No additional materials are provided for the following seven 'knowledge' questions. Please read each question carefully and select an answer from those available.
Question 1
Marks: 1 What is the main difference between a discretionary trust and a power of appointment under a trust instrument?
Choose one answer. A. Discretionary trusts always give the trustees a discretion as to who will receive the property, whereas powers of appointment can involve only one object
B. Powers of appointment are always to appoint capital, whereas discretionary trusts can be trusts of income
C. Discretionary trusts must be executed, whereas powers of appointment need not be exercised
D. Objects of a discretionary trust have vested interests in the trust property; objects of powers of appointment do not
E. Don't know
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The correct answer is (c).
The use of the terminology of 'trust' and 'power' generally aims to indicate the distinction between trustees' duties, and 'mere' powers which they have, which they need not exercise. While (a) is correct, it is not the main difference between the two: a trust with one object is still a trust, which a trustee must carry out, but it is a fixed trust, not a discretionary one. (b) is false: powers to appoint income are common. (d) is false as well. Neither objects of a discretionary trust nor objects of a power of appointment are regarded as having vested interests in the trust property.
Incorrect
Marks for this submission: 0/1.Question 2
Marks: 1 What is a dispositive power?
Choose one answer. A. It is a power to deal with or affect the beneficial interests in the trust property
B. It is a power to invest the trust property
C. It is a power to insure the trust property
D. It is a power to appoint new trustees
E. Don't know
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That's correct.
'Dispositive' powers are those by which the trustee 'disposes' of the trust property, which in this context means 'distributes' the trust property, i.e. to the trusts objects. It is standardly used in contrast to 'administrative powers, powers such as the power of investment, the power to insure the trust property, the power to appoint new trustees and so on. These administrative powers do not affect the beneficial interests of the objects -- they merely allow the trustee properly to manage the trust while it is in operation. Answers (c) and (d) are wrong as these are clearly administrative powers. Answer (b) is wrong for the same reason, but note that the way a trustee invests the trust funds can work to favour beneficiaries with income interests over the capital beneficiaries, or vice versa, so the power (and duty) to invest the trust funds is overlaid with a fiduciary duty to invest in an even-handed way (see the study guide 4.4).
Correct
Marks for this submission: 1/1.Question 3
Marks: 1 Which of the following statements about fiduciary duties is true?
Choose one answer. A. Only trustees can have fiduciary duties under a trust
B. All trustee duties are fiduciary duties
C. A fiduciary duty requires the trustee to act in the best interests of the beneficiaries
D. A fiduciary duty regulates trustees so they can act in conflict of interest
E. Don't know
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That's correct.
Answer (a) is wrong because, for example, other persons besides the trustee may have fiduciary powers under the trust; for example, a settlor may give himself a power to direct the trustee investments, and this power is likely to be fiduciary, i.e. must be exercised in the best interests of the beneficiaries. Answer (b) is incorrect, because trustees have duties of care and skill, for example in the investment of the trust funds, and duties of care and skill are not fiduciary duties, for they do not concern the trustees loyalty to the beneficiaries, but his competence. Answer (c) correctly gives the standard formulation of the fiduciary duty. Answer (d) is wrong because fiduciary duties prohibit trustees from acting in conflict of interest; they do not positively provide a framework whereby a trustee can do so.
Correct
Marks for this submission: 1/1.Question 4
Marks: 1 In which of the following situations does a fraud on a power take place?
Choose one answer. A. The trustee gives Mark £3000 on condition that he splits it with his sister, who is not an object of the power
B. The trustee gives Frank £2000 under a power of appointment on condition that Frank finishes his university studies
C. At Alison's request, the trustee gives Alison £5000 under a power of appointment so that Alison can set up a trust for her children, who are not objects of the power
D. Both (a) and (c)
E. Don't know
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The correct answer is (d).
