Anatomy of a discretionary trust

1. Introduction: I'll begin this essay by describing and defining what a discretionary trust is? A discretionary trust is a trust in respect of which the trustees are given a discretion to pay or apply the income, or capital or both to or for the benefit of all or any one of a group or class of objects on such terms and conditions as the trustees my see fit.
For example, S, a settler, transfers a cash fund of £100,000 to trustees on trust to pay or apply the income and capital (including accumulations of income) to or for the benefit of any or all of the settler's children, A, B and C, as the trustees may decide in their absolute discretion. In this example, a discretionary trust is created in respect of both income and capital.
Where the settler is uncertain as to future events and wishes the trustees to react to changed circumstances and the needs of the potential beneficiaries, he may create a discretionary trust. This would require the trustees to take into consideration the circumstances, including fiscal factors, surrounding individual members of the class of objects. The trustees may well take into account that the distribution of income will be more tax efficient if paid to objects with lower income and transfer of capital may be more beneficial to those with larger incomes. The effect is that the discretionary trust has the advantage of flexibility. Indeed, the settler may be one of the trustees and, even if he is not, he may still be entitled to exercise some influence over the trustees.
In Mettoy Pension Trustees Ltd v Evans,1 the UK High Court created a third type of power, namely, 'a fiduciary power in the full sense'. This is a power that cannot be released by the trustees. The courts will not compel the trustees to exercises their discretion, for the gift remains a fiduciary power and is not treated as a trust.
But if the trustees fail to exercise the power, the court may adopt a scheme that has effect of exercising the power in accordance with aims of the gift and the surrounding circumstances.
Who is a beneficiary?
Beneficiaries are the last of the five essential2 trust elements. Every trust must identify the persons who are to benefit from the trust assets during each phase of the trust.
The beneficiaries of a trust must almost always be people of charities. Only a few states permit pets to be named beneficiaries of a trust. At least one of the state statutes that permits pets to be beneficiaries of a trust gives the court considerable latitude to review the trust if the assets transferred to the trust are excessive.
The provisions that affect a beneficiary can be quite simple as illustrated in the following example.
Gary Grantor, hereby transfer $10,000 to Terri Trustee to hold in trust for the benefit of Mary Minor, as beneficiary. The trustee shall pay the income form this money to or for the benefit of the beneficiary until the beneficiary reaches age of 25. At such time, any assets remaining in this trust shall be distributed outright (i.e., without further trust) to John Smith. In many trusts, however, the provisions concerning beneficiaries are far more detailed and complex. Some trusts may give the beneficiary the right to demand that certain payments be made to them, or for their benefit. This is discussed in detail.
2. Conditions for invoking equity jurisdiction
Before I examine rights of a beneficiary under a discretionary trust, it will be appropriate to review conditions for invoking equity jurisdiction. The remedies offered by the law courts are very limited when contrasted with those available in equity.3 The English view has recognized this and contends that the legal remedy is never adequate. The US view goes almost as far except that upon prompt objection equity jurisdiction is not exercised in actions for purely pecuniary recoveries.4
Text writers agree to the general acceptance of the following fundamental principles of equity jurisdiction:5
1. Where the primary right or interest of the plaintiff is equitable only, the jurisdiction is necessarily exclusive and will always be exercised without regard to the nature of the relief; otherwise the party would be without remedy, since courts of law could not take cognizance of the case.
2. Where the primary right is legal, and the remedy sought is purely equitable, the jurisdiction is also exclusive, and always exists, but will not generally be exercised if the legal remedy, which the party might obtain, is adequate, complete and certain.
3. Where the primary right is legal, and the remedy is also legal, a recovery of money simply, or the possession of chattels, the jurisdiction is concurrent and only exists when the remedy which the party might obtain at law is not adequate.
3. Circumstances under which courts will exercise discretionary powers
Now I will begin by describing the events and happenings in a well-known case of Murphy Junior6 where an issue relating to the rights of beneficiary was reviewed and settled. In that landmark case a son, being a beneficiary in a trust, sued his further to disclose identity of trustees, as he (as plaintiff) was named as a potential beneficiary of the discretionary trust. The court was thus confronted with the following issues:
-- Does the plaintiff's case justify invoking the equity jurisdiction?
-- Whether or not circumstances exist to exercise discretionary powers of the court?
-- Is it a fit case for application of discovery jurisdiction?
-- Whether or not plaintiff has the right of seeking disclosure of identity of current trustees to the plaintiff who is a named potential beneficiary in the discretionary trust?
-- And to determine circumstances where courts will order disclosure form a third party?
