The beneficiary principle

What is it?

The cases disclose two versions of the beneficiary principle: the strong version and the weak version.

(1) The strong version of the beneficiary principle says that a non-charitable trust cannot exist unless there are one or more identified individuals who have a beneficial interest in the trust property. Lord Parker endorsed this strong version of the beneficiary principle when he said in Bowman v Secular Society Ltd (1917) that ‘A trust to be valid must be for the benefit of individuals, which this certainly is not, or must be in that class of gifts for the benefit of the public which the courts in this country recognise as charitable…’

(2) The weak version of the beneficiary principle says that a non-charitable trust cannot exist unless there exists someone with the power to enforce the obligations of the trustee. The original formulation of the beneficiary principle in Morice v Bishop of Durham (1804), by Sir William Grant, seems to endorse the weak version of the beneficiary principle: ‘There can be no trust, over the exercise of which this Court will not assume a control; for an uncontrollable power of disposition would be ownership, and not trust… Every…trust [other than a trust for charity] must have a definite object. There must be somebody, in whose favour the Court can decree performance.’

Viscount Simonds’ statement of the beneficiary principle in Leahy v Attorney General for New South Wales (1959) seems to straddle both views. In discussing the validity of a gift for the ‘general purposes’ of an association, Viscount Simonds observed, ‘If the words “for the general purposes of the association” were held to import a trust, the question would have to be asked, what is the trust and who are the beneficiaries? A gift can be made to persons…but it cannot be made to a purpose or to an object: so also, a trust may be created for the benefit of persons as cestuis que trust but not for a purpose or object be charitable.’ So far, so compatible with the strong version of the beneficiary principle. But Viscount Simonds then went on to say: ‘For a purpose or object cannot sue, but, if it be charitable, the Attorney-General can sue to enforce it.’ This seems to take the view that the beneficiary principle will be satisfied if there is someone who can sue to enforce the duties of the trustee of a non-charitable trust.

The trust in Re Denley

The decision in Re Denley and its subsequent reception illustrates the difference between the strong and weak versions of the beneficiary principle. The facts of the case are complicated, but for our purposes we can take it that the question Goff J had to decide was whether a company had created a valid trust when it settled land on trustees to be used as a sports ground ‘mainly for the benefit of employees of the company’. Goff J observed that:

‘I think there may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that 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, as it seems to me, apply to invalidate the trust…the beneficiary principle is [directed at] purpose or object trusts which are abstract or impersonal.’

This seems to endorse the weak version of the beneficiary principle, and open the door to recognising that a non-charitable purpose trust is valid if there exists someone who has enough of an interest in the purpose of the trust being fulfilled that they could be given standing to enforce the trust, and could be trusted to exercise their powers to enforce that trust. And Goff J could be said to have walked through that door when he upheld the trust in Re Denley as valid on the basis that ‘the employees [were to] be entitled to the use and enjoyment of the land.’ As such, Goff J held, the trust in Re Denley was ‘directly or indirectly for the benefit of an individual or indviduals’ and as such it ‘fell outside the mischief of the beneficiary principle.’

However, later cases have not adopted this interpretation of Goff J’s decision in Re Denley. Instead, they have read Goff J as holding that the trust in Re Denley did not offend against the strong version of the beneficiary principle. In other words, Re Denley has been interpreted as holding that the land in Re Denley was held on trust for the employees for the duration of the trust. On this reading, Goff J found in Re Denley that the land was held on trust for the employees, who had a beneficial interest in the land. In other words, the Re Denley trust was a persons trust, not a purpose trust. Vinelott J interpreted Re Denley in this way in Re Grant’s Will Trusts (1980), holding that in Re Denley Goff J ‘held that the trust deed created a valid trust for the benefit of the employees, the benefit being the right to use the land subject to and in accordance with the rules made by the trustees.’ Vinelott J did not see anything at all unorthodox about such a trust: ‘I can see no distinction in principle between a trust to permit a class defined by reference to employment to use and enjoy land in accordance with rules to be made at the discretion of trustees on the one hand, and, on the other hand, a trust to distribute income at the discretion of trustees amongst a class, defined by reference to, for example, relationship to a settlor.’ Of course, under a discretionary trust, the class of potential beneficiaries is regarded as collectively having a beneficial interest in the trust property, and similarly, the employees in Re Denley could be regarded – on this analysis – as having collectively a beneficial interest in the land in Re Denley. A similar view of Re Denley was adopted by Lawrence Collins J in Re Horley Town Football Club (2006), holding (at [99]) that the land in Re Denley was held on ‘trust for the benefit of individuals’.

