The Beneficiary Principle:
The Beneficiary Principle: objects of the trust must be persons and a trust must have beneficiaries.
In Re Endacott, a will provisions for money to be used to build a memorial. Court holds the trust invalid due to a lack of beneficiaries.
In Re Shaw, a will provisions for research and publication of a 40-letter alphabet. Court holds the trust invalid due to a lack of beneficiaries.
Without the beneficiary principle being satisfied, the trust will be invalid. Therefore, there generally cannot be purpose trusts.
By comparison, purpose powers may survive.
Reasons to Require Beneficiaries / Prevent Purpose Trusts:
Enforceability
The most common argument is that trusts must be enforceable, and enforcement is usually through beneficiaries. [1] Beneficiaries are perfectly suitable to enforce the trust because it is in their own best interests for the trust to be enforced. By lacking beneficiaries, purpose trusts become unenforceable.
This argument doesn’t seem very strong as a settlor could elect some other person, such as the settlor or third party, to enforce a purpose trust. This has not been accepted by English courts though because this third party still wouldn’t have a personal investment in the trust being enforced and may even collude with the trustee(s) for the trust property to be distributed between themselves instead.
Alternatively, settlors may be happy for the trust to be unenforceable so long as it is valid if they believe that their intentions will be given effect to, regardless of whether they are indeed legally enforceable (by choosing trustees they actually trust). However, it is perceived that, without the possibility of enforcement, there is a greater risk that trustees will not perform their obligations.
In the case of charitable purpose trusts, this argument does hold up as the Charity Commission can investigate and enforce the trustees duties as a beneficiary would.
Duties and Rights
Under this thinking, a trust cannot exist without duties being imposed on a trustee. Conversely, duties give rise to rights. Under a purpose trust, these rights would have to exist without a right-holder, and without this right-holder there is no real duty to give effect to the trust.
The argument here is fundamentally premised on the idea that duties and rights are the opposite sides of the same coin. This is not necessarily true.
EG: many criminal law duties do not have corresponding right-holders.
Ownership
All property must have a beneficial owner. This is not a problem where there is no trust or a trust with beneficiaries; it is a problem in regard to purpose trusts, because there is no beneficial owner. For this reason, the trust must fail. [2]
This argument is also weak. There are numerous examples of resources that are owned by nobody at all, yet the law accommodates these situations.
Nature of Trusts
A trust is akin to a gift as it transfers beneficial ownership. Just as you cannot make a gift to a purpose, you cannot create a trust for a purpose because both gifts and trusts require recipients.
The existence of charitable trusts provides a major obstacle to this argument – if a charitable trust can exist, the requirement for a recipient in other trusts seems unusual.
Persons and Purposes:
A persons trust will always benefit people. The line between whether a trust is a person’s trust and a purpose trust isn’t very clear as many purpose trusts (directly or indirectly) benefit people. Determining whether it is a purpose or persons trust is a matter of interpreting the trust deed and the reasonable intentions of the settlor.
A trust which uses words related to a purpose, but is ultimately for the benefit of a group of people, may be construed as being for the benefit of those people, thus making it a persons trust.
In Re Bowes, a will provisioned for £5000 to be held on trust for the planting of trees on the deceased’s land. The money left was much more than required for the task.
The court accepts the argument that the trust was for the purpose of those living on the estate, so the trusts beneficiaries were those who lived on the land. Therefore, it was not a purpose trust and was valid.
Note: the stated purpose was held to be merely advisory, so the beneficiaries were entitled to invoke their Saunders v Vautier right to freely use the money as they saw fit.
In Re Sanderson, a trust was established to the benefit of an individual to ‘pay and apply the whole or part of the rents, issues and profits for and towards his maintenance…’.
The court held the trust to be a person’s trust, but the purpose of the trust was not to be disregarded (unlike in Re Bowes, which seems to be distinguished due to nature of purpose and amount reserved in the trust). The named persons are entitled to the amount needed for the purpose.
Difference between Persons and Purpose Trusts:
In a purpose trust, the purpose of the trust is the primary consideration, and the money must be used by the trustee for the stated purpose.
EG: a settlor may create a trust for money to be held to fund the education of their children. [3] This will likely fail.
In a person’s trust, the best interests of the beneficiaries is the primary consideration, regardless of whether or not this goes against the settlor’s intended purpose.
EG: a settlor may create a trust for money to be held for their children, suggesting the money could be used to fund their education.
Exceptions to the Beneficiary Principle:
Types of Purpose Trusts that may Validly Exist:
Charitable purpose trusts.
‘Anomalous’ purpose trusts.
(Arguably, though often not seen as purpose trusts) Quistclose trusts.
