“…the duty of trustees to exercise their powers in the best interests of the trust, holding the scales impartially between different classes of beneficiaries”.
This shows that the Trustees must treat all beneficiaries equally when distributing the trust property; as a result beneficiaries who suffer from a change of circumstance may be able to obtain the trust property or may lose their beneficial interest in the property if the trustees have decided that their circumstances meant they no longer need the trust property.
Discretionary trusts can be either exhaustive or non exhaustive. An exhaustive discretionary trust is defined as when trustees must distribute the income, capital or both of a trust property during the trust period, but have discretion as to whom may benefit. A non exhaustive is defined as when trustees have the discretion as to whether or not to distribute and who to distribute to.
Normally, if the trustees do not distribute the trust property to beneficiaries, for whatever reason, they must accumulate the income to distribute to the beneficiaries. This is treated as capitalised income or capital, as confirmed in Re Lockers Settlement where it was said that Trustees with an "absolute and uncontrolled" discretion who fail to distribute trust income as required by the settlement may be permitted to distribute the income later or add it to the capital. However this case also said that the trustees should not exercise discretion in favour of beneficiaries who became objects after a reasonable time.
This may seem as though it is treating the beneficiaries unfairly if they can become objects rather than beneficiaries, However it means that it is easier to keep certainty of class and objects. The capitalised income could mean that certainty of objects would disappear unless the income is distributed at some point the objects would be uncertain as there would be no income to distribute for so long that the beneficiaries would not be able to claim trust funds that they were not entitled to.
However it was said in Ahuja v. Scheme Manager, Depositor's Compensation Scheme a deposit by trustees of the trust should be treated as one account
“...unless the beneficiaries of the trust are individuals whose identity and right to benefit can be conclusively established”.
This was under dispute through the courts. It has been held that the right of the beneficiaries to benefit could not be conclusively established, as a result they could not claim a beneficial interest.
Millett LJ held in Armitage v. Nurse with regards to the rights of the beneficiaries that
‘It is “fundamental to the concept of the trust” that there is an “irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them”, and “if the beneficiaries have no rights enforceable against the trustees there are no trusts”’
This means that the beneficiaries have enforceable rights against the trustee whether the trust is fixed or discretionary. However it may be harder for the beneficiary of a discretionary trust to be able to enforce their rights as the beneficiaries have to show that they have a right to the trust property before they are able to claim the trust property.
As the beneficiaries of any trust have an equitable interest in trust property with the trustee holding the legal interest to the property, the beneficiaries have no legal rights to the property, as a result when they don’t think the property is being properly distributed, they can only rely on the rules of equity and not the legal system. With discretionary Trusts, as there is uncertainty as to whether or not the beneficiary has a right to the trust property or not, this can cause major problems as they have no legal right to the property and only an uncertain equitable interest. This means that there is not a significant right to the beneficiaries to be able to force the trustee to distribute the trust property, as they only have an equitable interest if the trustees decide to give them one.
As trustees have a right to add or remove persons to a class of beneficiaries , it could be argued that although the powers are increasingly protected for the trustees, as they are only challenged if bad faith is proved, there is no palpable equitable interest for the beneficiary, unless they can prove bad faith. This could mean that, although the beneficiaries have an equitable interest in the property, beneficiaries have no right to claim trust property from the trustees unless the trustees are acting in bad faith.
It has been said of this
“… to enable an appointment to be made immediately to an object without the need to consider the merits of any other object …a common clause dealing with the former is being extended so as to prevent appointments to an object being challenged unless proved to have been made in bad faith, while the failure to take account of a relevant consideration or the taking account of an irrelevant consideration is not bad faith unless proved to be part of a dishonest design.”
This means that it is becoming increasingly harder for beneficiaries to be able to exercise their equitable interest in discretionary trusts, as trustees can decide to remove them from the class of beneficiaries and they can do nothing about it unless the trustee acts dishonestly.
The beneficiaries have rights to see the distribution of funds, as part of the trust property. The uncertainty of the class of beneficiaries due to the ability of the trustees to add or remove people from it means that the right to see the distribution of funds and equitable right to the trust property are both negligible.
