3b. Probate - Trusts

Question 1

Introduction

What are the two categories of trust?

Answer 1

1. Express trust
2. Implied trust

Question 2

Introduction

What are the two types of express trust?

Answer 2

1. Private trust
2. Charitable trust

Question 3

Introduction

What are the three types of private trust?

Answer 3

1. Fixed trust
2. Discretionary trust
3. Purpose trust

Question 4

Introduction

What is a fixed trust?

Answer 4

A trust where the interests of the beneficiaries are defined by the settlor

Question 5

Introduction

What is a purpose trust?

Answer 5

A trust set up for a purpose rather than people, and will normally fail because it does not have defined beneficiaries, subject to limited honorary trusts, e.g. to maintain an animal

Question 6

Introduction

What is a charitable trust?

Answer 6

A trust created for the benefit of an indefinite class of people, or the public in general, and it must fall under one of the recognised charitable categories to be valid

Question 7

Introduction

What are the two categories of implied trust?

Answer 7

1. Resulting trust
2. Constructive trust

Question 8

Introduction

In what three situations will a resulting trust arise?

Answer 8

1. Interest under an express trust fails
2. Express trust fails to exhaust the beneficial interest
3. Person makes a voluntary transfer or purchase in the name of another

Question 9

Introduction

What is the purpose of a constructive trust?

Answer 9

Imposed by the court to prevent unjust enrichment as a result of wrongful conduct

Question 10

Express private trusts

What are the three certainties required for a valid express private trust?

Answer 10

Certainty of:

1. Intention to create a trust
2. Subject matter i.e. property
3. Objects i.e. beneficiaries

Question 11

Express private trusts

When must a settlor’s intent to create a trust be expressly manifested?

Answer 11

When they own the property

Question 12

Express private trusts

However, whilst the intent must exist at the time the property is owned, what can arise later as evidence of this?

Answer 12

Subsequent conduct consistent with an earlier intent

Question 13

Express private trusts

When must the settlor intend the trust to take effect when they express their intent?

Answer 13

Immediately

Question 14

Express private trusts

What is a precatory expression and what is the effect of this?

Answer 14

A settlor’s mere hope, wish, or suggestion that property be used in a certain way is not sufficient to show intent to create a trust, i.e. impose a binding obligation on a trustee

I’m giving you £10,000 in the hope you will use it for your child’s education vs I’m giving you £10,000 to use for your child’s education

Question 15

Express private trusts

What happens when a trust fails for uncertainty of intention?

Answer 15

The property passes as a gift to the person who would be trustee

Question 16

Express private trusts

Whilst the subject matter must be certain, i.e. clear, when may an apparently uncertain description be valid?

Answer 16

When it is capable of objective definition, e.g. a reasonable income

Amount to be received by a beneficiary must be defined with sufficient clarity also

Question 17

Express private trusts

What factor determines whether a fractional share of property is valid?

Answer 17

Whether it is tangible or intangible.

Intangible, e.g. shares: Fractions, e.g. 50% or half are valid
Tangible: Not valid unless the fraction has been segregated for the trust, even if the property is identical, e.g. wine of the same type and vintage

Question 18

Express private trusts

Whilst a future interest can be held in a trust, what cannot be?

Answer 18

An interest not yet in legal existence, e.g. an expected interest in property

E.g. expected interest under a will where testator is still alive (they could change their mind up until death)

Question 19

Express private trusts

What happens when a trust fails for uncertainty of subject matter?

Answer 19

Property reverts to settlor

Question 20

Express private trusts

When a collective term for a class of beneficiaries is used, what must it be capable of? What are some examples of valid and invalid collective terms and why?

Answer 20

It must be capable of objective definition.

Nieces, nephews, brothers, sisters are valid because these can be defined by reference to the settlor’s actual family.

Friends, acquaintances are not valid because these are a fluid groups, changing all the time and over time.

This is conceptual certainty

Question 21

Express private trusts

Where a collective term is used for a class of beneficiaries, what are the two types of test used for (1) fixed trusts and (2) discretionary trusts?

Answer 21

1. Complete List Test - used for fixed trusts
2. Given Postulant Test - used for discretionary trusts

Question 22

Express private trusts

What does the complete list test require for a fixed trust to be valid where a collective term is used for a class of beneficiaries?

Answer 22

Trustee must be able to draw up a complete list of beneficiaries, with evidence

Will fail for evidential uncertainty if not evidenced

Not all beneficiaries need to be in existence, as long as they are ascertainable by the time their interest vests

Question 23

Express private trusts

Under the complete list test, will a fixed trust fail if a beneficiary is known to exist but cannot be traced?

Answer 23

No

Question 24

Express private trusts

What is required under the given postulant test for a discretionary trust?

