Chapter 11: Trustee Powers & Duties

Question 1

1. Introduction

Answer 1

This chapter explores the powers and duties of trustees. In order to understand the role of trustee, it is necessary to distinguish trustee powers from trustee duties.
(a) Trustee powers are permissive: They determine what a trustee may do. They are acts that are authorised but not compulsory.
(b) Trustee duties are mandatory: They determine what a trustee must do

Question 2

1. Introduction

Answer 2

Trustees also have a further set of duties which stem from the fiduciary nature of their relationship. Fiduciary duties control how trustees go about performing their role and are framed
in the negative. They are about what trustees must not do. Fiduciary duties are not just applicable to trustees. They apply to all fiduciaries and are covered in the chapter on ‘The fiduciary relationship

Question 3

1.1 Source of trustee powers and duties

1.1.1 Trust instrument

Answer 3

If the terms of the trust are contained in a written document (whether that’s a trust deed, will or something else) then that document (known as the ‘trust instrument’) is your first port of call.
The trust instrument may well contain express provisions setting out the powers and duties of the trustees. It is also important to check whether it expressly excludes or modifies any default statutory rules.

Question 4

1.1.2 Statute

Answer 4

Many trustee powers and duties have their basis in statute or common law and apply as default rules unless excluded, restricted or extended by the settlor.
The key statutes you need to be aware of for these purposes are:
* Trustee Act 1925 (‘TA 1925’)
* Trustee Act 2000 (‘TA 2000’)
In practice, you may also come across other legislation governing particular types of trust. A good example is pension trusts, which are subject to their own specialist legislation

Question 5

1.2 Categorising powers and duties

Answer 5

Although the precise powers and duties of trustees will vary depending on the particular trust, they can be divided into two broad categories:
(a) Administrative powers and duties, which relate to the management of the trust property while it is held on trust; and
(b) Dispositive (or ‘distributive’) powers and duties, which relate to the distribution of trust property in accordance with its terms.

Question 6

1.2.1 Administrative powers

Answer 6

The primary duty of a trustee is to comply with the terms of the trust. While the property is held on trust, their role is custodial in nature. They have an obligation to safeguard the trust property. In many cases, this will mean that the trustees have an obligation to ensure that the trust fund
produces income and capital growth ie a duty to invest.

Question 7

1.2.1 Administrative powers

Answer 7

Trustees therefore have administrative powers which enable them to carry out this function. It is common for trustees to have a power of investment, which is designed to produce income for the
trust. They will typically also have broader powers to buy and sell property (which they might need to do for a range of reasons). They may also have the power to raise money by charging
existing trust property. Trustees commonly also have powers to delegate some of their functions, including their investment powers.

Question 8

1.2.1 Administrative powers

Answer 8

Trust instruments will usually contain express administrative powers but, if not, there are default powers in TA 2000. It is important to check whether these rules have been amended or excluded.
These rules are considered in detail later in this chapter. Administrative powers relate to the management and protection of the trust property while it is held on trust. They do not affect the beneficial interest arising from the trust.

Question 9

1.2.2 Administrative duties

Answer 9

These administrative powers are typically curtailed by associated duties. Trustees have a duty to exercise their administrative powers in accordance with a prescribed standard of care and skill. They are also usually required to comply with specific rules when exercising their powers.

Question 10

1.2.3 Dispositive duties

Answer 10

Dispositive duties relate to the distribution of the trust property to beneficiaries or other objects. They therefore affect the beneficial interest arising from the trust. As a basic rule, trustees are required to distribute the trust property in accordance with the terms of the trust.

Question 11

1.2.3 Dispositive duties

Answer 11

In some cases they are required to accumulate income and add it to the trust capital, to be paid out along with the capital when the capital vests in possession. In other cases, they are required to distribute income as it arises but continue to hold the trust capital until it is time to distribute it to the beneficiary.

Question 12

1.2.4 Dispositive powers

Answer 12

Trustees will also often have dispositive powers which give them the ability to distribute income or capital. An example we have already come across is a power of appointment, which is more flexible than a discretionary trust because the trustees do not have to exercise it at all.

Question 13

1.2.4 Dispositive powers

Answer 13

Trustees also commonly have powers of maintenance (allowing them to apply trust income to maintain minor beneficiaries) and/or powers of advancement (allowing them to pay some or all of the trust capital before a beneficiary’s interest vests in possession). These rules are considered in detail later in this chapter.

