DISCRETIONARY TRUSTS

A discretionary trust exists where the trustees are given a discretion to pay or apply
property (the income or capital or both) to or for the benefit of all or anyone selected
from a group or class of objects on such terms and conditions as the trustees may see
Fit . 1.

McPhail v Doulton 2The settler, Bertram Baden, transferred property to trustees to apply the net
income, in their absolute discretion, to the officers, ex-officers, employees and ex-employees of
a company or their relatives or dependents. The question in issue was whether the trust was valid
as satisfying the test for certainty of objects. At this time the test for certainty of objects for all
private trusts was the ‘list’ test as stated above. The trust objects were too broad to satisfy this
narrow test. The House of Lords decided that the trust was valid and changed the test for
certainty in respect of discretionary trusts. The new test for such trusts is whether the trustees
may say with certainty that any given postulant is or is not a member of a class of objects, and
there is no need to draw up a list of the objects.

6.2 Exhaustive/non-exhaustive discretionary trusts

A discretionary trust may be either ‘exhaustive’ or ‘non-exhaustive’. This is determined

by reference to the intention of the settlor.
An exhaustive discretionary trust is one where, during the trust period, the trustees
are required to distribute the income or capital, or both, but retain a discretion as to the
mode of distribution and the persons to whom the distribution may be made. The trus-
tees are required to distribute the income each year as it arises, but have a discretion
regarding the persons who may actually benefit.
A non-exhaustive discretionary trust is one where the trustees are given a discretion
as to whether or not to distribute the property (either income or capital
It follows that the distinction between an exhaustive and non-exhaustive discretion-
ary trust is based on the power of the trustees to refrain from distributing the property
that is within the discretion of the trustees.
In IRC v Blackwell Minor’s Trustees 3, the accumulation of undistributed
surplus income at the discretion of the trustees was treated as capital of the beneficiary,
and not liable to income tax.

Discretionary trusts have been formed in a way that they dont fail for uncertainty

1
Unlocking Equity and Trust by Chris Turner
2
[1971] AC 424
3
(1925) 10 TC 235
Calouste Gulbenkian, a wealthy Armenian oil businessman and co-founder of the Iraq Petroleum
Company, made a settlement in 1929 that said the trustees should ‘in their absolute discretion’
and while his son Nubar Gulbenkian was still alive, give trust property to 'Nubar Sarkis
Gulbenkian and any wife and his children or remoter issue for the time being in existence
whether minors or adults and any person or persons in whose house or apartments or in whose
company or under whose care or control or by or with whom the said Nubar Sarkis Gulbenkian
may from time to time be employed or residing'. It was argued this was too uncertain to be
enforced

At first instance, Goff J declared the settlement invalid, following Re Gresham's Settlement[3]
where Harman J held a similar clause invalid.
Court of Appeal
The Court of Appeal held that the trust should be declared valid,[4] so long as any claimant
could be said to fall within the class at hand. Lord Denning MR said the action was a challenge
to Gresham’s case

Reasons for creating discretionary trusts

Flexibility
Where a settler wishes to make a present disposition on trust but is uncertain as to
future events and would like the trustees to react to changed circumstances and the
needs of the potential beneficiaries, he may create a discretionary trust.
148Discretionary trusts
6.10.2 Group interest
In trusts law, if all the objects entitled to both income and capital act in unison and if they
are of full age and sound mind, they are entitled to terminate the discretionary trust and
acquire the property for their own benefit.
1 Individual interest
Under a discretionary trust the trustees are given a discretion to decide what interest, if
any, may be distributed to the objects.
Re Coleman [1888] 39 ch 443
An object under a discretionary trust assigned his interest for consideration to a third party.
The trustees declined to pay the income to the third party. The question in issue was whether
the trustees had retained their discretion concerning the income. It was held that the third
party was entitled to no interest in the income as it nonenforceable in Gartside v IRC [1968] 1
All ER 121 vis-à-vis In relation to. 148Discretionary trusts
6.10.2 Group interest
In trusts law, if all the objects entitled to both income and capital act in unison and if they
are of full age and sound mind, they are entitled to terminate the discretionary trust and
acquire the property for their own benefit.
CASE EXAMPLE
Re Smith, Public Trustee v Aspinall4A testator gave one-quarter of the residue of his estate to
trustees on trust to pay, at their absolute discretion, the income for the maintenance of Mrs
Aspinall for life and/or all or any of her children. On the death of Mrs Aspinall the trustees were
required to pay both income and capital,including capitalised income, to the children in equal
shares. Mrs Aspinall joined with her two surviving children and the personal representative of
her deceased child in executing an assignment of their interest in favour of Legal and General
Assurance Company in order to secure a mortgage. The question in issue was whether the
trustees were required to pay the income, as it arose, to the company until the discharge of
the mortgage, or whether they were at liberty to pay the income at their discretion to Mrs
Aspinall. It was held that the income was payable to the company because the sole objects of the
trust were entitled to dispose of the entire income
PROTECTIVE TRUSTS
Protective trusts are created Since an object under a discretionary trust is not entitled to an
interest in the trust property,prior to the exercise of the discretion in his favour, but is merely
entitled to a hope of acquiring a benefit, the bankruptcy of such an object does not entitle the
trustee in bank-ruptcy to a share of the trust fund.

