Purpose Trusts Flashcards

Question

The efficiency of public services

Answer 1

Section 3(1)(l) provides that this purpose relates to the efficiency of the armed forces, the police, fire and rescue services or ambulance services. This head of charity traditionally related to the armed forces before it was extended by statute to also include e.g. the police and fire services. Case law has upheld a fund for the promotion of physical fitness (Re Gray) and for the provision of a library (Re Good) in respect of an army regiment as charitable. In addition to the existing case law Charity Commission guidance suggests a series of examples of purposes which would be considered charitable under this head including: • increasing technical knowledge of members of the services through the provision of educational resources, competitions and prizes; • providing opportunities for services personnel to gain additional experience relevant to their jobs.

Answer 2

There is also a wide, additional category in section 3(1)(m) which recognises that some charitable purposes may not have been captured within the previous 12 heads of charity. This provision covers purposes which would have been recognised as charitable under the previous law, or purposes which are analogous to or within the spirit of the statutory heads of charity and earlier case law. This principle of recognising charitable purposes by analogy is a long-standing principle of charity law. It ensures that the law on charitable purposes is flexible and can evolve to include additional purposes that were not specifically envisaged when the Act was drafted but nonetheless merit charitable status.

Answer 3

For a trust to have charitable status, its purposes must be wholly and exclusively charitable. In other words, all its purposes must be charitable. If a trust has a mixture of charitable and non-charitable purposes, the consequences depend on the precise situation: 1. As a basic rule, the trust will be void unless the non-charitable purpose falls within a recognised category of non-charitable purpose trusts. If the trust fails, the property will return to the settlor on a resulting trust. 2. If the non-charitable purpose can be construed as ‘incidental or subsidiary’ to the main, charitable purpose, the trust will remain effective (Latimer v IRC). 3. If the charitable and non-charitable purposes can be separated, and a portion of the fund allocated to each, the court will ‘sever’ the trust and recognise the charitable part. This will only be possible if the trust language contemplates severance of the fund (Salusbury v Denton). This requires the amount allocated to each purpose to be quantifiable (Re Coxen).

Answer 4

There is no definition of “public benefit” in the Act, but it does provide that: • there is no presumption of public benefit (section 4(2)). • Charity trustees must have regard to any guidance published by the Charity Commission in pursuance of its public benefit objective (section 17(5)). There are two elements to the public benefit requirement: a) Whether there is an identifiable benefit; and b) What constitutes the public, or a section of the public.

Answer 5

The question of whether there is an identifiable benefit is a separate question from whether the trust is for a charitable purpose as a matter of law. It is a question of fact as to whether there is a benefit to the public having regard to all the evidence in the particular case. The settlor’s belief as to benefit is not relevant. Benefit is balanced against any detriment or harm arising from the purpose. The benefit must be capable of being identified and described even if it cannot be quantified or measured. If it is not obvious that the purpose is beneficial, the Charity Commission may require evidence. • Re Hummeltenberg: A benefit could not be identified in relation to a training college for mediums notwithstanding the settlor’s belief that it was beneficial. • National Anti-Vivisection Society v IRC: The adverse effect on medical research outweighed the benefit arising to the welfare of animals of abolishing vivisection.