Question 14

1.3 Breach of trust

Answer 14

There is a clear relationship between powers and duties. Trustees may only act within their powers. When exercising those powers, they are subject to
duties which relate to the proper exercise of the powers.

Question 15

1.3 Breach of trust

Answer 15

A trustee will breach the trust if they either act outside their powers or fail to comply with their duties. Examples of breach of trust therefore include making an unauthorised investment, failing
to act in accordance with their duty of care when making an investment and distributing property to someone who is not a beneficiary. Breach of trust is considered in more detail in the chapter on ‘Liability of trustees’.

Question 16

1.4 Breach of fiduciary duty

Answer 16

It is important to be able to distinguish fiduciary duties from trustee duties because breach of fiduciary duty is a different cause of action with different consequences to a breach of trust.

Question 17

1.4 Breach of fiduciary duty

Answer 17

A trustee might also breach their fiduciary duties, whether or not they have breached the trust. In some cases, a trustee may be liable for breach of fiduciary duty even though they have done everything right in terms of their trustee duties and seemingly caused no harm to the trust fund. An example is a trustee who uses their powers of investment to benefit both the trust fund and themselves (perhaps by investing in their own business). Although the investment might be a good one for the trust, the trustee may still have breached their fiduciary duties by putting themselves in a position of conflict or by personally profiting from the opportunity.

Question 18

Fiduciary duties

Answer 18

Are considered in the chapter on ‘The fiduciary relationship’.

Question 19

2 Administrative powers and duties

2.1 Introduction to administrative powers

Answer 19

Many express trusts confer extensive administrative powers on trustees. These powers are often
set out in the trust instrument.
In the absence of such express powers, there are default powers set out in the Trustee Act 2000
(TA 2000). The Act also sets out the duties that apply to the exercise of those powers. These powers and associated duties can be excluded or modified by the settlor.
In this section we will explore the following statutory powers and associated duties:
* General power of investment (s 3 TA 2000)
* Power to acquire land (s 8 TA 2000)
* Power of delegation (s 11 TA 2000)

Question 20

2.2 General power of investment (s 3 TA 2000)

Answer 20

Section 3 TA 2000 sets out the general power of investment. Under this provision, a trustee may
make any kind of investment that they could make if they were absolutely entitled to the assets of
the trusts.
When exercising the general power of investment, trustees must:
* Consider the standard investment criteria set out in s 4 TA 2000
* Take advice in accordance with s 5 TA 2000
In carrying out these functions, trustees must act in accordance with the general duty of care set
out in s 1 TA 2000. This duty can be excluded, restricted or extended by the terms of the trust
instrument (Sch 1 TA 2000).

Question 21

2.2.1 Standard investment criteria

Answer 21

The standard investment criteria are found in s 4 TA 2000. Trustees must consider the criteria when deciding whether to make an investment (s4(1)) in the first place. Trustees also have a duty
to regularly review investments with reference to the standard investment criteria and decide
whether they ought to be varied.

Question 22

There are two key components to the criteria:

Answer 22

(a) Suitability (s 4(3)(a)): Trustees must consider the suitability of the proposed investments. There are two key questions to consider:
- General suitability: Is the investment of a suitable kind?
- Specific suitability: Is the particular investment suitable?

Question 23

Diversification

Answer 23

(b) Diversification (s 4(3)(b)): Trustees must also consider the need for diversification of trust
investments. The extent to which diversification is needed will depend on the size and nature
of the particular trust.

Question 24

Suitability

Answer 24

The question of suitability will be highly fact-specific. A suitable investment for one trust fund may
be entirely unsuitable for another. In considering this question, trustees must balance the duty to
preserve the trust assets against the need to produce appropriate growth on the investment.

Question 25

Key issues that trustees will need to consider when assessing suitability include:

Answer 25

• The size of the trust fund
• The period of time for which the trust is intended to subsist
• The respective rights of different beneficiaries

Question 26

Key issues that trustees will need to consider when assessing suitability include:

Answer 26

The trustees of a large, commercial trust fund which is intended to subsist for many years will
have a greater degree of freedom to invest in assets which are intended to produce long-term
growth, compared to the trustees of a small family trust which is only intended to last for a short
period of time. If the family trust includes both life and remainder interests, the trustees will also need to ensure that any investments produce income for the life tenant as well as capital growth for the
remainderman. Trustees must act even-handedly between beneficiaries.

