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SQE1 - Trust Law > 7. Trustees' Duties and Powers > Flashcards

7. Trustees' Duties and Powers Flashcards

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1
Q

FIDUCIARY OBLIGATIONS OF TRUSTEES

What are a trustee’s eleven duties?

A
  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
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2
Q

FIDUCIARY OBLIGATIONS OF TRUSTEES

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?

A

Hold it on constructive trust for the trust beneficiaries

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3
Q

FIDUCIARY OBLIGATIONS OF TRUSTEES

When does this rule not apply?

A

If the trustee would have gotten the paid appointment anyway

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4
Q

What must a trustee who earns personal profit as a result of opportunities or information which came to them due to their trusteeship do with this money?

A

Hold it on constructive trust for the trust beneficiaries, even when there is no obvious conflict

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5
Q

FIDUCIARY OBLIGATIONS OF TRUSTEES

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

A
  1. Clause in trust allowing them
  2. Professional trustee charges
  3. Trust corporation
  4. All beneficiaries agree
  5. Court authorisation
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6
Q

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

A
  1. Not the sole trustee
  2. Co-trustees give their written consent
  3. No express provision relating to trustee’s charges
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7
Q

What remuneration may a trust corporation receive?

A

Reasonable remuneration, even if they are the sole trustee

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8
Q

In what circumstances may the court authorise payment to a trustee?

A

If the trust is especially onerous, or the trustee performed exceptional services

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9
Q

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

A

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

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10
Q

What is the status of a purchase of trust property by a trustee?

A

Voidable by the beneficiaries

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11
Q

In addition the the beneficiaries, who may ratify a self-dealing transaction?

A

In exceptional circumstances, the court has the authority to permit a transaction of self-dealing to go ahead.

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12
Q

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

A

A beneficial interest to this property from a beneficiary

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13
Q

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

A

Trustee must show they:

  1. Paid a fair price
  2. Made full disclosure of all material facts
  3. In no way abused their position
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14
Q

What are five further equitable duties on a trustee?

A
  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
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15
Q

What are the two bases for the trustee’s duty of care?

A
  1. Statutory under the Trustee Act
  2. Case law
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16
Q

What is the statutory duty of care?

A

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

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17
Q

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

A

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

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18
Q

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

A

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.

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19
Q

What is required for the trustees to act by majority, instead of unanimously?

A

Clause in the trust instrument or court authorisation

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20
Q

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

A
  1. Administrative functions can be delegated
  2. Delegation of certain investment decisions (delegation for choice of investment to professional asset manager)
  3. Power of attorney for all functions for no more than 12 months
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21
Q

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

A

Exercise of discretion

Subject to power of attorney 12 month exception

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22
Q

Is a trustee liable for the acts or omissions of an agent if they select and supervise them in accordance with the statutory duty

A

No

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23
Q

Is a trustee liable for the acts or omissions of a power of attorney within the 12 month fixed period?

A

Yes

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24
Q

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

A

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

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25
Q

What is required for the beneficiaries to waive the trustee’s duty of confidentiality?

A

Beneficiaries must be fully informed of what the trustees intend to do with the information

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26
Q

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

A

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
  4. Keep investments under appropriate review
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27
Q

What is a trustee’s general power of investment?

A

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

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28
Q

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

A

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

29
Q

Why is there a distinction between land and other investments?

A

To ensure trustees have the power to deal in land in circumstances which might technically be outside the definition of investment

30
Q

What is not authorised concerning the purchase of land unless the trust instrument expressly provides for it?

A

Purchasing land outside the UK

31
Q

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

A
  1. Suitability of the investment in terms of time, cost, and risk
  2. The need for diversification of trust investments
32
Q

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

A

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

33
Q

Does the advisor have to be a qualified financial advisor?

A

No, just experienced in such matters

34
Q

When does the requirement to get advice not apply?

A

When the trustees reasonably conclude that it is unnecessary or inappropriate in the circumstances

35
Q

What is the statutory standard of care which applies when trustees are making investment decisions?

A

Act with such care and skill as is reasonable in all the cirumstances

36
Q

What was the traditional investment standard which is still relevant in applying today’s statutory standard?

A

Act as a prudent businessman would act if investing on behalf of a person for whom he felt morally obliged to provide

37
Q

What is a duty/power trustees may actually delegate, and what is required for this?

A

Trustees can delegate their duty/power to invest to an investment manager, as long as:

  • a written policy statement including details of the trust and
  • the investment objectives

is incorporated into the contract between the trustees and investment manager.

38
Q

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

A

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.

Although, consider whether trustee has adequately reviewed the investment!

39
Q

Must the trustees exercise the statutory powers of maintenance and advancement?

A

No, they are discretionary

40
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

What must the minor be entitled to for the powers of (1) maintenance and (2) advancement to apply?