Answer 6

The purpose must be beneficial to the public or section of the public, not to a private class of individuals. This is for policy reasons: a settlor should not benefit from the advantages of charitable status in respect of a trust which in fact benefits only e.g. the settlor’s family and friends. To satisfy the test: a) the possible beneficiaries must not be negligible in number; and b) the quality which distinguishes them from other members of the community must be a quality which does not depend on their relationship to a particular individual (Oppenheim v Tobacco Securities Trust Co Ltd). It is not simply a question of numbers. In Oppenheim a trust for the education of children of the employees of a company which employed over 100,000 staff was held not to be charitable on the basis that the beneficiaries were defined by reference to their personal relationship with the employer. Charity Commission guidance provides that charities can choose to focus on certain beneficiaries provided that: a) they have proper reasons for doing so b) the poor are not excluded from benefit c) the people focused on are a sufficient section of the public for the charity’s purpose. What constitutes a section of the public is therefore related to the purpose of the charity. In IRC v Baddeley Viscount Simonds gave an analogy: a bridge may be charitable and it does not matter how many people actually use it. But confine its use to a selected number of persons, however numerous or important, and it is not charitable. Charities can charge for the services or facilities they offer. They can even make a profit provided this is reasonable and necessary to carry out the charity’s aims e.g. used to fund the facilities provided by a private school or hospital. The opportunity to benefit must not be unreasonably restricted. For example if fees restrict the benefit to only those who can afford the fees it may be that the benefits are not available to a sufficiently large section of the public. If charges are of a level which the poor cannot afford, the trustees must make sure that the poor can otherwise benefit. This is always a matter of degree and will be considered further in the context of the advancement of education

Answer 7

Charities cannot pursue political objectives i.e. seek to change the law or government policy or promote the views of a political party. This is on the basis that the courts / Charity Commission are unwilling to consider whether such a purpose is for the public benefit, preferring to be politically neutral. A distinction can be drawn between a political purpose (which will not be charitable on public benefit grounds) and the use of political means to achieve a non-political objective (which can be charitable). This distinction may be very difficult to draw in practice, as illustrated by the examples below. A trust set up by Amnesty International included the objective (among others) of securing the release of prisoners of conscience by procuring the reversal of government policy. (McGovern v Attorney General). This was held to be non-charitable. An organisation set up to protect the environment carries out a range of activities including political activity aimed at changing government policy in relation to airports. (Charity Commission Guidance). This was held to be charitable.

Answer 8

The application of the public benefit requirement differs as between the different charitable purposes. In the remainder of this element we will consider examples of the application of the public benefit requirement in the context of the following purposes: a) The prevention or relief of poverty b) The advancement of education c) The advancement of religion d) The advancement of human rights

Answer 9

The requirement that the class of beneficiaries must not be defined by reference to their relationship with a single person is relaxed in the case of the relief or prevention of poverty. However, the purpose must still be for the benefit of a particular description of poor persons, as opposed to the benefit of particular poor persons (which would be a private trust). In Re Scarisbrick’s Will Trusts it was considered that trusts for ‘poor relations’ are ‘of so altruistic a character’ that the public element may be inferred, or they can otherwise be accepted as being a ‘hallowed, if illogical, exception’. The benefit is easily established for a purpose to relieve poverty, and the relaxation of the ‘public’ element means that trusts for such purposes can have pools of beneficiaries where there is a family or other personal connection to the settlor (such as to an employer in Dingle v Turner), or restricted to a smaller geographical area where this would not be allowed for other charitable purposes.

Answer 10

Fee paying schools have been an issue of particular difficulty in relation to the public benefit requirement. As noted above, charities can charge fees but must not by doing so exclude the poor from benefitting from the charitable purpose. Both elements of the public benefit requirement were considered in The Independent Schools Council v The Charity Commission: Identifiable benefit: The benefit of providing education was not outweighed by the social mobility implications of the requirement to pay fees. Section of the public: Although the accessibility of the benefit can be restricted by a requirement to pay fees, if fees are of a level which the poor cannot afford the trustees must make provision so that the poor can otherwise benefit. This benefit must be more than a de minimis or ‘token’ benefit. However, once that hurdle is met it is for the trustees to determine how this requirement might be met in the particular circumstances. Examples suggested included the provision of scholarships or making teaching materials or other facilities (such as swimming pools or sports grounds) available.