The anomalous exceptions

Whichever version of the beneficiary principle we endorse – and whatever view we take of Goff J’s judgment in Re Denley – there are some trusts that stand as exceptions to the beneficiary principle. These were listed in Re Endacott (1960) as ‘(1) trusts for the erection or maintenance of [funerary] monuments or graves; (2) trusts for the saying of masses…; (3) trusts for the maintenance of particular animals…’ These non-charitable trusts will be valid despite the fact that no one will have a beneficial interest in the trust property and it is not obvious who will be able to enforce these trusts.

So why do these exceptions to the beneficiary principle exist? The cases reveal two explanations. The first is that the courts simply screwed up when they recognised these trusts as being valid. This view was put forward most strongly by Harman LJ in Re Endacott, holding that these exceptions owe their existence to ‘occasions when Homer has nodded’ (i.e. the courts have gone to sleep and stopped thinking straight) and that they are ‘troublesome, anomalous and aberrant cases.’ The second view was put forward by Roxburgh J in Re Astor (1952) – that if you look at the cases where these anomalous trusts were recognised as being valid, in most of those cases, the trust under examination did not in fact violate the weak version of the beneficiary principle, in that there did exist someone who had the power to go to court to ensure that the trustee of the trust was not misappropriating the trust property.

In fact, there is a much more satisfying explanation of these exceptions, which focusses on the fact that they are often referred to as ‘concessions to human weakness or sentiment’. These exceptions to the beneficiary principle owe their existence to the fact that people cannot be stopped from trying to create these kinds of trusts in their wills. If you are making a will, you will want to set some money aside for the maintenance of your grave and the erection of a headstone (assuming that you can’t count on anyone else to do this, and you don’t want your name to disappear into oblivion once you die); and you will want to set aside some money for the care of your pets; and if you believe in Heaven and Hell and you aren’t certain where you are going to end up after you die, you will most definitely want to set aside some money for masses to be said for your soul. Now the courts could react to the fact that are going to put such trusts in their wills by taking a hard line and saying ‘These trusts are invalid.’ But that would be futile – people will simply not be deterred from inserting these kinds of provisions into their wills by a warning that these provisions will not be given effect to by a court. So what? they might think – I might as well make these stipulations, and just hope that they are put into effect. Recognising this, the courts have bowed to consumer demand and held that these kinds of purpose trusts – but (as was held in Re Endacott) only these kinds of purpose trusts – will be held to be valid despite the fact that they are not charitable in nature and violate the beneficiary principle.

Which version of the beneficiary principle should we prefer?

No one is in favour of abolishing the weak version of the beneficiary principle. The idea of upholding a trust when there is no effective means of ensuring that the trust property is not misapplied is not one that anyone favours. So the only issue relating to the beneficiary principle is whether we should give effect to the strong version of the beneficiary principle, in preference to the weak version. This depends on how we answer the Validity of Non-Charitable Purpose Trusts Question: Should we hold that a non-charitable purpose trust is valid provided that there exists an ‘enforcer’ who has standing to compel the trustee to apply the trust property for the purpose for which it was transferred to him? If our answer is ‘no’ then we are effectively in favour of the strong version of the beneficiary principle: the only sort of non-charitable trust we are willing to find is valid is a trust for persons, not a trust for purposes. If our answer is ‘yes’ then we have effectively rejected the strong version of the beneficiary principle and accepted the weak version of the beneficiary principle.

English law – Re Denley notwithstanding – has effectively said ‘no’ to the Validity of Non-Charitable Purpose Trusts Question. English law will not recognise a non-charitable purpose trust as being valid, even if there exists a queue of people ready and willing to acts as ‘enforcers’ to compel the trustee of the trust to apply the property for the purpose for which he has been given it. A number of jurisdictions elsewhere in the world have taken a different view: notably the Cayman Islands (with its Special Trusts (Alternative Regime) Law 1997 – non-charitable purpose trusts that are recognised as valid under the 1997 Law are usually referred to as ‘STAR’ trusts); but also Bermuda, the British Virgin Islands, the Isle of Man, Guernsey, Mauritius, and Brunei.

Academic opinion on how the Validity of Non-Charitable Purpose Trusts Question should be answered is also divided. David Hayton (‘Developing the obligation characteristic of the trust’ (2001) 117 Law Quarterly Review 96)  and Jonathan Hilliard (‘On the irreducible core content of trusteeship – a reply to Professors Matthews and Parkinson’ (2003) 17 Trust Law International 144) say ‘yes’; while Paul Matthews (‘The new trust: obligations without rights’ in Oakley (ed), Trends in Contemporary Trusts Law (1996), and ‘From obligation to property and back again? The future of the non-charitable purpose trust’ in Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Trusts (2002)) and Patrick Parkinson (‘Reconceptualising the express trust’ (2002) 61 Cambridge Law Journal 657) say ‘no’.

