Charitable trusts and non-charitable purpose trusts - Distinctions between charitable and non-charitable purpose trusts

Learning Outcomes

This article outlines the key differences between charitable trusts and non-charitable purpose trusts. It explains the general requirement for ascertainable beneficiaries in private trusts (the beneficiary principle) and why non-charitable purpose trusts typically fail. It also covers the exceptions to this rule and contrasts these trusts with charitable trusts, which must meet specific criteria under the Charities Act 2011, including having a recognised charitable purpose and satisfying the public benefit test. Understanding these distinctions is essential for applying trust law principles in the SQE1 assessments.

SQE1 Syllabus

For SQE1, your understanding of the differences between charitable and non-charitable purpose trusts is essential. You will need to apply the relevant legal principles to identify valid trusts and understand the consequences of invalidity. This includes the requirements for charitable status and the limited exceptions allowing non-charitable purpose trusts.

Focus your revision on:

• The beneficiary principle and its implications for purpose trusts.
• The requirements for a valid charitable trust under the Charities Act 2011, including charitable purposes and public benefit.
• The limited exceptions allowing non-charitable purpose trusts (e.g., trusts for the maintenance of specific animals or monuments, Re Denley trusts).
• The rules against perpetuities as they apply differently to charitable and non-charitable purpose trusts.
• The consequences of a trust failing for lack of a valid purpose or beneficiary.

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. Which principle generally requires trusts to have ascertainable human beneficiaries?
   1. The rule against perpetuities
   2. The cy-près doctrine
   3. The beneficiary principle
   4. The public benefit test
2. Which of the following is NOT a requirement for a valid charitable trust under the Charities Act 2011?
   1. Must be for a recognised charitable purpose
   2. Must be for the public benefit
   3. Must have specifically named individual beneficiaries
   4. Must be exclusively charitable
3. A trust set up to maintain the testator's favourite pet cat is likely to be:
   1. A valid charitable trust for animal welfare.
   2. A valid non-charitable purpose trust, provided it complies with perpetuity rules.
   3. Void for lack of certainty of intention.
   4. Void due to the beneficiary principle with no applicable exception.
4. The cy-près doctrine allows a court to:
   1. Appoint new trustees for a failed private trust.
   2. Vary the terms of any trust if the beneficiaries consent.
   3. Redirect funds from a failed charitable trust to a similar charitable purpose.
   4. Extend the perpetuity period for a non-charitable purpose trust.

Introduction

When creating a trust, the settlor usually intends to benefit specific individuals or a defined group of people. However, some trusts are established not for people, but to achieve a particular purpose. These are known as purpose trusts. English law draws a significant distinction between trusts for charitable purposes and trusts for non-charitable purposes. Generally, for a trust to be valid, it must have ascertainable beneficiaries who can enforce it – this is known as the beneficiary principle. Purpose trusts often conflict with this principle. Charitable trusts form a major exception, enjoying significant legal advantages, provided they meet strict statutory criteria. Non-charitable purpose trusts, on the other hand, are typically void, save for a few limited and anomalous exceptions. This article examines these distinctions, focusing on the requirements and enforceability of each type.

The Beneficiary Principle

The general rule is that a trust must have ascertainable beneficiaries capable of enforcing the trustees' duties. Without beneficiaries, there is no 'owner' of the equitable interest and no one to hold the trustees accountable to the court. This fundamental requirement is known as the beneficiary principle.

Key Term: beneficiary principle
The legal principle stating that, for a private express trust to be valid, it must have ascertainable human beneficiaries who are capable of enforcing the trust against the trustees. Purpose trusts, by definition, are created to achieve an objective rather than to benefit specific people. Therefore, they prima facie offend the beneficiary principle. A trust for an abstract purpose like 'promoting world peace' would typically be void because there is no specific individual who can go to court and compel the trustees to carry out that purpose.

Non-Charitable Purpose Trusts (NCPTs)

NCPTs are trusts established for purposes that are not recognised as charitable by law. Due to the beneficiary principle, NCPTs are generally void.

