Core principles of trust law - Beneficial entitlement

Learning Outcomes

This article explains beneficial entitlement in trust law, including:

• Distinguishing vested and contingent interests and the difference between interests vested in possession and vested in interest, with clear tests for ascertainment and postponement
• Explaining the operation of successive interests (life interests and remainders) and advising on outcomes if a beneficiary dies before an interest falls into possession, including transmission to the estate
• Identifying beneficiaries’ rights in fixed, discretionary, and bare trusts and when beneficiaries can require a trust to be brought to an end, or must await appointment or maturity
• Applying trustees’ statutory powers of maintenance and advancement to minors and postponed interests to assess practical entitlement before full age and the scope of trustees’ discretion
• Evaluating the validity of contingent interests under the modern rule against perpetuities and the consequences where interests fail for want of vesting
• Applying the Saunders v Vautier principle to fixed and discretionary trusts, including termination of sub-trusts or identifiable shares and limits where minors or open classes exist
• Analysing SQE2 case scenarios to identify and apply rights arising from beneficial entitlement and to provide focused exam-standard advice

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 beneficial entitlement, with a focus on the following syllabus points:

• 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
• trustees’ statutory powers to apply income and advance capital (Trustee Act 1925, ss 31–32, as amended)
• consequences where beneficial interests fail or are incomplete (automatic resulting trusts in outline)

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. In practice, the nature of a beneficiary’s entitlement will dictate whether they can call for capital or income now or only later, whether their interest can fail if a condition is not satisfied, and whether they can compel trustees to bring a trust to an end. Appreciating how statutory powers to apply income and advance capital interact with beneficial interests is also important where minors or postponed interests are involved.

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.

An interest may be vested despite being postponed. For example, a remainder following a life interest is vested in interest because the remainderman is definitely entitled, but must wait for the life tenant’s interest to end. If a settlor adds a condition precedent (for example, “to B if B reaches 25”), the interest becomes contingent and can fail if the condition is not satisfied. Where a vested remainder holder dies before their interest becomes possessory, the vested interest ordinarily passes to that person’s estate and is taken by their personal representatives when the prior interest ends. By contrast, a contingent remainder may fail on death if the condition has not been met and there is no gift over; in such a case, the beneficial interest may result back to the settlor or the settlor’s estate by automatic resulting trust because the express trusts have not completely disposed of the equitable interest.

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.

When assessing whether an interest is vested or contingent, ask:

• Are the beneficiaries ascertained or ascertainable?
• Is enjoyment postponed only by a prior certain event (e.g., the death of a life tenant), or is there an additional condition precedent that might not happen?

If beneficiaries are ascertained and entitled subject only to a prior certain event, the interest is typically vested. If entitlement depends on an uncertain future event, the interest is contingent until the event occurs.

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.

Worked Example 1.3

A settlement provides: “To T on trust for A for life, remainder to B absolutely.” B dies before A, leaving a valid will. On A’s death, who takes the capital?

Answer:
B’s remainder was vested in interest from the outset. Although B died before A, B’s vested interest passes to B’s estate. On A’s death, the capital is paid to B’s personal representatives to distribute under B’s will or intestacy.

Rights of Beneficiaries in Common Trust Types

Beneficiaries’ enforceable rights depend on the structure of the trust and the nature of their interest. It is also necessary to consider how statutory powers affect practical entitlement before the trust’s final distribution.

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. Trustees lack discretion as to who benefits and in what shares; their duty is to administer and distribute according to the settlor’s directions.

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

Fixed interest trusts often create successive interests: a life tenant entitled to income or use and enjoyment (for example, to live in a house rent-free), followed by a remainderman entitled to capital. While the life tenant is alive, the remainderman’s vested right is postponed. If the trust instrument includes age conditions or survival requirements, the remainderman’s interest may be contingent rather than vested. If a contingent remainder fails and there is no valid gift over, the undisposed beneficial interest typically results back to the settlor or settlor’s estate on an automatic resulting trust.

