A. Introduction: The powers conferred on trustees under the terms of the trust or by law can be conveniently broken down into two categories: administrative powers and dispositive powers. Administrative powers relate primarily to the investment of trust assets.
The second category, dispositive powers, relates to the distribution of the trust income.1 In this background this paper examines the nature of dispositive powers particularly in the light of rule laid down in Hasting-Base Case. The rules of equity relating to powers may be divided into three main groups: 2
i. Public policy rules, the rule against perpetuities, and the certainties of objects, in particular.
ii. Rules relating to the valid exercise of dispositive powers.3
iii. Rule, which relate to the valid and bona fide exercise of a power which nonetheless lends itself to be challenged in some way, mostly as an unintended consequence.4
B. Statutory dispositive powers Tax considerations play a primary role in the selection of the most desirable trust set-up, yet the wide discretion conferred on trustees is sometimes motivated in fact by uncertainty as to how the trust fund will eventually be applied among various potential beneficiaries.5
(1) The objects of discretionary powers A trust is a duty that the trustee must exercise in good faith and taking into account the best interests of the beneficiaries.6 The discretionary powers conferred under a trust may be divided into two categories: (a) those allowing trustees to appoint new objects of their power, ie to include new objects in the class of beneficiaries, and (b) those allowing trustees to allot income and capital within a given class of beneficiaries.
(a) Power to add beneficiaries The widest extent of a trustee's discretionary power is possibly contained in the following clause: Power by any deed or deeds revocable or irrevocable to declare that any person or persons corporation or corporations or charity or charities (other than a person or corporation who shall for the time being be a member of the excepted class or one of the trustees) shall thenceforth and for such period as shall be specified in such deed or deeds (not extending beyond the closing date) be included in the class of beneficiaries hereinbefore defined provided always that any such deed shall not take effect unless and until the same (or a memorandum stating the effect thereof) has been endorsed on this settlement.
This clause effectively allows the trustees to appoint virtually anybody (except an excluded person or themselves) to be a beneficiary of the settlement. This view was upheld by Templeman J in Re Manisty's Settlement as a power which the settler, disposing of his own property under skilled advice, could validly confer on his trustees.7
(b) Appointment powers within a class of beneficiaries A discretionary trust's description in the form of a power of appointment within a given class of beneficiaries or 'objects' was provided in the case of Exp Viscount Wimborne.8 And following the distinction made by Lord Reid in Gartside v Inland Revenue Commissioners, a settlement is categorised as a discretionary trust.9 Specific conditions of discretionary trust are mitigated by Lord Reid's statement in Re Gulbenkian,10 a case of a will trust under which the trustees had discretion to apply the trust fund in favour of any relatives of the settler, any person employed by him, or residing with him.
(c) Statutory enactments of offshore An express statutory provision permitting discretionary powers of appointment to be conferred on trustees is contained in some offshore statutes. An example is Article 39 of the Trusts (Jersey) Law 1984, providing for both a trustee's power to add beneficiaries and a power to appoint trust property within a given class. Equivalent provisions exist under the laws of Guernsey,11 Belize,12 the Turks and Caicos Islands,13 Labuan,14 Malta,15 and Mauritius.16
(d) 'Objects of powers' and their rights The rights of the 'objects' of a discretionary power of appointment conferred on the trustee are quite limited.17 Some recent decisions have reinforced this statement. In Johns v Johns a 'mere expectation' was held not to be a future interest in the trust fund.18 In Hunt v Muollo the court declined to order the production of certain discretionary trust documents for the purpose of an examination.19 This principle has also been followed in the case of Schmidt v Rosewood Trust Limited,20 and in Jersey Royal Court decision in Freeman v Ansbacher Trustees (Jersey) Limited.21 The English decision in Re Manisty's Settlement22 imposes a criterion consistent with the test spelt out in McPhail v Doulton.23
The circumstance that the beneficiaries of a discretionary trust have no proprietary interest in the trust fund, nor any claim to a mandatory distribution of income or principal, is described in the Uniform Trust Code (UTC) with an emphasis on the 'asset protection' features of such a situation.24 A conflict may arise25 in respect of the trustee's dispositive powers. The old case of Re Joycey shows that some room for uncertainty may still exist.26An additional issue is that a minor cannot give a valid receipt.27
(a) Powers of maintenance and of advancement under the Trustee Act 1925 The power under section 31 of the English Trustee Act 1925 is described as a 'power to apply income for the maintenance and to accumulate surplus income during a minority'. 28 If the beneficiary has a contingent interest under the trust, eg on reaching a certain age, the operation of the rule under section 31 of the Trustee Act 1925 provides for a three-stage system under which the trustees may:
(a) exercise their power of maintenance and apply part of the trust income to such beneficiary during his or her minority;
(b) apply all of the trust income to the beneficiary from his or her eighteenth birthday until the contingency is met; and
(c) hold the relevant share of the trust fund for that beneficiary absolutely once the contingency has been met.