However it has been said of this right to see the distribution of the trust property
“… discretionary will trusts in one or another shape or form are now commonplace, mean that a discretionary beneficiary's entitlement to information should not be an obscure byway, but something that we routinely consider, … at the outset when making the discretionary will. … [I]n particular is the right to see the trust accounts: asking to see them will be the practical starting point for any beneficiary who feels under-informed”
If this is followed it means that beneficiaries will have a right to see the distribution as part of the trust document, rather than having to make a fuss if they think something is wrong with the distribution of the trust property to be able to see the distribution.
This is one of the main ways a discretionary trust differs with a fixed trust, as in Re Londonderry it was said that the Trustees had an obligation to distribute the documents for the trust as part of the beneficial equitable interest. However this can not apply to discretionary trusts as the beneficiaries do not have a right to possess or use trust property. This could be seen to mean that unless it is in the trust document, as previously stated, there is no way for the beneficiary to see the trusts documents.
This point was asked in Murphy v Murphy in relation to discretionary trusts. Here Neuberger J said
“ It appears to me that it would be most undesirable for this court to make orders which would be likely to result in trustees of private discretionary trusts being badgered with claims by many beneficiaries for consideration to be given to their claims for trust moneys, or for accounts as to how trust moneys have been spent ….”
This confirms that the beneficiaries of discretionary trusts have no way of seeing the trust documents, unless the settler of the trust states so when creating the trust, as has been previously discussed.
Although the beneficiaries are the equitable owners of the trust property, it is debatable as to whether the legal ownership of the trustees is balanced with an identifiable equitable ownership, as the class of beneficiaries are unidentifiable at times other than the moment in which the trustees are distributing property, as the beneficiaries who receive an equitable interest in the trust property can change between each distribution depending on how the trustees distribute the property.
The trust has to have certainty of class to be a discretionary trust, however to allow the trustees to change the class of beneficiaries would mean that the certainty of class would be variable. For certainty of class in a fixed trust, the court must be able to say categorically whether or not a person is a beneficiary in a trust. In discretionary trusts, 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”
This has been taken to man by the courts that there is no certainty of objects, as is seen by fixed trusts, but has an “individual ascertainability” test instead. This was defined in McPhail v Doulton where it was held that discretionary trusts will not fail for uncertainty of objects, even though it would be impossible to draw up a fixed list of the beneficiaries of the trust.
As a result there is an inherent practical difficulty as to discovering whether or not a person is entitled to the beneficial interest of a discretionary trust, as the list can be so fluid as to be able to be changed by the trustees when they have reason to do so, as discussed above.
Edwards and Stockwell, Trusts and equity 8th edition (2007, Pearson Longman), page 556
Mowbray, Choosing among the beneficiaries of discretionary trusts P.C.B. 1998, 5, 239-250 at 240
Ramjohn, Unlocking Trusts (2005, Hodder Arnold) page 108
As quoted in Mowbray, Choosing among the beneficiaries of discretionary trusts, P.C.B. 1998, 5, 239-250 at 241
; [1978] 1 All E.R. 216; (1977) 121 S.J. 796
Matthews, The black hole trusts, uses abuses and possible reforms P.C.B. 2002, 2, 103-110 at 104
ibid, at page 253, as quoted in Mitchell, Disclosure of trust information to discretionary beneficiaries (1999) LQR 206
Hayton, Major trends in the trust world: Part 2 PCB 2007 2 122 at 122
Morris, Two issues on rights to information about a trust, P.C.B. 1999, 1, 29-43 at 30
ibid, as quoted in Morris, Two issues on rights to information about a trust, P.C.B. 1999, 1, 29-43 at 31
Warner J in Mettoy v Evans [1990] 1 WLR 1587
Watt, Trusts textbook, 2nd edition (2006, OUP) page 83
Bibliography
Cases
Ahuja v. Scheme Manager, Depositor's Compensation Scheme
Armitage v. Nurse
Cowan v Scargill
Murphy v Murphy
Re Lockers Settlement
Journals
Hayton, Major trends in the trust world: Part 2 PCB, 2007, 2, 122
Matthews, The black hole trusts, uses abuses and possible reforms P.C.B. 2002, 2, 103-110
Mitchell, Disclosure of trust information to discretionary beneficiaries (1999) LQR 206
Morris, Two issues on rights to information about a trust, P.C.B. 1999, 1, 29-43
Mowbray, Choosing among the beneficiaries of discretionary trusts P.C.B. 1998, 5, 239-250
Reference books
Edwards and Stockwell, Trusts and equity 8th edition (2007, Pearson Longman)
Ramjohn, Unlocking Trusts (2005, Hodder Arnold)