Trustees of fixed trusts owe the beneficiaries duties to invest prudently, to act even-handedly between life tenant and remainderman, and to distribute in accordance with the trust’s terms. In appropriate cases, beneficiaries may trace misapplied property or seek equitable remedies to restore their fixed entitlements.

Statutory powers supplement a beneficiary’s entitlement where enjoyment is postponed. Under Trustee Act 1925, s31, trustees generally apply trust income for the maintenance, education, or benefit of a minor beneficiary and may accumulate surplus income. Section 31 can be modified by the trust instrument (for example, to postpone a minor’s entitlement to income beyond 18). Under Trustee Act 1925, s32 (as amended by the Inheritance and Trustee Powers Act 2014), trustees may advance capital for the benefit of a beneficiary with an interest in capital, up to the whole of their presumptive share (subject to any prior interests and any express restrictions in the instrument). Where there is a life tenant with a prior right to income, an advancement to a remainderman may require the life tenant’s written consent, depending on the terms of the trust and the extent to which the life interest is prejudiced.

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. Until discretion is exercised in their favour, they have no specific proprietary interest in the trust fund; they are “objects” of the trust rather than holders of individual entitlements.

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

Discretionary objects can enforce proper administration: trustees must consider the right matters, exclude irrelevant ones, and periodically survey the field of possible objects. If a distribution is made to a particular object, that recipient obtains an individual vested entitlement to the amount or property appointed, which can then be demanded if of full age and capacity. The presence of a wide class or a default gift in favour of another person can affect who must consent to any early termination (see Saunders v Vautier below).

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). A bare trust often arises where property is held by nominees or where a trust has come to the point where only one adult beneficiary remains entitled to the entirety of the beneficial interest.

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

Under a bare trust, an adult, mentally capable beneficiary may direct trustees’ investment strategy, require transfers to themselves or others, or call for conveyance of the legal title so as to bring the trust to an end.

Worked Example 1.4

T holds securities on trust for X until X attains 25, then to transfer to X. X is 19. The trust instrument is silent on income during minority. Can X demand income and capital now?

Answer:
Capital cannot be demanded: X’s capital interest is vested but postponed until 25, unless X collapses the trust under Saunders v Vautier (see below). As to income, the trustees have statutory power under TA 1925, s31 to apply income for X’s maintenance and benefit while X is under 18, and thereafter the right to income is normally X’s from 18 unless postponed by the instrument. X may seek an advancement of capital under TA 1925, s32 at the trustees’ discretion.

Rule Against Perpetuities and Trust Interests

If a trust gives rise to a contingent interest, that interest must vest within the applicable perpetuity period or it is void. Modern law distinguishes between instruments taking effect on or after 6 April 2010 and earlier instruments.

Key Term: perpetuity period
The maximum period within which a contingent interest must vest. For instruments governed by the Perpetuities and Accumulations Act 2009, the default period is 125 years (unless a shorter period is expressly specified). Older instruments may be subject to the traditional “life in being plus 21 years” rule and “wait and see” under the 1964 Act.

For new trusts governed by the Perpetuities and Accumulations Act 2009, a single statutory period of up to 125 years applies unless a shorter period is chosen. For many older trusts, the common law period (identifiable lives in being plus 21 years) and statutory “wait and see” measures apply. Age conditions that could not be guaranteed to vest within the old period (for example, gifts to the first grandchild to reach 30) might be void under common law analysis; for modern instruments with a 125-year period, such gifts typically pose no vesting issue. Always identify the relevant regime and test whether, in all possible scenarios, vesting must occur within the permitted period.

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. For instruments within the 2009 Act, check whether an express period has been chosen or the 125-year default applies. If a contingent gift fails and no valid gift over has been provided, the undisposed beneficial interest usually results back to the settlor or the settlor’s estate.

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. Whether a trust can be brought to an early end depends on whether the entire beneficial ownership (the whole equitable interest) can be marshalled in favour of adults with capacity.

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.

Key Term: Saunders v Vautier
The principle that adult beneficiaries who are, alone or collectively, absolutely entitled to the whole equitable interest can require trustees to transfer the trust property to them, thereby terminating the trust.

