What is a discretionary trust?
A discretionary trust is a trust set up by a person (the Settlor) with the intention of giving the appointed trustees the discretion to decide how to distribute their money or assets to named beneficiaries or an identifiable class of beneficiaries.
In a discretionary trust, the trustees have control as to how much or what each beneficiary is to receive and when (if anything). These are particularly useful when the Settlor is unsure how they wish to distribute their estate or want to include future beneficiaries such as any future children in a class of beneficiaries.
By passing control to the trustees, the Settlor has flexibility over who will benefit from the trust as well as some protection where circumstances have changed. With this set up, the Settlor can provide guidance to the trustees who will consider all of the circumstances when making decisions in relation to the trust.
Marcus v Marcus: The Facts
A recent example of a discretionary trust that turned contentious is that of Marcus v Marcus.
In this case, the owner of a family toy business, Mr Marcus (“SM”), passed away in 2020 leaving a multimillion estate.
Prior to his passing, in 2003 SM executed a discretionary trust in favour of his “children and any remoter issue” including their spouses. At the time of execution, it was believed that SM had two biological sons, Edward (“EM”) and Jonathan (“JM”).
In 2010 SM’s wife, Patricia, approached EM with the news that his biological father was not SM as he had always believed and instead, the truth was that he was conceived with another man whilst SM was away for three weeks.
At the time that SM passed away, he still believed that both EM and JM were his biological children and was never told of Patricia’s claims.
Marcus v Marcus: The Issue of Paternity
In light of the claims by Patricia, the Court had to consider whether EM was included in the class of beneficiaries identified by SM in the trust. To do this, the Court considered the issue of paternity and whether EM was SM’s biological son.
The presumption, as cited by the Court, is that a child born during a marriage is a child of the husband. It is therefore presumed that EM was the biological child of SM unless proven otherwise. In this case, EM’s position was supported by the fact that SM was named as his father on his birth certificate.
In an attempt to disprove this, Patricia served witness evidence to confirm that she had a relationship with somebody else at the time EM was conceived. Patricia’s witness evidence deemed it impossible for SM to be the biological father of EM as a result of him being out of town.
In addition to Patricia’s witness evidence, DNA tests were conducted and concluded that EM and JM were more likely than not half-blood siblings, however, it cannot be determined which of them was likely to be the biological child of SM.
After considering the evidence, the Court held that on the balance of probabilities, SM was unlikely to be EM’s biological father.
Marcus v Marcus: The Issue of Construction
Once it was established that EM was unlikely to be SM’s biological son, the Court considered the meaning of the word “children” in the context of the discretionary trust created by SM and whether the class of beneficiaries extended to stepchildren or children of the family.
The Court considered the intention of SM at the time of execution by reference to that of a reasonable person having all relevant background knowledge to them at the time and their understanding of the language used.
The Court held that although the trust did not name EM and JM as beneficiaries specifically, at the time of execution SM believed that the word “children” would include them within the class of beneficiaries and that his way of drafting was common to allow for flexibility.
The Court confirmed that the term “children” should be given its technical meaning unless something in the context suggests another meaning was intended. In this case, the question was whether the Court could move away from the natural meaning of the word “children” in the circumstances.
Marcus v Marcus: The Outcome
It was held that the circumstances of the case pointed overwhelmingly in favour of a wider meaning of the word “children” to include both EM and JM.
Conclusion
This case is an example of the flexibility of discretionary trusts and the Court’s interpretation of drafting methods where matters become contentious. In this case, the Court was able to use its discretion to extend the meaning of the word “children” to include stepchildren and children of the family to ensure EM was within the class of beneficiaries identified. This was done on the basis that the Court considered there was sufficient evidence to show that this was SM’s intention at the time that the trust was drafted.
How Tozers can help
If you require advice as to the drafting or interpretation of a disputed trust, please give us a call to discuss ways in which we can help.
