THE TRUST AND OTHER CONCEPTS COMPARED
2.2.2 Trusts and powers
The main distinction is as follows:
s A trust is mandatory.
s A power is discretionary.
A trust has to be administered; even with a discretionary trust the trus-tees must exercise their discretion to benefit one or more beneficiaries.
However, 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 Hay’s Settlement Trusts (1981)).
2.2.2.1 Powers within a trust
Trustees have a number of powers within the trust arrangement, which include:
s how to invest (s 3 of the Trustee Act 2000);
s sale of the trust property (s 16 of the Trustee Act 1925);
s accumulate income;
s power to make payments of income as maintenance (s 31 of the Trustee Act 1925);
s power to make advances of capital sums (s 32 of the Trustee Act 1925).
2.2.2.2 Power to appoint (or power of appointment) This is the area that causes most difficulty.
A power to appoint can be a transaction on its own:
‘£100,000 to X with power to appoint A, B, C.’
This means that X can give the £100,000 to A, B or C (note the simil-arity with the discretionary trust).
The following are general principles concerning such a power of appointment:
s A power of appointment is not a trust:
s X is called the donee of the power; he is not a trustee and the power to appoint is known as a ‘mere power’;
s A, B and C are the objects of the power; they are not beneficiaries.
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2.2 THE TRUST AND OTHER CONCEPTS
s If X fails to appoint A, B or C (in other words, give one of them the property), then:
s fund returns to the donor on X’s death, or
s to whomever is entitled if no appointment has been made.
s A, B and C cannot agree to terminate under Saunders v Vautier (1841) as it is not a trust.
s A, B and C cannot compel X to exercise the power.
s A power of appointment must be certain. There must be a clear inten-tion to create a power, the subject matter and the objects must like-wise be certain (Re Gulbenkian’s Settlement Trusts (1970)).
Alternatively, a power of appointment can be attached to a trust:
‘£1 million to X on trust for Y and Z with power to appoint A, B, C to the class of beneficiaries.’
s The trustees have power to add A, B or C to the class of beneficiaries.
s A, B and C are not beneficiaries; they are merely persons who might become beneficiaries.
s X is a trustee, not due to being donee of the power but because he is already a trustee under the trust for which the power is attached.
s X being a ‘fiduciary’ has a mere power to appoint but he still has fidu-ciary responsibilities. A, B and C cannot terminate the power under Saunders v Vautier as they are not beneficiaries nor are they collec-tively entitled to the property.
As this is a mere power with the donee (X) being a fiduciary being, can the objects of the power compel the trustee to exercise it?
Case:
Re Hay’s Settlement Trusts (1982)
The only rights of the objects under a mere power where the donee is a fiduciary is that they can compel the fiduciary to periodically consider:
s whether to exercise it or not. They cannot actually compel the trustees to actually exercise the power;
s the range of objects of the power;
s the appropriateness of individual appointments.
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THE TRUST AND OTHER CONCEPTS
Is there any merit in the objects of a fiduciary power bringing an action compelling trustees to consider whether or not to exercise the power?
Reflection Point
s Where the donee is non- fiduciary there is not even a duty on the donees to even to consider its exercise! (Re Hay’s Settlement Trusts (1982).)
Workpoint
Consider the similarity between the power of appointment and the discretionary trust.
s In both cases the beneficiaries/objects have no identifiable interest until the trustees or donees of the power exercise their discretion.
What, however, are the differences between the two concepts?
Distinguishing trusts from powers
It is not always easy to distinguish whether a gift is a discretionary trust or a power of appointment. Consider the consequences:
s Beneficiaries under a discretionary trust can terminate the trust under Saunders v Vautier if they are all over 18, of sound mind and collec-tively entitled;
s An object of a power of appointment has no such rights.
s Trustees of a discretionary trust have a duty to exercise their discretion;
s A donee of a power only at the most has to consider whether to exercise it.
How to determine whether a gift is a discretionary trust or a power of appointment
Consider the instrument creating the interest:
s Does the gift create an imperative binding obligation (trust)
s ‘on trust for’
s ‘to hold on behalf of ’; or
s merely a discretion to exercise the right at all (power)
s ‘with power to appoint’
s ‘to appoint’?
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2.2 THE TRUST AND OTHER CONCEPTS
Remember: do not confuse this with a discretionary trust – the discretion must be exercised.
s Individual words alone should not be taken in isolation
s The whole gift should be read to ascertain the donor’s true intentions (Re Hamilton (1895); Comiskey v Bowring- Hanbury (1905) – see Chapter 3).
s Therefore individual words ‘trust’/‘power’/‘appoint’ might be indic-ative of a trust or a power but must not be viewed as per se conclusive (Re Weekes Settlement (1897)).
The effect of gift in default of appointment
The donor might insert a clause stating ‘if no appointment is made the gift shall go’ to a specified third party (a gift in default of appointment).
‘£100,000 on trust to X to hold for such of my children A, B and C.’
s This appears on its face to be a discretionary trust from the words used. Now add the following phrase:
‘£100,000 on trust to X for such of my children A, B or C. In default of appointment the gift shall go to my nephews.’
s A trust is mandatory; it has to be carried out. Even with a discretion-ary trust the trustees have a duty to exercise their discretion.
s However, the presence of ‘in default of appointment’ suggests that X need not make any appointment; there is no binding obligation on him to do so.
s According to Re Mills (1930):
s A ‘gift in default of appointment’ means that the gift is not manda-tory – therefore it is a power of appointment.
s So, in the above example, A, B and C are mere objects of the power, they are not beneficiaries under a discretionary trust.
s A gift in default of appointments makes the gift into a power of appointment.
Distinguishing a failure of appointment from a mere substitutional gift (known as a failure of appointees (beneficiaries))
s If a beneficiary of a testamentary gift predeceases the donor the gift is lost and goes into residue.
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THE TRUST AND OTHER CONCEPTS
s It is common to put substitutional gifts in wills so if the beneficiary predeceases the testator the gift does not go into the residue but goes to whomever the testator directs. This is not the same as a gift in default of appointment.
Workpoint
‘£1 million to trustees on behalf of my son David save that if David shall fail to survive me the aforesaid £1m shall go to the RSPCA for its charitable purposes.’
s The gift to the RSPCA is a substitutional gift which will take effect only if David predeceases his father.
What effect might such a gift have on the construction of whether a gift is a discretionary trust or a power?
Note again the gift in default of appointment:
‘£100,000 on trust to X for such of my children A, B, C. In default of appointment the gift shall go to my nephews.’
s This creates a power of appointment; the presence of the default of appointment clause is stating that the trustee does not have to carry out the terms of the gift – hence it is only a power.
But now consider the following:
‘£100,000 on trust to X for such of my children A, B, or C; however, if none of my children are living at my death the gift shall go to my nephews.’
s Here there is no failure of appointment; it is simply the fact that if there are no living beneficiaries, the fund shall go in substitution, to the nephews. The gift is not saying that the trustee need not carry out the terms of the trust.
s Thus a mere substitution clause will not per se turn a trust into a power (Re Llewellyn (1942)).
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2.3 WHY DO PEOPLE MAKE TRUSTS?
Item on checklist: Done!
I understand the distinction between a discretionary trust and a power of appointment.
I understand that it is a question of construction as to whether it is a trust or a power.
I understand that a gift in default of appointment means the gift is a power of appointment as this makes the requirement only discretionary not mandatory.
I understand that a mere substitution clause does not per se change the trust into a power of appointment.
Checkpoint – trust/power distinction