In a fixed interest trust, the trust instrument specifies exactly how the trust property is to be divided among the beneficiaries. Each beneficiary is entitled to a specific share, which may be expressed as a fraction (e.g., "to A and B in equal shares"), a percentage, or a specific asset. The trustees have no discretion over who receives what. Their role is simply to hold and manage the trust property and distribute it in accordance with the fixed terms of the trust.
Common examples include: "to A for life, remainder to B" (a life interest followed by a remainder); "to A and B equally" (a simple 50/50 division); "to A for 25 years, then to B absolutely" (a term of years followed by a vested interest). In each case, the beneficial interests are defined from the outset and the trustees cannot alter them.
A vested interest is a present, existing right to the trust property (or a share of it), even if the beneficiary does not yet have possession. There are three types. An absolute vested interest is unconditional and indefeasible: the beneficiary is entitled immediately and nothing can take it away. A vested interest subject to divestment (defeasible) means the beneficiary has a right now, but it will be taken away if a specified event occurs (e.g., "to A, but if A dies before 25, to B"). A vested interest in possession means the beneficiary is currently entitled to receive the income or the property.
A contingent interest is subject to a condition precedent: the beneficiary gets nothing until the condition is fulfilled. If the condition is never met, the interest never arises. Common conditions include reaching a specified age (e.g., attaining 21), getting married, surviving the life tenant, or some other event specified in the trust instrument. Until the condition is satisfied, the beneficiary has no proprietary interest in the trust property at all.
| Feature | Vested Interest | Contingent Interest |
|---|---|---|
| When does the right arise? | Immediately (though possession may be postponed) | Only when the condition precedent is fulfilled |
| Can the beneficiary transfer the interest? | Yes, it is a present property right | No, there is nothing to transfer until the condition is met |
| Does Saunders v Vautier apply? | Yes, if the beneficiary is absolutely entitled | No, the interest is not absolute |
| What happens if the beneficiary dies? | The interest passes to their estate | The interest lapses (unless the condition has been fulfilled) |
| Can trustees distribute? | Yes, to the vested beneficiary | No, until the condition is satisfied |
This case illustrates the importance of distinguishing between vested and contingent interests. Vandervell gave options to a college to purchase shares at a favourable price, with the intention that the college would hold the shares on trust for him. When the college exercised the option, it was held that Vandervell had a beneficial interest in the shares (the equitable interest was vested in him), even though legal title was held by the college. The case demonstrates that a beneficiary's equitable interest can be vested even where the legal title is held by someone else, and that the court will look at the substance of the arrangement rather than its form.
Look for condition precedent language such as "if", "provided that", "on condition that", or "when". If the trust says "to A if she reaches 25", A has a contingent interest until she turns 25. If it says "to A when she reaches 25" or "to A at 25", this is still contingent (condition precedent is attaining 25). But if it says "to A, but if she dies under 25, to B", A has a vested interest subject to divestment.
In a discretionary trust, the trustees are given the power to decide which of the specified beneficiaries should benefit, when, and in what proportions. The trust instrument will typically say something like "to such of my children as my trustees shall in their absolute discretion select". No single beneficiary has a right to any particular share. Until the trustees exercise their discretion and make a distribution, no beneficiary has a proprietary interest in the trust property. They merely have the right to be considered (the right to be a potential recipient).
This is the leading case on discretionary trusts. The trust was for the benefit of "the officers and employees or ex-officers or ex-employees of the company" and their relatives and dependants. The House of Lords held that the trust was valid. Lord Wilberforce set out the test for certainty of objects in discretionary trusts: it must be possible to say with certainty whether any given individual is or is not a member of the class. This is the "is or is not" test (also called the "any given postulant" test). It is a lower threshold than the fixed trust test (which requires that all beneficiaries be ascertainable). The trust only fails if it is conceptually impossible to determine who falls within the class.
The court has jurisdiction to approve any arrangement varying or revoking a trust on behalf of minor or unborn beneficiaries, if it is for their benefit. This is particularly relevant for discretionary trusts, where the trustees may wish to vary the terms to achieve tax efficiency or respond to changed circumstances.