Answer 11

Before the Charities Act 2006 there was a presumption that charitable trusts for the advancement of religion were for the public benefit. Now the presumption has been abolished the public benefit must be proven in each case. No public benefit could be proved in respect of a gift on trust to a community of cloistered nuns. The efficacy of prayer in itself could not be proved. It would have been different if the nuns had gone out to benefit the community (Gilmour v Coats). In contrast, land held by the Catford Synagogue was found to be held for charitable purposes. The key difference was that the court considered that a benefit to the public derived from mixing with others in a place of worship, in contrast with the nuns who lived in seclusion (Neville Estates v Madden).

Answer 12

A key difficulty in relation to intended charitable trusts for the advancement of human rights is distinguishing between trusts with political objectives (which would not meet the public benefit requirement) and those which are pursuing a political activity as a means of achieving a charitable end (which can satisfy the requirement). For example, a trust by Amnesty International has been held not to be charitable because its objectives included securing the release of prisoners of conscience and the abolition of torture and inhuman or degrading treatment. The court did not consider that it could judge whether procuring a change of law in a foreign country would be to the public benefit in the UK. (Other objectives of the trust were charitable, but the trust could not be charitable as it was not wholly and exclusively charitable).

Answer 13

Where a private trust fails there is usually a resulting trust to the settlor. Where a charitable purpose trust fails, however, a resulting trust would defeat the intention of the person who had dedicated their property to a charitable purpose. Charitable trusts are therefore subject to the cy-près doctrine. This provides that where a charitable purpose trust fails, any surplus funds will be applied to another charitable purpose by way of a scheme established by the Charity Commission or court. A person who donates property to a charitable purpose therefore knows that it will be used for charitable purposes, even if the particular purpose fails. Under section 62 of the Charities Act 2011 there are five grounds on which the original purpose of a charitable gift can be altered: a) The original purpose has been fulfilled or cannot be carried out. b) The original purpose may still be workable but does not provide a use for all the property available to the trust i.e. there are surplus funds. c) The property from similar trusts is combined so as to be used more effectively. d) The original purpose referred to an area or class of persons which is no longer relevant or suitable. e) The purpose has: i. been adequately provided for by other means; ii. ceased to be charitable in law; or iii. ceased to provide a suitable and effective method of using the property. Once property has been given to charity it is given for all time, so where there is a subsequent failure the gift cannot go back on a resulting trust, it will be applied cy-près. However, where there is an initial failure ie property cannot be applied to the specific purpose from the beginning, it will only be applied cy-près if the settlor has shown a general charitable intention. The question for the court to decide in construing the document is whether there was a specific intention to benefit a particular object, or an intention to give effect to a general mode of charity (notwithstanding a reference to a more specific object). Only in the latter case can the property be applied cy-près on the failure of the initial purpose. A gift expressed as being dedicated to a charitable purpose but which fails to specify the mode of application would show general charitable intent eg “£5,000 for the relief of poverty”. Key case: Biscoe v Jackson (1887) 35 Ch 460 The intended purpose was the provision of a soup kitchen and cottage hospital for the parish of Shoreditch. Suitable land could not be found and so the purpose failed. However, the court found that there was a general charitable intention to benefit the sick and poor of the parish. The impossibility only related to the form of the gift, and the general charitable purpose could be executed cy-près. Key Case: Re Good’s Will Trusts [1950] 2 All ER 653 a trust to provide rest homes in Hull was found to be too specific to demonstrate a general charitable intention. The testator had created detailed plans relating to the management of the homes which the court found to be inconsistent with a general charitable intention. There could therefore be no cy-près application of the funds when they transpired to be insufficient for the intended purpose.

