The Law of Trusts - Private Purpose Trusts & the Beneficiary Principle - By Abdul Rehman Yasin

Since the middle ages, property holders have been employing trusts as an effective means for settling property as they saw fit; and all that was required was for the proprietor to transfer the supposed property to another person, namely a trustee, on the promise/trust that he/she would hold the property for a said third party, the beneficiary. This was hugely beneficial to property owners as once a trust had been established, the law would deem the trustee liable for their obligations; so much so that if he/she failed in their task, they would be replaced, because “a trust does not fail for a want of trustees”.

In Knight vs. Knight (1890)[1]  the court laid down the requirements for the establishment of a valid express trust; i.e. that there must be a clear intention, an identified or identifiable subject matter and the beneficiaries must be known; giving birth to the three certainties requirement.  Thus, in order for a settlor to establish a trust, it was necessary to prove the three certainties to justify its existence. The reason are straightforward, firstly, before the law can imposes any duty upon the trustee, the trustee themselves need to have knowledge of the obligations which impede them and regarding which specific property and to whom are those duties owed. Additionally, the courts demand sufficient guidance to ascertain the settlor’s intentions; in order to impose the obligation or to judge if any of the obligations have been meet; if not the court would enforce such obligations.

It must be noted that the third condition in Knight v. Knight, is also known as the “beneficiary principle”; i.e. for a trust to be valid there must be ascertainable person/s for whose benefit the trust subject matter is to be used. This principle is derived from the case of Morice v. Bishop of Durham[2], where the court held that trusts should be made for the assistance of human beings, who could inversely have that advantage enforced in the court of law; otherwise the court added that it could protect against wrongful administration nor inform as to the proper management of the trust. Penner[3] argues this hypothesis is borrowed from the law of contract, namely “Privity of contract”, whereby only those who hold the power under the trust may enforce it, not any other person wanting the trust execution.

Perhaps there is no better statement that captures this obligation better that Sir Willian Grant MR in Morice where he said that “… there can be no trust, over the exercise of which this Court will not assume a control; for an uncontrollable power of disposition would be ownership, and not a trust… There must be somebody, in whose favour the court can decree performance”[4]. The principle is also called the ‘no purpose trust’ rule; with the exclusion of charitable trusts, approximately all trusts made for a purpose are invalid; this was reaffirmed in Re Endacott; where the court held that a testamentary trust for providing a useful memorial service for oneself was held to be invalid, for there were no beneficiaries to enforce that trust.

On the contrary, a public purpose trust or charitable trust, according to Penner[5], are validated by the courts because the duty of their enforcement lies with the state or King as “parens patriae”, namely the Attorney-General as the state’s legal representative; Leahy v Attorney General for New South Wales [1959] where the court held that “a trust may be created for the benefit of persons… but not a purpose”. Irrefutably, it must be concluded that law of trusts is an instrument of private law, which for legal purposes must confer rights and enforce duties; thus it seems illogical to confer rights to a purpose, in this context.

In Re Astor’s Settlement Trusts (1952) Roxburgh j expressly made it clear that said private purpose trust were to be held invalid because for a want of objects, simply because “… a trustee would not be expected to be subject to an equitable obligation unless there was somebody who could enforce a correlative equitable right, and the nature and extent of that obligation would be worked out in proceeding for enforcement.”[6] This judgement further affirms that public/charitable purpose trust, in comparison to private purpose trusts, may be held valid, despite its incoherency with the beneficiary principle, as long as its enforcement is guaranteed by the state.

Penner identifies that the real reason why private purpose trusts are to be assumed invalid lies in the “enforcer principle” which is derivative of the beneficiary principle; that the trust needs someone to have it enforced; in comparison to Public purpose trusts where enforceability is assured by state authorities, here there is no one except the trustees own accord.

Viscount Simonds’ statement of the beneficiary principle in Leahy v Attorney General for New South Wales (1959) seems to confirm this but causes confusion.  He said that even though “… a purpose or object cannot sue, but, if it be charitable, the Attorney-General can sue to enforce it.”[7] However, from this statement it was also inferred to mean that the beneficiary principle may be satisfied if there exists someone who could litigate to enforce the duties of the trustee of a non-charitable purpose trust.”