Re Vandervell Trustees Ltd [1971] Ch 918: This case involved a protective trust where the
court had to determine the validity of the trust and the rights of the beneficiaries. The court held
that the protective trust was valid and that the beneficiaries had equitable interests in the trust
property. The facts of the case are During his lifetime Mr Vandervell was a very successful
engineer. He had his own private company, Vandervell Products Ltd. - the products company, as
I will call it - in which he owned virtually all the shares. It was in his power to declare dividends
as and when he pleased.

In 1949 he set up a trust for his children. He did it by forming Vandervell Trustees Ltd. - the
trustee company, as I will call it. He put three of his friends and advisers in control of it. They
were the sole shareholders and directors of the trustee company. Two were chartered accountants.
The other was his solicitor. He transferred money and shares to the trustee company to be held in
trust for the children.

TRUSTS TO PAY CREDITORS

Trust to pay creditors also known as Creditor Trusts is established as of the effective date of
benefit of holders . 5
An issue comparing an ordinary trust with one to pay creditors was provided by Turner V.C in
Smith v Hurst .In his view where a deed vests property in trustees upon trust for the benefit of
particular person , the deed cant be revoke3d , altered or modified by its creditors , the issue of

4
[1928] ch 915

5
Law insider
whether it can be revoked ,altered or modified depends on the circumstances of each particular
case .
An example of a trust to pay creditors is an insolvent trust used in company law when companies
are to undergo liquidation.
Trusts to pay creditors these are also known as creditors trusts they are illustrated in Smith v
Hurst6was heard in the High Court of Chancery in England. Here are the key points: Facts: A
debtor executed a deed assigning his real and personal estate to one of his creditors for the
purpose of managing his affairs and liquidating his debts. The deed gave the creditor discretion
over the order and distribution of the proceeds1.
Issue: The main issue was whether the deed was valid and enforceable against other creditors of
the debtor.
Decision: The court held that the deed was fraudulent and void against other creditors. It was
determined that the debtor could not vest his property in one creditor to the detriment of others,
and such a deed was considered a fraud on the other creditors.

TRUST FOR SALE

A trust for sale is a legal arrangement in which a person or organization is asked to sell land or
property and to give the money made from sale to a particular person or group of people

According to section 13 of the Trustees Act Cap 164. Power to sell subject to
depreciatory conditions
(1) No sale made by a trustee shall be impeached by any beneficiary upon the ground that any of
the conditions subject to which the sale was made may have been unnecessarily depreciatory,
unless it also appears that the consideration for the sale was thereby rendered inadequate.
(2) No sale made by a trustee shall, after the execution of the transfer, be impeached as against
the purchaser upon the ground that any of the conditions subject to which the sale was made may
have been unnecessarily depreciatory, unless it appears that the purchaser was acting in collusion
with the trustee at the time when the contract for sale was made.
(3) No purchaser, upon any sale made by a trustee, shall be at liberty to make any objection
against the title upon any of the grounds aforesaid.
(4) This section applies to sales made before or after the commencement of this Act..

In re Leigl's Settled Estates. [1926] Ch. 852.1

Mrs. Tenison held land subject to a yearly rentcharge payable to her On her marriage in 1923 she
conveyed it to trustees on trust to sell and to hold the proceeds of the sale (or the rents and profits
until sale) upon trusts declared in a settlement of even date; power was given to postpone the sale
which was not to take place without her consent.The present summons was brought primarily to

6
(1852 )8 E.R. 826
determine who was the tenant for life to whom under the new legislation the legal estate must be
conveyed by a vesting deed.As the recipient of the annual income of the land, Mrs. Tenison
came within the category of those persons who are to be deemed to be tenants for life (S.L.A.
1925,s. 20 (vili)), provided that the land was not held on trust for sale; in this latter contingency
the trustees were entitled to the legal estate, and, with it, to all the powers of a tenant for life. Mr.
Justice Tomlin decided that there was not a trust for sale.We must first examine the
considerations which led the learned judge to this paradoxical conclusion.He asked himself what
is a trust and found his answer in the Law ofProperty Act, 1925,s. 205 (i) (xxix), where it is
defined as" an immediate binding trust for sale, whether or not exercisable
at the request or with the consent of any person, and with or without a power at discretion to
postpone the sale."
The qualifying clauses of this definition are clear enough, and show that neither the power to
postpone the sale nor the exercise was dependent on Mrs.Tension's consent, bring the present
case outside the meaning of the term.There remain the adjectives
" immediate binding."
There is no difficulty about the significance of the former, which, is to distinguish a trust for sale
coming immediately into operation from one that is not intended to arise till the happening of
some future event.The crux is the word " binding." Tomlin J.held that it meant that the trust for
sale must bind the whole unencum-bered fee simple, and therefore must be capable of
overreaching a/ll prior charges. In the present case, the trust was not capable of over-

REPUGNANCY DOCTRINE
The blacks law dictionary defines repugnancy as inconsistency or contradiction between two or
more of a legal instrument.
This deals with conflict between two pieces of legislation which when applied to the same facts
produce different results.
Case of Gwao bin kilimo v kisunda the court ruled that fathercould not compensate for the son s
crimes and the custom was rendered repugnant
In line with the law of trust any trust which is repugnant is rendered to be void