Answer (a) is a paradigm example of a fraud on a power, for here the condition requires Mark, a proper object of the power, to direct the appointed property into the hands of someone who is not a proper object, and in answer (c) the exercise of the power is intended to place the trust money in the hands of non-objects; it doesn't matter if this fraud is instigated by a proper object of the power; it is still a fraud on the power. Answer (b) is incorrect because it is not fraudulent for a trustee merely to impose conditions on his exercise of the power, so long as he acts in the best interests of the beneficiaries. Answer (d) is incorrect; while a breach of trust, a mistaken exercise of an investment power is not fraudulent.
Incorrect
Marks for this submission: 0/1.Consider the following testamentary trust provision, which would be typical in a family trust of the 19th century.
"The rest and residue of my estate on trust for my wife Marjorie for life, and then to my children in such shares as my trustees shall in their absolute discretion see fit, with power to my trustees to appoint up to half the capital during the life of my said wife to such of my children as they shall in their absolute discretion think fit"
Questions 5 to 7 relate to this provision.
Question 5
Marks: 1 Which statement best describes the positions of the objects under this provision?
Choose one answer. A. Marjorie and the children are all discretionary beneficiaries
B. Marjorie has an income interest, the children each have a discretionary capital interest, and the children are each objects of a power of appointment of capital
C. Marjorie has an income interest and the children are the objects of a power of appointment of the income, and of a capital interest in remainder
D. Marjorie has a fixed interest and the children are beneficiaries of a discretionary trust
E. Don't know
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The correct answer is (b).
Answer (a) is wrong because Marjorie has a fixed interest in the income. While, if the power to appoint capital is exercised, there will be less capital upon which income can be earned, the appointment does not alter her interest. Answer (c) is wrong because the power of appointment is of capital, not income. Answer (d) is correct as far as it goes, but it doesn't mention that the children are also objects of the power of appointment.
Incorrect
Marks for this submission: 0/1.Question 6
Marks: 1 Who are the persons who take in default of appointment under this provision?
Choose one answer. A. The children
B. Marjorie
C. The children in such shares as the trustee selects
D. Marjorie and the children
E. Don't know
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That's correct.
Answer (a) is close, but (c) is better; if the power of appointment is not exercised, then the trustee will have all of the capital to distribute amongst the children, but as objects of a discretionary trust, each child has only a 'mere hope' or mere spes (latin for hope) of getting any property. So they take in default of appointment as a discretionary class. Answers (b) and (d) are wrong because Marjorie cannot take any of the capital whether the power is exercised or not. If you thought (d) because Marjorie is better off if the capital is not appointed, because more capital in the fund is likely to mean more income, then you were on the right track, but is technically wrong because Marjorie's income interest is not altered in any way if capital is appointed; it's just that her interest is less valuable now, depending upon a smaller pool of capital.
Correct
Marks for this submission: 1/1.Question 7
Marks: 1 In practical terms, which statement best describes the purpose behind the provision?
Choose one answer. A. To provide for Marjorie during her life, and then to provide for the children, but if Marjorie antagonises the trustees they can use the power of appointment to reduce her income
B. To provide as much as possible for the children, while giving Marjorie some income during her life
C. To give Marjorie the benefit of the property for her life, but with the possibility of benefiting the children during her life if they are well behaved
D. To provide for Marjorie during her life, and then to provide for the children on her death, but to allow the trustees to give the children the benefit of the capital early depending on the circumstances of Marjorie and the children
E. Don't know
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That's correct.
The purpose of such a provision is to allow flexibility. The settlor's first concern is to provide for his widow for as long as she lives, and then allow the trustee to distribute the capital to the children in whatever shares seem sensible at the time of his widow's death. For example, one child might already have made a fortune, while another is poor. The discretionary trust of capital allows the trustee to give unequal amounts depending upon the circumstances at the time. The power of appointment, to appoint up to half the capital, gives further flexibility. If for example, the income from the fund is large, and more than enough to meet Marjorie's needs, but the children could benefit from the capital while she is still alive, for example if one was getting married or was starting a business, the power allows the trustee to give one or more children the benefit of some of the capital without having to wait until Marjorie dies.