Answer 14

• The law on charitable purposes has developed over hundreds of years, before codification in the Charities Act 2006 and consolidation in the Charities Act 2011. • There are 12 specific heads of charity set out under section 3(1) Charities Act 2011, which expand the four traditional heads of charity recognised at common law. • There is also a further head of charity in this section, allowing the recognition of further charitable purposes by reference to the previous case law and by analogy to recognised charitable purposes. • The purposes of a charitable trust must be wholly and exclusively charitable, otherwise the trust may fail (unless it is a recognised non-charitable purpose trust, the non-charitable purposes are ancillary or it is possible to sever the fund and save the charitable component). • Charitable trusts must satisfy the public benefit test set out in the Charities Act 2011. • There is no presumption of public benefit and it is necessary to demonstrate that the trust satisfies this requirement. • Trustees must consider Charity Commission guidance on the meaning of public benefit. • The question of public benefit is separate to that of whether the purposes are charitable. It must be shown that the trust provides some ascertainable benefit. • The purposes of a trust must be for the public or a section of the public. The trust must not be restricted to a private class of individuals. • Charities may charge for their services but such fees must not act so as to restrict the poor from benefitting from the trust. • If the purposes of a charitable trust fail, the cy-près doctrine applies, allowing the property to continue to be used for other charitable purposes.

Answer 15

In order to be valid, the purpose of a non-charitable purpose trust must fall within a recognised exception to the beneficiary principle. These exceptions apply only when a trust is created in a will and were classified in the case of Re Endacott [1960] Ch 232. They are: 1. Trusts for the maintenance of particular animals 2. Trusts for the erection and maintenance of monuments and graves 3. Trusts for the saying of private masses Note that there are a few further miscellaneous exceptions, the continuing validity of which is doubtful. The court also classified gifts to unincorporated associations as a further exception, but there is a separate body of case law dealing with such gifts. This module focuses only on the three exceptions recognised above.

Answer 16

A trust for the welfare of animals generally would be charitable. However, a trust for the care of a particular animal would not be charitable, as it would not pass the public benefit test. Nonetheless, trusts for the maintenance of particular animals have been upheld as valid (provided they comply with certainty and perpetuity requirements). Example: Trust for maintenance of testator’s two dogs A testator wishes to create a trust by their will for the care of their two dogs.

Answer 17

A trust for the purpose of constructing or maintaining a monument could be charitable if it is of cultural or historical importance. However, monuments and graves in respect of private individuals will not be charitable. Nonetheless, trusts for the erection and maintenance of monuments and graves have been upheld as valid (provided they comply with certainty and perpetuity requirements). Example: Trust to maintain family grave A testator wishes to leave property on trust to maintain a family grave and decorate it with flowers.

Answer 18

A trust for the purpose of conducting religious ceremonies may be charitable if it passes the public benefit test. However, a ceremony that takes place in private will not pass the public benefit test and will therefore not be charitable. Nonetheless, trusts for the saying of private masses have been upheld as valid (provided they comply with certainty and perpetuity requirements). Example: trust to secure private masses A testator wishes to create a trust by their will for the saying of a private family mass in their memory.

Answer 19

It is worth looking more closely at the case of Re Endacott itself. Before this case, the law on purpose trusts had developed in a piecemeal and not particularly principled way. In Endacott, Lord Evershed reviewed the case law and summarised the approach that should be taken to the recognition of non-charitable purpose trusts. Key case: Re Endacott [1960] Ch 232 Facts: A testator gave his residuary estate ‘for the purpose of providing some useful memorial to myself’. Held: the provision was held to be void. The purpose was too uncertain to be charitable and did not fall within a recognised class of non-charitable purpose trusts. In reaching this conclusion Lord Evershed said: ‘No principle perhaps has greater sanction of authority behind it than the general proposition that a trust by English law, not being a charitable trust, in order to be effective, must have ascertained or ascertainable beneficiaries.’ In relation to the exceptions, he said that: ‘[...] the scope of these cases...ought not to be extended. So to do would be to validate almost limitless heads of non-charitable trusts...; and, in my judgment, that result would be out of harmony with the principles of our law.’

