The Beneficiary Principle

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The beneficiary principle defined

The beneficiary principle holds that a trust can be valid only if it has a beneficiary

  • So, generally “there must be someone in whose favour the court can decree performance” (Grant MR in Morice v Bishop of Durham)

The principle gives rise to the following questions:

  • i) What is a “beneficiary” (and so what does the beneficiary principle demand)?
  • ii) Is it true that a trust is valid only if it has a beneficiary?
  • iii) Should a trust be valid only if it has a beneficiary?

What is a beneficiary?

There are 2 different understandings of what a beneficiary is, and therefore 2 different versions of the beneficiary principle

1) Beneficiary = equitable owner

The first understanding of a beneficiary equates a beneficiary with an equitable owner

“Beneficiary” as equitable owner of the trust property

On one view, a “beneficiary” is someone who has equitable ownership of the trust property → The “beneficiary principle” thus demands the existence of an equitable owner in order for there to be a valid trust

When does X have “equitable ownership” of trust property?

X has equitable ownership of trust property if he has an immediate claim to the trust property → X has a claim to the trust property if he can avail himself of the rule in Saunders v Vautier (1841) (i.e. is able to wind up the trust and take the trust property absolutely)

2) Beneficiary = holder of proprietary interest

“Beneficiary” as anyone holding a proprietary interest in trust property

An alternative view takes a “beneficiary” to be anyone possessing a proprietary interest in trust property → the “beneficiary principle” thus demands the existence of someone with a proprietary interest in the trust property in order for there to be a valid trust

  • What is meant by ‘proprietary interest’ is a matter of great contention

When does X possess a “proprietary interest” in trust property?

X possesses a “proprietary interest” in trust property if it is at least possible that the trust property will be paid out to him (Nolan)

  • This tells us that where there is a possibility that an individual will have trust property paid out to him, they can be said to have a proprietary interest → this definition embraces those who will certainly receive trust property, but also embraces those who will possibly (but not certainly) receive the trust property

While the “equitable owner” of trust property necessarily has a “proprietary interest” in it, the converse is not true

  • It it is possible for someone to have a proprietary interest in trust property without having equitable ownership of the property → so you can have a proprietary interest without being able to invoke Saunders v Vautier

In consequence, the 1st understanding of the beneficiary principle, is narrower than the 2nd

The beneficiary principle as a description

Does either version of the ben principle provide an accurate description of our law?

BENEFICIARY PRINCIPLE VERSION 1: EQUITABLE OWNER ESSENTIAL FOR VALIDITY:

Is this, first, description of the beneficiary principle an accurate description of our law?

Academic support

The first, narrower, version of the beneficiary principle has the support of James Penner:

  • Penner says we do need equitable ownership for a valid trust to exist → “The very existence of a trust turns on there being a trust obligation to someone who, in consequence, has equitable ownership of the trust property”
  • However, the view that a trust must have an equitable owner in order to be valid has never been stated as necessary judicially, because the law does not really appear to reflect the narrower version of the beneficiary principle

Bare trusts vs. other configurations

Equitable ownership is undoubtedly a feature of bare trusts

  • So, it is worth saying, firstly, that some legally valid trusts are characterised by equitable ownership e.g. a bare trust

It is less clear that equitable ownership characterises other trust configurations, e.g.:

  • For X for life; remainder to Y
  • To be distributed at the trustee’s discretion between X and Y
    • These are both valid trusts, but is it possible to say that either of those valid trusts feature an equitable owner, like a bare trust does?
    • Well, using the rule in Saunders v Vautier as our touchstone for equitable ownership we can observe in each case neither X nor Y acting alone can use the rule in Saunders v Vautier to wind up the trust and take the trust property absolutely
    • However, in each case, if X and Y agree what they can do is team together and in a joint capacity they can avail themselves of the rule in Saunders v Vautier
      • Given that, it is certainly arguable here that collectively X and Y have equitable ownership and therefore each of the trusts is characterised by equitable ownership after all
      • BUT, on the other hand, the possibility of a lack of agreement might tell against viewing multiple individuals - even collectively - as possessing equitable ownership of the trust property
    • So it is arguable in these two examples whether or not they are characterised by equitable ownership → a case can be made either way

Equitable ownership inessential to validity

Even if we are happy, in theory, with viewing multiple individuals as together possession equitable ownership of trust property, we certainly encounter a problem with large scale discretionary trusts e.g. the large scale discretionary trust in Mcphail v Doulton