Correct
Marks for this submission: 1/1.Comprehension
Each question in the Comprehension section refers to an extract. Please make sure you read the relevant extract before answering the questions below.
Please read the following extracts from the speeches of Lord Hodson (dissenting) and Lord Wilberforce in McPhail v Doulton [1971] AC 424 and then answer the six questions (Q8 - Q13) that follow. Question 8
Marks: 1 How does Lord Hodson explain the principle stated by Lord Eldon in Morice v Bishop of Durham?
Choose one answer. A. Where a trust has too many beneficiaries, the court cannot control the trust
B. The court must be able to distribute the trust property equally amongst the beneficiaries
C. If the beneficiaries cannot be ascertained the court cannot control the trust, and it is void for uncertainty
D. Too many beneficiaries makes a trust void for uncertainty
E. Don't know
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That's correct.
Answers (a) and (d) are wrong because the issue is not one of absolute numbers, but whether each beneficiary can be identified. Where the beneficiaries cannot each be identified, the trustee's duty to distribute is uncertain, and thus the court cannot control the execution of the trust. Answer (b) is not relevant at this point, for that concerns the way in which a court might execute a trust where the beneficiaries can all be identified.
Correct
Marks for this submission: 1/1.Question 9
Marks: 1 Why did Lord Hodson think that the court has no power to authorise a scheme of distribution where not all the beneficiaries are acsertainable?
Choose one answer. A. Such a scheme would allow the court to distribute amongst a class not chosen by the settlor
B. Such a scheme would violate the maxim 'equality is equity'
C. Such a scheme would be impractical to administer
D. Such a scheme would interfere with the trustee's discretion
E. Don't know
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That's correct.
Answers (b), (c) and (d) are wrong; Lord Hodson doesn't mention them in the passage where he discusses this. Lord Hodson quotes Lord Upjohn in Re Gulbenkian for the proposition that the settlor did not confer upon the trustee any discretion to choose only amongst a subset of the class he intended, in particular only amongst the identifiable beneficiaries, leaving those who are not ascertained out of his consideration. Thus if a court were to propose a scheme of distribution amongst only the beneficiaries that were ascertainable, the scheme would distribute to a class that the settlor had not chosen. In such a case, the court would not be carrying out the settlor's trust, but a different trust of its own devising.
Correct
Marks for this submission: 1/1.Question 10
Marks: 1 Which of the following reasons does Lord Wilberforce give for his claim that the distinction between powers and duties is 'narrow', and in a sense, 'artificial'?
Choose one answer. A. A trustee will have fiduciary duties in respect of both
B. A trustee has an obligation to exercise both powers and duties
C. In practical terms, a trustee will decide whether to exercise a power or exercise his discretion under a discretionary trust in much the same way
D. Both (a) and (c)
E. Don't know
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That's correct.
Review the three paragraphs beginning with 'Before dealing with these two questions....' and locate the reasons given in (a) and (c). Answer (b) is wrong because, not only does Lord Wilberforce not suggest it as a reason, but his speech does not intend to assimilate powers with duties per se, so that powers of appointment are discretionary trusts; rather, his argument is that trusts, like powers, can still be carried out even though the class of beneficiaries contains some unascertainable members.
Correct
Marks for this submission: 1/1.Question 11
Marks: 1 What, in practical terms, is the main difference between how a trustee will give effect to a discretionary trust and a power of appointment, according to Lord Wilberforce?
Choose one answer. A. The trustee must try to equalise the benefit amongst beneficiaries in the case of a trust
B. In the case of a trust, each benefiary must get something
C. In the case of a power of appointment, the trustee needn't consider using the power at all
D. The trustee must carry out a wider and more systematic survey of the objects in the case of a trust
E. Don't know
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That's correct.
Answers (a) and (b) are both wrong, and there is nothing in Lord Wilberforce's judgment to suggest otherwise. Answer (c) is wrong, as Lord Wilberforce specifically requires a trustee holding a power of appointment to consider exercising it from time to time.
