8. Trustees' duties, powers and liability

Question 1

What general duty is on trustees?

Answer 1

To act
- honestly and
- in good faith,
-for benefit of beneficiaries

Question 2

What is the difference between trustee duties and trustee powers?

Answer 2

Powers: authorised but not compulsory
Duties: mandatory

Question 2

How can trustees be appointed?

Answer 2

-No minor can be one
- No fixed number necessary (except for trusts of land where max is 4)
- Usually appointed by settlor and for testamentary trusts, may be named in will e.g. the executors may be named trustees as well

Question 3

What methods are there for appointing replacement trustees?

Answer 3

• Any express powers in trust instrument
• Beneficiaries exercising S v V rights
• Statutory powers
• The court
• Charity Commission for Charitable trusts

Question 4

In what circumstance does the general statutory power to appoint replacement trustees apply and who is it exercised by:

Answer 4

• death of trustee,
• trustee abroad for over 1 year,
• minor/lacks capacity,
• wants to retire/refuses/unfit
  Exercised by
• persons nominated in instrument or - surviving/continuing trustees
• If all trustees are dead, by PRs of last to die

Question 5

How do beneficiaries exercising S v V rights appoint a replacement trustee?

Answer 5

• In writing
• Cannot be used where instrument contains express power to appoint trustees

Question 6

When shouldn’t the court appoint a trustee?

Answer 6

Where there’s dispute between beneficiaries as to whether they’d be appropriate

Question 7

How can trustees be removed?

Answer 7

• Check trust instrument
• statutory powers
• Court can where trustee is bankrupt, lacks capacity or is a company in liquidation
• Charity Comission

Question 8

In what 2 ways can trustees retire?

Answer 8

1. Voluntary retirement
2. Direction of beneficiaries: in writing & all agree

Question 9

How can trustees voluntary retire?

Answer 9

• By deed
• Where at least 2 other people or 1 trust corporation are there to act as trustees
• Co-trustees & anyone else with power to appoint trustees consent
• Should also obtain formal discharge of liability from beneficiaries

Question 10

If a trustee is given a power of appointment, what kind of power is it, and the consequence? And if not a trustee?

Answer 10

Trustee = fiduciary power (don’t need to exercise but must consider doing so periodically)
Not Trustee = personal power (don’t need to consider exercising it)

Question 11

What words suggest a discretionary trust vs power of appointment?

Answer 11

Discretionary: ‘must’
Power: ‘may’

Question 12

What words suggest a discretionary trust vs power of appointment?

Answer 12

Discretionary: ‘must’
Power: ‘may’

Question 13

What are discretionary trusts?

Answer 13

Trustees must exercise discretion and do so within a reasonable time

Question 14

If trustees of a discretionary trust don’t exercise it, what can beneficiaries do (and not do)?

Answer 14

Can sue to enforce trust and ensure discretion is exercised
Cannot compel them to exercise it in their favour

Question 15

What trustee obligations are there for a discretionary trust?

Answer 15

• Consider range of possible beneficiaries
• Don’t require trustees to identify all people, just an appropriate survey of the class
• Is/Is Not Test: trustee must be able to say with certainty whether any given individual is a member of the class or not
• Requires conceptual certainty
• For evidential certainty, it’s for C to prove that they’re within the class

Question 16

What happens with a discretionary trust and a power of appointment where the class of objects is too wide?

Answer 16

Discretionary = void
Power = remains valid

Question 17

What is the trustees’ duty of care?

Answer 17

Must exercise such care and skill as is reasonable
- Consider any special knowledge/experience a trustee has
- Standard of care higher for professional trustees
- Doesn’t apply to all acts of a trustee

Question 18

What is the power of investment for trustees?

Answer 18

A trustee may make any kind of investment they could make if absolutely entitled to the assets
Have a duty to invest where necessary

Question 19

What must trustees do if they exercise the power to invest?

Answer 19

1. Consider standard investment criteria: (a) suitability (general & specific), and
   (b) diversification
2. Take advice (unless reasonably conclude not needed)
3. General duty of care

Question 20

What rules are there for taking advice when exercising power of investment?

