Beneficial Entitlement and Trust Types — SQE1 FLK2 Trusts Law

A will leaves £120,000 to trustees for three children in equal shares. The eldest is 24. The second is 20. Both want the money now. The youngest is 16, she is happy for that to happen, and her mother has written to the trustees agreeing to it on her behalf. Every beneficiary wants the trust wound up. Can they force the trustees to hand it over? No.

And the reason is one condition in a rule from 1841. This topic is about who is entitled to what, and when they can act on it. Fixed interests against discretionary ones. Vested against contingent. And the rule that lets beneficiaries override the settlor, if, and only if, they satisfy every one of its conditions. Keep the three children in mind.

Here is the route. Fixed interest trusts, and the difference between a vested interest and a contingent one. Then discretionary trusts, where nobody owns anything until the trustees decide. Then the rule in Saunders v Vautier, its three conditions, and what to do when one of them fails. Then life interests and remainders. And last, accumulation and protective trusts.

Start with the simplest kind. In a fixed interest trust the instrument specifies exactly how the property is divided. To A and B in equal shares. To A for life, remainder to B. Each beneficiary is entitled to a defined share, and the trustees have no discretion at all. Their job is to hold, manage, and distribute according to the terms.

Then the distinction that runs through the whole topic. A vested interest is a present, existing right, even if possession is postponed. It comes in more than one shape. An absolute vested interest is unconditional and cannot be taken away. A vested interest subject to divestment is a right you have now that will be removed if a specified event happens. A vested interest in possession means you are currently entitled to the income.

A contingent interest is different in kind. It is subject to a condition precedent, and until that condition is fulfilled the beneficiary has no proprietary interest in the trust property at all. Not a small one. None. If the condition is never met, the interest never arises, and if the beneficiary dies first, it simply lapses.

So how do you tell them apart in an exam? Watch the words. To A if she reaches 25 is contingent. To A when she reaches 25 is contingent. To A at 25 is still contingent, because attaining 25 is the condition. But to A, and if she dies under 25 then to B, is vested, subject to being divested. Try it. To my daughter on her marriage. Contingent.

Discretionary trusts now, and they work quite differently. The trustees are given power to decide which of a class of beneficiaries benefits, when, and in what proportions. To such of my children as my trustees shall in their absolute discretion select. Until they exercise that discretion and distribute, no beneficiary has a proprietary interest. What each has is the right to be considered.

Which raises the certainty question, and the leading case is McPhail v Doulton, from 1971. The trust was for the officers and employees, and ex-officers and ex-employees, of a company, and their relatives and dependants. The House of Lords upheld it. Lord Wilberforce set the test: it must be possible to say with certainty whether any given individual is or is not a member of the class.

That is the is-or-is-not test, and it is a lower threshold than the one for a fixed trust. A fixed trust needs a complete list, because you cannot divide a fund into defined shares without knowing every share. A discretionary trust fails only where it is conceptually impossible to say who is in the class.

And keep a discretionary trust apart from a mere power of appointment. A discretionary trust puts the trustees under a duty to consider distributing within the class. A mere power gives a discretion with no duty to exercise it. The difference bites when nothing happens. A court may direct trustees who have failed to exercise a discretionary trust. A power that is simply never exercised has no such consequence.

The distinction is not academic either. Undistributed income of a discretionary trust is taxed at the trust rate, where the income of a fixed trust is taxed on the beneficiaries directly. And a beneficiary's interest under a discretionary trust cannot be seized by their creditors, because there is no defined share to seize. A fixed share can be.

Now the rule the topic is built around. Saunders v Vautier, from 1841. If all the beneficiaries are of full age and capacity, are between them absolutely entitled, and all agree? Then they can compel the trustees to hand over the trust property and bring the trust to an end. Even if the settlor said it should run for another thirty years. The beneficiaries can override the settlor entirely.

Three conditions, and they are cumulative. Full age and capacity, for every beneficiary. Absolute entitlement, between them, to the whole beneficial interest. And unanimous agreement, from every single one. If one dissents, the rule cannot be used. And back to your three children. Two adults who agree, one sixteen-year-old who also agrees, and a mother consenting for her. It fails, because the rule looks to the beneficiary's own capacity to consent.

So the trap is almost always a missing condition. A minor. A beneficiary who lacks capacity. A contingent interest. A life interest. Or one beneficiary who simply says no. And here is the pitfall the examiners like best. A life tenant and a remainderman cannot invoke the rule together. Neither is absolutely entitled: one gets income for life, the other must wait. Vested is not the same as absolute.

What do you do when the rule is unavailable? You go to the Variation of Trusts Act 1958. Under s.1 the court can approve an arrangement varying or revoking a trust on behalf of those who cannot consent for themselves: minors, the unborn, unascertained persons, and the incapacitated. It must be for the benefit of the person approved for, with one exception, the discretionary beneficiaries of a protective trust.

That Act exists for a reason. In 1954 the House of Lords held the court had no general inherent jurisdiction to sanction a variation. The inherent power was narrow, reaching emergencies and compromises rather than arrangements made to save tax. Parliament supplied the jurisdiction in 1958. And do not confuse it with s.57 of the Trustee Act 1925, which confers additional administrative powers on trustees and does not touch beneficial interests.

