Chapter 17 Establishing and managing a trust Flashcards
17.2 Initial considerations on setting up a trust
Trusts should be given maximum flexibility. Trustees are often given power to exclude beneficiaries or add new ones as circumstances may change and to allow the trust instrument to be flexible. It is important to be aware of legal limitations affecting the property and where other assets are involved.
17.3 Essential elements for creating an express private trust
In order to create an enforceable express private trust, the three certainties of intention, subject matter and object must be present. Certainty of intention – the words used by a settlor do not need to be formal but must be imperative and not precatory, they must not just express a hope or wish. They must clearly indicate that the settlor intends for the property to be held in a trust. If there is no clear intention to create a trust, the recipient can take the trust property as a gift for their own personal benefit, free from the trust. Certainty of subject matter – the property must be identified precisely. The trust is sometimes commenced with a nominal amount and at a later stage other asset are added by transfer to the trustees. It also requires the interests of the beneficiaries must be ascertainable, so it is known how the beneficiaries enjoy the property. Certainty of objects – the settlor must identify or provide the means of identifying the persons whom the trustees are to regard as the beneficiaries of the trust. The description of the beneficiaries should be neither conceptually nor evidentially uncertain. A trust may not be set up for an unborn child, but it is possible to settle the trust once the child is born and to provide the unborn child will join the class of beneficiaries once born. The trust deed often allows trustees the power with or without the consent of the settlor to add new beneficiaries.
17.4 Formalities for creating an express private trust
Express private trusts are usually created in writing by deed, but they can be created orally. No formal requirements need to be observed for an express trust of property other than land. It may be necessary to provide evidence of the terms, but a lack of a written deed will not make it invalid. Trusts of estates or interests in land must be evidenced in writing and signed by the settlor, or by declaration of trust signed by the trustees. The settlement of existing trust interests on trusts must also be in writing and signed.
A non-charitable trust cannot run indefinitely, known as the law against perpetuities. A trust settled after 6 April 2010 cannot last for more than 125 years (this rule does not apply in Scotland). When the period expires the trustees must bring the trust to an end by transferring the trust property to the remainderman to hold absolutely.
17.5 Complete constitution of the trust
A trust is constituted when the legal title to the trust property is transferred to the trustees. The trust is then irrevocable unless there is an express power of revocation in the trust. The beneficiary obtains an enforceable interest as against the trustees. A completely constituted trust may be formed in two ways:
• There is a transfer of the trust property by the settlor to the trustees, so they hold the legal title. Common law does not vest unless the formalities of governing the transfer are satisfied in detail. Equity recognises this when the settlor has done everything in their power to transfer the property even if the law requires a task from a third party
• The settlor may declare they hold the property on trust for beneficiaries. As they are already the owner there is no need for transfer and the trust is constituted on its valid declaration
17.6 Appointment of trustees
The office of trustee – anyone sound of mind can be a trustee. A minor can be a trustee depending on the nature of the property. Minors cannot act as a trustee of a trust of land. A person not UK resident or a company can act as a trustee. There is no maximum or minimum number of trustees, however if land is settled in the trust, there must be at least two trustees. But if the trustee is a trust corporation, they can settle a land trust on their own. Only the first 4 named trustees become the trustees of the land as legal ownership of land is limited to 4. Trustees can disclaim appointment.
Appointment and removal of trustees – the settlor normally appoints the first trustees in the trust deed or will. The settlor only has the power to appoint new trustees if the trust deed gives them powers of appointment. the existing trustees have statutory powers to appoint new trustees and replace existing ones. This may be exercised to replace a deceased trustee or one that remains outside the UK for more than 12 months.
Beneficiaries have statutory power to appoint new trustees where no one person is expressly nominated in the trust deed to appoint trustees, this power can be excluded in the trust instrument. The court can appoint new trustees in certain circumstances. The office of trustee can be ended by disclaimed, death, retirement or removal. The court can remove a trustee who takes up resident abroad, is unfit to act, becomes bankrupt or behaves improperly.
17.7 Trustees’ powers and duties
Power of maintenance – only applies to minor beneficiaries. Trustees can exercise this by making payments out of the income of the trust for the maintenance. It covers any expenditure that is non-capital in nature for the benefit of the beneficiaries. the trustees are usually authorised to make payments to a parent or guardian for the purposes of which the trustees approve.
Before they exercise their power, they must make sure the income of the trust can be used to maintain the minor beneficiary, called the immediate income of the trust, the power may not be exercised where there is a prior interest in the trust income. The trustees must exercise a discretion and are required to take account of the minor’s age and requirements. Any income not used for maintenance is added to capital during the minority of a beneficiary and that becomes available to the minor at 18, unless the deed states otherwise.
Power of advancement - this applies to the trust’s capital to a beneficiary of any age who is entitled to a share but before the time they are entitled to call upon the ownership of the capital to them. The purpose must be a recognised one.
In exercising the power trustees must exercise a discretion but the total amount must not be greater than the beneficiaries presumptive share and on any future distribution of trust capital, the advance must be set off against the amount the beneficiary is entitled to. If beneficiaries have a conditional interest that fails after they receive an advancement, they do not have to return the advanced amounts.
Duties – they must act in the best interests of the beneficiaries and not blindly follow the suggestions or orders of the settlor if they do not benefit the beneficiaries. Some specific duties include:
• To act within the scope of their powers
• To protect the trust property
• To invest the trust property
• To act impartially as between beneficiaries
• To keep true and accurate accounts
• To distribute income and capital to beneficiaries as they become due
• Not to profit personally from the trust
• Not to purchase property from the trust
17.8 Payments for trustee services
Trustees can receive reasonable remuneration for their services. A deed can include a cause allowing trustees to charge for time spent on the work as part of their profession and a corporate trustee to charge fees in accordance with its standard scale.
17.9 Variation of trust
Generally, a completely constituted trust is irrevocable and the terms of the trust are not variable except in accordance with the terms of the trust instrument or in accordance with well-defined statutory or legal principles.
Under the case Saunders v Vautier, where all beneficiaries have indefeasible vested interests, they can collectively agree to vary the terms of the trust or to bring it to an end.
The trustees clone cannot vary a trust, but the trust document can give them specified powers to vary the terms of the settlement.
The trust can be varied on application of the court. The court must be satisfied the variation is for the benefit of beneficiaries who cannot give their own consent. But the court cannot intervene if a beneficiary who is sui juris and has a vested interest, refuses to agree to the variation. The role of the court is confined to giving consent on behalf of those not in a position to do so themselves.
17.10 Breach of trust
Trustees are personally liable for any loss suffered by the trust and for any breaches of contract, although they have the right to be indemnified out of the trust property. They are personally liable to the beneficiaries for profits gained from breach of trust or loss caused to the trust.
A breach of trust arises where trustees fail to carry out their duties in accordance with the terms of the trust instrument or because they exercise their powers improperly. Where a trust suffers a loss, the beneficiaries have two remedies available:
• Recover trust property that still exists and is identifiable. However, property cannot be recovered from a bona fide purchaser for value who does not have notice that it was received in breach of trust
• They can claim damages from the trustees, who are personally liable for any loss not recovered through an action to recover trust property.
