Discretionary beneficiary at present?

Trusts Discussion
1

Hello Forum

A layperson question
for better understanding, if you have the time.

An insurance company’s draft discretionary trust deed includes a “beneficiary”, “and at any time during there are no Beneficiaries under any of (i) to (iv) above, any company, body or trust established for charitable purposes only".

My questions
If the trustees wish to amend the trust and assuming there are other human beneficiaries at this time and there is no express permission to amend. So the consent of all the trust beneficiaries would be required or the court’s permission.

(1) Is the above a remote possibility of a beneficiary, or not a beneficiary at all at present?

If they are a potential beneficiary it maybe impossible to pin down what charity the trustees need consent from.
(2) If the above is a potential beneficiary, so their consent is required, maybe a crude solution, how about the beneficiary being revocable from onset?

In this same trust, in the default clause, similar appears “or if none, for such charitable purposes as the trustees shall select”.
But this time, the trust says who is selecting this or these charitable beneficiaries,the trustees.

Thank you again for your assistance.
Neil

2

A trust is not like a contract. It cannot just be amended by agreement of the parties i.e. the settlor if alive and the current trustees.

That is why a discretionary trust confers on the trustees very wide and flexible powers so they can deal with most if not all eventualities.

The eligible beneficiaries are generally fixed from the outset, by description if not named, though they may not yet be alive e.g. future descendants of the settlor and if the class of beneficiaries is described its members may fluctuate e.g. the employees of a particular company. Many trusts now allow a beneficiary to be added to the class by the trustees usually with some specified person’s consent.

It is dangerous to comment on any trust document without seeing the exact wording but the provisions about charities seem clearly intended to avoid the possibility that everyone who would come within the class of beneficiaries is no longer alive and there is no prospect of anyone qualifying in future either. You cannot distribute trust property to a deceased beneficiary or, unless they themselves come within the class, to those benefiting under their will or intestacy.

Although it is only in the default clause that the trustees are to select which charities, including them as “reserve” beneficiaries means it is also the trustees who can choose which are to benefit. If charities are now the only conceivable eligible beneficiaries it is the duty of the trustees to choose and distribute. The settlor has manifested a general charitable intent to avoid the consequences of the property falling back into his personal ownership even if he is dead (a resulting trust). Given that there are no human beneficiaries that might well mean that the State would scoop the pool on intestacy or some very remote relatives or that his will would in effect reactivate and those entitled to residue would take.

If the settlor is alive he can be asked which charities he favours. If dead and he has not indicated his wishes in a letter to the trustees it may be possible to investigate whether he made charitable donations while alive. The trustees must not distribute to charities unless it is absolutely certain that there are no living or yet unborn persons who do or would come within the specified classes of beneficiary because only then can charities benefit. Trustees can take a little time to decide but their duty is to choose and distribute. If they do not the Court can remove them and appoint new trustees who will.

As the charities are not named you might well ask: who will find out? If the trustees do nothing they may be held in breach of trust and if they wrongly deal with the trust assets civil liability may not be their only sanction. You do not say what those assets are or what income they may produce but failure to deal responsibly and in a timely manner with the assets and income is going to put the trustees in jeopardy. You also do not say who the trustees are. No professional trustee is going to take that risk. Lay trustees often have the conscience of a well-trained hippopotamus but even a hippo would be cute enough not to mess about with what did not belong to him, especially as he would be unpaid and just inviting trouble unnecessarily for no reward. Anyone in a hole should stop digging.

Jack Harper

3

Thank you Jack

You always very kindly take the time to reply.

Your reply, was packed full of information and knowledge. It is only last two decades, that I have had some limited contact with Trusts. During this time more flexible powers have been common in discretionary trusts and flexible life interest trusts.

So I may generally think trusts are more amendable than they are. Being aware, of powers of amendment, including adding beneficiaries and possibly excluding beneficiaries.

I was interested to know if it was possible without the very wide, flexible powers which I believe are called the overriding powers, to achieve some flexibility, in a Trust. So if all the core beneficiaries consent, the trustees could amend a trust, but still have a reserve beneficiaries whose consent is not needed to amend.

The text below was from an Insurance company draft deed and caught my attention.

“and at any time during which there are no Beneficiaries under any of (i) to (vi) above, any company, body or trust established for charitable purposes only.”

What appeared to me after some thinking, in error this might be a “beneficiary” whose consent is not required, not a beneficiary at this moment in time as they would not benefit at that moment in time, but could in the future. I believe what is called a contingent interest. And because the charity or charities were not named, even more difficult for me to determine.

So in the insurance draft text this reserve beneficiary, at that moment in time, an undetermined charity or charities would be required, as they are a beneficiary.

I note what you say, Beneficiaries are normally fixed from the onset.

The only idea I could come up with, if allowed tac and trust law.

(1) was to make the reserve beneficiaries revocable?

(2) Or stating that any reserve beneficiaries consent is not required to amend the trust?

For better understanding and

A concern of the Overriding Powers being flawed, partly from a recent personal experience from a trust we thought was more flexible. And what you brought to my attention, the fairly recent court-reversed transfer, originally from GET to Grandview. It appears the transfer was void, due to the Grandview being a purpose trust, so had no direct human beneficiaries. Even though this transfer, was reported as the settlers’ intentions The GRT transfer provision only allowed transfers to a Trust, that had human beneficiaries.

Kind Regards

Neil

4

The charity does not have a contingent interest as technically defined. It is not a beneficiary at all until the condition is satisfied AND one or more specific charities is or are chosen. Any charity chosen will not have a contingent interest even then but a mere hope of benefiting, like any discretionary beneficiary. To benefit the charity the trustees may have the power if the trust deed permits as it surely will. Because a DT in standard form will permit the trustees to distribute ALL income and capital to ANY eligible beneficiary. If there are numerous living members of the eligible class that would be a most unusual thing to do, and would need justifying, but where there are none, and none likely to qualify in future, the trustees have a non-discretionary duty (not a power) to select as beneficiaries a charity (or several) plus a discretionary power to select by name which one(s) to include. So it seems highly appropriate to distribute everything to it or them once they have made them eligible. The trust would thereby become a charitable trust so distributions should be tax exempt.

I am afraid your suggestions marked (1) and (2) make no sense at all. They are simply misconceived.

Your analysis of Grand View is not analogous at all. In your case the trustees did not have a power to add a brand new beneficiary. Once the pre-condition was satisfied the trust automatically became one for such charity or charities as the trustees might select. They had a duty to select and a fiduciary power to distribute which must be exercised properly or the Court could intervene. The Court could not direct them as to which charities to select but it could make them do their duty to select or it could remove them as trustees and appointed trustees who would. In Grand View the power which the trustees had, also fiduciary, was a power to add a brand new beneficiary. It which was found by the Court to have been exercised improperly on the particular facts (by adding a purpose trust) and so it was void. The trust deed could have expressly allowed that but it did not.

In your case the analogy would be if the trustees distributed to a person who was not a charity in law, which meant they would have to do their best to verify that status before distributing. Distributing to a non-charity would make that exercise of their power improper and void and them liable in breach of trust if the property could not be recovered from whoever had acquired it.

Jack Harper