Life interests next. A life tenant is entitled to the income the trust property produces, for as long as they live. Where the property includes a dwelling, they also have the right to occupy it. They have no right to the capital, and cannot sell it. On their death the capital passes to the remainderman, not to the life tenant's estate.

Which puts the trustees in the middle. They owe a duty to hold an even hand between the life tenant and the remainderman. That means investing so as to produce a reasonable income for one, while preserving the capital for the other. They may not deliberately favour one class at the expense of the other.

A remainder can itself be vested or contingent. A vested remainder is subject to no condition beyond the natural ending of the prior interest. It is a present property right. It can be transferred, and it passes to the holder's estate if they die first. A contingent remainder needs some further condition satisfied, and until it is, there is nothing to transfer and nothing to inherit.

Accumulation, briefly, because the modern position surprises people. For instruments taking effect on or after 6 April 2010, s.13 of the Perpetuities and Accumulations Act 2009 abolished the statutory restrictions on accumulating income in a private trust. Income may now be accumulated for the whole duration of the trust, limited only by the 125-year perpetuity period. Only charitable trusts still face a statutory cap, broadly 21 years, under s.14.

Last, protective trusts, under s.33 of the Trustee Act 1925. The beneficiary is entitled to the income until they do, or attempt to do, something that would deprive them of it. Typically becoming bankrupt, or assigning or charging the interest. On that event the life interest ends and the trust over the income becomes a discretionary trust for the beneficiary and their family.

Notice the word until, because it is doing the work. You cannot give someone an absolute interest and then attach a condition forfeiting it on bankruptcy. That condition is void as repugnant to the gift, which is what Brandon v Robinson decided back in 1811. A protective trust works because the interest is limited from the start, and simply determines. And once it converts, it is permanent. It does not revert when the bankruptcy is discharged.

A word on how SQE1 tests this. You will not be asked to recall case names or section numbers. You get a scenario, five answers, and one instruction: pick the best. What is tested is whether you can classify an interest correctly and then say what follows from it.

If you keep only three. Saunders v Vautier, and its three cumulative conditions, because more questions in this topic turn on it than on anything else. The is-or-is-not test from McPhail v Doulton, for discretionary trusts. And s.33 of the Trustee Act 1925, because a protective trust behaves differently from every other life interest.

Traps the examiners set. One: full age and capacity is only one condition of three. The commonest wrong answer here is a beneficiary who is plainly an adult, plainly agrees, and still cannot end the trust, because somebody's interest is contingent.

Two: a life tenant and a remainderman together cannot invoke the rule. Neither is absolutely entitled. The life tenant gets income only, and the remainderman has to wait. Vested is not the same as absolute, and that distinction decides the question.

Three: a parent cannot consent for a minor. The rule looks to the beneficiary's own capacity. Four: watch the language. To A if she reaches 25 is contingent. To A at 25 is still contingent. But to A, and if she dies under 25 then to B, is vested, subject to being taken away.

And five, on protective trusts. Once the trigger fires and the life interest converts to a discretionary trust, the conversion is permanent. It does not revert when the bankruptcy is discharged. Which is rather the point of it.

Quick check. A will trust directs the trustees to pay the income to the widow for her life. The capital goes to his son, if the son attains the age of 30. The widow is 65. The son is 25, of full capacity. He asks the trustees to wind the trust up and pay him the fund now. He argues he is bound to reach 30 eventually, and nobody else can take under the will.

Must the trustees go on holding the fund? Three candidate answers. One: no, the son is an adult of full capacity and nobody else can take. Two: yes, his interest is contingent and the widow is entitled only to income. Three: no, attaining 30 is so likely his interest may be treated as vested. Pause here if you want a moment.

The answer is two. His interest is contingent on attaining 30, a condition he has not satisfied, so he has no proprietary interest in the fund at present. The widow's interest is limited to income. And between them they do not exhaust the beneficial interest, because if the son dies under 30 the capital results to the estate.

Why the others fail. One treats full age and capacity as the whole test. It is one condition of three, and absolute entitlement is the one he cannot satisfy. Three is tempting. How likely a condition is to be satisfied is irrelevant. An interest stays contingent until it occurs.

Five things to take away, and the three children cover the first. One: Saunders v Vautier has three cumulative conditions. Full age and capacity, absolute entitlement between them, and unanimous agreement. One sixteen-year-old defeats it, and her mother cannot consent for her.

Two: vested is not the same as absolute. A life tenant and a remainderman are both vested, and neither is absolutely entitled. Three: under a discretionary trust nobody has a proprietary interest until the trustees distribute, which is why creditors cannot reach it.

Four: where the rule cannot be used, the Variation of Trusts Act 1958 is the route, and the court approves for those who cannot consent. Five: a protective trust under s.33 converts on bankruptcy or attempted alienation, and it converts permanently. Next time, Charitable Trusts and Non-Charitable Purpose Trusts.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.