This hypothesis was taken up in Re Denley, where Lord Goff J said that

“… there may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would, as it seems to me, apply to invalidate the trust…the beneficiary principle is [directed at] purpose or object trusts which are abstract or impersonal.”[8]

This seems to open a flood gate scenario; for the acknowledgement of private purpose trust. If it could be satisfied that firstly there existed someone so intimately vested with the trust that they devote themselves to ensure that the purpose of the trust is being fulfilled; secondly that they can be granted legal standing to get the trust enforced and thirdly that they could be trusted to exercise their powers to enforce that trust; then Goff J concluded such a trust was not subject to the beneficiary principle because it was “directly or indirectly for the benefit of an individual or individuals”; who could have it enforced. However, cases after Re Denley did not seem to adopt such an interpretation; instead in Re Grants Wills Trusts (1980)[9], Vinelott J followed Goff J to mean that private purpose trusts; with a defined class of beneficiaries; are like discretionary trust; where a class of potential beneficiaries is to be regarded as collectively having a beneficial interest in the trust property, and he held that the employees in Re Denley could be regarded wholly owning the beneficial interest i.e. land.

Before, moving to the exception to Private purpose trusts, it is noteworthy to see that how this concept breaches the rule of perpetuities; which requires that once a trust has been created the property must vest in individuals within a recognised period of time. The perpetuity period at common law is 21 years, however, this has been altered by s 5 of the Perpetuities and Accumulations Act 2009[10] which extends the vesting period to 125 years from the creation of the trust. But if the property does not vest in the allotted time, the interest would lapse; this is placed for economic reason, i.e. to restrict property from being open-endedly inaccessible. But for private purpose trusts, this makes life problematic as the trust property never vests in any ascertainable beneficiary and the property remains inalienable i.e. it cannot be disposed of. It is for this reason that s 15 of the 2009 Act states that perpetuity period does not apply to purpose trusts. The consequences for ignoring the rule of perpetuity could be seen in Musset v. Bingle (1876)[11] where the court dismissed a disposition with no time limit set for the continuance of the purpose; i.e. maintenance of a memorial. It must be contrasted with Re Hooper (1932[12]) where a similar disposition for the maintenance of tombs and monuments was held valid because the disposition mentioned the maintenance to end at its legal limit, i.e. 21 years under common law.

However, there exist exceptions to the rule, listed in Re Endacott (1960)[13], private purpose trusts may be held valid, despite infringing the beneficiary and perpetuities rules. Firstly, as trusts for the erection or maintenance of monuments or graves; secondly for religious services to the extent that these are not charitable in advancement of religion; Bourne v Keane. And there must be an element of a benefit to the local community; re Hetherington. And, thirdly for trusts to maintain animals. In Re Dean, the courts, being sympathetic to the intention of the testator, affirmed the use of the “Petingall” order; which was devised in: Pettingall v Pettingall[14]. This order required the trustee or executor to undertake the task/s of the will relating to the mentioned animal. The justification for the allowance of these private purpose trusts was primarily sympathy to the testator; and that the purposes were beneficial and it was reasonably possible to execute them through a court order to carry out the purpose. Most notably, Roxburgh J in Re Astor (1952) [15]said that in most of the aforesaid cases, the trusts did not in fact breach the beneficiary principle in a way; there was always somebody who had the power to take the matter to court to ensure proper execution of the trust stipulations by the trustee.

Another problem facing with the validity of private purpose trusts are gifts to or held on trust for unincorporated associations, expressly excluding charities, as they create difficulties in terms of ownership of the property and enforceability of the trust. An unincorporated association is an assembly of persons who come together to achieve some purpose; although lacking any legal personality; unlike a limited company, such associations have no right or duties except those assumed by its distinct followers. Thus, every members of the association is responsible for their own actions, even if carried out on behalf of the association, because it is not a legal entity.

