Discretionary Trust or Power of Appointment?

Posted by Catherine Robinson on August 2, 2021

5-min read

When presented with a Trusts and Equity problem question that requires you to determine the validity of several clauses in a will, it can often be difficult tell the difference between a power of appointment and a discretionary trust. This article aims to help you distinguish between these two seemingly similar instruments so that you can write a first class essay to any will problem question that you may face.

Have a look at the will clauses below: could you tell which is a power of appointment and which is a discretionary trust? If not, come back to them after reading the article and have another go.

Erin died in 2021. Her validly executed will contained the following clauses:

(a) The sum of £300,000 to be held on trust within my trustees’ discretion for the benefit of employees of Jimbo’s Ice Cream Ltd.

(b) I give 50 of my 950 shares in Jimbo’s Ice Cream Ltd to Sally, who may allocate a further 30 of the shares as she sees fit.

(c) I hereby direct that my Louboutin shoe collection should be sold and the proceeds given to my brother John who may distribute the money between any of the members of my family.

Discretionary trusts

Discretionary trusts are a type of express trust that allows the trustee to distribute the trust property as they choose to people within a particular class, e.g. ‘I leave £50,000 to my executors upon trust for any of my grandchildren’. The word ‘any’ means that the trustees can choose who to give the money to, and there are no precatory words to suggest that the trustees may choose whether or not to distribute the money. Instead, the trustees must act but they can choose how to act.

This can be contrasted with a fixed trust where there is no room for any discretion on the trustee’s part, e.g. ‘I give £10,000 to my sons in equal shares’. Here, the trustee has no choice over who gets the money; they must split the money equally between the listed beneficiaries.

The common feature of both discretionary trusts and fixed trusts is that the trustee must distribute the trust property. Even with a discretionary trust, the trustee cannot simply choose to ignore the trust instrument.

Example: In McPhail v Doulton [1971] AC 424 (HL); [1970] UKHL 1, the discretionary trust instrument provided that:

“The trustees shall apply the net income of the fund in making at their absolute discretion grants to [the class of beneficiaries] in such amounts at such times and on such conditions (if any) as they think fit.”

Powers of appointment

A power of appointment differs from a fixed or discretionary trust as the donee does not have to dispose of the property as suggested in the trust instrument. Instead, the language used will imply that the donee can choose whether to use the power or not. For example, the trust instrument could state: ‘the donee may share £10,000 amongst members of the Harry Potter Society’. The wording isn’t strong enough to be capable of compelling the donee to act. Therefore, if the donee were to never make any appointments, they would not be in breach of duty to either the donor nor the potential beneficiaries.

There are three different types of powers: general powers, special powers, and hybrid powers.

General powers

With a general power of appointment, the donee may allocate the property to anyone they choose – including themselves. The operation of this type of power can be seen in Re Beatty's Will Trusts [1990] 3 All ER 844. Here, the trustees were instructed to allocate the trust property ‘as they think fit’, which was held to confer no obligation to distribute the property in a particular way. Instead, the trustees could choose to either: (a) not allocate the property, (b) distribute the property between any beneficiaries they choose, or (c) keep the property for themselves. I know which I’d choose.

Special powers

If a donor specifies that the trust property may only be allocated to a particular class of people, then they have created a special power. For example, in Re Weekes’ Settlement [1897] 1 Ch 289, the donor gave her husband a power of appointment in favour of their children. Thus, he was given the power to either: (a) not allocate the property or (b) distribute the property between the members of the class specified, i.e. the children.

Under a special power of appointment, the donee may only distribute the property to those within the specified class. Therefore, they cannot keep the property for themselves or give it to those outside of the class.

Hybrid powers

These are probably the most interesting powers of all. The donee may exercise their power in favour of anyone except those within a particular class. For example, in Re Byron’s Settlement [1891] 3 Ch 474, a power of appointment was given to the donor’s daughter. She was directed to allocate the trust property to anyone except ‘her present husband or any friend or relative of his’. I wonder what had gone on there. A similar situation arose in Re Lawrence’s Will Trusts [1972] Ch 418, where the donee was given a power of appointment in favour of anyone except the donee’s relatives.

The crucial difference between powers of appointment and discretionary trusts

The difference may be summed up in the following terms: a discretionary trust gives the trustee the discretion to choose who shall receive the trust property, but they must choose. On the other hand, a power of appointment gives the donee the choice of whether to exercise their power or not. In other words, after being appointed they may choose to just do nothing.

However, (confusingly) that doesn’t mean the donee can just ignore their power. As Megarry VC said in Re Hay’s Settlement Trusts [1981] 3 All ER 786, the donee is not obliged to exercise their power, however they cannot simply ignore it. They must consider whether to exercise their power, and if they do not, the court can direct them to.

Which clause is which?

Hopefully, you will now be able to identify whether the will clauses at the start of this article are discretionary trusts or powers of appointment.

For clause (a), we had a situation in which the trustees could choose which of the employees were to be allocated the property. However, there was nothing in the clause that implied that the trustees had a choice whether or not to exercise their power. Therefore, it can safely be assumed that clause (a) has created a discretionary trust.

The first part of clause (b) involved absolutely no discretion, so must be a fixed trust. However, the second part of the clause stated that Sally ‘may’ allocate another 30 shares ‘as she sees fit’, suggesting that Sally would have the choice whether to exercise her power and who to allocate the trust property to. Consequently, clause (b) would likely create a general power of appointment rather than a discretionary trust.

Lastly, clause (c) again uses the word ‘may’, suggesting that a mere power of appointment has been created. However, this is probably a special power rather than a general power as John can only allocate the property to members of the family. Therefore, he would have the choice whether to exercise his power, but could only allocate the property to family members if he did choose to exercise the power.

Certainty of objects

You must work out which type of instrument a will clause is in order to apply the appropriate test for certainty of objects. Certainty of objects is the third of the three certainties set out by Lord Langdale in Knight v Knight (1840) 49 ER 58; (1840) 3 Beav 148.

Fixed trusts – requires a ‘complete list’ of beneficiaries and conceptual and evidential certainty, per IRC v Broadway Cottages [1955] Ch 20.

Discretionary trusts – use the ‘is or is not’ test; requires only conceptual certainty, per McPhail v Doulton [1971] AC 424 (HL); [1970] UKHL 1. May fail for administrative unworkability.

Powers of appointment – use the ‘is or is not’ test, per Re Gulbenkian’s Settlement [1970] AC 508. These are not subject to the administrative unworkability test, per Re Manisty's Settlement Trusts [1974] Ch 17.

Gift subject to a condition precedent – individual proof test, per Re Barlow’s Will Trust [1979] 1 WLR 278.

If you found this article helpful, you might also be interested in my Equity and Trusts revision notes. Click here to see a sample.

Disclaimer:

The information provided in this blog post is based on the research I carried out for my law degree which I completed in 2020. I accept no responsibility for errors or omissions. Legal principles and interpretations may change over time, and the content presented here may not reflect the most current developments in UK contract law. This information is intended for general informational purposes only and should not be considered as legal advice or relied upon as a substitute for professional legal counsel. For the most up-to-date and accurate legal information or advice, it is advisable to consult with a qualified legal professional who is knowledgeable about the latest legal developments and can provide guidance specific to your situation.