Answer 24

Definition of class must be sufficiently clear to enable to the trustees to assess the potential range of beneficiaries and determine whether any given postulant (person) falls within the class

It is not necessary for the whole range of potential beneficiaries to be ascertainable.

Question 25

Express private trusts

Why will evidential uncertainty not cause a discretionary trust to fail?

Answer 25

Because a potential beneficiary who cannot prove they are within the class has no right to be considered by a trustee

Question 26

Express private trusts

Regarding objects, what one thing will cause a discretionary trust to fail despite the relaxed rules on class definition?

Answer 26

Where there are so many beneficiaries that the trust is administratively unworkable

E.g. a trust of £400,000 to be divided among the people in the county of Antrim

Question 27

Express private trusts

What happens when a trust fails for uncertainty of objects?

Answer 27

A resulting trust in favour of the settlor or the settlor’s successors is presumed

Question 28

Express private trusts

Except for honorary and charitable trusts, what must the objects of an express trust be?

Answer 28

Human

Trusts “to maintain freedom of the press” or “to maintain my home” will fail

Question 29

Express private trusts

If a trustee refuses the appointment, resigns, or dies, in what circumstance will the court not appoint a replacement?

Answer 29

Where the settlor intended the trust to continue only as long as that particular trustee served

Question 30

Express private trusts

Who may be a trustee?

Answer 30

Anyone with capacity to acquire and hold property for their own benefit, even the settlor

e.g. a private individual, a professional person, or a trust company, but not a minor

Question 31

Express private trusts

Why is it not advisable to appoint too many trustees?

Answer 31

Because trustees must act with unanimity

Question 32

Express private trusts

What is the minimum and maximum number of trustees allowed?

Answer 32

Minimum of one. No limit on the maximum.

A trust of land must have at least two (one if trust corp) and no more than four trustees.

Question 33

Express private trusts

What are the two rules against perpetuities?

Answer 33

1. Remoteness of vesting rule
2. Inalienability rule

Question 34

Express private trusts

What does the remoteness of vesting rule provide?

Answer 34

An interest under a trust is void if it does not or will not vest within 125 years

Question 35

Express private trusts

What does the inalienability rule provide?

Answer 35

In the exceptional case where a non-charitable purpose trust is valid, it is valid for either:

1. 21 years or
2. The rest of a living person’s life plus 21 years

Question 36

Express private trusts

Where no perpetuity period is given in a non-charitable purpose trust, what is presumed?

Answer 36

That it is for no more than 21 years

Question 37

Express private trusts

What is a declaration of trust in an intervivos trust?

Answer 37

Settlor’s irrevocable demonstration by words or conduct satisfying three certainties and perpetuity, that they intend the trustee (or themselves as trustee if it is transfer to self) to be legally bound

Question 38

Express private trusts

How must a settlor transfer property to the trust?

Answer 38

In the same legal fashion as a PR does to a beneficiary

Assent/transfer deed for land, then registered at HMLR; stock transfer form for shares; chattels delivered with intent

Question 39

Express private trusts

What is required for a declaration trust of land?

Answer 39

It must be evidenced in writing and signed by settlor

Question 40

Express private trusts

Where a settlor is setting up a trust of land with a third party as trustee, what should be distinguished?

Answer 40

• Requirement for a signed writing to evidence the declaration of trust; and
• Requirement for a deed registered at HMLR to make the transfer

Question 41

Express private trusts

What is the impact of the maxim equity will not assist a volunteer on the process of setting up a trust with a third party as trustee, and what is the name given to the gift in this situation?

Answer 41

If an individual attempts to make a gift of property to another but fails to transfer the legal title in the correct manner, equity will not normally enforce the gift

The gift is imperfect and fails, because the donee has paid no consideration and is asking the court to enforce a gratuitous promise

Question 42

Express private trusts

What are the four exceptions to this rule that equity will not perfect an imperfect gift, which also apply to improperly constituted trusts?

Answer 42

1. Every effort test
2. Donatio mortis causa
3. Fortuitous vesting rule in Strong v Bird
4. Proprietary estoppel / unconscionable to change mind

Question 43

Express private trusts

Under the every effort test, what must be done for equity to perfect an imperfect gift?

Answer 43

Donor/settlor has done everything required of them and has put the property outside their control

Naturally will not apply if they retain possession.

Question 44

Express private trusts

What are the three requirements for donatia mortis causa, i.e. gift by reason of death?

Answer 44

1. Donor delivers property to donee while in objective contemplation of imminent or impending death
2. Donor intends that the property be given to donee if donor dies, or returned if donor survives, and
3. Donor does indeed die

Will not apply if donor did was not aware of or considering their imminent death when making the gift

Question 45

Express private trusts

What triggers the fortuitous vesting rule in Strong v Bird with regard to (1) gifts and (2) trusts, and what is the effect of the rule?