Answer 20

Following Endacott, it is apparent that the exceptions are anomalous and difficult to justify other than as ’concessions to human weakness or sentiment’. The intended purpose must fall squarely within a recognised exception to be valid. Unlike charitable purposes, the exceptions will not be extended by analogy. Non-charitable purpose trusts falling within an Endacott exception are sometimes referred to as trusts of imperfect obligation because although the court recognises their validity (meaning they will not fail if included in a will) they are not enforceable. As a practical point it is therefore prudent to check that the appointed trustee is willing to carry out the terms of the trust. If they are, the court will make what is known as a Petttingall order. This requires the trustee to give an undertaking to comply with the trust. If they do not, the testator’s residuary legatees (who would otherwise receive the property) can sue to enforce the undertaking and prevent a misapplication of the fund.

Answer 21

Because of their anomalous status, non-charitable purpose trusts are subject to more restrictive perpetuity rules (limiting the duration of the trust) than other trusts. These rules are discussed in detail in a subsequent topic 7 but, broadly, a non-charitable purpose trust should be drafted with an express perpetuity clause to ensure it does not fail for want of perpetuity.

Answer 22

• In order to be valid, the purpose of a non-charitable purpose trust must fall within one of the recognised Endacott exceptions to the beneficiary principle. These are: 1. Trusts for the maintenance of particular animals 2. Trusts for the erection and maintenance of monuments and graves 3. Trusts for the saying of private masses • The class of exceptions is anomalous and cannot be extended, even by analogy. • It is essential to include an express perpetuity period as the perpetuity rules are strict. • Non-charitable purpose trusts are technically unenforceable although if the trustee is willing to act, the court will grant a Pettingall order, effectively securing enforcement.

Answer 23

Because of their anomalous status, non-charitable purpose trusts are subject to more restrictive perpetuity rules (limiting the duration of the trust) than other trusts. These rules are discussed in detail in a subsequent topic 7 but, broadly, a non-charitable purpose trust should be drafted with an express perpetuity clause to ensure it does not fail for want of perpetuity.

Answer 24

With the exception of charitable purpose trusts, which can last indefinitely, trusts cannot be permanent arrangements. They are a temporary way of dealing with property. Some trusts are intended to last for only a very short period of time while others (such as trusts for minors) may last many years. Where the beneficiaries of a trust have vested interests in the trust property, the rule in Saunders v Vautier (covered in topic on ‘Beneficial entitlement’) provides a mechanism for bringing the trust to an end, allowing the beneficiaries to take full control of the property. What about trusts under which the objects do not have vested interests, such as discretionary trusts or trusts which give rise to contingent interests? Even if the rule in Saunders v Vautier could theoretically be exercised by all the potential objects, in practice this is very unlikely. In the case of a discretionary trust, the trustees are obliged to exercise their discretion within a reasonable timeframe, limiting the duration of the trust. But what about trust interests which are limited by a contingency? If the contingency is never satisfied, how is the trust brought to an end? And what about fixed trusts where property is to be divided between a fluctuating class of objects? When are the trustees required to distribute the property?

Answer 25

Often a trust instrument will contain rules dealing with how and when the trust is brought to an end. It is good practice for a trust instrument to expressly limit the duration of the trust. You may see this described in the trust instrument as the ‘trust period’ or similar. In cases where a class of objects fluctuates, the class will close at the end of this period and the property distributed between the people who fall within the class at that time. A well-drafted trust instrument will ensure that the trustees have a mechanism for disposing of any trust property that remains at the end of this period (for example, if a contingency remains unsatisfied). In the case of complicated trust arrangements (which may involve a mixture of trusts and powers) there will often be a gift-over clause providing for the property to be distributed to a particular beneficiary or beneficiaries. It is common for the ultimate recipient of the gift-over to be a charity, in case there are no other beneficiaries at the end of the trust period. But what if there is no express limitation on the trust duration? Could it go on indefinitely? With the exception of charitable trusts, the answer to this question is no. It is not in the public interest for property to be tied up on trust indefinitely. The law therefore limits the duration of trusts by means of rules known as the perpetuity rules. An express clause cannot extend a trust beyond the relevant legal perpetuity period. Often the express clause will reflect the maximum legal perpetuity period, unless the settlor wants the trust duration to be shorter than this.