The concern is that gift to such associations depend on the court willingness to place a construction on them; in Neville Estates Ltd v Madden [1962][16] Cross J lays down three possible propositions for their validity. In the first scenario, he says, a gift may be validated to such an association by way of joint tenancy or co-ownership, on the date of the gift thus each member getting equal share and could sever their respective share; but this may infringe upon the settler’s intention, that he may not have wanted disbursement of the gift; Leahy v AG for New South Wales. The second alternative he discussed was the placement of the share to the next member, on the death or resignation of the previous member. It is suggested that this approach is derived from contractual obligations which may exist between the association; Conservative Central Office v Burrell (1982)[17]; and is bound by this contractual duty whereby the members use the property for the allotted purpose. Re Lipinski’s Will Trusts affirmed that such gifts or transfers are to be held valid, as dispositions to the members, who are under a contractual duty to use the property in furtherance of the association’s purpose; such a purpose trust may not fail. This is called the contract holding theory. The third alternative, he suggest is the transfer of a gift to an unincorporated association as a private purpose trust which may only be validated if it were charitable or fulfil the requirements in Re Denly; however such an approach would be put the transferor in a devastating position. Similarly, when such an association is dissolved issues arise as to the ownership and surplus funds. It is suggested that it should fall under an ART but there exists no coherent regime. In Re William Denby Sick and Benevolent Funds (1971)[18] Brightman J identified four methods of dissolution, namely automatic dissolution by events, voluntary dissolution by members, permanent loss of substratum and dissolution by a court.

The beneficiary principle is the glue which holds trustee accountable for his trust obligations; because of its significance court generally refuse to accept private purpose trusts. Courts are further discontent by the ignorance of the rule of perpetuities, but are willing to uphold such trusts despite the fact that no beneficiaries exist to enforce such a trust. Such trusts were classified as anomalous cases or trusts of imperfect obligation by Lord Evershed in Re Endecott. Even still, such trust fly in the face of the rule of perpetuities as they tend to last a long time; but the courts have accepted such trusts because of  human sentiments. There are known as trusts of imperfect obligation because of their breach of the beneficiary principle and the lack of any means to sway the trustees to enforce them. Furthermore unincorporated associations are also characterized as an exception to the beneficiary principle as well and courts have adopted various methods to interpret the dispositions. But nevertheless, it must be submitted that employing the contract holding theory to validate disposition to unincorporated associations throws this areas of the law of trusts, at the mercy of the contractual law, which undermines the control of the beneficiary principle.

Bibliography

1. “The Law of Trusts” by J.E. Penner, 6^th Edition
2. “An Introduction to the Law of Trusts” By Simon Gardner, 3^rd Edition.
3. “Trusts Law: Text and Materials” By Graham Moffat, Gerard M. D. Bean, Gerry Bean, John Dewar; 4^th Edition.
4. “Todd & Wilson's Textbook on Trusts” By Sarah Wilson
5. Todd and Watt's Cases and Materials on Equity and Trusts By Gary Watt 6th edition
6. Unlocking Trusts By Mohamed Ramjohn 4th edition

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[1] Knight vs. Knight (1890) - http://www.numyspace.co.uk/~unn_mlif1/creation_1/Creation%20of%20express%20trusts%201.ppt

[2] Morice vs. Bishop of Durham(1804) - http://www.vanuatu.usp.ac.fj/courses/la302_equity_trusts_and_succession_1/LA302_Cases/Morice_v_The_Bishop_of_Durham.html

[3] Pg 246 – The Law of Trusts by Penner – 9^th edition

[4] Pg 246 – The Law of Trusts by Penner – 9^th edition

[5] Pg 247 – The Law of Trusts by Penner – 9^th edition

[6] Pg 247 – The Law of Trusts by Penner – 9^th edition

[7] PG 366 - Cases & Materials on Trusts By Mohamed Ramjohn

[8] Pg 75 - Todd and Watt's Cases and Materials on Equity and Trusts By Gary Watt 6^th edition

[9] Pg 296 - Unlocking Trusts By Mohamed Ramjohn 4^th edition

[10] http://www.legislation.gov.uk/ukpga/2009/18/contents

[11] The Law of Trusts by Penner – 9th edition – Chapter 9

[12] The Law of Trusts by Penner – 9th edition – Chapter 9

[13] Re Endacott (1960)- http://mcbridesguides.com/2012/09/12/the-beneficiary-principle/

[14] The Law of Trusts by Penner – 9th edition – Chapter 9

[15] The Law of Trusts by Penner – 9th edition – Chapter 9

[16] Neville Estates Ltd v Madden [1962]- http://swarb.co.uk/neville-estates-ltd-v-madden-chd-1962/

[17] Conservative Central Office v Burrell (1982)-http://www.bailii.org/ew/cases/EWCA/Civ/1981/2.html

[18] Pg 181 - Cases & Materials on Trusts By Mohamed Ramjohn