The principles for invoking the rules of equity, justice and fair play were considered by the court. These principles state that:
(i) 'If through no fault of his own a person gets mixed up in the tortuous acts of others so as to facilitate their wrong-doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving his full information and disclosing the identity of the wrongdoers...Justice requires that he should cooperate in righting the wrong if he unwittingly facilitate its perpetrators'7
(ii) 'In this case the plaintiffs do not know, and cannot discover, who the persons are who have invaded their rights, and who may be said to have abstracted their property. Their proceedings have come to a deadlock, and it would be a denial of justice if means could not be found in this court to assist the plaintiffs'8
(iii) 'It is clear that courts do not compel discovery from persons who sustain no other relation to the contemplated litigation, or to the object of the suit, and that of witnesses; and it is also clear that a bill for discovery cannot be used to enable a plaintiff to fish for information of any causes of action he may have against other persons than the defendant... But when a plaintiff has a cause of action against persons who are defined ... by their relations to property ... by the management of which the plaintiff has suffered an injury, and the names and residences of these persons are unknown to him, it is not clear that there may not be such a state of facts as a 'The Court would have to decide whether in all the circumstances it was right to make an order. In so deciding it would no doubt consider such matters as the strength of the applicant's case against the unknown alleged wrong-doer, the relation subsisting between the alleged wrong-doer and the respondent, whether the information could be obtained from another source, and whether the giving of the information would put the respondent to trouble which could not be compensated by the payment of all expenses by the applicant.'9
(iv) "...there is good authority that the court may make orders with the purpose of ascertaining the whereabouts of the missing trust fund..."10
(v) 'A sweeping order requiring directors and an employee of the defendant company to make full disclosure of certain specified facts.'11
(vi) 'In order to enable justice to be done - in order to enable these funds to be traced - it is a very important part of the Court's armoury to be able to order discovery. The powers in this regard, and the extent to which they have gone, were exemplified in Norwich Pharmacal ...'12
The court in Murphy Junior's case13 thus came to the conclusion that in the circumstances of the case, invoking of equitable jurisdiction was justified. In its ordinary acceptation, as distinguished on the side from the general power to decide matters at all, and on the other form the jurisdiction "at law" or "common-law jurisdiction," it is the power to hear certain kinds and classes of civil causes according to the principles of the method and procedure adopted by the court of chancery, and to decide them in accordance with the doctrines and rules of equity jurisprudence, and decision my involve either the determination of the equitable rights, estates, and interests of remedies.
In order to bring a cause within the scope of the equity jurisdiction, one of two alternatives is essential; either the primacy right, estate, or interest relating to cause of action, must be equitable rather than legal; or the remedy granted must be in its nature purely equitable, or if it be a remedy which may also be given by a court of law, it must be one which, under the facts and circumstances of the case, can only be made complete and adequate through the equitable modes of procedure.14
The court observed that there can be no trust over the exercise of which the court will not assume a control. Such an observation must not be taken out of context; nor should it be invoked to justify the Court doing whatever it likes. However, it does serve to emphasize the wide jurisdiction of the Court when it comes to trusts.
The 'control' of trust involves ordering something to be done so as to enable the trustees to exercise their functions as described in Manisty and in Chaine-Nickson, or, to put it another way, to enable the plaintiff to exercise his rights as a potential beneficiary, with a view to applying to the court if, but only if, those rights have been infringed.
By extending the principle settled in A v C,15 it was observed by the court that such an extension is not, a judgment, impermissible. The principle laid down in Norwich Pharmacal16 was fairly recently extended by Sir Richard Scott VC17 to enable the plaintiff to obtain discovery against a defendant, not on the basis of an actual tort, but to see if a tort had been committed against him and what the precise nature of the tort was, as well as to identify the tortfeasor (if any). The fact that the discovery jurisdiction can be, and has recently been, extended (albeit for rather different reasons) gives a little assistance and comfort in reaching the conclusion. As in P v T Ltd,18 the plaintiff wishes to find out certain facts, in this case in relation to a trust of which he is a potential beneficiary.
Where beneficiaries wished for good reasons to know the identity of the trustees of a settlement, and the settler (who reserved the power of appointment of trustees) refused to tell them, it would be surprising, indeed, it is suggested, remarkable, if the Court had no power to compel him to do so.
Similarly, if all but one or two of the beneficiaries wished to know, particularly if the one or two were receiving all the income. If that is right, it would seem to follow that one would expect the Court at least to have jurisdiction to require a settler in such circumstances to give the information to a single discretionary beneficiary.
It appears on the plaintiff's evidence (not denied by the defendant in his affidavit) that there is a settlement with assets, in respect of which the plaintiff is within the class of discretionary beneficiaries. The plaintiff says, through his counsel, which he is seeking both to find out what has happened to the trust funds, and to make out a case as to why he should receive some of those funds. His bona fides is not challenged in this regard.
The mere fact that the Court has jurisdiction to make the order cannot mean that the Court has no discretion as to whether to make such an order. The very reasoning which leads me to the conclusion that there is power to make such an order, namely the wide and flexible jurisdiction of the Court of Equity, must carry with it a broad discretion.
