7. Trustees' Duties and Powers

Question 1

What are a trustee’s eleven duties?

Answer 1

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 2

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 2

Hold it on constructive trust for the trust beneficiaries

Question 3

When does this rule [to hold money received from office received by virtue of role as trustee on constructive trust for the trust] not apply?

Answer 3

If the trustee would have gotten the paid appointment anyway

Question 4

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?

Answer 4

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

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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

Question 7

What remuneration may a trust corporation receive?

Answer 7

Reasonable remuneration, even if they are the sole trustee

Question 8

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

Answer 8

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

Question 9

The duty not to self-deal prevents a trustee (or their sole-owned company, or part-owned company with a controlling interest) from purchasing trust property. What is the full extent of this prohibition?

Answer 9

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

Question 10

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

Answer 10

Voidable by the beneficiaries

Question 11

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

Answer 11

The court

Question 12

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

Answer 12

‘Faird dealing’: A beneficial interest to this property from a beneficiary, but this is voidable if trustee can’t prove that they took no advantage, made full disclosure, and transaction was fair and honest

Question 13

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

Answer 13

Trustee must show they:

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

Question 14

What are five further equitable duties on a trustee?

Answer 14

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 15

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

Answer 15

1. Statutory under the Trustee Act
2. Case law

Question 16

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

Answer 16

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 the agents

Question 17

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

Answer 17

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

Question 18

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

Answer 18

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 all their duties. However, in playing their respective parts, the trustees must act unanimously in the exercise of their discretions.

Question 19

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

Answer 19

Clause in the trust instrument or court authorisation

Question 20

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

Answer 20

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

Question 21

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

Answer 21

Exercise of discretion

Subject to power of attorney 12 month exception

Question 22

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

Answer 22

No

Question 23

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

Answer 23

Yes

Question 24

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

Answer 24

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 25

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

Answer 25

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

Question 26

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

Answer 26

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

Question 27

What is a trustee’s general power of investment?

Answer 27

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

Question 28

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

Answer 28

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

Question 29

Why is there a distinction between land and other investments?

Answer 29

To ensure trustees have the power to deal in land in circumstances which might technically be outside the definition of investment (eg. for beneficiary’s residence). Remember land can only be bought in UK

Question 30

What is not authorised [re: land purchases] unless the trust instrument expressly provides for it?

Answer 30

Purchasing land outside the UK

Question 31

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

Answer 31

1. Suitability of the investment in terms of time, cost, and risk (and types of beneficiaries ie. life vs remainder)
2. The need for diversification of trust investments

Question 32

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

Answer 32

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

Question 33

Does the advisor have to be a qualified financial advisor?

Answer 33

No, just experienced in such matters

Question 34

When does the requirement to get advice for investments not apply?

Answer 34

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

Question 35

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

Answer 35

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

Question 36

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

Answer 36

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

Question 37

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

Answer 37

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

Question 38

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

Answer 38

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 39

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

Answer 39

No, they are discretionary

Question 40

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

Answer 40

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

Question 41

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

Answer 41

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

Question 42

Why is income not payable directly to a minor?

Answer 42

Because a minor cannot legally receive money/trust property

Question 43

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?

Answer 43

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

Question 44

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

Answer 44

Whether the minor has a beneficial interest to begin with

Question 45

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

Answer 45

Income which has accumulated in the trust

Question 46

What occurs on the minor’s 18th birthday?

Answer 46

The power of maintenance concerning them ends, and they become entitled to the new income as it arises 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.

Question 47

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

Answer 47

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

Question 48

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

Answer 48

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

Question 49

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

Answer 49

Yes

Question 50

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?

Answer 50

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

Question 51

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

Answer 51

Date of death

Question 52

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

Answer 52

When a beneficiary (adult or minor) has a right to the capital of the trust (vested or contingent), they can be advanced an amount up to 100% of their entitlement

Question 53

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?

Answer 53

Whether the beneficiary had a interest in capital

Question 54

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

Answer 54

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

Question 55

What are the three conditions on the power of advancement?

Answer 55

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

Question 56

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

Answer 56

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

Question 57

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

Answer 57

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

Question 58

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

Answer 58

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

Question 59

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

Answer 59

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

Question 60

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

Answer 60

The capital is paid by the trustees directly for the required purpose (or, less desirably, to their parents, who will need monitoring to check they don’t misuse)

Question 61

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

Answer 61

50% of the beneficiary’s entitlement

Question 62

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

Answer 62

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

Question 63

What documents are the beneficiaries not entitled to inspect?

Answer 63

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

Question 64

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 64

That it was irrational and capricious

Question 65

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

Answer 65

Generally, no

Question 66

In what situation may a trustee be required to provide an explanation for their decision-making to the beneficiaries?

Answer 66

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 67

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 67

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 68

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

Answer 68

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.