Charity ends at home

From time to time, the trustees of family trusts are asked to make a payment to a charity '“ not where the charity is expressed itself to be a beneficiary of the trust, but where the trustees have a power of appointment or advancement to benefit a given beneficiary and it is said that a gift to a charity will be for the benefit of that beneficiary.

A century ago, the young squire with a position to keep up was expected to be open-handed towards local causes and it was held proper for his trustees to fund such payments as being for his benefit (Re Walker [1901] 1 Ch 879 at 887). In the 1960s, the son of the tycoon Charles Clore asked trustees to exercise a power of advancement by paying over a much more significant sum, one-seventh of his prospective interest in capital, to his father's charity; that too was held to be proper (Re Clore's Settlement Trusts [1966] 1 WLR 955). A similar decision was given in 1980 (Re Leigh's Settlement Trusts (1980) 19 Tru LI 109, reported only in 2005). There matters rested, as far as reported authority is concerned, until the decision last November of Hart J in X v A [2006] 1 WLR 741.

The proposal there was proportionately on a larger scale than in Clore. There was a life tenant, the settlor's wife, and the trustees also had a power to appoint capital 'to or for the benefit of' the wife. Subject to her interest, the fund went on discretionary trusts for the benefit of her children and other issue. The life tenant asked the trustees to appoint the bulk of the fund, about three-quarters of it, to a charity which she and the settlor were keen to support. The settlor was an Anglican priest and they devoted much of what they had to charity. The trustees applied to the court asking whether they could give effect to the proposal. The answer was no.

Clore had established that:

• When exercising a power for the benefit of a beneficiary, the 'material situation' of the beneficiary had to be improved; but the requisite benefit was not confined to his direct financial advantage. It could include satisfying a moral or social obligation.
• If the beneficiary could reasonably regard himself as being under a moral obligation to give to charity, benefiting the beneficiary could include making a donation to discharge that obligation.
• That was not limited to a case in which the beneficiary would come under such pressure that it would be detrimental to his position if the donation were not made.
• But it was essential that the beneficiary himself recognised the moral obligation, so the trustees could not pay away capital over his head.
• The precise amount which could be transferred to charity depended on the circumstances; the whole interest could not have been transferred but the proposed one-seventh was on the right side of the line.

X v A followed Clore on those points. It was accepted in X v A that 'benefit' was a word of wide meaning. But Hart J held that it was not enough: (i) that the wife could reasonably regard herself as under a moral obligation to make the proposed donation; and (ii) that she did in fact recognise the obligation. Before the power to make the donation arose, there had to be some sense in which the material situation of the beneficiary was improved. Nothing suggested that the wife would in fact regard her moral obligation as having been discharged if the proposed donation were made: she was anxious to support the charity to the fullest extent within her power.

Since some improvement in the beneficiary's material situation is a limiting factor on the trustees' power, how far can they go? Hart J said that the answer was to be found in 'the concrete examples provided by the decided cases and the reliance placed in them on generally accepted norms applicable in the context of dealings with settled wealth' (ibid, para 43). It will be a bold trustee who can identify those norms and translate them into a figure on a cheque. Indeed, so it seems, the wider the obligation felt by the beneficiary, the less the trustees will be able to give effect to it, since the obligation will not have been discharged. Trustees thinking of a substantial donation to charity will need the protection of a court order.

If they do go to court, they will need to think exactly what they are asking the court to do. The court's role when trustees seek a ruling was also the subject of comment from Hart J. It is now pretty well established that there is more than one way in which the court can act (Public Trustee v Cooper [2001] WTLR 901 at 922ff). One option for trustees who have a discretionary power is to surrender their discretion to the court. The court need not accept the surrender, but if it does, it then takes the decision as if it were the trustee. The other option for the trustees is to identify what they want to do and then ask the court to give its blessing. The court's function is limited to ensuring that the proposed exercise is lawful and within the power; that it does not infringe the trustees' duty to act as reasonable and prudent trustees might act; and that the trustees can properly form the view that the proposed exercise is for the benefit of beneficiaries or the trust fund. But then, said Hart J, the court will be cautious: those beneficiaries adversely affected are likely to be at a disadvantage because they will not have had the full disclosure or the cross-examination that they would have had if they were attacking the decision after the event. Doubts about the evidence will be resolved against the proposal.

So X v A does not provide definite guidance on quantum in similar cases. It does sound a note of caution on a matter which has not engaged the attention of the courts for quarter of a century.