  • In such a case, the class of objects are so wide (i.e. there are so many potential beneficiaries) that no list of objects can be drawn up, so Saunders v Vautier can have no practical operation
    • So, at least in respect of some discretionary trusts it is clear that Saunders v Vautier cannot bite and therefore such trusts are not characterised by equitable ownership
  • So, given this, what does this mean for the first version of the beneficiary principle as a description of our law?
    • Well, given that at least some valid trusts do not feature an equitable owner we know that this first version of the beneficiary principle (espoused by Penner), which demands an equitable owner in order for a trust to be valid, CANNOT be an accurate description of our law
    • So the demand for equitable ownership cannot accurately reflect our law, as it cannot account for large-scale discretionary trusts

BENEFICIARY PRINCIPLE VERSION 2: PROPRIETARY INTEREST ESSENTIAL FOR VALIDITY:

Judicial Support

The 2nd, wider, version of the beneficiary principle is implicit in various judicial statements including: “If the beneficial interest was in [X] and he fails to give it away effectively to another or others…it must remain in him.” (Vandervell v IRC [1967] Lord Upjohn)

  • So unlike the first version of the beneficiary principle, this second version of the beneficiary principle has some judicial support → so a number of judicial statements are indeed premised on the idea that in order to be valid a trust must possess a beneficiary in the second meaning of the word i.e. in the sense that they have a proprietary interest in the trust property
  • This quotation says that if a proprietary interest has not been conferred on anyone then a valid trust has not been created

Comparison with narrower beneficiary principle

The version of the beneficiary principle which demands a proprietary interest in order for a trust to be valid provides a more accurate description of our law

Crucially, this version of the beneficiary principle accommodates trusts requiring payment to multiple people

  • So this version of the beneficiary principle accommodates all types of trust configurations → it accounts for the validity of trusts such as:
    • For X for life; remainder to Y
    • To be distributed at the trustee's discretion between X and Y
  • In each case, X and Y have a proprietary interest in the trust property in the sense that the property either will or maybe be paid out to them
  • And this wider version of the beneficiary principle can also account for the validity of large-scale discretionary trusts (such as in McPhail v Doulton) where the class of objects is extremely large, because here of course we can still say that each object (even on this large scale) has a proprietary interest in the trust property in the sense that it is possible they will receive it
  • So the second version is a better reflection on the state of our law

However, this wider version of the beneficiary principle – just as much as the narrower version – struggles to account for the existence in our law of the validity of purpose trusts

  • In other words, the existence of legally valid purpose trusts calls into question the descriptive accuracy of both beneficiary principles

Purpose trusts

The descriptive accuracy of the wider beneficiary principle is, however, called into question by the existence of legally valid purpose trusts

A “purpose trust” does not provide for the trust fund to be given to a person(s) as cash but instead specifies that it is to be spent on delivering a particular purpose

  • So a purpose trust does not intend to give individuals cash payments, but is to give the money to deliver a particular goal, aim, and purpose
  • And purpose trusts appear to lack a beneficiary, on either definition of the term, and therefore appears to contradict both versions of the beneficiary principle
  • When a trust is aimed at the fulfilment of a particular purpose, there is no equitable owner of the trust property (i.e. there is no individual who can wind up the trust and take absolute ownership of the funds via Saunders v Vautier) and there is also nobody with a proprietary interest of the property (i.e. there is nobody to whom the trust will or will not be paid out as the trust fund is instead to be applied in pursuing and fulfilling a particular purpose)
  • So the existence of legally valid purpose trusts seems to contradict the beneficiary principle as an accurate description of our law

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CONTENT

Categories of valid purpose trust

There are three categories/types of legally valid purpose trust:

  • i. Charitable trusts
  • ii. Miscellaneous, non-charitable trusts
  • iii. Re Denley trusts

A purpose trust not falling within one of the above categories is legally void (Re Astor’s Settlement Trusts [1952]; Re Shaw’s Will Trust [1957])

  • So a purpose trust not falling within one of these categories is not a valid trust
  • Re Astor’s Settlement Trusts [1952]: money was settled to a trustee for various purposes, including maintaining cooperation between nations and preserving the independene and integrity of newspapers. The trust was held not to fall under any of the three categories, so the trust was therefore void
  • Re Shaw’s Will Trust [1957]: Shaw left money on trust for the creation of a 40 letter alphabet. The purpose was held not to fall under any of the three categories, so the trust was therefore void and the money reverted on resulting trust

i. Charitable trusts

A charitable trust is one aimed at exclusively charitable purposes (CA s.1)

  • So they are purpose trusts by definition, and are aimed at fulfilling certain purposes, rather than aimed at paying out money to certain individuals
  • So this is one category of purpose trust the law accepts as legally valid

A charitable purpose is a purpose which falls within the list in CA s.3(1) and is for the public benefit (CA s.2)

Ii. Miscellaneous, non-charitable purpose trusts

The law has accepted as valid some non-charitable purpose trusts.