| Feature | Fixed Interest Trust | Discretionary Trust |
|---|---|---|
| Beneficiaries' shares | Defined and fixed from the outset | Determined by trustees' discretion |
| Proprietary interest | Each beneficiary has a defined equitable interest | No beneficiary has an interest until distribution |
| Certainty of objects | Complete list test: all beneficiaries must be ascertainable | "Is or is not" test (McPhail v Doulton) |
| Saunders v Vautier | Can apply if all beneficiaries are absolutely entitled | Cannot apply (no beneficiary is absolutely entitled) |
| Trustees' role | Distribute according to fixed shares | Select which beneficiaries receive what |
| Tax treatment | Generally more straightforward | Different (and often more complex) tax rules apply |
| Bankruptcy of beneficiary | Beneficiary's fixed share forms part of their estate | No fixed share to claim, but trustees may still appoint to them |
The distinction between fixed and discretionary trusts matters in several practical contexts. For tax purposes, discretionary trusts are treated differently from fixed trusts. Income of a discretionary trust that is not distributed is taxed at the trust rate, while income of a fixed trust is taxed on the beneficiaries directly. For creditor protection, a beneficiary's interest in a discretionary trust cannot be seized by their creditors (since they have no defined share), whereas a beneficiary's fixed share can. For variation, the court can more readily approve variations of discretionary trusts under its inherent jurisdiction or s.57 Trustee Act 1925.
A discretionary trust creates a duty on the trustees to consider distributing to the beneficiaries within a specified class. A mere power of appointment gives the trustees (or another person) a discretion to appoint property among a class of persons, but there is no duty to exercise the power. The distinction matters because if the trustees of a discretionary trust fail to exercise their discretion, a court may direct them to do so, whereas a failure to exercise a power has no such consequence.
The rule in Saunders v Vautier (1841) 4 Beav 115 provides that if all beneficiaries are of full age and capacity, are absolutely entitled to the trust property, and are all in agreement, they can between them compel the trustees to transfer the trust property to them and bring the trust to an end. This is a powerful rule because it allows the beneficiaries to override the settlor's intentions entirely. Even if the settlor specified that the trust should continue for a specific period, the beneficiaries can terminate it early if the conditions are met.
Step 1: Identify all beneficiaries under the trust
Step 2: Check that every beneficiary is of full age (18 or over) and has full mental capacity
Step 3: Check that every beneficiary is absolutely entitled (no contingent interests, no life interests)
Step 4: Check that all beneficiaries are in agreement — every single one must consent
Step 5: If all conditions are met, beneficiaries can compel the trustees to transfer the trust property and terminate the trust
Three cumulative requirements must all be satisfied. First, all beneficiaries must be of full age and capacity. If any beneficiary is a minor (under 18) or lacks mental capacity, the rule cannot be invoked. Second, all beneficiaries must be absolutely entitled to the trust property. This means they must have vested interests that are not subject to any condition precedent or life interest. Third, all beneficiaries must be in agreement. Every single beneficiary must consent. If even one dissents, the rule cannot be used.
This rule comes up regularly in SQE1 questions. The typical exam scenario will present a trust and ask whether the beneficiaries can terminate it. The trick is usually that one of the three requirements is not met. Look carefully for minors, contingent interests, life interests, or beneficiaries who disagree. If any one of these is present, the rule does not apply.
A common exam pitfall is assuming that a life tenant and reversioner can together invoke Saunders v Vautier. They cannot. The life tenant is not absolutely entitled (they only get income for life) and the reversioner is not absolutely entitled (they must wait for the life interest to end). The rule requires absolute entitlement, not merely vested interests.
A life tenant is a beneficiary who is entitled to receive the income generated by the trust property for the duration of their life. If the trust property includes a dwelling house, the life tenant also has the right to occupy it. The life tenant's interest ends on their death. They do not have any right to the capital of the trust. The life tenant is sometimes referred to as having a "life interest in possession" because they are currently receiving the income.
The trustees owe a duty to the life tenant to invest the trust property so as to produce a reasonable income. This was established in Re Chapman [1908] 2 Ch 381. The trustees must also keep the trust property in repair (if it is a dwelling house) and may need to use capital to do so. The life tenant has the right to occupy any trust property that is a residence, and the trustees cannot unreasonably refuse this right.
A remainderman (or reversioner) is the beneficiary entitled to the capital of the trust when the life interest ends. The remainder may be vested or contingent. A vested remainder is one where the remainderman's identity is known and their interest is not subject to any condition precedent (other than the natural termination of the life interest). A contingent remainder is one where the remainderman must satisfy some additional condition before they become entitled (e.g., "to A for life, remainder to B if B reaches 25").