When does it not apply?

Answer 45

Triggered by donor/settlor dying before transfer is made.

Transfer is complete in law and enforceable if

1. Gifts - Recipient becomes the donor’s personal representative
2. Trusts - Trustee becomes the settlor’s PR

Rule does not apply if there is evidence that donor changed their mind before they died, by doing something inconsistent with the original gift, e.g. selling it

Question 46

Express private trusts

What are the requirements for a testamentary trust, and why is there not a requirement for the testator to transfer the property?

When does the trust take effect?

Answer 46

Trust must be:
1. Revocable until death, and
2. Be contained in a duly executed valid will

No requirement for T to transfer as PRs do this

The trust takes effect upon death

Question 47

Express private trusts

In addition to the trust just being fully set out in the will, what is the distinction between a fully secret testmentary trust and a half secret testmentary trust?

Answer 47

A fully secret trust looks like an outright gift to a nominated person.

A half secret trust will mention that a trust exists but keeps the identity of the beneficiary secret

Question 48

Express private trusts

In order for a beneficiary under a half secret trust to enforce, when must their identity be communicated to the trustee?

What must be true of the communication of the half secret trust?

Answer 48

At or before the making of the will

The communication of the half secret trust must not be inconsistent with the will

Question 49

Express private trusts

What must a beneficiary of a fully secret trust do to enforce it?

Answer 49

Prove the terms by clear and convincing evidence

Question 50

Express private trusts

Like a half-secret trust, does the communication giving the nominated person the instructions regarding the fully secret trust need to be made before the will?

Answer 50

No, it can be made before or after

Question 51

Express private trusts

One of what two things will cause a fully secret trust to fail, and what happens to the property?

Answer 51

A fully secret trust will fail if:
1. Nominated person expressly refuses to accept the trust, or
2. Did not know of the intended secret trust until after the testator’s death

The nominated person will take the property free of any trust

Question 52

Express private trusts

What is a limited interest beneficiary?

Answer 52

A beneficiary who does not have an interest in the capital of the fund, but only in its income

E.g. a life interest holder

Question 53

Express private trusts

What are the two requirements for the beneficiaries to call for the termination of the trust and transfer of trust property under the rule in Saunders v Vautier, which trustees are obligated to comply with?

Answer 53

All beneficiaries must:

1. Together have an absolute interest in the property, i.e. an interest in the capital, and
2. Be of full age and sound mind

Question 54

Resulting trusts

What are the three situations in which a resulting trust will arise?

Answer 54

Where:

1. Property is transfered to another with no consideration or evidence of any reason;
2. Property is purchased using joint proceeds but legal title is not in the name of all parties
3. An express trust fails to dispose of all of the trust property

In 1, the transferee holds property on trust for transferor. In 2, person with legal title holds a proportionate share on trust for the contributor. In 3, property reverts to the settlor.

Question 55

Resulting trusts

For the purchase money rules to apply, what must the would-be beneficiary’s purchase money contribution actually go towards?

When must the consideration be supplied?

Answer 55

Consideration for the purchase of the property

Insufficient if money just used to make improvements or pay taxes

Consideration must be supplied before the purchaser takes legal title

Question 56

Resulting trusts

What is the standard of proof and who has the burden of proving a resulting trust?

Answer 56

The would-be beneficiary must prove by clear and convincing evidence

Question 57

Resulting trusts

If a presumption of resulting trust has arisen in a purchase money situation, what three things can the title holder suggest to rebut it?

Answer 57

Suggest the money used as consideration was:

1. A gift
2. A loan
3. Payment of a debt

Question 58

Resulting trusts

When is the presumption of resulting trust deemed not to apply, and what are three archaic, yet testable situations in which this may arise?

How is the transfer treated?

Answer 58

The presumption of advancement applies when the provider of the purchase money is treated as being under a “moral obligation” to make financial provision for the recipient:

1. Husband to wife
2. Father to daughter
3. Loco parentis (assumed parental duties); only one which applies to females

The transfer is treated as a gift

Question 59

Resulting trusts

How may the provider rebut the presumption of advancement, i.e. argue that a resulting trust should be presumed?

Answer 59

Providing evidence of acts and declarations before or at the time of purchase or transfer to show they intended to retain an equitable interest

Before or at the time, not after

Question 60

Trusts of the family home

What is a declaration of trust, and is it conclusive even where there was unequal contribution to the purchase?

Answer 60

A document where the parties owning an asset declare they hold it on trust in for themselves and others

Conclusive, unless there is fraud or mistake

Also available when only one party holds legal title, but others contributed

Question 61

Trusts of the family home

Where only one party holds the legal title, what is required for the declaration of trust to control?