  • The ambit of non-charitable purpose trusts that the law accepts is extremely limited → the following types of purpose trusts will be valid

The trusts accepted as valid are limited to those aimed at the following purposes:

  • i. Constructing and/or maintaining graves and monuments (Re Hooper [1932])
  • ii. Privately saying masses (Bourne v Keane [1919])
    • We know that a trust for publicly saying masses will be charitable (as that would advance religion and be for the public benefit), but a trust for privately saying masses cannot be charitable
  • iii. Maintaining particular animals (Re Dean (1889))
    • A trust for maintaining animals in general tends to be charitable, but a trust for maintaining particular animals is not charitable because of a lack of public benefit – nevertheless, this type of trust can be legally valid as a non-charitable purpose trust
  • iv. Promoting fox-hunting (Re Thompson [1934])
    • This is presumably defunct now because most forms of fox hunting are now illegal

iii. Re Denley purpose trusts

The final category of valid purpose trusts are what is known as a Re Denley purpose trust

Trusts aimed at purposes are valid when there are individuals directly and tangibly benefited by the purpose’s performance (Re Denley [1969])

  • The principle in Re Denley is that a trust aimed at a purpose will be legally valid provide that there are individuals directly and tangibly benefited by the purpose’s performance

In Re Denley, a trust for the purpose of providing a sports field to be used by the employees of a particular company was held legally valid

  • The sports field delivered a direct and tangible benefit to individuals (i.e. the employees), so the trust was held to be valid
  • The court held that ordinarily a purpose trust wouldn't be valid unless it were charitable or fell under one of the miscellaneous categories in the previous slide, but you can create a valid purpose trust provided that there are individuals directly and tangibly benefitting from the trust’s performance
  • Such a trust, Goff J said, is in general outside the mischief of the principle that every trust must have a certain cestui qui trust

The principle in Re Denley underlies a number of other decisions e.g. Re Abbott Fund Trusts [1900]; Re Aberconway [1953]; Barclays Bank v Quistclose [1970]

Purpose trusts and the beneficiary principle

Purpose trusts clearly lack a beneficiary (in both the narrow and wide sense of the word), but this does not dissuade those who consider the beneficiary principle an accurate description of our law

  • Because purpose trusts are aimed at the fulfilment of a particular purpose, they clearly lack an individual who owns property in equity or has a proprietary interest in that trust property i.e. purpose trusts clearly lack a beneficiary in both the narrow and wide formulations of the word
  • So the validity of purpose trusts seems to undermine the beneficiary principle as an accurate description of our law → how can the beneficiairy principle be accurate when trust law holds as valid various categories of purpose trust who lack a beneficiary?
  • A number of academics, nevertheless, claim that at least the wider version of the beneficiary principle (i.e. you need someone with a proprietary interest in the trust property for validity) is in fact an accurate description of our law e.g. Virgo
    • So these advocates of the beneficiary principle have an explanation for the 3 categories of purpose trust that seem to imperil/threaten the beneficiary principle

Advocates of the beneficiary principle regard charitable trusts as ‘exceptional’ (Re Endacott [1960]), miscellaneous, non-charitable purpose trusts as ‘anomalous’ (Re Astor [1952]) and Re Denley etc. as wrongly decided (Twinsectra v Yardley [2002])

  • So it is clearly possible, then, to uphold the beneficiary principle (at least the wider version of it) as an accurate description of our law by explaining away the three categories of purpose trusts as exceptional, anomalous, or just bad law
  • However, although this is possible it may not be particularly sensible → it may be that these categories of valid purpose trust are just too substantial/significant to make support for the beneficiary principle as a description of our law as either tenable or credible
    • So it may not be particularly sensible to keep invoking/asserting the beneficiary principle in light of these exceptions to it
    • And in particular, the beneficiary principle must yield (i.e. surrender) as a description of our law if there is some other principle which better captures the state of trust law
    • So, then, we must turn to a principle that can legitimately claim to provide a better description of trust law then can the beneficiary principle → the enforceability principle

The Enforcability Principle

The enforceability principle defined

Enforceability principle holds a trust can be valid only if there is someone to enforce it

  • The beneficiary principle says that a trust is only valid if there is a beneficiary, whereas the enforceability principle says a trust is valid only if there is someone to enforce it

