6.1 The Classification of Trusts

A trust exists where the owner of property is obliged to deal with that property for the benefit of some other person or persons, or for some purpose recognized by the law. 
There are 3 necessary elements:
•    The trustee: the titleholder, under a personal obligation to deal with the property for the benefit of the beneficiary or object of the trust.
•    Trust property: must be identifiable and capable of being held on trust;
•    The beneficiary or object: a person or group of persons including an unborn child, for whose benefit the trustee holds the property.

Trusts fall into two broad groups:
1)    Express Trusts: trusts arising from express declaration, which can be effected by some agreement or common intention held by the parties to the trust. Trusts for charitable purposes are usually express trusts.

2)     Trusts arising by operation of law:
a.    Resulting Trusts: There are two kinds:
- An automatic resulting trust is imposed to fill what would otherwise be a gap in beneficial ownership: e.g., where a testator devises Blackacre to trustees on trust for A for life, and fails to dispose of the equitable remainder, or for A if she attains the age of 25 years and he or she does not.
A presumed resulting trust arises by virtue of the application of a rebuttable presumption of intention, deriving from the failure of the person who acquires title to contribute to the cost of its acquisition.
- Resulting trusts are also known as implied trusts, but the modern judiciary prefers ‘resulting’. Note that the implied trust referred to in the Conveyancing Act 1919 (NSW) s23C(2) is probably a presumed resulting trust, though this point has not yet been resolved.
b.    Constructive trusts: These are trusts imposed by the court irrespective of the intentions of the parties, in circumstances where it would be unconscionable for the legal titleholder to deny the beneficial interest claimed by another party.

•    The Origins of Trusts

Trusts have their origins in feoffments to uses employed in late medieval England. Under those arrangements, a landholder, the feoffer, would convey land to certain trusted agents, the feoffees to uses, who were bound to hold the land for the benefit of (to the use of) whomever the feoffor designated. Feoffments to uses allowed feudal landholders to make wills of their lands, which previously would simply pass to their heirs at law, the eldest son, or the eldest daughter if there were no sons. They also allowed land holders to effect settlements of their land which included limitations providing for future interests in the land, something unknown to the common law. By 1450, much of the land in England was held in use; that is, subject to feoffment to uses.

The courts of common law would not recognise these arrangements; the court of Chancery recognized uses and enforced the obligations of feoffees to uses in its ‘English’ jurisdiction by resort to principles which came to be known as equity. Henry VIII found himself in need of finances in the 1530’s and attempted to have a bill passed by the parliament abolishing uses, but that met with opposition in the commons, he then made a test case where the judges agreed that no will could be made of an interest in land held in use. The Commons then compromised and the result was the Statute of Uses 1535. 

This statute provided that, where one person held any land to the ‘use’, trust or confidence’ of another person in any estate, that thereafter the second person would be deemed to hold an estate at law equal to that previously held for him in use.

In 1540, the Statute of Wills was introduced, which gave a statutory right to make testamentary gifts of land, subject to a proviso that a Crown should enjoy wardship of one third of the land so devised.

•    Discretionary Trusts

These are trusts so called because of the discretion or power conferred on the trustee
in dealing with or distributing the beneficial interests in the trust estate. Those discretions will usually include:
1.    A discretion to select from the designated range of objects of the trust those who are to receive benefits of income, capital or both;
2.    an accompanying power to decide the amount or proportion of income or capital to be allocated to the selected object or objects; and
3.    a power to decide not to allocate benefits to some objects or, indeed, to allocate benefits to one object to the exclusion of all others.
There will sometimes be an additional discretion: a power to add to the designated range of objects.

In a trust established on such terms, no beneficiary has any entitlement to any specific part of the trust property unless and until the trustee decides to allocate some or all of the income or capital to that beneficiary. Prior to this, it is outlined in Gartside v IRC that the rights of the beneficiaries are restricted to:
1.    a right for nomination by the trustee;
2.    right to compel proper administration of the trust.

Point 1 may also be coupled with another power, a power not to distribute at all to the class or range of objects of the power. A trust set up on this way will usually be structured so that it is, on its face, a trust in favour of some designated group e.g the descendants of a certain person living at a defined date, usually 80 yrs from the date the trust comes into operation.  usually referred to as a gift-over in default of appointment.

Where the trustee is obliged to make a distribution, the trustee is said to hold under a ‘discretionary trust’  the trustee is bound to make a distribution. The only discretion he or she has is the discretion as to the proportions in which the property will be distributed. This is described as a power of appointment in the nature of a trust or trust power.

If the trustee has a ‘discretionary power’, it means that the trustee has the power to distribute, but it is not bound to do so and thus has a double discretion: whether to allocate the property in the first place, and if he or she does so, a discretion as to the proportions in which he or she makes the allocations, usually including power to give all to one to the exclusion of all others. Under the discretionary power, the trustee is ‘authorised’ but not obliged to distribute property among some group or class.  this is ‘mere’ or ‘bare’ power of appointment as opposed to power of appointment ‘in the nature of a trust’.

Under the trust power the trustee is obliged, or ‘directed’, to distribute among the designated group. A power of appointment is an authority vested in a person to deal with or dispose of property not his or her own, usually conferred by will or settlement. 

In a discretionary power there is no trust in favour of the objects of the discretionary power because the objects of the power are not beneficiaries in the true sense because the trustee is not bound to hold the property for their benefit  they cannot compel the trustee to make a distribution, and the trustee can, refrain from conferring any benefits on any of them.

Even though the holder of a trust power is ‘obliged’ to exercise the power and appoint the property, that obligation, at least so far as the capital of the trust is concerned, is expressed as an obligation to distribute no later than the expiry of a period of time fixed by reference to the rule against perpetuities  during that time, there is no rule requiring the trustee to exercise the power within a ‘reasonable period’: Neill v Public Trustee.

Neither the objects of discretionary powers nor the members of a class of beneficiaries of a discretionary trust have any right to demand a distribution in their favour. Both have an ‘interest’ in the assets of the trust in the sense that they can enforce due administration of the trust. They are entitled to information about the trust: Spellson v George.

But they cannot require the trustees to give reasons for the exercise of their discretions: Re Londonderry’s Settlement.

Where a class of objects of a discretionary trust is ascertained (that is able to be identified and listed), are all of legal age and unanimous, that class of object combined can call for a distribution: Sir Moses Montefiore Jewish Home v Howell & Co (No 7) Pty Ltd.

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