Correct
Marks for this submission: 1/1.Question 12
Marks: 1 In the case of a discretionary trust where the trustees fail or refuse to carry out the trust, which of the following is not a means that Lord Wilberforce says the court can employ to execute the trust?
Choose one answer. A. The court can appoint new trustees
B. If an appropriate method of distributing the trust property is apparent to the court, it can order the distribution of the property itself
C. The court can order the trustee to distribute the property as equally as possible amongst most of the beneficiaries
D. The court can call on the representative beneficiaries to prepare a scheme by which the trust assets can be distributed, and order that distribution
E. Don't know
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That's correct.
The methods of execution in (a), (b), and (d) are all illustrations Lord Wilberforce gives to show that 'the court, if called upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor's or testator's intentions.' The means of distribution outlined in answer (c) is not acceptable; indeed, Lord Wilberforce denies that a distribution of the fund on the basis that 'equality is equity' is sensible in this context, for it is likely to be the last thing the settlor intended.
Correct
Marks for this submission: 1/1.Question 13
Marks: 1 What, according to Lord Wilberforce, would give rise to 'administrative unworkability'?
Choose one answer. A. The words describing the objects of the trust are too vague
B. The definition of the class is so wide as not to describe a class of objects at all
C. The whereabouts of the beneficiaries is unknown
D. The class of objects is uncertain
E. Don't know
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That's correct.
Answers (a) and (d) are wrong because administrative workability is not, about the use of vague words or uncertainty in general. Nor, as against answer (d), does it have to do with finding out where the beneficiaries are. Administrative unworkability is a difficult concept, but seems to be related not to certainty of objects per se, but to the problem any trustee would have in distributing the funds if the class chosen, such as all ther residents of greater London, doesn't seem to give the trustee any idea as to how he is to choose one object over another in distributing the trust property.
Correct
Marks for this submission: 1/1.Application
Please answer the following two examination questions (Q14 and Q15):
Question 14
Marks: 1 Consider the following testamentary provision: 'I hereby give £1m on trust to my trustees to distribute within 10 years to anyone in the world except to the trustee, any employee of the trustee or relation of the trustee, or to anyone in my immediate family.'
Which statement best explains the validity or invalidity of this provision?
Choose one answer. A. This is a power of appointment that is uncertain on the 'is or is not' test
B. This is a discretionary trust that is certain on the 'is or is not' test
C. This is a power of appointment that fails for administrative unworkability
D. This is a discretionary trust that fails for administrative unworkability
E. Don't know
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That's correct.
Answers (a) and (c) are wrong because this provision is framed imperatively, 'on trust... to distribute'. This imposes a duty, not a mere power which the trustee can exercise or not as he chooses. (b) is correct as far as it goes, though there may be queries to be made about the conceptual certainty of the term 'relation' or 'relative' (see Re Baden No. 2 [1973] Ch. 9). But it does not recognise the problem which is stated in answer (d), which is that the beneficial class here is everyone in the world except an excluded group. This would seem to fall within a class description 'so hopelessly wide' as not to indicate any true class of objects at all.
Correct
Marks for this submission: 1/1.Question 15
Marks: 1 Consider the following testamentary provision: '£1m for distribution to persons in Wales who have had coal miners in their family for three generations'
The validity of this provision will turn on whether...
Choose one answer. A. 'in their family for three generations' is sufficiently certain to define a class
B. it creates a discretionary trust or a power of appointment
C. it is administratively unworkable
D. whether a complete list of mining families in Wales can be drawn up
E. Don't know
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That's correct.
Answer (a) is correct because it is not clear what having coal miners 'in the family for three generations' means: does a person who only has distant cousins who were miners count? Answer (b) is wrong because the same test of validity, the 'is or is not' test, will apply to both. Answer (c) is wrong because adminstrative unworkability does not seem to be a problem here; the class appears to be a sensible one; clearly the settlor has some emotional attachment to miners and their families and wished to benefit those who had a long association with the industry. Answer (d) is wrong because it suggests the 'complete list' test for certainty applies, but McPhail v Doulton decided that it doesn't.
Correct
Marks for this submission: 1/1.
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