So what the enforceability principle is dictating then that a trust is only valid if there is someone who can take the trustees to court in the event of a breach or suspected breach of their duty

Judicial support

There are various judicial statements supporting the enforceability principle:

  • “There must be somebody, in whose favour the court can decree performance.” (Morice v Bishop of Durham (1804) Grant MR) i.e. there must be someone they can sue
  • “[A] trustee would not be expected to be subject to an equitable obligation unless there was somebody who could enforce a correlative equitable right.” (Re Astor [1952] per Roxburgh J); “a court of equity does not recognised as valid a trust which it cannot… enforce”

Comparison with beneficiary principle

Trusts with beneficiaries (in both the narrow and wide sense of the word) comply with the enforceability principle: they are enforced by their beneficiaries

  • Beneficiaries of a trust (whether of a fixed or discretionary trust) can bring their trustees to court in the event of a maladministration
  • So when a trust has a beneficiary it also has someone who can enforce → so trusts with beneficiaries comply with the enforceability principle
  • BUT, of course, this doesn't take us any further than the beneficiary principle did → the real issue is whether the enforceability principle can deal with purpose trusts in a way in which the beneficiary principle could not…

Importantly, the enforceability principle can also accommodate some categories of legally valid purpose trust

Enforcing charitable and Re Denley trusts

Charitable trusts comply with the enforceability principle: they are enforced by the Attorney-General and Charity Commission (something neither beneficiary principle could do)

Re Denley purpose trusts comply with the enforceability principle: they are enforced by those persons benefited by the purpose (as Goff J highlighted in the judgment)

Enforcing miscellaneous, non-charitable purpose trusts

The category of miscellaneous, non-charitable purpose trusts does not comply with the enforceability principle: such trusts are not fully enforceable as it is only the remainderman who has standing to sue the trustee (Pettingall v Pettingall (1842))

  • So this category of purpose trust does NOT comply with the enforceability principle as it is only the remainderman who has standing to sue
  • A remainderman is the person who is entitled to any sums remaining after the achievement of the purpose
    • So say the miscellaneous, non-charitable purpose trust is one for the maintenance of a particular animal (which falls under this category as seen above), a settlor might settle £200,000 for the purpose of maintaining a particular animal and direct any money left over after this purpose has been fulfilled to go to his daughter; the daughter here is the remainderman
  • The law tells us a remainderman is indeed entitled to enforce these miscellaneous non-charitable purpose trusts – e.g. in the above example the daughter can indeed take the trustees to court in the event of their maladministration – and they will clearly wish to enforce if the trustee, for example, wrongfully reduces the trust fund by overspending on the purpose → so in the case of the above example, the daughter will have an incentive to enforce if it felt the trustees are overspending on the maintenance of the animal to their detriment
  • But the remainderman will have no incentive to enforce if the trustee underspends on the purpose in question because this will maximise the amount which remains to be directed to them
  • So we can see that this category of purpose trusts does not have a proper enforcer → so it is not properly enforceable in the way demanded by the enforceability principle i.e. the remainderman can enforce but they often will not be incentivised to do so

Enforceability mapped against our law

Given the legal validity of miscellaneous, non-charitable purpose trusts, the enforceability principle is not a fully accurate description of our law

Yet it provides a more accurate description than does the beneficiary principle

The Beneficiary Principle as a Normative Vision

Should equitable ownership be necessary for validity?

Are there any arguments to support the narrower version of the beneficiary principle as a normative vision of trust law i.e. should we be saying that you can only create a valid trust if that trust features an equitable owner?

The case for restricting valid trusts to those conferring equitable ownership rests on arguments relating to rights and economic utility

  • There is an argument in favour of restricting valid trusts to those conferring equitable ownership → this argument rests on rights and economic utility
  • The argument from rights is that people should be able to enjoy their property in a full way and it posits that trust arrangements other than those featuring an equitable owner infringe upon the right to full enjoyment of property
    • The idea is that trusts do not confer absolute entitlements on individuals (i.e. beneficiaries of trust property are not simply given property absolutely), rather trusts confer qualified entitlements (e.g. an individual may only be able to receive the trust income)
    • Trusts, therefore, by their very nature infringe upon individuals rights to full enjoyment of property i.e. trusts by conferring qualified entitlements infringe upon individual’s rights to full enjoyment of property
    • This criticism is, however, avoided by trusts conferring rights on an equitable owner → this is because the equitable owner can avail themselves of the rule in Saunders v Vautier to free themselves from the trust and take the property absolutely to enjoy it as they wish (rather than in the limited way prescribed by the settlor)
  • The argument from economic utility requires that property be exposed to market influences → so this means that the property must be owned by someone with complete liberty over how it is used
    • So, again, when a trust features an equitable owner the idea is that the equitable owner can wind up the trust and so take the property absolutely, and thus expose it to market influence
    • But where Saunders v Vautier cannot be utilised (e.g. in the case of a discretionary trust) there is no such exposure to market influence → this lack of exposure is bad from an economic perspective
    • Also, purpose trusts mean the money can only be spent on the particular purpose and the particular commodities needed to achieve it → and therefore this money would be immune from market influence

