Posted: 21/03/2014
A trust must be administered in accordance with its terms, and it is therefore imperative that trustees can quickly and easily identify the meaning of those terms. However, even where the terms of a trust appear straightforward, difficulties can arise in practice. The recent case of Holden-Hindley v Holden-Hindley is an example of that situation, where two settlements and subsequent deeds of appointment established in the 1970s and 1980s, combined with the recent birth of illegitimate children, gave rise to an application to the court by the trustees for guidance as to who should benefit from the trust funds.
Holden-Hindley v Holden-Hindley raises two areas of potential difficulty for trustees. First, the position of illegitimate children as beneficiaries of trusts where the class of beneficiaries includes “children”. Second, the interpretation of what is of “benefit” to a particular beneficiary or a class of beneficiaries.
In 1973 David Holden-Hindley established a trust known as the “No 7 Settlement”. In 1974 David’s brother, Airlie, established a trust known as the “No 9 Settlement”. The No 7 and No 9 settlements contained agricultural land in Cumbria. The No 7 Settlement was for the benefit of David’s children and issue, his sister-in-law and her children, and his sister (Doreen) and her children and issue. The No 9 Settlement was for the benefit of Airlie’s children, and the children of Doreen. Both settlements specifically excluded the application of s.15 Family Law Reform Act 1969. As a result, the class of beneficiaries excluded illegitimate children.
In 1983, two deeds of appointment were made under the No 7 and the No 9 settlements. The deeds provided that the funds held by the settlements were for the benefit of Airlie’s daughter, Emma. Once Emma attained the age of 25 she was to receive income from the settlement funds for life, with the capital being held on trust for her “child or children”. The deeds also gave the trustees power at any time during Emma’s lifetime to pay, transfer, or apply the whole or any part or parts of the capital of the trust fund “to or for the benefit of Emma absolutely…to the intent that the trustees shall, in deciding whether to exercise the said power, have regard exclusively to the interests of Emma”.
Due to the provisions in the original settlements, the reference to “child or children” in the subsequent deeds also excluded illegitimate children. In 2011 Emma and her partner, who are not married, had a child. As a result, on Emma’s death the capital in the settlements would be payable to her younger brother, Mark. Mark also has a child with his partner, to whom he is not married. If both Emma and Mark were to die, the capital of the trust fund would therefore have to pass back to the children of David, or Doreen. In an alternative scenario, if Emma were to marry and have a legitimate child, one of her children would be eligible to benefit from the trust fund, whilst the other would not. Unsurprisingly, this potential outcome was a source of some concern to Emma and her family.
The trustees made an application under CPR 64.2 to ask the court to authorise the exercise of their power of appointment by executing a new deed of appointment. The proposed deed of appointment provided for the payment of income from the trust funds to Emma for her life, subject to which the income and capital would be held for any of her children, regardless of legitimacy. To decide whether to authorise the proposed exercise of the power of appointment, Mr Justice Roth was required to find that allowing illegitimate children to benefit from the trust was for the “benefit” of Emma absolutely, having regard exclusively to her interests.
At common law, in the context of disposing of property, the definition of “children” does not include illegitimate children. That definition can be displaced if there is evidence of a contrary intention by a settlor or testator.
Furthermore, English common law did not recognise legitimation (where parents marry after the date of their child’s birth). However, in cases where a father was domiciled abroad at the date of the child’s birth, if that child was treated as legitimated by the law of that country by their parent’s subsequent marriage, English common law would recognise that child as legitimate. This was the case even if the legitimation took place after the time of the disposition.
To reflect changes in society, various statutes have been introduced, which make the old common law position virtually obsolete. Generally the statutes do not have retrospective effect, such that trustees need to consider the law relevant to the period in which a settlement was established.
The relevant statutes are:
In the light of the above, establishing the persons contained within a class defined as “children” might not prove straightforward. Modern society accepts that the family unit can involve a huge variety of arrangements. In addition to issues regarding legitimacy, trustees must be alert to other possible issues regarding children. For example, there are now statutory provisions for adopted children (the Adoption Act 1976), children carried as a result of IVF methods (the Human Fertilisation and Embryology Act 1990), and children who have changed gender (the Gender Recognition Act 2004). Those issues are beyond the scope of this article, but they demonstrate the breadth of matters which a trustee should bear in mind when considering the persons potentially included within the definition of child or children.
The original settlements in this case were executed in 1973 and 1974. As such, the starting point for determining the definition of “children” in those settlements would be the application of the Family Law Reform Act 1969. However, the provisions of the Family Law Reform Act 1969 are subject to any contrary intention, and the settlements specifically excluded that statute.
Furthermore, as the settlements were executed prior to the provisions of the Legitimacy Act 1976, any subsequent marriage by Emma would not invoke the provisions of that statute. The Legitimation Act 1926 was also inapplicable, because no legitimation had occurred prior to the date of the settlements.
As such, the definition of “children” in the settlements did not include Emma’s illegitimate children. Even if Emma were to marry her children’s father, they would be unable to benefit from the settlements on their original terms. Mr Justice Roth was therefore asked to approve a new Deed of Appointment, which would allow all of Emma’s children to potentially benefit from the settlements, regardless of legitimacy.
In his judgment, Mr Justice Roth made reference to the decision of the Jersey Royal Court in Re Pinto’s Settlement. That case involved a trust which prohibited the settlement of trust funds or the distribution of capital for the benefit of any persons other than those specified in the trust deed. The Jersey court was asked to sanction the appointment of part of the trust fund to a new trust for the benefit of the children of one of the specified beneficiaries. The Jersey court refused, because the appointment was expressly forbidden by the terms of the original trust deed.