Here are three arguments in favour of responding ‘no’ to the Validity of Non-Charitable Purpose Trusts Question that you should consider in making up your own mind as to how you would answer this question:

(1) The capriciousness argument. In Brown v Burdett (1882), a testatrix provided in her will that her house should be bricked up and people generally prevented from entering it for twenty years after the death. During the twenty years, the house was only to be occupied by ‘some respectable married couple’ who would occupy ‘the kitchen, back-kitchen, middle attic and hall’ and who would look after the house and generally make sure that no one else could enter it. After the twenty years were up, the house would be inherited by various heirs, so long as they made sure that the house was kept empty of visitors for the twenty years immediately after the testatrix’s death. The trust to keep the house in Brown empty satisfied the weak version of the beneficiary principle, insofar as her ultimate heirs had an incentive to ensure that the trustees of the testatrix’s will had ample incentive to ensure that the trustees complied with her instructions to keep the house empty of visitors. Despite this, the trust was declared invalid. Bacon V-C held that ‘I think I must “unseal” this useless, undisposed of property’ and gave a declaration that the house was ‘undisposed of by the will, for the term of twenty years from the testatrix’s death.’ (That is literally all he said.) The case of Brown v Burdett illustrates one of the dangers involved in declaring non-charitable purpose trusts to be valid, so long as the weak version of the beneficiary principle is satisfied. You could end up requiring that valuable property be used for purposes that are completely capricious (which, in this context, means ‘useless’ – for another meaning, see the essay on the creation of express trusts, elsewhere on this website). (Many thanks to W.S. for referring me to the case of Brown v Burdett.)

(2) The economic argument. Even if the purpose for which property has been left on trust is not capricious, and is intelligibly valuable, requiring that the property be applied for that purpose is potentially inefficient in that it could tie up property so that it can only be used for a particular purpose for the perpetuity period (in this context, 21 years) when its being used for some other purpose would be much more productive. For example, there are no guarantees that the most beneficial use of the land in Re Denley was that it be used as a sports ground for a company’s employees. Maybe converting the land into a housing estate would have been more beneficial. A free market economy seeks to ensure that property ends up being used for the most beneficial purpose by allowing property to gravitate into the hands of those who are ready and willing to pay the most for the property. (The idea being that those who can make the most socially productive use of property are those who will be and ready and willing to pay the most for that property; a very questionable assumption, but no better yardstick for measuring the social worth of the way someone proposes to uses a particular piece of property has even been arrived at.) Non-charitable purpose trusts get in the way of the free market distributing property into the hands of those who are ready and willing to pay the most for that property by requiring that that property be used for a particular purpose, and only for that purpose, during the perpetuity period. It is for this reason, I believe, that law requires that a purpose trust be for the ‘public benefit’ before it will declare that the trust is valid as a charitable trust. Before the courts will tie up the property to be used for a particular purpose (for perpetuity), they will require it to be established that using that property for that purpose will be of some proven benefit to the public benefit that will outweigh the possible detriment to the public resulting from the property being tied up so that it cannot be used for any other benefit.

(3) The tax avoidance argument. It seems to be no accident that all of the jurisdictions that allow settlors to create non-charitable purpose trusts are notorious tax havens: countries that make it easy for rich people who are willing to deposit their money in the country’s banks to structure their affairs so as to minimise the amount of tax they have to pay on that money. Non-charitable purpose trusts are a wonderful device for avoiding tax. In a jurisdiction that recognises the validity of non-charitable purpose trusts, S can settle money and shares on T to be used for the non-charitable purpose of ‘looking after the needs of S, his family and close relatives’. As S etc. (and T) do not have a beneficial interest in the money and shares that are held on this non-charitable purpose trust, they cannot be taxed on the income earned by the money and shares. And any disbursements they receive from the trust fund will count as gifts from the trust fund, and so will not be taxable on receipt. Companies can also use non-charitable purpose trusts to minimise their taxes. For example (an example drawn from Alexander Bove, ‘The purpose of purpose trusts’ (2004) 18 Real Property, Probate and Trust Law Journal 34), in a jurisdiction that recognised non-charitable purpose trusts as being generally valid, a company could set up a non-charitable purpose trust, the purpose of which trust would be to lease the company equipment. (The company would then act as ‘enforcer’ of the trust to ensure that the weak version of the beneficiary principle is observed.) The trustees of the trust then purchase a piece of machinery which the company needs. The company leases the machinery from the trustees of the trust fund, thereby repaying the trust fund for the money it has spent on the piece of machinery. But the machinery – being leased – does not appear on the company’s balance sheet, and the lease payments count as a loss on the company’s accounts, thereby diminishing the profits it has to declare, and the amount of tax it has to pay on those profits. (For those interested in exploring issues relating to tax avoidance, Nicholas Shaxson’s website is as good a starting point as any. Nicholas Shaxson wrote Treasure Islands: Tax Havens and the Men Who Stole the World (2012) – an eye-opening look at the history and reality of countries’ setting themselves up as tax havens for rich people from around the world.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s