The law29 requires the written consent of a beneficiary with a 'prior life or other interest' in the trust property before an advancement to another beneficiary.30
(b) Offshore statutory enactments Almost identical provisions to those of sections 31 and 32 of the English Trustee Act 1925 exist in all the offshore trust statutes directly influenced by it, such as those of the Bahamas,31 Bermuda,32 the BV1,33 the Cayman Islands,34 Hong Kong,35 the Isle of Man, 36 New Zealand, 37 and Singapore.38 The Trust Ordinance of Gibraltar provides for the statutory power of advancement,39 but not for the power of maintenance. Section 24 of the Trustee Act 1975 of Bermuda is similar to section 32 of the English Trustee Act 1925.
A higher degree of flexibility over the maximum amount available for advancement was recognised as desirable in the recent English decision in the matter of the trusts of two insurance policies CD (a minor) v O,40 where the court per Lloyd J exercised its discretion under the Variation of Trusts Act 1958 to vary the terms of a trust so that the whole trust fund, not merely one-half, could be advanced to a minor beneficiary. One of the latest enactments of this kind is section 48 of the Trusts (Guernsey) Law 2007, labelled 'power of accumulation and advancement.41
The provision under Jersey law42 was perhaps the earliest example of a re-enactment of the powers specified under sections 31 and 32 of the English Trustee Act 1925. Accordingly, it was almost literally followed in the trust statutes of Labuan,43 Malta, 44 and Mauritius,45 while it influenced the corresponding provisions under the laws of Turks and Caicos46 and Belize.47 Two common features of these offshore enactments are: (a) they are expressed as default powers applying 'subject to the terms of the trust'.48 (b) in respect of the trust law of Bermuda, the whole 'presumptive share' of a beneficiary may be advanced under the statutes.
C. The doctrine of 'fraud on a power' The exercise of a power for an improper purpose is technically described as a 'fraud on a power'.49 The decision in Cowan v Scargill,50 may be construed as an indication that the exercise of investment powers to further a trustee's political views, rather than to pursue the best return for the beneficiaries, amounts to a 'fraud on a power'.
