Trustees of Discretionary trusts

The duties of trustees of discretionary trusts

The prime obligation of the trustee of a discretionary trust is to carry out the terms of the trust and allocate the fund amongst the class of potential beneficiaries. In the case of an exhaustive trust, the trustees must allocate the whole of the fund or its income, whereas in the case of a non-exhaustive discretionary trust they have the power to retain and accumulate all or part of the fund or income. The central issues concern the question how the trustees should go about their obligation to allocate in practice.

The duty to conduct a survey of the range of the objects

The trustees of a discretionary trust are subject to a duty to consider the members of the class as potential recipients of benefit from the trust fund. In the case of a trust with a fairly small class of beneficiaries it may be practicable for the trustees to consider the circumstances of each and every member of the class before deciding on any allocations of benefit. However, in the case of discretionary trusts with a large class it is impossible for the trustees to consider the circumstances of each and every member of the class of potential beneficiaries.

The requirements that the trustees ‘consider’ allocations in favour of members of the class of beneficiaries has been developed in a way which reflects what can reasonably be expected of them in practice. The exact degree of consideration required of the trustees will depend on the type of the discretionary trust concerned, and in particular the size of the class of potential beneficiaries. The larger the class, the less onerous the duty to consider becomes. In McPhail v Doulton [1971] AC 424 Lord Wilberforce stated that trustees must ‘make such a survey of the range of objects or possible beneficiaries as will enable them to carry out their fiduciary duty.’ In the course of his judgment he sought to elucidate what that duty required:

‘Any trustee would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power, and whether, in relation to other possible claimants, a particular grant was appropriate.’ 

In the case of a discretionary trust with a large class of beneficiaries, the factors that will be taken into account in determining the extent of the trustees’ duty to survey the range of objects include the size of the class and the size of the fund available for distribution. As Lord Wilberforce observed:

‘…a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know. He would examine the field by class and category; might indeed make diligent and careful enquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and the needs of particular categories and of individuals within them; decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications.’

The test is therefore extremely flexible, and appropriate to the modern usage of discretionary trusts as a mechanism to distribute relatively small funds amongst selected members of a potentially vast class. As Sachs LJ observed in Re Baden’s Trusts (No 2):

‘The word “range”…has an inbuilt and obvious element of elasticity, and thus provides for an almost infinitely variable range of vision suitable to the particular trust to be considered. In modern [discretionary] trusts…it may be sufficient to know whether the range of potential postulants runs into respectively dozens, hundreds, thousands, tens of thousands or even hundreds of thousands…Assessing in a businesslike way “the size of the problem” is what the trustees are called on to do.’

In practical terms, what this means is that the trustee must not make an allocation from the fund to an individual beneficiary without first assessing the appropriateness of that allocation in the light of the claims of other possible beneficiaries. It would be inappropriate for the trustees of a fund of £1m held on an exhaustive discretionary trust for a class of ten beneficiaries to allocate only three or four individuals without first considering the claims of all the members of the class. In the case of a fund of £1m to be divided amongst a class of a hundred thousand, the trustees would not need to consider the case for each member of the class, provided they bear in mind the number of potential claimants from the class and the purposes of the fund when deciding whether to make any individual allocations.

The duty not to make allocations outside of the class of potential objects

The trustees must not allocate the trust fund to persons who do not fall within the class of beneficiaries. Any such allocations will be held void by the court because they fall outside the terms of the trust, and the trustees will be in breach of trust. Is such an allocation is made the beneficiaries may enforce remedies against the trustees and the wrongful recipient of the trust property.