Core principles of trust law - Beneficial entitlement

Learning Outcomes

After reading this article, you will be able to distinguish between types of beneficial interests under a trust, including vested and contingent interests. You will understand the rights of beneficiaries in fixed, discretionary, and bare trusts, and when beneficiaries can require a trust to be brought to an end. You’ll also be equipped to identify and apply rights arising from beneficial entitlement in SQE2 case scenarios.

SQE2 Syllabus

For SQE2, you are required to understand how beneficial entitlement operates in trust law and how to advise clients or analyse scenarios involving:

• the distinction between vested and contingent interests in trusts
• the meaning and effect of interests vested in possession and in interest
• the nature of beneficiaries’ rights in fixed, discretionary, and bare trusts
• application of the rule in Saunders v Vautier for trust termination
• the impact of the rule against perpetuities on contingent interests

This knowledge enables you to apply the law to common trust situations and deliver SQE2-standard advice or problem analysis.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. True or false: If a trust states “for A for life, then to B absolutely,” B has a vested interest even if B may die before A.
2. Which of the following must be true for the beneficiaries to terminate a trust using Saunders v Vautier?
   a) All beneficiaries are adults and absolutely entitled.
   b) All beneficiaries have vested interests only.
   c) All beneficiaries are in dispute.
3. In a discretionary trust, do beneficiaries have a proprietary right to the trust assets before the trustees exercise their discretion?
4. If property is held on trust for the first child of C to reach age 25, what type of interest does each child have before anyone reaches 25?

Introduction

Beneficial entitlement is central to trust law. It determines which people have enforceable rights over trust property and under what circumstances. For SQE2, you must know the differences between types of beneficial interests and understand the rights and actions available to different categories of beneficiaries.

Vested and Contingent Interests

Every beneficiary’s entitlement under a trust can be categorised as either vested or contingent. These distinctions affect what rights the beneficiary has and how (or if) those rights can be enforced.

Key Term: vested interest
An interest that confers a present right of enjoyment or a certain right to future enjoyment, regardless of whether enjoyment is immediate or deferred.

Key Term: vested in possession
An interest that gives the beneficiary a current right to receive benefits (such as income or occupation) from the trust property.

Key Term: vested in interest
An interest where the beneficiary is entitled to future enjoyment as of right, but enjoyment is delayed by a prior interest (for example, a life tenancy).

Key Term: contingent interest
An interest that only arises on fulfilment of a condition (such as attaining a specified age or marrying); if the condition is not met, the interest never vests.

Worked Example 1.1

A will declares, “My house to trustees for my wife for life and, after her death, to my daughter if she is then alive and has reached age 30, otherwise to my son.” What interests exist before the wife’s death?

Answer:
The wife’s interest is vested in possession (current enjoyment). The daughter’s interest is contingent—she must survive the wife and reach age 30 for her interest to vest. The son also holds a contingent interest, which will arise if the daughter fails to meet her condition.

Rights of Beneficiaries in Common Trust Types

Beneficiaries’ enforceable rights depend on the structure of the trust and the nature of their interest.

Fixed Trusts

A fixed trust provides each beneficiary with a definite share. Beneficiaries have an enforceable proprietary claim; they can insist the trust is managed and property paid as specified.

Key Term: fixed trust
A trust where the settlor defines precisely each beneficiary’s entitlement.

Discretionary Trusts

Discretionary trusts grant trustees a power to choose who benefits and, to some extent, in what proportion. Beneficiaries have only the right to be considered by trustees and cannot compel any payment.

Key Term: discretionary trust
A trust where trustees decide who, within a class, receives what benefit and when.

Bare Trusts

A bare trust is one where the beneficiary is absolutely entitled to both income and capital and can direct the trustees as they wish. Beneficiaries have full control (if of full age and capacity).

Key Term: bare trust
A trust where the beneficiary’s interest is absolute and unconditional; the trustees hold the property as nominee.

Worked Example 1.2

Under a will: “All my shares to my nephew upon trust to pay income to my niece for life, then hold for my nephew absolutely.” What are the rights during the niece’s lifetime and after her death?

Answer:
During the niece’s life, she has a vested interest in possession (right to income); the nephew’s interest is vested in interest (future right to capital). Upon the niece’s death, the nephew’s interest becomes vested in possession and he is entitled to the shares entirely.

Rule Against Perpetuities and Trust Interests

If a trust gives rise to a contingent interest, that interest must vest within the perpetuity period or it is void.

Key Term: perpetuity period
The maximum period—a contingent interest must vest (usually “lives in being” plus 21 years, or 125 years if stated under statute).

Exam Warning

For contingent gifts (e.g. “to the first grandchild to reach age 30”), always assess whether all possible scenarios mean the interest must vest within the permitted period. If not, the gift fails for perpetuity.

Beneficiaries’ Powers and Termination of Trusts

Certain rights flow from the nature of beneficial entitlement, including the power to dissolve the trust and direct trustees.

The Saunders v Vautier Rule

If all beneficially entitled persons are of full age and capacity (sui juris) and together absolutely entitled to the whole of the trust fund, they may require the trustees to bring the trust to an end—even if the trust specifies otherwise.

Key Term: sui juris
A person who is both an adult and under no legal disability.

Worked Example 1.3

A will provides: “All my investment account to my three grandchildren equally, held on trust until each turns 25.” All grandchildren are now over 18 but only two have turned 25. Can they terminate the trust and demand the funds?

Answer:
No. Unless all three have reached 25, all beneficiaries are not absolutely entitled. The condition for the third grandchild’s share is not yet satisfied, so the Saunders v Vautier rule cannot be used to terminate the trust for the whole fund.

Revision Tip

Saunders v Vautier only operates if every person(s) entitled to the beneficial interest consents and is an adult with legal capacity. If the trust includes minors or unresolved contingencies, the rule does not apply.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Beneficiary interests in trusts are either vested (in possession or interest) or contingent.
• A contingent interest must vest within the perpetuity period to be valid.
• Beneficiaries of fixed trusts have enforceable property rights; discretionary beneficiaries have only a right to consideration.
• Bare trust beneficiaries have full management control.
• Trusts can be terminated early if all beneficiaries are sui juris and absolutely entitled (Saunders v Vautier).

Key Terms and Concepts

• vested interest
• vested in possession
• vested in interest
• contingent interest
• fixed trust
• discretionary trust
• bare trust
• perpetuity period
• sui juris