## Facts

- A settlor created a trust directing the trustees to allocate the net income of a fund among employees of his company, their relatives, or their dependents.
- The trustees were given discretion regarding both the selection of recipients and the amount to be distributed to each individual within this broad class.
- The wording of the trust specified employees, relatives, and dependents as potential beneficiaries.
- Existing legal precedent, particularly from IRC v Broadway Cottages, required that all beneficiaries of a discretionary trust must be identifiable, allowing for a complete list to be compiled.
- The validity of the trust was challenged on the basis of whether the class of beneficiaries was sufficiently certain.

## Issues

1. Whether a discretionary trust is valid without the ability to compile a complete list of all potential beneficiaries.
2. Whether the definition of beneficiaries as employees, relatives, and dependents satisfied the requirement of conceptual certainty.
3. Whether the previously established ‘complete list’ test should remain the standard for certainty of objects in discretionary trusts.
4. Whether practical limitations, such as administrative unworkability, could affect the validity of a discretionary trust.
5. How evidential certainty should be managed under the newly proposed test for discretionary trusts.

## Decision

- The House of Lords departed from the ‘complete list’ approach and overruled IRC v Broadway Cottages for discretionary trusts.
- The court held that it was not necessary to compile a complete list of all potential beneficiaries in order for a discretionary trust to be valid.
- Lord Wilberforce introduced the ‘is or is not’ test: a trust is valid if, for any given person, it can be said with certainty whether they are or are not a member of the class.
- The ruling emphasized conceptual certainty of the beneficiary class over the ability to identify every member.
- The court acknowledged that, even if a trust is conceptually certain, it may still be invalid if it is administratively unworkable.
- Following the ruling, the case was remitted and in Re Baden (No 2), the Court of Appeal judges upheld the trust’s validity, but differed in their interpretations regarding evidential certainty.

## Legal Principles

- Certainty of objects in discretionary trusts requires that it can be determined for any individual whether they are within the beneficiary class (‘is or is not’ test).
- The ‘is or is not’ test replaced the need for a ‘complete list’ of beneficiaries.
- Conceptual certainty is mandatory, but practical considerations such as administrative unworkability can still invalidate a trust.
- The approach to evidential certainty may vary, as shown in Re Baden (No 2), but a trust is generally valid if it is possible to apply the beneficiary class test as described.

## Conclusion

McPhail v Doulton fundamentally reshaped trust law by establishing the ‘is or is not’ test for discretionary trusts, rejecting the rigid ‘complete list’ standard, and introducing the concept of administrative unworkability as a practical limitation. This decision, clarified through Re Baden (No 2), provides a more flexible framework for determining the validity of discretionary trusts.


McPhail v Doulton [1971] AC 424 (HL)