(Arguably) Denley trusts.
The existence of the exceptions undermine the justifications to the beneficiary principle.
‘Anomalous’ Purpose Trusts:
Some trusts have been upheld despite being without principle or policy justifying them running contrary to the beneficiary principle. They are generally seen as accidents of legal history and the courts have stressed that these types of trust cannot be extended, even by analogy.
Remaining ‘Anomalous’ Purpose Trusts:
Trust in Re Denley:
A trust may be upheld provided there is an ascertained or ascertainable class of people who would benefit, directly or indirectly, from the property being applied for the trust’s stipulated purpose.
In Re Denley, a settlor company transferred land to trustees on terms that it ‘be maintained and used as and for the purpose of a recreation or sports ground … primarily for the benefit of the employees of the company’.
The court (first instance) held trust to be valid, stating that the beneficiary principle is satisfied if the trust (directly or indirectly) benefits at least one individual. The sports field delivered a direct and tangible benefit to the employees.
Goff J: ‘I think there may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where the benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would … apply to invalidate the trust.’
‘The present is not, in my judgment, of that character. Apart from this possible exception … the beneficiary principle … is confined to purpose or object trusts which are abstract or impersonal’
‘Where … the trust, though expressed as a purpose, is directly or indirectly for the benefit of an individual or individuals, it seems to me that it is in general outside the mischief of the beneficiary principle’
The case has never been overruled, but remains controversial.
It is unclear as to whether the case decides the trust to be a person’s trust (similar to Re Bowes case, where beneficiaries can simply override the purpose), [7] or a purpose trust (an entirely new exception to beneficiary principle). Commentary in this regard is mixed.
Unincorporated Associations:
By forming into a company (incorporating), the law treats the company as a separate legal person. This gives them their own distinct rights and obligations from the actors within the company. Contrastingly, an unincorporated association is a group of people who have not formed a company.
Cf. the LSE (a company) with the Law Society (an unincorporated association).
Unincorporated associations were often previously thought to fit into the list of exceptions to purpose trusts.
There are numerous issues regarding how the unincorporated association would hold the money and what happens if/when the association ends. This is because these associations usually lack express terms (like a company constitution).
Property Holding:
If purpose trusts were valid, the trust asset could be held for the purpose of the association. Generally, this cannot be (due to the beneficiary principle) so another solution is required.
Contract Holding Theory: [8]
The theory establishes that property is beneficially held by the members of the unincorporated association, but it is a contract between them that limits their use and access to the property, not the trust itself.
Dissolution:
As with companies, membership in unincorporated associations is likely to change over time. The association may also cease to exist at a certain point too. The law needs to deal with these possibilities.
Traditional View: [9]
The traditional accounts states that, upon the association ending, either a resulting trust will arise to the trust’s contributors, or the trust asset becomes ownerless and vested in the Crown (‘bona vacantia’).
Contract Holding Theory: [10]
The contract holding theory suggests that there is an implied term that there will prima facie be an equal distribution between the current members at the date of dissolution.
Political Parties: [11]
The contract holding theory cannot be applied for political parties and their constituency branches.
This is because the members do not set policies (they are set by the party on a national level), while the theory is based on members being in control. Without this autonomy from the national party, the members could not unanimously agree to waive the rules and divide the property among themselves.
A gift to an unincorporated association with a purpose prescribed is valid if the members benefit from the purpose. [12] This is particularly the case if they are vested with capital.
Resources:
References:
[1] Morice v Bishop of Durham [1805] EWHC Ch J80 [2] EG: Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, [90] (Millett LJ) [3] EG: Re Andrew’s Trusts [1905] 2 Ch 48 [4] Re Dean (1889) 41 Ch D 552 [5] EG: Re Hooper [1932] 1 Ch 38 [6] Bourne v Keane [1919] AC 815 [7] See Re Lipinski [1976] Ch 235 (Oliver J) [8] Re Recher's Will Trusts [1972] Ch 526 [9] EG: Re West Sussex Constabulary’s Widows, Children and Benevolent (1930) Fund Trusts [1971] Ch 1 [10] Re Bucks Constabulary Widows and Orphans Fund Friendly Society [1979] 1 All ER 623 [11] Re Grant's Will Trusts [1979] 3 All ER 359; Conservative and Unionist Central Office v Burrell [1981] EWCA Civ 2 [12] Re Lipinski [1976] Ch 235
Cases Mentioned:
Re Endacott [1959] EWCA Civ 5
Re Shaw [1957] 1 WLR 729
Re Bowes [1896] 1 Ch 507
Re Sanderson's Trust (1857) 3 K & J 497
Re Denley’s Trust Deed [1969] 1 Ch 373
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