A vested remainder is not subject to any condition precedent other than the termination of the prior estate. The remainderman is known and their interest is secure. A contingent remainder is subject to a condition precedent, such as attaining a certain age, surviving the life tenant, or some other specified event. If the condition is not met, the contingent remainder fails. The practical difference is significant: a beneficiary with a vested remainder has a present property interest that can be transferred, whereas a beneficiary with a contingent remainder has no transferable interest until the condition is fulfilled.
| Feature | Vested Remainder | Contingent Remainder |
|---|---|---|
| Is the remainderman identified? | Yes, known from the outset | May be known, but interest depends on condition |
| Condition precedent? | None (other than termination of prior estate) | Yes — must be fulfilled before interest takes effect |
| Can the interest be transferred? | Yes, it is a present property right | No, not until the condition is met |
| What if the remainderman dies? | Interest passes to their estate | Interest lapses (unless the condition was fulfilled before death) |
| What if the condition is never met? | Not applicable — no condition to fail | The remainder fails and the property may revert to the settlor or pass under a gift over |
Trustees may be authorised or directed to accumulate trust income (i.e., add it to the capital rather than pay it out to the life tenant). However, the law limits how long income can be accumulated. The Perpetuities and Accumulations Act 2009 (which replaced the 1964 Act for instruments taking effect after 6 April 2010) provides that the default accumulation period is the life of the relevant person in being plus 30 years. For instruments before that date, the Perpetuities and Accumulations Act 1964 set out prescribed periods. The purpose of these rules is to prevent trust property from being locked up for excessively long periods.
The default period for accumulation of income under a trust is the period of 21 years from the date of the creation of the trust, or for wills and codicils, from the date of the testator's death. Different rules may apply to instruments taking effect before 6 April 2010 under the Perpetuities and Accumulations Act 1964.
In exam questions, watch out for scenarios where a life tenant wants to sell or mortgage the trust property. A life tenant cannot sell the capital — they can only enjoy the income and occupation. Also be alert to questions about what happens when the life tenant dies: the capital passes to the remainderman, not to the life tenant's estate.
In a mandatory or fixed trust, the trustees have a duty to distribute the trust property in accordance with the fixed terms. They must identify the beneficiaries, ascertain their entitlements, and distribute accordingly. If the trustees fail to distribute, the beneficiaries can apply to court for an order compelling distribution. The trustees have no discretion to withhold a beneficiary's share or to redistribute it to someone else.
In a discretionary trust, the trustees have a power (but not a duty) to select which beneficiaries receive distributions and in what amounts. The trustees must exercise their discretion properly: they must consider all relevant factors and ignore irrelevant ones. If they fail to exercise their discretion at all, the court may direct them to do so. However, the court will not substitute its own judgment for that of the trustees. The trustees can distribute to one beneficiary and not another, or to all in unequal shares, as long as their decision is made in good faith and is rational.
Where any income arising under any trust or power is directed to be accumulated during the lifetime of any person or for any period not exceeding that specified in section 64 of the Settled Land Act 1925 or the Perpetuities and Accumulations Act 1964, then, if during that lifetime or period, the person entitled to the income in possession becomes bankrupt or attempts to assign or charge that income, the income shall cease to be so directed to be accumulated and shall go to the persons or persons who would have been entitled to it had the accumulations not been directed.
A protective trust is created under Trustee Act 1925, s.33. It starts as a life interest (the beneficiary is entitled to income), but if the beneficiary does something to endanger their interest — typically becoming bankrupt or trying to alienate (assign or charge) their interest — the life interest automatically converts into a discretionary trust. The trustees then have discretion over how to distribute the income among the beneficiary and other members of a class (often the beneficiary's family). This protects the trust property from the beneficiary's creditors.
Step 1: The trust is set up as a life interest for the beneficiary
Step 2: The beneficiary receives income from the trust property
Step 3: If the beneficiary becomes bankrupt or attempts to assign/charge their interest, the protective trust is triggered
Step 4: The life interest terminates and is replaced by a discretionary trust
Step 5: The trustees now have discretion over who receives the income among the class of beneficiaries
Step 6: The trustees may choose to continue paying the income to the original beneficiary, but their creditors cannot access it
In an exam, if a question mentions a beneficiary who is in financial difficulty or has creditors, consider whether a protective trust under s.33 might be relevant. The key trigger events are bankruptcy and attempted alienation (assignment or charge). Remember that once the protective trust is triggered, it cannot revert to a life interest — the conversion is permanent.
A mandatory trust is one where the trustees MUST distribute according to fixed terms. A discretionary trust is one where the trustees MAY distribute at their discretion. The key difference is duty vs power. A mandatory trust creates a duty; a discretionary trust creates a power. If an exam question asks whether the trustees "must" or "may" distribute, you need to identify which type of trust you are dealing with.