4. Discovery jurisdiction
It appears that the observations of the House of Lords in Norwich Pharmacal as to the discretionary exercise of the discovery jurisdiction are, at least in broad terms, applicable to the equitable jurisdiction. Discovery jurisdiction is concerned in the ascertainment of that which was previously unknown; the disclosure or coming to light of what was previously hidden; the acquisition of notice or knowledge of given acts or facts; as, in regard to the "discovery" of fraud affecting the running of the statute of limitations, or the granting of a new trial for newly "discovered" evidence. Ronald Dawarkin19 proposes that it is the duty of judges to invent law in order to settle the issues in a case.
5. Right to seek disclosure
a) Under trust laws for getting information from a trustee, the beneficiary is entitled to see the trust documents, since beneficiary has proprietary interest in some of the documents.
b) A beneficiary can also hold the trustee accountable for trust accounts, even if he is a remote beneficiary, he does possess the same rights.
c) The trustee is bound to show formal documentation regarding investments, opinion and instructions sought from solicitors regarding trustee's duties and even in the case of hostile litigation.20
d) The beneficiary's rights to inspect trust documents are founded not upon any equitable proprietary right which he or she may have in respect of those documents but upon the trustee's fiduciary duty to keep the beneficiary informed and to render accounts. It is the extent of that duty that is in issue.21
e) A trustee has to furnish to a beneficiary:
(a) trust documents,
(b) information or the means of obtaining information as to the mode in which the trust property or beneficiary's share has been invested or otherwise dealt with,
(c) full accounts in respect of trust being managed,
(d) to specify whether the beneficiary has a present interest in the trust property or only a contingent interest,
(e) whether or not he is an object of a discretionary trust.22
1. Mettoy Pension Trustee Ltd v Evans [1990] 1WLR 1587 (HC).
2. (a) Grantor (b) Trustee (c) Beneficiary (d) Intent of Trust (e) Trust Property.
3. For an analysis of the remedies available at law and equity see Pomeroy's Equity Jurisdiction (4th Ed.) sec. 109 and 110. Black on Rescission and Cancellation (2nd Ed.) sec. 646 and 647. Proof of fraud in equity is quite different from the standard required to make out a case at law. In equity it is sufficient if the representation be untrue, was relied upon, and injury ensued. Eibel v. Von Fell, 55 NJ.Eq. 670; Commercial Casualty Ins. Co v. So. Surety Co, 100 NJ.Eq. 92; Bonded B. & L. Ass'n v. Noll, 111 NJ.Eq. 163. Moral delinquency is essential to a recovery at law. Cowley v. Smith, 46 NJ.L. 380. But the injured party may not, by selecting the action that is more easily proved, obtain in equity the measure of redress that is recoverable only when the more onerous burden has been sustained in a court of law. Faulkner v. Wassmer, 77 NJ.Eq. 537. There is, however, one statement in the opinion of both Commercial Casualty Co v. So. Surety Co, supra, and Keuper v. Pyramid Bond & Mortgage Corp, supra, which is very troublesome, i.e., that complainant is not to be put to the greater hazard of proving his case at law. Surely this cannot mean that equity will entertain fraud cases merely because of the lesser requirements demanded of the complainant in sustaining his proof. A bill filed in equity for rescission or cancellation although requiring the complainant to merely prove a material misrepresentation and damage actually seeks to place the defrauded party only in that position which he stood before the fraud was committed and the measure of damages is entirely different than that recoverable at law.
4. Krueger v. Armitage 12 N.J. Eq. 357 (Chaudhry 1899).
5. Pomeroy's Equity Jurisdiction (4th Ed.) sec. 911.
6. Murphy Junior v John Murphy Senior: 2 OFLR (ITELR) 125.
7. Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133.
8. Hall V-C in Orr v Diaper 4 ChD 92 at 96.
9. Supreme Court of Massachusetts, Post v Toledo, Cincinatti and St. Louis Railroad Co (1887) 11 NE Rep 540.
10. A and another v C and another [1981] 1 QB.
11. Mediterrania Raffineria Siciliana Petroli SpA v Mabanaft GmbH (unreported).
12. Bankers Trusts Co v Shapira [1980] 1 WLR 1274. At 1281F-H.
13. Post v Toledo supra
14. Norback v. Board of Directors of Church Extension Soc., 84 Utah 506, 37 P.2d 339.
15. AVC supra
16. Norwich Pharmacal v Customs supra
17. PVT Ltd [1977] 1WLR 1309.
18. P v T Ltd supra
19. Dwarken, Ronald: Law's Empire; Hart Publishing Oxford: 1986.
20. Breakspear v Auckland [2008] EWHC 220 ch there is an inevitable tension between confidentiality and disclosure in relation to wish letters, and that it is advisable to lay down guidelines to attempt to avoid unnecessary litigation. Applying Londonderry, he said: "It is in the interests of beneficiaries of family discretionary trusts, and advantageous to the due administration of such trusts, that the exercise by trustees of their dispositive discretionary powers be regarded, from start to finish, as an essentially confidential process."
21. Schmidt v. Rosewood Trust [2003] UKPC 26: 3 ITELR 734, Re Ojjeh's Trust [1992-93] CILR 348.
22. Lemos v Coutts & Company (Cayman) [1992-93] CILR 460.