Answer 26

There are two different perpetuity rules which apply in different circumstances: a) The rule against remoteness of vesting. b) The rule against inalienability.. Broadly, the rule against remoteness applies to trusts with people or charities as their objects. It is important to consider this rule when establishing or administering a trust that does not immediately give rise to vested interests in the trust property (such as discretionary trusts, trusts that contain contingencies and fixed trusts with a fluctuating class of objects). The rule against inalienability is a more limited rule which applies to non-charitable purpose trusts.

Answer 27

The rule against remoteness of vesting is a statutory rule which requires that a person (or charity) must obtain a vested interest in the trust property within a recognised ‘perpetuity period’. By s 5(1) Perpetuities and Accumulations Act 2009 this period is 125 years although it is possible for a trust instrument to limit the duration of the trust to a shorter period. (As noted above, it is not possible for a trust instrument to extend the 125-year perpetuity period). Any interest under a trust which does not vest within the statutory perpetuity period is void. This need not be clear from the outset of the trust. Section 7 contains a ‘wait and see’ rule which means that the trust can subsist until it becomes apparent that the interest cannot vest within the perpetuity period. Anything done before this will remain valid. Section 8 also contains ‘class closing’ rules which can save a trust by excluding objects who might otherwise cause the trust to fail because their interest would vest outside the perpetuity period.

Answer 28

The perpetuity rules will often be relevant when a trust contains conditions or powers particularly those involving a series of successive interests or a wide class of potential objects. The statutory perpetuity period is, however, designed to accommodate common uses for trusts. Consider the following examples: a) A trustee holds property on trust for A for life, remainder to B. b) A trustee holds property on trust for A for life, remainder to B if B survives A. c) A trustee holds property on trust for A (age 2) for life, the remainder to be divided equally between A’s children and grandchildren. d) A trustee holds property on trust for A for life, the remainder to be divided equally between such of A’s children and grandchildren as are living at the date of A’s death. e) A trustee holds property on trust for A for life, remainder to a named charity. f) A trustee holds property on trust for the first of the settlor’s lineal descendants to obtain a first class law degree.