Why NCPTs Usually Fail

1. Lack of Beneficiaries: There is no one to enforce the trust (Morice v Bishop of Durham (1804)).
2. Uncertainty: The purpose may be too vague or uncertain for a court to control or enforce.
3. Perpetuity: NCPTs are subject to the rule against perpetuities, specifically the rule against inalienability, which prevents capital being tied up indefinitely (often limited to 21 years or a life in being plus 21 years). Trusts for purposes may potentially last forever.

Key Term: non-charitable purpose trust
A trust established to achieve a specific purpose that is not recognised as charitable under the law. Such trusts are generally void unless they fall into specific, limited exceptions.

Exceptions to the Rule: Valid NCPTs

Despite the general rule, courts have recognised certain exceptions, often described as anomalous or 'trusts of imperfect obligation' because they lack an enforcer. These exceptions are narrowly construed (Re Endacott [1960]) and must comply with the rule against perpetuities.

1. Trusts for the maintenance of specific animals: Trusts for the care of specific pets (e.g., 'my favourite horse', Re Dean (1889)) can be valid, provided they are limited in duration to the perpetuity period (often implied by the animal's likely lifespan). This differs from charitable trusts for animal welfare generally.
2. Trusts for the erection or maintenance of monuments and graves: A trust to build a monument is often assumed to be completable within 21 years. However, a trust for ongoing maintenance must be expressly limited in duration (e.g., 'for 21 years' or 'so long as the law allows') to be valid (Re Hooper [1932]).
3. Trusts for the saying of private masses: Masses said in public may be charitable, but trusts for private masses can be valid NCPTs if limited in perpetuity.

Re Denley Trusts

A further significant exception arises from Re Denley's Trust Deed [1969]. A trust expressed as being for a purpose can be valid if it directly or indirectly benefits ascertainable individuals in a tangible way, and those individuals have standing (locus standi) to enforce the trust.

Key Term: Re Denley trust
A type of purpose trust held to be valid because, although expressed as a purpose, it directly or indirectly benefits ascertainable individuals who can enforce it. For a Re Denley trust to be valid:

• The purpose must provide a tangible benefit to individuals.
• The class of individuals must be ascertainable (often applying the 'given postulant' test used for discretionary trusts).
• The trust must comply with the rule against perpetuities.

Worked Example 1.1

Arnold's will leaves £50,000 to trustees 'to provide and maintain a sports ground for the employees of my company, XYZ Ltd, for the next 20 years'. XYZ Ltd has 50 employees. Is this trust likely to be valid?

Answer: This appears to be a trust for a purpose (providing a sports ground). It is unlikely to be charitable due to the 'personal nexus' test (benefiting only employees of a specific company). However, it could be valid as a Re Denley trust. The employees are ascertainable individuals who receive a direct, tangible benefit from the sports ground and could enforce the trust. The trust is expressly limited to 20 years, complying with the perpetuity rule for NCPTs. Therefore, it is likely valid.

Charitable Trusts

Charitable trusts are a major exception to the beneficiary principle and perpetuity rules. They are purpose trusts recognised and regulated by law due to their benefit to society.

Requirements for Charitable Status (Charities Act 2011)

To be a valid charity, a trust must meet three key requirements set out in the Charities Act 2011:

1. Charitable Purpose: The trust's purpose must fall within one of the descriptions of purposes listed in section 3(1) of the Act. These include relieving poverty, advancing education, advancing religion, advancing health, advancing citizenship, arts, culture, heritage, science, amateur sport, human rights, environmental protection, animal welfare, relief of those in need, and promoting the efficiency of armed forces or emergency services.
2. Public Benefit: The purpose must be for the public benefit. This has two aspects:
   • Benefit aspect: The purpose must provide an identifiable benefit, and any detriment must not outweigh the benefit.
   • Public aspect: The benefit must be available to the public at large or a sufficient section of the public. A trust benefiting a group defined by a personal nexus (e.g., family members, employees of a specific company) generally fails this test, except for poverty relief trusts. Fees charged must not exclude the poor (Independent Schools Council v Charity Commission [2011]).
3. Exclusively Charitable: The trust's purposes must be wholly charitable. If a trust mixes charitable purposes with non-charitable ones (e.g., political purposes like campaigning for a change in law), it will generally fail (McGovern v Attorney-General [1982]). Incidental non-charitable activities may be permissible.

