is simply too wide.  In McPhail v Dalton, Lord Wilberforce gave the example of ‘the residents of Greater London’.

Lord Wilberforce’s ‘workability’ criteria has been refined in the ensuing decades after McPhail v Dalton in order to produce a more coherent set of guidelines for courts of equity.  In Re Hay’s Settlement Trust, the court held that it would be prepared to hold that an intermediate trust (one excluding certain specified individuals, and including everyone else) would be administratively unworkable because the a trustee’s obligations in relation to a discretionary trust are more stringent than for a power of appointment: as trustees are under an obligation to distribute trust property, they would have to carry out a wider and more systematic survey than those with power of appointment.  The sensible logic behind this decision is that an obligation to carry out such a survey could itself run down the trust fund through expenses, and thus defeat the object for which it was intended in the first place. Therefore, Lord Wilberforce’s criteria represents an important practical qualification of the court’s zeal to implement a trust if at all possible, vitiating such an arrangement where a class of persons is so hopelessly wide or capricious that a trustee or a judge would have little hope of fulfilling their obligations without running down the trust fund significantly.

Conclusion

The rules developed by the courts for certainty of object are important, since in recent decades litigation surrounding the selection of beneficiaries has increased. The courts’ development of case law in the second half of the last century to the present day has been deliberately flexible and accommodating, so that trusts can be enforced in favour of beneficiaries where possible.  This means that the ‘complete list’ test in fixed trusts is approached quite liberally.  For discretionary trusts, Lord Wilberforce’s emphasis on conceptual certainty enables the operation of trusts where the class is sufficiently distinguishable from others, such as family members, though rightly disallowing woolly concepts such as ‘friends’.  Elsewhere, the ‘unworkability’ qualification ensures that trust funds are not run down in searching for a hopelessly wide class of potential beneficiaries.  The upshot is a sensible and pragmatic approach, which one hopes will continue into the twenty-first century.

Bibliography

Case Law

IRC v Broadway Cottages [1955] Ch 20

Knight v Knight (1840) 3 Beav 148

McPhail v Dalton [1971] AC 424

OT Computers Ltd v First National Tricity Finance Ltd [2007] WTLR 165

Re Barlow’s Will Trusts [1979] 1 WLR 278

Re Benjamin [1902] 1 Ch 723

Re Gulbenkian’s Settlement Trusts [1970] AC 508

Re Tuck [1978] 2 WLR 411

Re Wynn [1952] Ch 271

Secondary sources

Hardcastle, I. M. ‘Administrative unworkability – a reassessment of an abiding problem’ in Conveyancer and Property Lawyer (1990) Jan/Feb, 24-33

Hudson, A. Equity and Trusts (7th ed, Routledge, 2013)

Hudson, A. Understanding Equity and Trusts (4th ed, Routledge, 2013)

Martin, J. Modern Equity (18th ed, Sweet & Maxwell, 2009)

Oakley, A. J. The Modern Law of Trusts (9th ed, Sweet & Maxwell, 2008)

Watt, G. Cases and Materials on Equity and Trusts (8th ed, OUP, 2011)

Wood, J. ‘Trust disputes – the trustee’s perspective’ in Private Client Business (1998) 3, 127-140

Wilson, S. Textbook on Trusts (10th ed, OUP, 2011)

Footnotes

(1840) 3 Beav 148

Sarah Wilson, Textbook on Trusts (10th ed, OUP, 2011) 66

Alastair Hudson, Equity and Trusts (7th ed, Routledge, 2013) 199

Leahy v Attorney-General of NSW [1959] AC 457

Re Denly [1969] 1 Ch 373

A. J. Oakley, The Modern Law of Trusts (9th ed, Sweet & Maxwell, 2008) 43

Jill Martin, Modern Equity (18th ed, Sweet & Maxwell, 2009) 107

OT Computers Ltd v First National Tricity Finance Ltd [2007] WTLR 165

[1955] Ch 20

Alastair Hudson, Understanding Equity and Trusts (4th ed, Routledge, 2013) 44

[1952] Ch 271

[1978] 2 WLR 411

Oakley, The Modern Law of Trusts, 66

This is derived from the decision in Re Benjamin [1902] 1 Ch 723

Wilson, Textbook on Trusts,76

[1971] AC 424

Martin, Modern Equity, 109

Ibid, 112

Re Gulbenkian’s Settlement Trusts [1970] AC 508

Watt, G. Cases and Materials on Equity & Trusts (8th ed, OUP, 2011) 255

[1979] 1 WLR 278

[1971] AC 424 at 427

[1982] 1 WLR 202

I. M. Hardcastle, ‘Administrative unworkability – a reassessment of an abiding problem’ in Conveyancer and Property Lawyer (1990) Jan/Feb, 24

John Wood, ‘Trust disputes – the trustee’s perspective’ in Private Client Business (1998) 3, 127