Answer 29

The statutory perpetuity period is deliberately long enough to prevent simple life interest trusts like the first two examples from failing. Example: Vested interests A trustee holds property on trust for A for life, remainder to B: There is no problem with perpetuity in this case as B has a vested interest from the outset. Example: Contingent capital interest A trustee holds property on trust for A for life, remainder to B if B survives A: In this case B has a contingent interest so the perpetuity rules are technically relevant but are extremely unlikely to be problematic. It is not certain that B’s interest will vest as B may die first. The ‘wait and see’ rule applies, as the trust could fail for perpetuity, but only if A lives more than 125 years after the trust is created. What the rule is intended to prevent is the sort of situation where a settlor leaves a series of never-ending life interests for their descendants, with nobody obtaining a vested interest in the capital (and therefore no chance of collapsing the trust). Example: Equal distribution of capital among members of indeterminate class A trustee holds property on trust for A (age 2) for life, the remainder to be divided equally between A’s children and grandchildren. At the date the trust is created, only A has a vested interest in the trust property (and only in the income). When A dies, any of their children and grandchildren who have already been born will have vested interests. However, there may be grandchildren yet to be born. As this is a fixed trust in equal shares, the trustee cannot divide the property between the objects until they are all ascertainable. It could take many years before it becomes impossible for more grandchildren to be born (however unlikely this may be). Rather than the trust failing, the class closing rules will apply to limit the class of beneficiaries to A’s children and grandchildren, if any, who are alive as at the end of the perpetuity period. The problem with this provision is not actually perpetuity but poor drafting. As we have already seen, the wait and see rule allows a trust to subsist for up to 125 years, until it is clear how the property should be distributed. This means that at least some of the intended beneficiaries (i.e. A’s children) are practically unable to make use of their interest under the trust. To avoid this problem, the trust should contain a provision limiting the objects. This next example solves the problem as it provides a date for the vesting of the remainder interest, ensuring that the beneficial interests fix as at A’s death. Example: Equal distribution among members of a determinate class. A trustee holds property on trust for A for life, the remainder to be divided equally between such of A’s children and grandchildren as are living at the date of A’s death. Only A’s children and grandchildren who are living at that date obtain an interest, allowing the trustee to immediately divide the property between them. Any children or grandchildren who die before A or are born after A’s death are not included in the class. The capital interests will therefore vest on A’s death. This does not necessarily mean that the trust will come to an end at A’s death. This depends on the age of the beneficiaries, as discussed in the ‘Beneficial entitlement’ topic and the exercise of any powers of advancement, discussed in the ‘Trustee powers and duties’ topic. Example: Named charity as capital beneficiary A trustee holds property on trust for A for life, remainder to a named charity This provision also poses no problem from a perpetuity perspective. A has a vested interest in the trust income. The charity has a vested interest in the capital which will vest in possession once A dies. The charity may take the form of a company or a charitable purpose trust. Even if it is a charitable purpose trust, there is no restriction on the length of time for which the trust can subsist. It can go on indefinitely and there is no problem with perpetuity. The practical difference between property vesting in beneficiaries and vesting in a charity is that a trust with beneficiaries will be extinguished once the capital is distributed to the beneficiaries. In contrast, capital which vests in charity trustees will continue to be held by the trustees and used for those purposes unless the property runs out. If the trust fund is well-managed, the property may never run out so the trust will continue to subsist unless the purposes fail. This means that charitable purpose trusts can exist indefinitely. As we saw in, there will also be no problem if the charitable trust does not go on indefinitely, because any surplus funds will be applied cy-pres. Example: Contingent interest 6. A trustee holds property on trust for the first of the settlor’s lineal descendants to obtain a first class law degree. This provision could be more problematic from a perpetuity perspective. Although the condition for obtaining a vested interest in the trust property is clear enough, it is unknown whether or when that condition might be satisfied. The ‘wait and see’ rule will apply here, meaning that the trustee will hold the property on trust for up to 125 years. If a lineal descendant of the settlor does satisfy the condition in that time, they will be entitled to the trust property. If nobody obtains such an interest within 125 years, the trust will come to an end. A well drafted trust instrument will set out what happens at the end of the perpetuity period but if it is silent, there will be a resulting trust for the settlor or – more likely given the 125 year time period – the settlor’s estate.

Answer 30

Before the implementation of the statutory perpetuity rules, there was a stricter common law perpetuity rule known as the rule against inalienability. This rule provides that assets cannot be tied up on trust for longer than the common law perpetuity period of a specified life in being plus 21 years (or just 21 years if no life in being is specified). This rule no longer applies to most trusts but remains relevant to non-charitable purpose trusts, as the statutory rule does not apply to them. The rule against inalienability is applied strictly. It must be certain at the time the trust is created that it will come to an end within the perpetuity period, otherwise the trust will be void. The ‘wait and see’ rule does not apply. A drafter should therefore always include an express perpetuity clause limiting the duration of a non-charitable purpose trust to the perpetuity period to ensure its validity. In the absence of such an express clause, the trust will typically fail. Older case law upheld clauses which limited the duration of trusts in a general, imprecise manner. But there is no guarantee these cases would be followed today. Example: Imprecise limitation of a trust period For so long as the trustees can legally do so. In older cases, clauses of this type were regarded as sufficient to limit to trust to the common law period of 21 years. This example does not reflect best drafting practice. It is advisable to include a clause which explicitly limits the trust to the common law perpetuity period of 21 years (or a life in being plus 21 years). The perpetuity period can be extended by reference to a human life in being ie the 21-year period does not start to run until the person dies. The person does not need to be associated with the trust. Royal lives are often chosen as in the example below. Example: Royal lives clause £5,000 to my trustees on trust to maintain my grave for a period not exceeding 21 years following the death of the last surviving descendant of King Charles III who is alive at the date of my death." It seems clear that animal lives cannot be used as lives in being. Lives means human lives. Although the case law is not consistent on this point, it is likely that a trust to maintain an animal for the rest of its life will be void because it cannot be said with certainty that the animal will definitely die (and the trust therefore come to an end) within the perpetuity period – even if this may be highly likely. Similarly, although it could be argued that a trust for the purpose of constructing a monument is likely to end within 21 years (as the monument is likely to have been completed within that time) as this is not certain it is advisable to include an express perpetuity period.