Question 27

Key case: Cowan v Scargill [1985] Ch 70

Answer 27

Cowan itself involved a pension trust for British coalmine workers. Although such investments were
permitted by the terms of the trust, the trustees wanted to adopt a policy of refusing to invest in oil or overseas. This decision was said to be made on the basis of principle and in accordance with the policy of National Union of Mineworkers (representatives of whom made up half of the pension trust management committee).

Question 28

Key case: Cowan v Scargill [1985] Ch 70

Answer 28

The court disagreed with this policy. The obligation of the trustees was to produce the best financial return for the trust fund, in order to preserve the value of the pensions of the current and future members of the pension scheme.

Question 29

Key case: Cowan v Scargill [1985] Ch 70

Answer 29

I find it impossible to see how it will assist trustees to do the best they can for their beneficiaries
by prohibiting a wide range of investments that are authorised by the terms of the trust. Whatever the position today, nobody can say that conditions tomorrow cannot possibly make it advantageous to invest in one of the prohibited investments. It is the duty of trustees, in the interests of their beneficiaries, to take advantage of the full range of investments authorised by the terms of the trust, instead of resolving to narrow that range.

Question 30

A key case on investment is Cowan v Scargill [1985] Ch 70, which sets out the following principles:

Answer 30

(a) When considering the suitability of trust investments, the trustee obligation to act in the best
interests of beneficiaries means their best financial interests.
(b) The trustees must balance the interests of all beneficiaries (current and future).
(c) The personal views of the trustees are not relevant to this assessment. Trustees must exercise
their powers fairly and honestly, and not for any ulterior purpose.

Question 31

A key case on investment is Cowan v Scargill [1985] Ch 70, which sets out the following principles:

Answer 31

(d) Although the ‘best interests’ of the beneficiaries could be construed more widely in some
cases, allowing trustees to take into account moral and ethical concerns (such as in cases where all beneficiaries are adults of sound mind who share those concerns and would not wish to benefit from an investment they consider immoral or unethical) this will be extremely rare in practice.
(e) Although trustees are not bound to follow the advice they receive on investments, they cannot
ignore it simply because they personally disagree with it. They can only do so if they consider
that a reasonably prudent trustee would act in the same way.

Question 32

Diversification

Answer 32

The requirement to consider diversifying the trust investments reflects the principles of modern
portfolio theory.

Question 33

Diversification

Answer 33

This involves taking an overall approach to the risk profile of the trust fund rather than considering
each investment on an individual basis. It allows trustees to invest in a mixture of high and low risk
investments, rather than investing exclusively in low risk (and therefore probably low yield)
investments. Trustees should also invest across a range of different types of assets, so that the trust fund is not overly exposed to the risks of losses in a particular sector.

Question 34

Diversification

Answer 34

Again, the extent to which trustees can diversify the investments will depend on the size and nature of the trust fund, with larger funds able to spread their investments across a wider range of assets. Smaller trust funds may not be able to diversify in the same way but the trustees may consider investing in investment funds, which pool the assets of multiple investors and allow them to obtain the benefits of diversification.

Question 35

Qualifications to general principles

Answer 35

Although moral and ethical considerations will not generally be relevant to trustee decisions, this
does not stop trustees preferring ethical investments if they have a straightforward choice between two investments of economical equivalence. As we have already seen, the trustees can also take into account the ethical views of beneficiaries, where the beneficiaries are all of sound
mind and agree on the decision.

Question 36

Qualifications to general principles

Answer 36

There is also more scope to take non-financial considerations into account in the case of charitable trusts. In particular, charitable trustees may refrain from making investments which might conflict with the aims of the charity or hamper its work. For example, trustees of a cancer research charity would not be expected to invest in the tobacco industry, even if this was the most profitable investment available.

Trustees can also consider whether making ethically questionable
investments is likely to undermine the work of the charity (eg by deterring potential donors from
supporting the charity). Trustees would be required to balance the risk to the charity of financial
loss from not making the investment against the detriment and disadvantages to the charity of
making the investment.

Question 37

2.2.2 Advice (s 5 TA 2000)

Answer 37

Under s 5 TA 2000 trustees are required to obtain and consider ‘proper advice’ before exercising
their powers of investment (s 5(1)) and when reviewing their investments (s 5(2)). The advice must relate to how the power should be exercised, with reference to the standard investment criteria.
‘Proper advice’ is defined in s 5(4) as being provided by a person ‘who is reasonably believed by the trustee to be qualified to give it’ by their ‘ability in and practical experience of financial and other matters relating to the proposed investment’.