Answer 61

A writing signed by the owner, made on the day of conveyance or after

i.e. when they actually came into the legal title

Question 62

Trusts of the family home

Where proprietary estoppel arises in the context where legal title is only in the name of one party, what will the claimant’s remedy depend on?

Answer 62

Their expectation (based on assurance) and the detriment actually suffered

Question 63

Trusts of the family home

What equitable interest is presumed where there is no declaration of trust, and why?

Answer 63

Joint tenancy, because equity will follow the law

Joint tenancy is the only way to hold a legal interest jointly

Question 64

Trusts of the family home

How is this presumption that equity follows the law with regard to an equitable interest in the absence of a declaration of trust rebutted?

Answer 64

Using evidence that the parties intended otherwise, either before or after the purchase

E.g. the parties intended a different split in the equitable interest

Question 65

Trusts of the family home

When does a common intention constructive trust arise, and what are the two criteria a claimant must establish?

Answer 65

When claimant attempts to assert an equitable interest in the family home based on actual discussions between the parties.

Claimant must establish:

1. Parties had an express or inferred common intention to own the property, such that the claimant should have an equitable interest, and
2. Claimant relied to their detriment

Question 66

Trusts of the family home

What must a claimant show to establish express common intention?

Answer 66

Actual discussions between the parties, relating to ownership of the property, leading the claimant to this belief. Discussions of a “life together” are not sufficient.

Question 67

Trusts of the family home

In the context of express common intention, when will the court allow the legal owner to give an excuse?

Answer 67

If the excuse would cause a reasonable person to conclude there is some legitimate desire for not having two owners

Question 68

Trusts of the family home

In what four situations can the court infer a common intention?

Answer 68

1. Direct contribution to purchase price
2. Mortgage payments
3. Payment of household expenses to enable legal owner to make mortgage payment
4. Substantial renovations to the property

Note how this is different from a resulting trust in the property which requires the money to directly fund the purchase, and where only option 1 and not options 2-4 would suffice.

Question 69

Charitable trusts and other purpose trusts

What are the three distinctive features of charitable trusts?

Answer 69

1. No requirement of ascertainable human beneficiaries
2. Cy-pres doctrine applies
3. May be perpetual

Question 70

Charitable trusts and other purpose trusts

What are the two requirements for a charitable trust?

Answer 70

1. Principal purpose(s) must be charitable and exclusively so
2. Must be for public benefit

Question 71

Charitable trusts and other purpose trusts

What are some of the charitable purposes under the Charities Act 2011?

Answer 71

• Poverty
• Education
• Religion
• Health or saving lives
• Community development
• Arts, culture, heritage
• Amateur sport
• Human rights
• Environment
• Animal welfare

Question 72

Charitable trusts and other purpose trusts

What is the public benefit test for a charitable trust?

Answer 72

Trust must bestow identifiable benefit on the public or a section of the public

Question 73

Charitable trusts and other purpose trusts

What is the status of purposes which are not allowed under a charitable trust, e.g. politics or private purposes, but are merely incidental?

Answer 73

An otherwise valid charitable trust which incidentally advances politics or benefits some private individuals will not fail

Question 74

Charitable trusts and other purpose trusts

Where there is a mix of charitable and non-charitable principal purposes, what can the court do to prevent the charitable purpose trust from failing?

Answer 74

Sever the charitable from the non-charitable purposes

Question 75

Charitable trusts and other purpose trusts

Despite not having ascertainable beneficiaries, who is able to enforce a charitable trust?

Answer 75

The Attorney General, on behalf of the public

Question 76

Charitable trusts and other purpose trusts

What are the perpetuities rules and which ones apply to charitable trusts?

Answer 76

1. Remoteness of vesting rule – 125 years (applies as normal, unless charity to charity transfer)
2. Inalienability rule – 21 years (does not apply to charitable trusts)

Therefore, the initial gift to a charitable trust must vest within 125 years, unless a charity to charity transfer

Question 77

Charitable trusts and other purpose trusts

When does the cy-pres doctrine apply, and what does it permit the court to do?

Answer 77

Cy-pres applies when the charitable purpose of a trust has become impossible or impractical, and it permits the court to direct trust property be applied for another charitable purpose as close as possible to the original one rather than allowing the trust to fail

Question 78

Charitable trusts and other purpose trusts

How many approaches to cy-pres are there, what does the applicability of each depend on, and what does the use of each determine?

Answer 78

Two approaches, depending on when the objectives became impossible relative to the trust, and the approach determines whether charitable intent on behalf of the settlor is needed

Question 79

Charitable trusts and other purpose trusts

Is charitable intent of the settlor required if the gift fails (1) at the time the trust comes into operation, and (2) after the trust comes into operation?

Answer 79

Initial failure: Cy-pres requires general charitable intent of settlor
Subsequent failure: No charitable intent needed

Question 80

Charitable trusts and other purpose trusts

What makes a general charitable intent difficult to infer?