The rule applies to:

• a sole absolutely entitled adult beneficiary (a bare trust); and
• a group of adult beneficiaries who, together, are absolutely entitled to the entire beneficial interest (for example, a life tenant and the sole remainderman acting together), including some discretionary trusts in which all possible objects are ascertainable, sui juris, and collectively entitled to the entirety in default of further discretion.

Practical constraints include:

• Minors, unborn beneficiaries, or indeterminate members of an open class prevent absolute entitlement from being gathered, so the rule cannot be used.
• Where there is a gift over in default of appointment under a discretionary trust, the default beneficiary is part of the group whose consent is required if the trustees have not exhausted their discretion.
• The rule may be used to terminate as to a particular share only, where an individual’s interest is carved out as a separate sub-trust and that individual is absolutely entitled to that share.

Worked Example 1.5

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. Nor can the two collapse the third’s sub-trust without that third grandchild being sui juris and absolutely entitled to their share.

Worked Example 1.6

A trust says: “To trustees to hold on discretionary trusts for such of my children as they think fit; in default of appointment, equally between them.” The children are A and B, both over 18. The trustees have made no appointments. Can A and B together require termination?

Answer:
Yes, in principle. All objects and the default beneficiaries are the same two adult individuals and there are no further potential objects. As in Re Smith, the whole beneficial interest can be gathered by those entitled, so A and B, being sui juris and collectively absolutely entitled in default of appointment, can require the trustees to transfer the fund to them.

In contrast, where the class of objects is open (for example, “for my grandchildren” and further grandchildren may be born) or where a default gift includes minors or unborns, the rule cannot be invoked because all beneficial owners cannot be ascertained and absolutely entitled at the relevant time.

Worked Example 1.7

Property is held “on trust for X for life, remainder to Y absolutely.” X and Y, both adults, wish to end the trust and divide the fund now. Can they do so?

Answer:
Yes. Separately, neither X nor Y is absolutely entitled to the whole beneficial interest. Together, however, they are the entire beneficial ownership. If both are adults with capacity, they may require the trustees to transfer the fund to them jointly (or as otherwise agreed between them), terminating the trust.

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, unborn or unascertained beneficiaries, or unresolved contingencies, the rule does not apply. Where beneficiaries cannot achieve early termination, variation or rearrangement may be sought under the Variation of Trusts Act 1958 (court-sanctioned), but that is procedurally distinct from Saunders v Vautier.

Summary

In addition, remember that:

• A vested remainder passes to the remainderman’s estate if the remainderman dies before the life tenant; a contingent remainder may fail if its condition is not met and there is no gift over.
• Trustees’ statutory powers under ss 31–32 TA 1925 allow income to be applied for minors and capital to be advanced for beneficiaries with an interest in capital, potentially softening the impact of postponed enjoyment.
• For modern trusts governed by the 2009 Act, the 125-year perpetuity period will usually accommodate age conditions and remote contingencies that would otherwise risk invalidity under the traditional rule.

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 vested remainder is transmissible to a deceased beneficiary’s estate; a contingent remainder can fail if the condition is unmet.
• A contingent interest must vest within the applicable perpetuity period to be valid; modern instruments typically use a 125-year period under the Perpetuities and Accumulations Act 2009.
• Beneficiaries of fixed trusts have enforceable property rights; discretionary beneficiaries have only a right to consideration and proper administration until appointed.
• Bare trust beneficiaries who are sui juris have full control and can call for transfer of legal title.
• Trustees may apply income for minors and advance capital for beneficiaries with capital interests (TA 1925, ss 31–32).
• Trusts can be terminated early if all beneficiaries are sui juris and absolutely entitled (Saunders v Vautier), including some discretionary trusts where the whole beneficial interest can be gathered.
• If an express trust fails to dispose of the entire beneficial interest and there is no valid gift over, the undisposed equitable interest usually results back to the settlor or their estate.

Key Terms and Concepts

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