Mr Justice Roth, opined that the case before him was “readily distinguishable,” because in Re Pinto’s settlement the proposed appointment itself was expressly and specifically prohibited. Mr Justice Roth considered that in the case of Holden-Hindley the original settlements excluded the application of the Family Law Reform Act 1969 in the context of defining the original class of beneficiaries only, rather than having implications for restricting the trustees’ powers going forward (e.g. for future appointments).
However, in his opening description of the background facts, Mr Justice Roth had stated that the two deeds of appointment made in 1983 “must be interpreted consistently with the original settlement and will also exclude any illegitimate children.” If that statement indicates that the deeds of appointment in 1983 must be interpreted consistently with the specific intentions of the original 1970s settlements as a matter of principle, then surely the same reasoning would apply to a deed proposed in 2013. Perhaps, alternatively, that statement reflects a view that the 1983 deeds were interpreted in the light of the 1970s settlements by default, because no contrary intention was expressed at that time. Either way, the reason that the deed of appointment proposed by the trustees was required was because the 1983 deeds excluded illegitimate children by reference to the terms of the original settlements.
Despite the specific statement in the settlements that the 1969 Act should be excluded, Mr Justice Roth concluded that Emma’s illegitimate children should be treated in the same way as any legitimate children she might have in the future. The case of Holden-Hindley is therefore an example of the court amending a trust, contrary to the very specific intention which was set out in the original trust documents. The settlors had clearly addressed their minds to the provisions of the 1969 Act, because it was specifically excluded. The effect of that express exclusion would be overridden by the proposed deed of appointment, which made provision for Emma’s illegitimate children.
Having determined that Emma’s illegitimate children were excluded from the class of potential beneficiaries as defined in the original settlements, Mr Justice Roth needed to be satisfied that the proposed deed of appointment to provide for those children was within the trustees’ powers. The 1983 deeds of appointment in Holden-Hindley gave the trustees power to pay, transfer or apply the whole or any of the capital “to or for the benefit of Emma absolutely…to the intent that the trustees shall, in deciding whether to exercise the said power, have regard exclusively to the interests of Emma.” The question for Mr Justice Roth was therefore whether the amendment of the terms of the trust to allow illegitimate children to receive trust funds was for the “benefit” of Emma, having regard exclusively to her interests.
Mr Justice Roth referred to Re Halstead’s Will Trust, in which Mr Justice Farwell stated “that a man should be married and have a family and have no means of making any sort of provision in the event of his death is a prospect that, to many of us, would be so appalling that some provision for the man’s wife and children would seem to be for the benefit of that man, because he would be relieved from what would be a very anxious position so long as no provision was made.”
In Holden-Hindley concern was raised not only about the exclusion of Emma’s illegitimate children, but also about the potential difficulties if Emma went on to have legitimate children. Emma’s mother provided a witness statement in which she stated that such a situation would cause “a great deal of family tension, anxiety and disunity,” which could be “extremely upsetting for Emma.” Based on that evidence, and in accordance with Re Halstead’s Will Trust, the trustees argued that including Emma’s illegitimate children in the class of potential beneficiaries was for Emma’s benefit.
Another case considered by Mr Justice Roth was the New Zealand authority of Wong v Burt. In that case the trustees had (without seeking approval from the court) paid out trust funds to the widow with the intention that she should pass that onto a granddaughter. The power to advance capital was expressed only for the benefit of the widow. The court held that the decision to advance capital to the widow for the specific purpose of her then passing that on to a granddaughter constituted a deliberate fraud on the power.
Mr Justice Roth distinguished Wong v Burt on the following two grounds:
Those two grounds might be questioned, given that the true analysis as to whether the proposed deed was for the benefit of Emma would presumably be the same regardless of:
Having said that, it is easy to see how the payment to the widow of a sum to which she was solely entitled but which was intended to give her no financial benefit whatsoever, is distinguishable from the proposal to include Emma’s illegitimate children in the class of potential beneficiaries on the event of her death.
Mr Justice Roth found that it was for Emma’s benefit to amend the trusts to provide for her children, whether they were illegitimate or legitimate. He also found that the trustees had given regard exclusively to Emma’s interests in deciding how to exercise their power. Mr Justice Roth therefore ruled that the proposed deed of appointment was within the powers granted to the trustees. The proposed deed of appointment was accordingly approved, bringing Emma’s children within the class of potential beneficiaries of the settlement funds, regardless of their legitimacy.
In modern society, the decision to allow illegitimate children to be treated in the same way as legitimate children does appear to be a pragmatic and fair one, even if the grounds on which similar cases have been distinguished might be questionable. However, it is worth noting that the application in Holden-Hindley was made by the trustees with the consent of all the relevant parties. The case also involved circumstances in which the settlements did not benefit from the relevant provisions of either the Legitimacy Act 1976 or the Family Law Reform Act 1969. As such, this case might be of limited authority, although it is general confirmation that provision for a child can be of “benefit” to their parent.
The lesson for trustees is that they must remain mindful of the potential pitfalls when considering the class of beneficiaries of a trust. The word “children” combined with various family situations could give cause for further investigations. The date of the settlement and the applicable law must be considered. However a wide interpretation has been given to “benefit”, and even if an analysis of the terms of the trust gives rise to potential difficulties, Holden-Hindley illustrates that an application to the court might be one way of circumventing undesirable trust terms.
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