Answer 31

Consider the following examples: 1. A testator leaves £10,000 on trust in their will, the income from which is to be used to maintain the grave of the testator. 2. A testator leaves £10,000 on trust in their will, from which both the capital and income are to be used to maintain the grave of the testator. 3. A testator leaves £10,000 on trust in their will, from which both the capital and income are to be used to maintain the testator’s pet tortoise. 4. A testator leaves £10,000 on trust in their will, from which both the capital and income are to be used to maintain the testator’s pet dog. All of these purposes are capable of being the object of valid non-charitable purpose trusts but they will all fail due to the rule against inalienability. Example: Maintenance of grave from income only A testator leaves £10,000 on trust in their will, the income from which is to be used to maintain the grave of the testator. This trust is clearly void for perpetuity. Only the income from the trust fund is to be used for the specified purpose, meaning that the capital will never be disposed of and the trust could go on forever. Example: Maintenance of grave from capital and income A testator leaves £10,000 on trust in their will, from which both the capital and income are to be used to maintain the grave of the testator. Although this trust provides for the capital to be used as well as the income, it will still be void for perpetuity because it is not clear when the capital will be used up. It is therefore not clear that it will come to an end within the common law perpetuity period of 21 years. For a trust like this to be valid, it must contain an express perpetuity period limiting its duration. Example: Maintenance of tortoise from capital and income A testator leaves £10,000 on trust in their will, from which both the capital and income are to be used to maintain the testator’s pet tortoise. Although this trust could be distinguished from the previous example on the basis that it will eventually come to an end when the tortoise dies, it is not clear that this will be within the 21 year perpetuity period. Indeed tortoises can live for a very long time! This trust would therefore be void. Example: Maintenance of dog from capital and income A testator leaves £10,000 on trust in their will, from which both the capital and income are to be used to maintain the testator’s pet dog. You might think that this example is different, on the basis that the dog is unlikely to live for longer than 21 years (particularly if it is already an older dog). Although the case law on this point is inconsistent, the courts tend to take a restrictive approach to the rule against inalienability and it is therefore highly likely that this trust would be void.

Answer 32

To ensure their validity, all non-charitable purpose trusts should include an express perpetuity clause. • A simple example would be to provide that the trust should last for 21 years. • Another method that is sometimes used is an express perpetuity period for “as long as the law allows”. This would most likely be interpreted as the common law perpetuity period of 21 years but for the sake of certainty it is preferable not to use this. • To extend the perpetuity period, it is possible to provide that it should only start running at the death of a named person. It is common to use a Royal lives clause such as:

Answer 33

The statutory rule against remoteness of vesting applies to trusts with people or charities as their objects. • The statutory perpetuity period is 125 years. The trust property must vest in a person or charity before or at the end of that period. • It does not need to be clear from the outset that the trust property will vest within 125 years. The ‘wait and see’ rule applies. • The class closing rules apply at the end of the statutory perpetuity period. The common law rule against inalienability applies to non-charitable purpose trusts. • The common law perpetuity period is 21 years. • It must be clear from the outset of the trust that it will come to an end within the common law perpetuity period. It is not possible to wait and see. • The common law perpetuity period can be extended by reference to a life in being. A common way to do this is by way of a Royal lives clause.

Purpose Trusts Flashcards

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