Answer 80

When the testator has taken care to identify a specific named charity

Question 81

Charitable trusts and other purpose trusts

What are the four private purpose trusts which are valid in exception to the general rule, subject to perpetuity rules?

Answer 81

1. Denley trusts
   and honorary trusts for the:
2. Maintenance of particular animals
3. Saying of private masses, and
4. Erection and maintenance of monuments and graves

The rule against perpetuity (21 years) applies to purpose trusts

Question 82

Charitable trusts and other purpose trusts

What is a Denley trust?

Answer 82

A trust which appears to be for a private purpose but is valid because it is actually for the benefit of ascertainable human beneficiaries, e.g. where beneficiaries are employees of a company, at any given time, there will be a record of every single person who is an employee

Question 83

Charitable trusts and other purpose trusts

What happens if the trustee refuses or fails to carry out an honorary trust?

Answer 83

A resulting trust is imposed for the settlor or their estate

Question 84

Charitable trusts and other purpose trusts

What is meant by the fact the court will not take judicial notice of the subject matter of an honorary trust for perpetuity purposes?

Answer 84

The court will not take into consideration the likely lifespan of a particular animal, so a gift for an animal’s maintenance will fail unless specific provisions are made limiting its duration, unless it is obvious the entire gift will be spent within the perpetuity period

Question 85

Charitable trusts and other purpose trusts

Where a timescale is not specified, how can it be inferred based on value that a gift does not breach the vesting rule?

Answer 85

If the amount will likely be spent within 21 years, the gift is likely allowed

Question 86

Appointment, retirement, and removal of trustees

What is the minimum number of trustees?

Answer 86

One, but if trust property is land at least two trustees or a trust corporation is required to give valid receipt for capital money arising on the sale of land

Question 87

Appointment, retirement, and removal of trustees

What is the maximum number of trustees for (1) a trust of land and (2) a trust of all other property?

Answer 87

Land: Maximum of four
Other property: No maximum

Question 88

Appointment, retirement, and removal of trustees

Once the trust is created, does the settlor retain power to appoint new trustees?

Answer 88

Not unless there is express provision in the trust instrument

Question 89

Appointment, retirement, and removal of trustees

Who has the power to appoint additional trustees?

Answer 89

All trustees, unless one is designated to have this power

Question 90

Appointment, retirement, and removal of trustees

Even where the trust is not land, what is the number of trustees which a trust must not exceed specifically through the trustees’ power to appoint new trustees?

Answer 90

Four.

If a trust already has four trustees, this power will therefore not be available.

Question 91

Appointment, retirement, and removal of trustees

What four parties have the power to appoint replacement trustees, and in what order of priority?

Answer 91

1. Person named in the trust instrument, or if silent:
2. Surviving/continuing trustees, or if none:
3. Personal representative of the last surviving trustee, or if none
4. The court

Question 92

Appointment, retirement, and removal of trustees

Must the appointment of a replacement be in writing?

Answer 92

Yes, but it does not have to be made by deed

Question 93

Appointment, retirement, and removal of trustees

Even though a deed is not necessary, why is it usually used?

Answer 93

Because it will vest legal title to the trust property in the new trustee

Question 94

Appointment, retirement, and removal of trustees

Although beneficiaries generally have no power to control the trustees unless there has been a breach, they can select trustees if what three conditions are met?

Answer 94

1. No person is nominated in the trust instrument to have this power
2. The criteria of the rule in Saunders v Vautier are met (full age and sound mind, together they are absolutely entitled), and
3. Beneficiaries act unanimously

Question 95

Appointment, retirement, and removal of trustees

Where these criteria are satisfied, what can the beneficiaries do, and why when the general rule is that they cannot?

Answer 95

In writing, order one or more of the existing trustees to retire and order the remaining trustees to appoint a trustee/trustees of the beneficiaries’ choosing.

They can do this because the rule in Saunders v Vautier is satisfied, so they could elect to shut down the trust and take the property anyway if they wanted.

Question 96

Trustees’ duties and powers

What are a trustee’s eleven duties?

Answer 96

1. Of care
2. Of confidentiality
3. Not to profit from trust
4. Not to self-deal
5. To observe terms of trust
6. To act jointly
7. To act personally
8. To take possession of trust property
9. To keep accounts
10. To act impartially
11. To invest

Question 97

Trustees’ duties and powers

What must a trustee who obtains remunerative employment by virtue of a trusteeship, e.g. directors fees for acting on the board of a company in which the trust holds shares, do with this money?

Answer 97

Hold it on constructive trust for the trust beneficiaries

Same as a trustee who earns personal profit as a result of opportunities or information which came to them due to their trusteeship

Question 98

Trustees’ duties and powers

When does this rule not apply?