(1) Distributions to non-beneficiaries In Wong v Burt the Court of Appeal took a harsh approach to a distribution intended to benefit some non-objects (ie the settler's grandchildren),51 while in Kain v Hutton the Supreme Court upheld the exercise of a power of appointment followed by the beneficiary's resettlement of some property for some people who would not have been beneficiaries under the original settlement.52
In Wong v Burt53 the trustees had implemented an 'overt and predetermined idea' that amounted to a 'fraud on a power'. A valid course of action would have been to advance capital to the grandmother, who would then exercise a genuine freedom of action to benefit her grandchildren. This principle was applied again by the Court of Appeal in Kain v Hutton, 54 and subsequently affirmed by the Supreme Court of New Zealand.55
The trustees' argument that the transaction should be treated as an exercise of their power of appointment under the trust instrument was rejected, based on a distinction between powers of appointment and advancement.56
A major lesson to be learnt from these cases, particularly Wong v Burt,57 is that trustees are better advised to apply for direction by the court in cases where their intended course of action, however correctly motivated, they may be liable to cross the border of a 'fraud on a power'. For example, in Finch v Wachovia Bank & Trust Co NA, the trustee declined to 'invade capital" and made a distribution to a life tenant (the testator's widow) to fund her intended gifts to family members and charities.58
(2) Distributions 'for the benefit' of a beneficiary The trustees' intentions behind the actions, which earned a harsh sanction, were benevolence and socially understandable.59
(a) Revocable trust In Brown v Miller,60 a recent decision by the Court of Appeals of Florida, (Fifth District), a distribution to the revocable trust created by a beneficiary was held to be equivalent to a distribution to that of beneficiary.
(b) Paying a beneficiary's debts The exercise of a power of advancement to pay some debts owed by a beneficiary had been approved in Lowther v Bentinck as early as 1874.61 In Klug v Klug,62 a decision of 1918, the court directed that a sufficient sum should be raised by the trustees to meet a beneficiary's liabilities in respect of legacy duties, although one of the co-trustees, who happened to be the beneficiary's mother, refused consent since he had married without her approval.63
A decision by the Jersey Royal Court In re Esteem Settlement,64 and affirmed by the Court of Appeal,65 provides a remarkable exception to the principle that the payment of a debt owed by a beneficiary is necessarily to be construed as an application of trust property 'for his benefit'. The court declined to order a distribution out of the trust fund on the grounds that this would not be for the benefit of grantor.66 Most recently, the Jersey Royal Court referred to the principles laid down in another case.67
(c) Discharging a beneficiary's moral obligations Several cases involved the application of trust funds to discharge moral obligations a beneficiary felt were owing to some specified object.68 Re Hampden's Settlement Trusty's case is an example of the exercise of a power of advancement to discharge a beneficiary's obligation to provide for his family and dependants.69 Another example is Netherton v Netherton,70 followed by the Jersey case In re X Trust.71 In the latter case, the Jersey Royal Courier Deputy Bailiff Birt approved a capital distribution out of a trust settled by the husband's father, of which the wife was not a beneficiary, in order to enable the husband to meet a previous court order under the Matrimonial Causes (Jersey) Law 1949, where the same trust had been treated as a 'resource' available to the husband.72
D. When things go wrong: the 'rule in Hastings-Boss' Exercising the trustees' dispositive powers in good faith, for a proper purpose, and within the boundaries of the discretion conferred on them may bring about unintended consequences, especially of a fiscal nature, mostly as a result of the exceedingly complex and quickly changing tax legislation affecting the settler and beneficiaries in various jurisdictions. An alternative escape route has gained increasing judicial favour during the first decade of the twenty-first century.73
Under the 'rule in Hastings-Bass the court has discretion to set aside the exercise of a trustee's power and thus effectively 'undo' the unintended tax consequences of its exercise. To the extent that trustees ordinarily exercise their powers by way of documents such as deeds of appointment, the practical outcome of the 'rule in Hastings-Bass is effectively equivalent to that of rectification, yet the scope for the court's discretion to this effect is considerably wider. An order under the 'rule in Hastings-Bass can be made if the court is satisfied that the unintended tax consequences result from the trustees' failure to take into account relevant considerations, or indeed their reliance on considerations they should not have taken into account. The tax implications of a particular transaction, especially under a change of the relevant tax regime, are an example of such considerations.
From this point of view, the 'rule in Hastings-Bass, as it has evolved in the twenty-first century, appears to be a far reaching, readily available remedy for trustees and beneficiaries when things go wrong. In fact, the 'user- friendliness' of the rule is the main reason for its legal weakness, as perceived by some authoritative commentators.74
(To be continued tomorrow)
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