Question 38

2.2.2 Advice (s 5 TA 2000)

Answer 38

There is an exception set out in s 5(3) which provides that trustees need not seek advice if they
reasonably conclude that in all the circumstances it is unnecessary to do so. This will depend on
the circumstances but might, for example, include situations where the cost of the advice
outweighs the benefit of obtaining it or cases where the trustee has sufficient knowledge and
expertise to make the decision without advice.

Question 39

2.3 Statutory duty of care (s 1 TA 2000)

Answer 39

The statutory duty of care is found in s 1 TA 2000 and requires trustees to ‘exercise such care and skill as is reasonable in the circumstances’.
* Section 1(1)(a) requires the assessment to take into account ‘any special knowledge or
experience’ that a trustee has or holds themselves out as having.
* Section 1(1)(b) applies to professional trustees and requires the assessment to take into account
the any ‘special knowledge or experience’ that it is reasonable to expect of a person acting in
that capacity.

Question 40

2.3 Statutory duty of care (s 1 TA 2000)

Answer 40

In other words, the standard of care is always higher for professional trustees, because they are
being paid to provide a service.
It is also raised for lay trustees who may have been appointed on the basis of having (or purporting to have) particular skills that would make them desirable trustees.
This is why it is important for individuals to think carefully about whether to accept the role of
trustee, as their actions will be assessed objectively. The statutory duty of care does not apply to all acts of a trustee, but only to those set out in Sch 1 TA 2000.

Question 41

Common law duty of care

Answer 41

There is also a common law duty of care which applies more widely. Broadly, it requires trustees to exercise the standard of diligence and care expected of an ordinary prudent businessperson. Case law on investment predating the TA 2000 applies the common law duty of care. It is generally considered that there is no difference between the two standards (with the TA 2000 codifying the duty of care in certain circumstances). Earlier case law therefore remains useful in
assessing whether a trustee has complied with the statutory duty of care.

Question 42

2.4 Acquisition of land (s 8 TA 2000)

Answer 42

Section 8 TA 2000: Trustees have a statutory power to acquire freehold or leasehold land in the UK
(but not overseas). This power may be exercised for investment purposes but also more widely
(including for occupation by a beneficiary). If the land is acquired for investment purposes, the trustees must consider the standard investment criteria and take advice in accordance with ss 4 and 5 TA 2000 respectively.
The statutory duty of care applies to all trustee powers to acquire land, whether they arise under
s 8 or otherwise, and whether the land is acquired for investment or other purposes.

Question 43

2.5 Delegation (s 11 TA 2000)

Answer 43

Section 11 TA 2000 provides trustees with broad powers of delegation. Although there are some functions which trustees cannot delegate (such as their distributive obligations) they are
permitted to delegate their powers of investment and powers to acquire land. There are restrictions on the persons to whom powers may be delegated (s 12). Crucially, trustees cannot delegate decisions to beneficiaries (even if they are also trustees).

Question 44

2.5 Delegation (s 11 TA 2000)

Answer 44

Trustees cannot delegate their investment powers except by an agreement evidenced in writing (s
15 TA 2000). This agreement should include a term ensuring compliance with a written ‘policy statement’ to be prepared by the trustees. The ‘policy statement’ should give guidance as to how the agent should exercise their functions ensuring they are in line with the best interests of the beneficiaries.

Question 45

2.5 Delegation (s 11 TA 2000)

Answer 45

The agent to whom the function is delegated is bound by any restrictions on the exercise of its
investment powers in the same way the trustee would be (s 13(1) TA 2000). There are two primary reasons why a trustee might wish to delegate their functions:
(a) The trustee may be incapable of discharging their duties for a limited period.
(b) The trustee lacks the expertise to discharge the particular responsibility and prefers to have
an expert do this.

Question 46

2.5 Delegation (s 11 TA 2000)

Answer 46

There are two primary reasons why a trustee might wish to delegate their functions:
(a) The trustee may be incapable of discharging their duties for a limited period.
(b) The trustee lacks the expertise to discharge the particular responsibility and prefers to have
an expert do this.

Question 47

2.5 Delegation (s 11 TA 2000)

Answer 47

Trustees are required to comply with the statutory duty of care both with respect to selecting agents and entering into agreements with those agents.
As such the trustees should ensure:
* An appropriate agent is selected for the function
* The agreement complies with their requirements under statute
* The arrangement is reviewed regularly If trustees comply with their duties when exercising the power of delegation, they will not be vicariously liable for any loss caused by the agent acting negligently.

Question 48

2.6 Summary