6.4. Trustees and Fiduciary Obligations

Question 1

What are some provisions granted by the Trustee Act 1925?

Answer 1

s36 - [appointment of trustees] - power of appointing new or additional trustees
s39 - [retiring of trustees] - retiring of trustee without a new appointment
s40 - [vesting of trust property] - vesting of trust property in new or continuing trustees
s41 - [court’s ability to appoint trustees] power of court to appoint new trustees (application to court)

Question 2

What are some provisions granted by TLATA 1996?

Answer 2

s19 - appointment and retirement of trustee at instance of beneficiaries

Question 3

What can beneficiaries do if a trustee has breached a duty?

Answer 3

Beneficiaries can sue the trustees for compensation if the trustees have breached a duty and this has caused loss to the trust.

Duties are laid down by statute and the general law.

Question 4

What is the standard of care that should be demonstrated by trustees?

Answer 4

Trustees must exercise the appropriate standard of care - using such care as would a prudent man of business (Speight v Gaunt)

Question 5

What are the specific duties for trustees? [E.P.I.D.A]

Answer 5

1. Exercise reasonable care and skill in administering the trust
2. Provide information about the trust to the beneficiaries
3. Invest trust property
4. Distribute trust property in accordance with the trust’s terms
5. Act impartially

Remember EPIDA!

Question 6

What is the standard investment criteria (section 4 of the Trustee Act)?

Answer 6

When exercising a power of investment, trustees must have regard to the ‘standard investment criteria’ (S.D.A.R):
1. Suitability
2. Diversification
3. Advice (s5)
4. Review

If trustees do not consider these factors, they are in breach of trust. If this causes loss to the trust, the trustees must compensate the beneficiaries.

Question 7

Explain the criterion of ‘suitability’ in relation to investments

Answer 7

Particular investment should be a suitable example - e.g will shares benefit both life tenant and remainderman?

Question 8

Explain the criterion of ‘diversification’ in relation to investments

Answer 8

Trustees must consider the need for diversification of investments insofar as is appropriate to that trust

Question 9

Explain the criterion of ‘advice’ in relation to investments

Answer 9

Trustees must obtain and consider proper advice about the way they should exercise their power of investment

Question 10

Explain the criterion of ‘review’ in relation to investments

Answer 10

Trustees must from time to time review trust investments and consider whether they should be varied

Question 11

What is the statutory duty of care that needs to be adopted by trustees?

Answer 11

Trustees have a duty to adopt the appropriate standard of care as per their knowledge and expertise (s1 and Sch 1 of the Trustee Act 2000)

Question 12

What is meant by the ‘power of maintenance’ that can be exercised by trustees?

Answer 12

This allows trustees to apply the income of the trust fund for minor beneficiaries. Trustees may pay or apply the whole or any part of the trust income as they see fit.

Trustees also do not need to consider the age and requirements of the infant and other income available to him or her.

Question 13

What is meant by the ‘power of advancement’ that can be exercised by trustees?

Answer 13

This allows trustees to apply part of a beneficiary’s share of trust capital before that beneficiary is strictly entitled to receive it.

Question 14

What are the two main rules that apply to fiduciaries (such as trustees)?

Answer 14

The no-conflict rule and the no-profit rule

Question 15

What is the ‘no-conflict rule’?

Answer 15

The no-conflict rule requires that the fiduciary not put themselves in a position of actual or potential conflict between their duty and their own interest.

This includes not selling trust property to themselves (no self-dealing) and not purchasing the beneficial interest of any of the beneficiaries unless certain requirements are fulfilled (fair-dealing)

Question 16

What is meant by the ‘no-profit rule’?

Answer 16

The no-profit rule requires that a fiduciary does not make a personal profit from their position as a fiduciary. The remedy for a breach of this rule is an account of profits.

Question 17

Who can be a trustee?

Answer 17

Anyone who is able to own property (over 18) and is not of unsound mind

Question 18

Explain the powers to appoint trustees for a trust?

Answer 18

The power to appoint trustees is set out in the trust deed (typically by the settlor). Existing trustees have statutory powers to appoint new or replacement trustees.

Where no express appointment power exists, the beneficiaries can appoint a trustee by agreement (unless specifically excluded by the trust deed).

Question 19

What powers are conferred to trustees expressly through the trust instrument and in statute?

Answer 19

The powers to:
1) invest trust property
2) maintain or use the trust income for the education, maintenance or benefit of the beneficiaries
3) advance capital to the beneficiaries

Question 20

Explain the element of ‘self-dealing’ within the no conflict rule in further detail.

Answer 20

Trustees should not purchase trust property for themselves, regardless of whether the price is fair. The sale is voidable by the request of any beneficiary.

Question 21

What are the exceptions to the ‘self-dealing’ rule?

Answer 21

1) The trust instrument authorises it and all the beneficiaries, sui juris, authorise it
2) The purchase is pursuant to a contract or option agreed or granted before the trusteeship arose

Question 22

What are the exceptions to the ‘fair-dealing’ rule?

Answer 22

The purchase of the beneficiary interest of any beneficiary by a trustee is valid provided the trustee can demonstrate that:
1) They took no advantage of their position;
2) They made full disclosure to the beneficiary, and;
3) The transaction was fair and honest.