Answer 98

If the trustee would have gotten the paid appointment anyway

Question 99

Trustees’ duties and powers

What are the five exceptions to the general rule that a trustee may not charge for expenses other than out of pocket expenses?

Answer 99

1. Clause in trust allowing them
2. Professional trustee charges
3. Trust corporation
4. All beneficiaries agree
5. Court authorisation

Question 100

Trustees’ duties and powers

Under the Trustee Act 2000, what three conditions must be satisfied for a professional trustee to charge reasonable remuneration?

Answer 100

1. Not the sole trustee
2. Co-trustees give their written consent
3. No express provision relating to trustee’s charges

Question 101

Trustees’ duties and powers

The duty not to self-deal prevents a trustee from purchasing trust property. What is the full extent of this prohibition?

Answer 101

It applies in all circumstances, even if they pay fair market price or more, and irrespective of good faith or benefit to the trust

A purchase of trust property by a trustee is voidable by the beneficiaries, and may also be ratified by the court

Question 102

Trustees’ duties and powers

Whilst a trustee cannot purchase trust property, what is there no prohibition on them purchasing?

Answer 102

A beneficial interest to this property from a beneficiary

Question 103

Trustees’ duties and powers

What three conditions must be met for the purchase by a trustee of a beneficiary’s beneficial interest to not be voidable?

Answer 103

Trustee must show they:

1. Paid a fair price
2. Made full disclosure of all material facts
3. In no way abused their position

Trustee has burden of proof if the beneficiary who sold their interest challenges this

Question 104

Trustees’ duties and powers

What are five further equitable duties on a trustee?

Answer 104

1. Enquire as to trust property
2. Take control of it
3. Ensure its preservation
4. Ensure legal title is vested in all trustees
5. Ensure trust property is segregated from the trustee’s personal assets

Question 105

Trustees’ duties and powers

What is a trustee’s statutory duty of care, and when does it apply?

Answer 105

Trustees must exercise such care and skill as is reasonable in the circumstances, taking into account special knowledge the trustee either has or holds himself out as having, especially if they are a professional

Applies when trustees are making investment decisions and appointing agents

Question 106

Trustees’ duties and powers

When the statutory duty does not apply, what is the traditional duty of care?

Answer 106

Trustees must act with the prudence of an ordinary man of business acting in relation to their own affairs

Question 107

Trustees’ duties and powers

How do the duty to act personally and the duty to act jointly not contradict each other?

Answer 107

In acting personally, the trustee must actually play their part and remain active in the trust. They do not have a general power to delegate. However, in playing their respective parts, the trustees must act unanimously in the exercise of their discretions.

Clause in trust or court authorisation needed to not act unanimously

Question 108

Trustees’ duties and powers

What are the three exceptions to the duty to act personally?

Answer 108

1. Administrative functions can be delegated
2. Delegation of certain investment decisions to an investment manager
3. Power of attorney for all functions for no more than 12 months (trustee still liable)

For 1 and 2, trustee not liable if they supervise in accordance with statutory duty

Question 109

Trustees’ duties and powers

Whilst a trustee may delegate administrative functions, what may they never delegate?

Answer 109

Exercise of discretion

Subject to power of attorney 12 month exception

Question 110

Trustees’ duties and powers

What is the effect of the duty to take possession of trust property where there is more than one trustee?

Answer 110

It trust property is left in control of one of them only, the co-trustees will be liable if that trustee misappropriates the property

Question 111

Trustees’ duties and powers

What are the four requirements of a trustee under the duty to invest?

Answer 111

Trustee must ensure:

1. Investments they select are authorised by statute or trust instrument
2. Take into account the standard investment criteria
3. Take any necessary advice, unless unnecessary
4. Keep investments under appropriate review

Question 112

What is a trustee’s general power of investment?

Answer 112

Any investment they could make if the were absolutely entitled to trust assets

Question 113

Trustees’ duties and powers

What was investment traditionally interpreted to mean, and what has the approach been in recent years?

Answer 113

Traditionally an income producing asset, but recently a purchase aimed primarily at capital growth has been acceptable #gains

Question 114

Trustees’ duties and powers

What is not authorised unless the trust instrument expressly provides for it?

Answer 114

Purchasing land outside the UK

Question 115

Trustees’ duties and powers

What are the two standard investment criteria, which trustees must consider?

Answer 115

1. Suitability of the investment in terms of time, cost, and risk
2. The need for diversification of trust investments

Question 116

Trustees’ duties and powers

What type of advice must the trustees receive before exercising the power to invest?

Answer 116

Proper advice, which is the advice of a person the trustees reasonably believe to be qualified to give it based on their ability and experience

Does not have to be a financial advisor, as long as experienced in such matters

Question 117

Trustees’ duties and powers

What is required for trustees to delegate their duty/power to invest to an investment manager?

