•    Trust and debt

A debtor is not normally trustee for his or her creditor, there is no specified fund held on trust.

A beneficiary, of legal age and fully entitled, can call for the trustee to transfer the trust property to him or her at any time; a secured creditor may only sell the security to recover the debt in the event of a default by the debtor. Similarly, a creditor is restricted to the common law remedy of damages to recover lent money, whereas a person who has paid money on trust – by paying money into a solicitors trust account, for instance, can trace money into any property into which it has been converted.

Whether a trust or debt has been created depends on the intention of the parties. It was held that these two concepts are not mutually exclusive in Barclays Bank Ltd v Quistclose Investments Ltd.

Re Kayford Ltd
Facts:
1.    The company conducted a mail order business. Customers either paid the full price for goods in advance or paid a deposit.
2.    Its suppliers got into difficulties and Kayford could not meet the orders. Its accountants advised the company to open a separate ‘customers’ trust deposit account’ and pay into it all the money received form customers for goods not yet delivered, withdrawing money only upon delivery of the goods.
3.    The object was to allow the company to fully refund payments to customers should the company go into liquidation.
4.    The company accepted this advice except that the money was paid into a dormant account in the company’s name, the title of the account being changed later.
5.    When the company went into liquidation, the liquidators sought a declaration as to the ownership of the sums of money paid into the account.
Held:
[F]rom the outset the advice (which was accepted) was to establish a trust account at the bank. The whole purpose of what was done was to ensure that the moneys remained in the beneficial ownership of those who sent them, and a trust is the obvious means of achieving this. No doubt the general rule is that if you send money to a company for goods which are not delivered, you are merely a creditor of the company unless a trust has been created. The sender may create a trust by using appropriate words when he sends the money, or the company do it by taking suitable steps on or before receiving the money. If either is done, the obligations in respect of the money are transformed from contract to property, from debt to trust.

•    Trust and Body Corporate

Unlike a body corporate, a trust is not a separate legal entity. Property held in the name of the trustee is beneficially owned by the cestui que trust.

Property held in the name of a corporation is beneficially owned by the corporation, not by its shareholders. The shareholders are the beneficial owners of their shares which give them certain rights.

•    Trustee and Personal Representative

The respective powers and duties of executor and trustee differ. The executor’s duties are limited to matters necessary for the administration and distribution of the estate. They may become a trustee of property in the estate if he or she holds in it his or her name for the beneficiaries after the administration of the estate is completed.

The beneficiaries of a deceased estate do not obtain any equitable interest in the assets of the estate by virtue of the will alone. Their rights initially are restricted to a right to secure proper administration of the estate: Livingston v Commissioner of Stamp Duties (Qld).

6.3 Trusts and Powers of Appointment – the Machinery of Discretionary Trusts

•    Trusts and powers

A power of appointment is a power to dispose of or distribute the property of some other person. It is not necessary for the holder of such a power to have title to the property subject to the power, nor is the holder necessarily subject to any fiduciary duty in the manner of his or her exercise of the power.  

There are basic differences between trusts and powers of appointment, however such powers form the basis of the modern discretionary trust, and the power then become part of the machinery of the trust, rather than something which can be distinguished from it.

Powers of appointment come in 3 different types:

1.    General :
-    power to appoint the property to anyone in the world, including the holder of the power himself or herself;
-    Gregory v Hudson: The Hallmark of a general power in his honour’s view was that it was a power to appoint to anyone in the world, including the donee or holder of the power;
-    these are not used in discretionary trusts;
-    they are sometimes used in wills;

2.    Special :
-    Power to appoint in favour of a class or group;
-    The object of such power must be described with the necessary certainty;
-    Under current law there is no need to be able to identify all the objects of the group for the power to be effective;
-    Thus it is better described as being
a power to appoint in favour of a range of objects defined principally by inclusion;

3.    Hybrid or Intermediate Powers :
-    Usually described as a power to appoint in favour of anyone with the exception of some excluded group of class;
-    The holder of the power must be excluded, either expressly or by necessary implication, which will be the case if the power is conferred on a trustee;
-    This power can be described as a power to appoint in favour of a range of objects identified by exclusion;

What type of power has been conferred depends on the provisions of the instrument conferring the power.