Answer 20

They are not bound to follow the advice but can’t ignore it simply as they personally disagree with it - can only do so if a reasonably prudent trustee would do the same
Must obtain proper advice before exercising power & when reviewing instruments
Exception: don’t need to seek advice if reasonably conclude it’s unnecessary

Question 21

What is the power to acquire land?

Answer 21

Trustees have statutory power to acquire freehold or leasehold in UK (not overseas)
Can be done for investment or wider purposes
If done for investment, relevant criteria apply
Statutory DoC applies

Question 22

What is the power of delegation?

Answer 22

• Can delegate powers of investment and to acquire land, but cannot for distributive obligations
• Can’t delegate to beneficiaries
• Must be an appropriate agent, reviewed regularly with an agreement that complies with statute
• For investment, must be evidenced in writing

Question 23

What is the duty to distribute?

Answer 23

must pay as soon as possible

Question 24

What is the power of maintenance?

Answer 24

Where a minor has a vested (or contingent) interest in trust, trustees can pay income as they think fit
Can be paid to child/parent/guardian or applied directly for child’s ‘maintenance, education or benefit’
Income not paid out must be accumulated but can be paid out after - accumulated income added to capital when reaches 18
Must be used for primary benefit of minor

Question 25

What is the power of advancement?

Answer 25

A B who expects to receive capital from trust in future may wish to receive capital before it vests in possession
Can be used by both adult and minor B, vested or contingent interests
Trustees can pay up to 100% of entitlement before it vests at all but must get written consent of beneficiaries with prior interest, if they’re of age and of sound mind
Must be providing an immediate financial benefit, ensuring money is used for purposes it was provided for

Question 26

What different ways can a trustee commit a breach?

Answer 26

• acting outside powers
• failing to act in accordance with their duties
• Acting in breach of fiduciary duties

Question 27

Are trustees liable for breaches committed before their appointment?

Answer 27

No
But if they discover a breach, must commence proceedings otherwise could become liable

Question 28

Are trustees liable for breaches once they retire?

Answer 28

They are liable for breaches committed before they retired
Only liable for breaches that occur after where:
a) trustee retired to facilitate breach
b) trustee parts with property in retiring without due regard

Question 29

What remedies are there for breaches?

Answer 29

• Where trustee misapplied TP, can seek to recover property/TP
• If not possible to recover property or results in loss in trust value, seek compensation
• Trustees only liable for losses where their breach is a ‘but for ‘ cause

Question 30

How can trustees avoid liability for breaches/wrongful distribution?

Answer 30

• Advertising for claimants in national newspaper (after 2 months, they can distribute)
• Retaining fund or paying money into court
• Seeking court directions
• Benjamin order
• Taking out insurance against wrongful distribution

Question 31

How can trustee liability be excluded or limited?

Answer 31

1. Can have exclusion clause in instrument (not where breach is fraudulent)
2. Can rely on s61 TA 1925: gives court discretion to excuse trustee where they acted honestly and reasonably, and ought fairly to be excused
3. If they show they obtained fully informed consent or Bs acquiesced, operates as partial defence

Question 32

What limitation period is there for bringing a claim for breach of trustee duties?

Answer 32

6 years (for beneficiaries vested in possession)
Doesn’t apply for fraudulent breaches or proprietary claims

Question 33

How can trustees be protected from the outset?

Answer 33

• Ouster cause - trust deed removes duty
• Exemption clause - limits liability for breach
• Trustee liability insurances

Question 34

How can trustees be protected during administration?

Answer 34

• seeking directions
• s48 to rely on Counsel
• Surrendering discretion to the court
• Obtaining beneficiary consent

Question 35

What is the process for s.48?

Answer 35

• get written legal opinion
• apply to high court for authorisation to rely on that opinion

Question 36

How can trustees protect themselves from Unidentified beneficiaries?

Answer 36

• Benjamin Order
• s.27 Notice
• Retain funds to satisfy missing beneficiaries
• Pay money into court
• Insurance
• seek indemnity from known beneficiaries

Question 37

In what circumstances is a Benjamin Order used?

Answer 37

• know of existence of a beneficiary but can’t find them (assumes missing B is dead)

Question 38

What is a s.27 notice?

Answer 38

notice placed in:
- London Gazette
- Newspaper covering land involved
- other appropriate newspaper

Question 39

In what circumstances is a s.27 Notice used?

Answer 39

• protection against unknown beneficiaries