Answer 117

A written policy statement including details of the trust and the investment objectives must be incorporated into the contract between the trustees and investment manager

Question 118

Trustees’ duties and powers

Is a trustee liable if assets go down in value or fail to appreciate?

Answer 118

Not as long as the trustee has complied with their duties as set out in these cards. It is understood that investing in anything does not guarantee returns, so failure to produce returns alone is not a breach of duty.

Question 119

Trustees’ duties and powers

Whilst trustees are not generally subject to the control of beneficiaries, what two rights do the beneficiaries have?

Answer 119

1. Right to compel exercise of duties, via court application
2. Right to inspect trust documents, other than documents detailing trustee’s exercise of discretion

Question 120

Trustees’ duties and powers

What must the beneficiaries show of trustee behaviour for it to be excepted from the rule that trustee behaviour within their powers cannot be challenged/controlled?

Answer 120

That it was irrational and capricious

Question 121

Trustees’ duties and powers

Although not generally required, in what situation may a trustee be required to provide an explanation to the beneficiaries?

Answer 121

If trustees have given beneficiaries a legitimate expectation that discretion will be exercised in a particular way, they are expected to warn the beneficiaries if they decide to change their mind

Question 122

Trustees’ duties and powers

What are the two additional powers beneficiaries have when they are full age and capacity, and absolutely entitled to the entire interest between them?

Answer 122

1. Bring trust to an end and require trust funds be transferred to them (Saunders v Vautier)
2. Require trustees to retire and appoint new ones of their choice (extension of S v V rule)

Question 123

Liability for breach of trust

What is the question to ask in assessing whether a trustee breached a duty, and what is the situation if the answer is no?

Answer 123

Was the act one that the trustee was authorised to perform or omission one that they were not required to perform under the trust instrument or by law?

If the answer is no, the trustee is in breach of duty regardless or good faith, skill, diligence, or benefit to the trust.
If yes, consider whether trustee acted in accordance with the relevant standard of care (statutory duty for investing and appointing agents; traditional duty for everything else)

Question 124

Liability for breach of trust

Who has the burden of proof where the trustee is accused of causing loss?

Answer 124

The beneficiary, and if they cannot prove loss, the trustee has no liability

Question 125

Liability for breach of trust

What is the consequence of the rule that gains from one breach cannot be used to offset losses of an earlier breach (unless part of a linked investment scheme)?

Answer 125

The beneficiaries can keep the gain from the profitable breach, but still sue for the loss

Question 126

Liability for breach of trust

Whilst a trustee is not vicariously liable for the acts of co-trustee, what could they be liable for?

Answer 126

Their own separate breach of trust, e.g. failure to supervise the actions of the trustee in breach

Question 127

Liability for breach of trust

What is the liability of breaching trustees where more than one is in breach?

Answer 127

Joint and several

Court can apportion liability so that it is just and equitable

Question 128

Liability for breach of trust

What are the three main defences available to trustees?

Answer 128

1. Consent of beneficiaries (full age and capacity, with full knowledge of what they are consenting to)
2. Limitation period
3. Exclusion clause

Trustee still liable to any beneficiary who did not consent

Question 129

Liability for breach of trust

What are the three considerations which affect the six year limitation within which an action for breach of trust must be brought?

Answer 129

1. The six year clock does not run for a beneficiary with a remainder interest until the interest vests
2. No limitation where trustee was a party to fraud
3. No limitation to recover trust property or proceeds from a trustee

Question 130

Liability for breach of trust

Whilst clauses purporting to exclude trustee liability are strictly construed, they will generally be enforceable in the absence of what four things?

What is the extent of breaches which can be excluded?

Answer 130

1. Bad faith
2. Intentional breach
3. Fraud
4. Recklessness

Up to and including gross negligence

Question 131

Liability for breach of trust

What is the difference between (1) a personal claim and (2) a proprietary claim?

Answer 131

1. Personal: Claim for breach of trust against the trustee personally
2. Proprietary: Claim against trust property or proceeds when it is known to be in the trustee’s possession (equitable tracing)

Question 132

Liability for breach of trust

Why is a proprietary claim advantageous?

Answer 132

1. Personal claims are a waste of time if trustee is insolvent
2. In proprietary claim, beneficiaries have priority over other creditors
3. In proprietary, if value of property increases, beneficiaries get this value

Question 133

Liability for breach of trust

In a proprietary claim, (1) what can the beneficiaries do if the original trust property is in the hands of the trustee, and (2) what are their two options where the trustee has substituted the property?

Answer 133

1. Original trust property: Claim it back
2. Substituted: Either claim that asset or a charge over it covering the loss

Question 134

Liability for breach of trust

What are the beneficiaries’ options when the trustee combines trust funds with their own to purchase an asset?