Where the power of appointment is conferred on someone who is also a trustee or otherwise subject to fiduciary obligations, the trustee or fiduciary will usually not be entitled to exercise the power for his or her own benefit  the power will be a special and not a general power.

In light of Re Baden’s Deed Trusts, there are now good grounds for saying that there should only be two classes of powers of appointment, general and special. 

Hybrid powers are acceptable in discretionary trusts formed inter vivos but are invalid when used in a will, since they infringe a supposed rule against delegation of will-making power: Tatham v Huxtable. However such a power may be validly conferred by will in England: Re Park.

As well as the ‘type’ of power, it is also important to identify the nature of a power. A power of appointment might fall into one of two categories:
1.    Trust powers: powers in the nature of a trust under which the holder of the power is ‘directed’ or obliged to exercise the power – a power of appointment that MUST be exercised in favour of the designated range of beneficiaries, the holder is under a fiduciary obligation to exercise the power. OR;
2.    Mere or bare powers: powers of appointment in which the holder of the power is ‘authorised’, but not obliged to exercise the power – the holder MAY exercise the power by distributing income favour of the range of designated objects but is not bound to do so;

•    Trustee holding mere or bare power

Where there is a mere power of appointment in a trust, it does not convert the power into a trust power. The trustee is still not bound to make any appointment under the power but is subject to fiduciary obligations in the manner in which the power is exercised, including any decision not to exercise it.

‘A settlor or testator who entrusts a power to his trustee must be relying on them in their fiduciary capacity so they cannot simply push aside the power and refuse to consider whether it ought in their judgment to be exercised’: Re Gulbenkian’s Settlement Trusts.

The objects of the mere power have no right to compel the holder to exercise it, however, they can prevent any improper exercise of the power, such as an appointment in favour of someone outside the designated range or benefit.

In determining whether a mere or trust power is intended, the whole of the instrument must be taken into consideration, not just the provision conferring the power, to ascertain the intention of the settlor or testator: Horan v Borthwick. The crucial test is whether the donee or holder of the power is bound to exercise it.

•    Trustee holding a trust power

The distinction between mere and trust powers is of less importance than it once was. In the case of trust powers, the class of objects had to be ‘ascertainable’ at the date the instrument came into operation, such that a complete list of those objects could be made at the date of the testator’s death, or at the date of execution of a settlement inter vivos: IRC v Broadway Cottages Trust.  test known as ‘list certainty’, while the test for the description of objects of mere powers is known as ‘criterion certainty’. 

Re Baden’s Deed Trusts; McPhail v Doulton
Facts: A fund was settled on trustees to provide retirement and other benefits for the staff, including former staff of a certain company, together with their relatives and dependants. Clause 9 of the deed provided that ‘The trustee shall apply the net income in making at their absolute discretion grants to or for the benefit of any of the staff, former staff, their relatives and dependants in such amounts at such times and on such conditions (if any) as they think fit’. No-one was to have any rights to or in the fund except by exercise of the trustees’ discretion. The settlor’s executors sought a declaration that the trust was void.
Held: It was agreed that this was a trust power. The trust when considered as a whole, clearly cast an imperative obligation on the trustees to exercise the power of appointment in favour of the members of the designated range of objects. 3 judges held that the tests for certainty for the description of objects of mere powers and trust powers should be assimilated. A trust power will be valid if it can be said with certainty whether a given postulant is or is not a member of the range of objects. The courts main role was to give effect to the intention of the settlor, which could be done by appointing new trustees or authorising some scheme of distribution.

When discussing the application of criterion certainty, linguistic and semantic uncertainty, which would render any settlement void was distinguished from evidentiary uncertainty, which could be resolved by directions.
It was also stated that a trust might fail where the definition of beneficiaries was so hopelessly wide as not to form ‘anything like a class’ so that the trust was administratively unworkable.

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