Key Term: charitable purpose
A purpose falling within the list defined in section 3(1) of the Charities Act 2011, such as the relief of poverty or advancement of education. Key Term: public benefit
The requirement that a charitable trust's purpose provides an identifiable benefit to the public or a sufficient section thereof, without unduly restrictive criteria (like personal connections or prohibitive fees).

Advantages of Charitable Status

Charitable trusts enjoy significant legal advantages:

• Enforcement: Enforced by the Charity Commission and/or the Attorney General, overcoming the beneficiary principle issue.
• Certainty: Less strict certainty requirements apply compared to private trusts. Uncertainty of objects is not fatal.
• Perpetuity: Exempt from the rule against perpetuities; they can exist indefinitely.
• Tax Relief: Benefit from substantial tax exemptions (income tax, corporation tax, capital gains tax, inheritance tax reliefs).
• Cy-près Doctrine: If the original purpose fails or becomes impossible/impracticable, the court or Charity Commission can apply the funds to a similar charitable purpose.

Key Term: cy-près doctrine
A legal doctrine allowing the funds of a failed charitable trust to be applied to the nearest possible alternative charitable purpose, rather than resulting back to the settlor.

Worked Example 1.2

Beatrice leaves £100,000 in her will 'to campaign for a ban on fox hunting'. Is this likely to be a valid charitable trust?

Answer: No. Campaigning for a change in the law is considered a political purpose. Political purposes are not charitable. Therefore, the trust fails the requirement that its purposes must be exclusively charitable. It cannot be a valid NCPT either, as it doesn't fall within the limited exceptions. The £100,000 would likely fall into the residue of Beatrice's estate.

Worked Example 1.3

Charles establishes a trust to provide scholarships for 'poor and deserving students resident in the County of Kent'. Is this likely to be a valid charitable trust?

Answer: Yes, this is likely valid. The purpose falls under both the relief of poverty and the advancement of education. The public benefit requirement is likely met: there's an identifiable benefit (education/financial relief), and the class 'residents of the County of Kent' is a sufficient section of the public (geographic limitation is usually acceptable). Although restricted to the 'poor and deserving', trusts for poverty relief have more lenient public benefit rules regarding personal connections. The purpose appears exclusively charitable.

Distinctions Summarised

Exam Warning

Be careful not to confuse trusts for animal welfare generally (which can be charitable) with trusts for the care of specific animals (which fall under the non-charitable purpose trust exceptions and must comply with perpetuity rules). Similarly, trusts for public religious services may be charitable, while trusts for private masses may be valid NCPTs if limited in duration.

Revision Tip

When analysing a purpose trust scenario, always ask:

1. Is the purpose charitable under the Charities Act 2011?
2. Does it satisfy the public benefit test?
3. Is it exclusively charitable?
   If 'yes' to all, it's a valid charitable trust. If 'no' to any, ask:
4. Does it fall within the Re Denley exception (benefit ascertainable individuals)? OR
5. Does it fall within the anomalous exceptions (animals, monuments, private masses)?
6. Does it comply with the rule against inalienability?
   If it doesn't fit any valid category, it is likely void.

Key Point Checklist

This article has covered the following key knowledge points:

• The beneficiary principle generally requires trusts to have ascertainable human beneficiaries for enforcement.
• Non-charitable purpose trusts (NCPTs) usually fail due to the beneficiary principle and perpetuity rules.
• Limited exceptions exist for NCPTs, including trusts for specific animals, monuments, private masses (if perpetuity compliant), and Re Denley trusts benefiting ascertainable individuals.
• Charitable trusts are a major exception, valid if they meet the Charities Act 2011 criteria: charitable purpose, public benefit, and exclusivity.
• Charitable trusts are exempt from the beneficiary principle and perpetuity rules and benefit from the cy-près doctrine and tax advantages.
• The public benefit test requires an identifiable benefit to the public or a sufficient section of the public, avoiding narrow personal connections (except for poverty) or prohibitive fees.
• Political purposes invalidate charitable status.

Key Terms and Concepts

• beneficiary principle
• non-charitable purpose trust
• Re Denley trust
• charitable purpose
• public benefit
• cy-près doctrine