Answer 134

The beneficiaries may:

1. Claim a proportionate part of the asset, or
2. Claim a charge over the asset for the amount of trust property used

Question 135

Liability for breach of trust

Where a trustee places trust money into a bank account with the trustee’s own money, how are subsequent transactions treated, and what are the beneficiaries’ options?

Answer 135

Trustee is treated as spending their own money first, and the beneficiaries may claim a charge over the bank account for the amount of trust funds in it

Question 136

Liability for breach of trust

What occurs when the trustee uses mixed money to purchase an asset and then dissipates the balance, and why is it considered an exception to the spend own money first rule?

Answer 136

If trustee uses mixed money to purchase an asset and then dissipates the balance, the beneficiaries can claim a share or charge over the asset up to the value of the trust property taken, as if the trustee had actually spent trust money first.

Any shortfall at this stage is the subject of a personal claim against the trustee.

Question 137

Liability for breach of trust

If after this, the trustee tops up their account with their own money, is this treated as replacing trust money?

Answer 137

Not unless the trustee shows a clear intention that this is the case

Question 138

Liability for breach of trust

What is the lowest intermediate balance in this situation and what is the effect of it?

Answer 138

It is the account balance after the last payment out but before the next payment in topping up the account, and it is the limit that the beneficiary can claim in a proprietary claim

Question 139

Liability for breach of trust

Where a trustee mixes funds from two or more funds in the trustee’s personal account, what determines how the funds are treated?

Answer 139

The type of bank account, i.e. current or savings

Question 140

Liability for breach of trust

What is the rule where the trustee’s personal account is a current account?

Answer 140

The general rule is first in first out

Question 141

Liability for breach of trust

What is the rule where the trustee’s personal account is a savings account?

Answer 141

The proportionate rule is the default rule

Question 142

Liability of third parties

What is a bona fide purchaser for value without notice?

Answer 142

A third party who acquires legal title to trust property for value and without notice of the trust

Beneficiaries have no proprietary or personal claim against a BFP for V

Question 143

Liability of third parties

What is an innocent volunteer recipient?

Answer 143

Similar to a bona fide purchaser for value without notice, except instead of purchasing for value, they were gifted it or otherwise came into possession

Beneficiaries may have a proprietary claim against an IVR

Question 144

Liability of third parties

What are the three conditions for a beneficiary to bring a proprietary claim against an innocent volunteer recipient?

Answer 144

1. Property was subject of fiduciary relationship
2. Property or proceedings identifiable using equitable tracing rules
3. Property is not in the hands of a bona fide purchaser for value without notice

Question 145

Liability of third parties

In a proprietary claim against an innocent volunteer recipient, what is the beneficiary’s option when:

(1) Property is in its original form or has been substituted for another asset;
(2) Property is mixed with the volunteer recipient’s own property to purchase an asset?

Answer 145

1. Beneficiaries can claim the asset
2. Beneficiaries can claim a proportionate share of the asset

Question 146

Liability of third parties

In a proprietary claim against an innocent volunteer recipient when property is mixed with the volunteer recipient’s own property to purchase an asset, why is there no option for the beneficiary to claim a charge over the asset like they can with a trustee, and what is the effect of this?

Answer 146

Because the volunteer is an innocent party, and there can be no charge against them.

Loss in value is therefore shared proportionately between innocent volunteer and trust beneficiaries.

Question 147

Liability of third parties

What is subrogation?

Answer 147

The process whereby upon an innocent volunteer using the trust funds to discharge a secured debt, the beneficiary can trace the money into the repayment and bring the debt back to life, making the beneficiary the creditor on the original terms

Question 148

Liability of third parties

What is a knowing recipient, and what claim is available against them?

Answer 148

A third party who receives money or property traceable to a breach of trust if they knew or should have known of the breach will be treated as if they were a trustee, and as such a personal claim will be available

Claimaint must show it would be unconscionable for the third party to retain the property

Question 149

Liability of third parties

What is a dishonest accessory?

Answer 149

A third party who facilitates a breach of trust will be treated as if they were a trustee if their assistance was dishonest, i.e. a constructive trustee liable for a personal claim

Passive assistance can qualify

Question 150

Liability of third parties

What is the conscious impropriety requirement for dishonest accessory and what is the highly examinable effect of it?

Answer 150

Dishonesty requires not acting as an honest person would in the circumstances.

The dishonest accessory does not need to know they are participating in a breach of trust. They must merely know that the scheme they are involved in is somehow dishonest or improper.

Question 151

Liability of third parties

Why is a proprietary claim not usually relevant in the case of a dishonest accessory?

Answer 151

Because the accessory is unlikely to have received trust property in the course of facilitating the breach of trust, which is the basis of a proprietary claim