Specificity within discretionary trusts is a virtual prerequisite should the settlor wish to enjoy its success; as while the courts are empowered to dispense as the creator intended, they are still subject to restrictive criteria that can often render them ineffective.
When a company owner took the liberty of constructing a trust deed for the benefit of past and present employees and their relatives and children, the duties assigned to the trustees were flexible enough to allow for common sense and equity to steer their decisions.
This was because the funds within the trust were limited, and therefore issue to selected employees was restricted on a yearly basis, with further provision for continuous investment in order to extend the lifetime of the trust.
Over twenty years after execution of the deed, and following the death of the owner, the validity of the trust was brought into question by his widow and certain family members, who having found themselves exempt from the pleasures of regular payments from the trustees, sought to challenge the terms of the instrument contained within clause 9, which read that:
“(a) The trustees shall apply the net income of the fund in making at their absolute discretion grants . . . in such amounts at such times and on such conditions (if any) as they think fit . . . (b) The trustees shall not be bound to exhaust the income of any year or other period in making such grants . . . and any income not so applied shall be . . . [placed in a bank or invested], (c) The trustees may realise any investments representing accumulations of income and apply the proceeds as though the same were income of the fund and may also . . . at any time prior to the liquidation of the fund realise any other part of the capital of the fund . . . in order to provide benefits for which the current income of the fund is insufficient.”
On this occasion, it was argued that while the trust designated that a class of people were intended as beneficiaries, the list was wide enough to introduce uncertainty at to whether the discretion offered the trustees was construed as a power, rather than trust instructions. Andso under those circumstances, the trust had prima facie failed, and that whatever funds existed fell within the deceased’s estate.
When heard in the Court of Chancery, the judge upheld the idea that such a power exceeded the delicate framework of a trust, and that clause 10 of the same deed indicated that the interest in the trust lay solely in the hands of the trustees; therefore any disposition of funds were in accordance with their discretion, which resulted in uncertainty as to exactly whom the beneficiaries were.
Heard again at the Court of Appeal, the original judgment was upheld, while granting leave to appeal to the House of Lords.
Here, the issues surrounding the true intention of the settlor were given greater consideration, with particular regard to the limitations of the trust fund use, and the relatively ascertainable identity of the employees and their family members.
When looked at in context, it was apparent that the aim of the trust was one that afforded creativity of the funds after the needs of the beneficiaries were met; therefore, it could not be construed as self-serving and obstructive of the intended purpose.
Rather, it boiled down to poor drafting, that while in the immediate sense, lent to initial confusion of those unfamiliar with trusts and fiduciary duties, did not prevent the House from clarifying that the same degree of uncertainty could be removed in lieu of a perfectly functional instrument of generosity, while reminding that parties that:
“[W]here there is a trust there is a duty imposed upon the trustees who can be controlled if necessary in the exercise of their duty. Whether the trust is discretionary or not the court must be in a position to control its execution in the interests of the objects of the trust. Where there is a mere power entirely different considerations arise. The objects have no right to complain.”