Editorial Committee of the Cambridge Law Journal

Trusts. Discretionary Interests Not InterestsAuthor(s): John TileySource: The Cambridge Law Journal, Vol. 26, No. 2 (Nov., 1968), pp. 209-211Published by: Cambridge University Press on behalf of Editorial Committee of the Cambridge LawJournalStable URL: http://www.jstor.org/stable/4505236 .

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209 209 C.L.J. C.L.J. Case and Comment Case and Comment

in their stead: for that, the judge had wd, would in truth be " a complete new resettlement."] S. J. 3;AILEY.

WUSDISGRETIONARY INERESTS NOT INERESTS WHAT is the connection between a beauty competition a.nd a dis- cretionary trust? Connoisseurs of tax law will not be surprised that there is a connection. The point arose in the decision of t:he House of Lords in Gartside v. I.R.C. [1968] A.C. 553 that beneficiaries uncler a discretionary trust do not have axl interest in possession.

In Gartside a settlor created a trust of the residue of his estate, the trustees to use the income during the life of A for the maLintenance or benefit of all or any of A, A's wife or children (if any) and to accumulate the surplus on the same trusts as the settlement. On A's death the property passed to A's cllildren who attained tventy-one or, if female, attained twenty-one or Inarnod. Just before the power of accumulation expired the trustees exercised an express power of advancoment and vested some £47,000 in the sons of A. A died within two years of this advancement. Duty was d on the prope:rty still in the settlement, but the Revenue claimed duty in res&ct of the £47,000 on the ground that this was the pardal determmalaion of an interest in possession. The trustees argued that there was no interat

* %

In possesslon.

The basic estate duty advanl:age of the discretionary trust is simple. If property is settled for successive life interests for A, B, C and D, duty will be paid on the capital value of the property settled on each of the four deaths, assuming that they die m alphabetical order. , however, the property is held by trustees on discretionary trust for A, B, C and D, duty will be psd on the death of the last of the four to die but not usually on the three previous deaths.

Many different arrangements use this basic advantage. At one extreme there is the pcxwer of appointment in which there is ne dtlty to distnbute either the income or the capital. Then there is the trust proper but of the type in which the duty to distribute income is excluded by a power to accumulate. Thirdly, there is the trust in which there is no power to accum-ulate. In such a trust there will be a duty to distribute the income aulong the beneficiaries, the only dis- cretion being as to the amount (if any) which each is to get. In the absence of an express accumulation clause, however, it does IlOt

necessarily follow that there is a binding duty to distribute all the income, since the proper construction of the document may show tllat income surplus to that which the trustees decide to distribute should pass on resulting trust to the settlor or his estate.

in their stead: for that, the judge had wd, would in truth be " a complete new resettlement."] S. J. 3;AILEY.

WUSDISGRETIONARY INERESTS NOT INERESTS WHAT is the connection between a beauty competition a.nd a dis- cretionary trust? Connoisseurs of tax law will not be surprised that there is a connection. The point arose in the decision of t:he House of Lords in Gartside v. I.R.C. [1968] A.C. 553 that beneficiaries uncler a discretionary trust do not have axl interest in possession.

In Gartside a settlor created a trust of the residue of his estate, the trustees to use the income during the life of A for the maLintenance or benefit of all or any of A, A's wife or children (if any) and to accumulate the surplus on the same trusts as the settlement. On A's death the property passed to A's cllildren who attained tventy-one or, if female, attained twenty-one or Inarnod. Just before the power of accumulation expired the trustees exercised an express power of advancoment and vested some £47,000 in the sons of A. A died within two years of this advancement. Duty was d on the prope:rty still in the settlement, but the Revenue claimed duty in res&ct of the £47,000 on the ground that this was the pardal determmalaion of an interest in possession. The trustees argued that there was no interat

* %

In possesslon.