A
  1. Power of maintenance: Interest in income required
  2. Power of advancement: Interest in capital required
41
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

What interests give an interest in income, and which give an interest in capital?

A
  • Interest in income comes from vested or contingent, but not remainder interest
  • Interest in capital comes from vested, contingent, or remainder interest
42
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

Why is income not payable directly to a minor?

A

Because a minor cannot legally receive money/trust property

43
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

However, whilst a minor has no right to directly be paid the income, what does the Trustee Act provide, and what are the conditions for this?

A

If a minor has a right to the income of a trust, the trustees can decide to use this income for the minor’s maintenance, education, or benefit until the minor turns 18

44
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

On the exam, on a question regarding maintenance powers, what is the first thing to look out for?

A

Whether the minor has a beneficial interest to begin with

45
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

In addition to income as it is generated, what else may the trustees use for the minor’s maintenance, education, or benefit?

A

Income which has accumulated in the trust

46
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

What occurs on the minor’s 18th birthday?

A

The power of maintenance concerning them ends, and they become entitled to the new income and accumulated income directly, as long as they have a vested interest

If vested, and they are the only beneficiary, the trust will end and they will be entitled to transfer of the property.

47
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

What is the minor’s entitlement upon turning 18, if they still have a contingent interest?

A

They are entitled to income arising after their 18th birthday only, but income accumulated before accrues to the capital of the trust

48
Q

POWERS OF MAINTENANCE AND ADVANCEMENT

Where a beneficiary’s contingent interest fails, what happens to the capital?

A

It passes under any substitutional gift in the trust instrument, of in there is none, trustees will hold on resulting trust for the settlor or their estate

49
Q

Can the settlor alter the operation of the power of maintenance in the trust instrument?

A

Yes

50
Q

Whilst there is no limit for trusts created after 1 October 2014, what was the test previously for how much income trustees could pay, in case it appears in a wrong answer choice?

A

The trustees could only pay income that was reasonable in all the circumstances

51
Q

POWER TO ADVANCE CAPITAL

As an aside, when does a trust in a will take effect?

A

Date of death

52
Q

When does the trustee’s discretionary power of advancement apply, and what are the limits on the advance?

A

When a beneficiary has a right to the capital of the trust, they can be advanced an amount up to what they are entitled

53
Q

On the exam, what should we look for if asked whether or why a payment out of capital to a beneficiary was a breach of trust?

A

Whether the beneficiary had a interest in capital

54
Q

What is the trustee’s discretion when the power of advancement applies?

A

Pay or apply capital sums for the beneficiaries’ advancement or benefit in their absolute discretion

55
Q

What are the three conditions on the power of advancement?

A
  1. Amount must not exceed entitlement
  2. Advance must be accounted for in final distribution
  3. Consent of prior interest holder required
56
Q

Who is the most likely person to have a prior interest and therefore object in an advancement of capital situation, and why?

A

A beneficiary with an interest in the income, because if the capital is depleted for the advance, the trustees have less capital to generate profit (income) with

57
Q

What is required of the beneficiary with a prior interest in order for advancement to be allowed?

A

They must be of full age and sound mind and give their written consent

58
Q

In an exam situation with a prior interest holder objecting to an advance, what should we actually check is the case?

A

Whether the objecting beneficiary’s interest is actually prior, e.g. if they all share the same interest, this is not prior

59
Q

Unlike the power of maintenance, what does the power of advancement not require?

A

Power of advancement applies whether the beneficiary is under or over 18, unlike maintenance which requires beneficiary to be a minor

60
Q

As a minor cannot give valid receipt of capital, how is the advancement to a minor achieved?

A

The capital is paid by the trustees directly for the required purpose

61
Q

Whilst there is no limit for trusts created after 1 October 2014, what was the percentage for how much capital trustees could advance, in case it appears in a wrong answer choice?

A

50% of the beneficiary’s entitlement

62
Q

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

A
  1. Right to compel exercise of duties, via court application
  2. Right to inspect trust documents
63
Q

What documents are the beneficiaries not entitled to inspect?

A

Documents containing details of the trustee’s discussions concerning exercise of their discretions

64
Q

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?

A

That it was irrational and capricious

65
Q

Are trustees required to give reasons for why they exercised their discretion in a particular way?

A

Generally, no

66
Q

In what situation may a trustee be required to provide an explanation to the beneficiaries regarding their exercise of discretion?

A

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

67
Q

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

A
  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)
68
Q

For the avoidance of doubt, what will not be an absolute interest, and why?

A

One which is contingent on anything, because the two powers effectively allow the beneficiary to take over the trust and either shut it down and have the property transferred to them or order the trustees be changed to parties who will do what the beneficiary wants. It would not be appropriate for a party with a contingent interest to be able to do this.

SQE1 - Trust Law (9 decks)

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