There are, however, countervailing considerations; not least, facilitative logic

  • But there are countervailing considerations that push against the arguments relating to rights and economic utility → not least, facilitative logic
  • Facilitative logic recognises that the express trust construct exists in order to provide settlors with a legal vehicle to give effect to their wishes
    • In other words, the whole reason why express trusts exist is to allow settlors to do what they want with their property
    • So the argument from facilitation proposes the universe of valid trusts be as broad as possible in order to provide settlors with a wide range of ways in which they can settle their money i.e. in order to best give effect to their wishes whatever those may be
    • So from this perspective then the universe of valid trusts should not be limited in accordance with the narrow version of the beneficiary principle
      • The argument is that if a settlor wishes to create a trust lacking an equitable owner, the law should accommodate that wish → it is felt that a limited trust law would limit the opportunity for settlors to settle their property for a broad range of wishes
  • Furthermore, if trust were limited to those with an equitable owner for rights and economic utility, this will restrict other trusts that will have a benefit on society e.g. charitable trusts, by definition, bring a benefit to society

Should a proprietary interest be necessary for validity?

The wider version of the beneficiary principle is inferior from a rights/economic utility perspective but responds better to facilitative logic

  • This wider version of the beneficiary principle permits trusts to be valid despite the lack of an individual who can wind up the trust and take property absolutely → so this beneficiary principle infringes the right to full enjoyment of the property (to an extent) and insulates property from market influence
  • On the other hand, this wider version of the beneficiary principle responds better to facilitative logic because on this wider account of the beneficiary principle settlors are permitted to create a broader range of trusts and therefore the settlor’s desire is better facilitated
  • So there are reasons why this version of the beneficiary principle may be thought both superior and inferior to the previous version of the beneficiary principle

Although this version of the beneficiary principle is often rationalised and defended on its own terms, people frequently defend it as a normative vision on the grounds that a beneficiary is needed to enforce a trust

  • So many academics, such as Virgo, who seem to be advocating for the second version beneficiary principle as an appropriate model and normative vision of trust law (i.e. as something that should be reflected in law) are really advocating for the enforceability principle → “It is a fundamental principle of the law of trusts that the objects of the trust are people rather than purposes, because there need to be ascertained or ascertainable beneficiaries who are in a position to enforce the trust.” (Virgo)
  • So, in substance, they are not advocating for the beneficiary principle in and of itself, but advocating for the beneficiary principle because we need enforceability → so what they are really advocating for is the enforceability principle
  • So a lot of people who seem to be advocating for this model (2nd version of the beneficiary principle) are probably in substance advocating instead for the enforceability principle

Should enforceability be necessary for validity?

The enforceability principle, while rooted in the idea that trusts exist to facilitate settlor intent, does not fully express this idea

  • Much like the second version of the beneficiary principle, the enforceability principle does not really respond well to arguments from a rights and economic utility perspective, but it is rooted in facilitative logic (i.e. trusts exist to facilitate settlor’s intent)
  • The enforceability principle would permit a much broader range of trusts to be valid than does either version of the beneficiary principle

Facilitation is compromised by the demand for enforceability; this demand captures the thought that an unenforceable trust is an unintelligible concept

  • The enforceability principle does not fully facilitate settlor intent for it only permits valid trusts which can be enforced → so there are some limits on the idea of facilitation here
  • So why do those advocating the enforceability principle wish to compromise facilitation in this way?
    • Well the limitation on the universe of valid trusts that can be enforced reflects the thought than an unenforceable trust is an unintelligible notion i.e. unenforceable trusts is a concept which makes no sense
    • So the argument goes that a trust involves a legal owner of property holding it entirely for the benefit of another person or purpose to the exclusion of their own personal interests – the argument then is that if the trustees duties are legally unenforceable against them (i.e. you cannot sue them) then the whole trust structure collapses as there is nothing stopping trustees to use trust property as if it were there own
    • Hence those that advocate for the enforceability principle as a normative vision say that a trust should have an enforcer in order to be valid → if it doesn't have someone to enforce it then it makes no sense

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