The basic estate duty advanl:age of the discretionary trust is simple. If property is settled for successive life interests for A, B, C and D, duty will be paid on the capital value of the property settled on each of the four deaths, assuming that they die m alphabetical order. , however, the property is held by trustees on discretionary trust for A, B, C and D, duty will be psd on the death of the last of the four to die but not usually on the three previous deaths.

Many different arrangements use this basic advantage. At one extreme there is the pcxwer of appointment in which there is ne dtlty to distnbute either the income or the capital. Then there is the trust proper but of the type in which the duty to distribute income is excluded by a power to accumulate. Thirdly, there is the trust in which there is no power to accum-ulate. In such a trust there will be a duty to distribute the income aulong the beneficiaries, the only dis- cretion being as to the amount (if any) which each is to get. In the absence of an express accumulation clause, however, it does IlOt

necessarily follow that there is a binding duty to distribute all the income, since the proper construction of the document may show tllat income surplus to that which the trustees decide to distribute should pass on resulting trust to the settlor or his estate.

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210 The Cambridge Law lournal [1968]

All these arrangements share the basic estate duty advantage of the discretionary trust. The Revenue's arguments sometimes chal- lenged, sometimes questioIled the basis of the rule. One explanation of the rule is that the individuaI beneficiary cannot have an interest in the property because he has no right to have the income applied in his individual favour. Another explanation was that the individual beneficiary has an interest but that it cannot be quantified, since the Act (Finance Act 1894, s. 7 (7) ) requires the capital value to be assessed in terms of the proportion of the income to which the bene- ficiary is entitledz The difference between the two views is that, if the latter view is correct, while it is not possible to quantify the interest which an individual beneficiary takes, it will be possible to

add together the interests of all the beneficiaries and to quantify that sum as e whole of the income available for distribution.

The House of Lords naled against the Revenue. Interest meaxlt a right to xncome and a beneficiary did not have that. One caMot quantify an interest that does not exist and the House was thus able to avoid the problem whether the interest if it existed was one in

possession. The House did however stress that it was not deaIing with the situation in which there was a duty to distribute all the

income. Tn the instant case that dllty was excluded by the power of

accumulation and it was not permissible to add together the interests

of the discretionary beneficianes anU those of the accumulation

beneficiaries to make one interest in possession. The House rejected the idea that there might be a group right

in the discretionary beneficiaries. As Lord Reid put it: " Two or

more persons cannot have a single right un]ess they hold it jointly

or in common. But clearly objects of a discretionary tnust do not

have that: they have individual nghts: they are in competition with each other and what the trustees give to one is his alone " (pp. 605-

606). The House was able to avoid the problem whether the interest

was one in possession by holding that there was no interest. How-

ever, both Lord Reid and Lord Wilberforce discussed the matter. Lord Reid again:

To have an interest in possession does not merely mean that you possess the interest. You also possess an interest in expecEncy, for you may be able to assign it and you can rely on it to prevent the trustees from dissipating the trust fund. i' In possession ' must mean that your interest enables you to claim now whatever may be the subject of your interest (p. 607).

The lmplication that in the Gartside case there was during the life of A no interest in possession in anyone was accepted with equanimity.

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211 211 C.L.J. C.L.J. Csse and Comment Csse and Comment

The dsion is analogous to that of the Privy Council in Com- missioner of Stamp Duties (Queenslartd) v. Livingston [19651 A.C. 694 [1965] C.L.J. 44, where it was held that the nght of a beneficiary to the residuary estate was, while the estate was still being adminiF tered and no clear residue had besl ascertained, not a right in the property comprising the estate but merely a right to compel tbe executors to administer the estate correctly. In Gartside, too, the bene- ficianes could prevent the trustees Erom committing a breacIl of trust, but that alone did not give them an interest in the property.

The ruling had one uncomfortable implication for the Rearenue. Estate duty is not levied on the death of one of the beneficiaries under a discretionary trust. X, however, on the death of A, one discretionary tmst ceases and another one beg,ins, estate dut has alutays been levied (e.g., Burrell and Kinrzaird v. Att.-Gen. [19371 A.C. 286). If, however, the reason for this levy is that one interest crsevs or another one begins, Gartside, by holding that there is no intsest, would seem to evcclude a charge to estate duty. In a subsequent case (Re Weir's Settlement [l968] 2 ASl E.R. 1241) Cross J. held that dutr was still leviable in such cases partly because the decisions in favour of the Revenue were many and of high authority and partly because the structure of estate duty, when devised in 1894, did not have to face up to the use of the discretionary trust. (The learned judge also held that there was no group right even where the trustees wereb under a duty to distnbute all the income among the beneficiaries.)

The Gartside case has two epitaphs. One is the Finance Act l9ti8, s. 39, which declares that discretionary beneficiaries in lik: circum- stances are to be deemed to have an interest in possession. 'Ishe other the case must share with other decisions. Cross J. described the problem m Re Weir (p. 1244E):

The facts are simple enough but it will not surpnse anyone acquainted with this branch of the law to learn that the argument lasted over four days during which counsel at all events wasted no wordand that some thirty authorities, many of them in the House of Lords were referred to. The law of estate duty has now attained a degree of reEnement that would have glad,Jened the heart of Lord St. Leonards.

JOHN rlLEY.

POWERS IN THE NATURE OF A TRUST POWERS OL>n- CERTAINTY OF OSE=S

THE substantial distinction betwsen a trust and a mere power of appointment is frequently stated in the terms that " a tIU,t is obli- gatory, a power discretionary." The pnncipal consequenfx of this

The dsion is analogous to that of the Privy Council in Com- missioner of Stamp Duties (Queenslartd) v. Livingston [19651 A.C. 694 [1965] C.L.J. 44, where it was held that the nght of a beneficiary to the residuary estate was, while the estate was still being adminiF tered and no clear residue had besl ascertained, not a right in the property comprising the estate but merely a right to compel tbe executors to administer the estate correctly. In Gartside, too, the bene- ficianes could prevent the trustees Erom committing a breacIl of trust, but that alone did not give them an interest in the property.

The ruling had one uncomfortable implication for the Rearenue. Estate duty is not levied on the death of one of the beneficiaries under a discretionary trust. X, however, on the death of A, one discretionary tmst ceases and another one beg,ins, estate dut has alutays been levied (e.g., Burrell and Kinrzaird v. Att.-Gen. [19371 A.C. 286). If, however, the reason for this levy is that one interest crsevs or another one begins, Gartside, by holding that there is no intsest, would seem to evcclude a charge to estate duty. In a subsequent case (Re Weir's Settlement [l968] 2 ASl E.R. 1241) Cross J. held that dutr was still leviable in such cases partly because the decisions in favour of the Revenue were many and of high authority and partly because the structure of estate duty, when devised in 1894, did not have to face up to the use of the discretionary trust. (The learned judge also held that there was no group right even where the trustees wereb under a duty to distnbute all the income among the beneficiaries.)

The Gartside case has two epitaphs. One is the Finance Act l9ti8, s. 39, which declares that discretionary beneficiaries in lik: circum- stances are to be deemed to have an interest in possession. 'Ishe other the case must share with other decisions. Cross J. described the problem m Re Weir (p. 1244E):

The facts are simple enough but it will not surpnse anyone acquainted with this branch of the law to learn that the argument lasted over four days during which counsel at all events wasted no wordand that some thirty authorities, many of them in the House of Lords were referred to. The law of estate duty has now attained a degree of reEnement that would have glad,Jened the heart of Lord St. Leonards.

JOHN rlLEY.

POWERS IN THE NATURE OF A TRUST POWERS OL>n- CERTAINTY OF OSE=S

THE substantial distinction betwsen a trust and a mere power of appointment is frequently stated in the terms that " a tIU,t is obli- gatory, a power discretionary." The pnncipal consequenfx of this

This content downloaded from 195.34.78.191 on Fri, 13 Jun 2014 10:31:01 AMAll use subject to JSTOR Terms and Conditions