Module 6 - TRUSTS and Trustees

Question 1

Does Scots law recognise the doctrine of legal and equitable estates?

Answer 1

NO

Question 2

2 classifications of a trust - what are they?

Answer 2

Private & Public Trusts

Question 3

What is a Private Trust

Answer 3

the benefit is intended for individuals, and so the Trust cannot continue indefinitely.

Question 4

What is a Public Trust

Answer 4

The benefit is intended for the public or a section of the public, and so can continue indefinitely.

Question 5

What is the difference between public and charitable trust

Answer 5

None - they are public trusts - just the INland Revenue must accept them as being charitable trust.

Question 6

To be a Charitable Trust the Inland Revenue must be satisfied that the Trust is for one of the following purposes

Answer 6

• The relief of poverty
• The advancement of education
• The advancement of religion
• Other purposes beneficial to the community in a way recognised as charitable.

Question 7

Private Trusts can be classified as

Answer 7

Mortis Causa Trust (in consideration of death)

Inter Vivos Trust (among the living)

Question 8

Mortis Causa Trust is set up usually in

Answer 8

A Trust Disposition and Settlement (T.D. & S) - an elaborate Will setting up the Trust.

Question 9

Example of a Mortis Causa Trust

Answer 9

A wishes to transfer a liferent (ie life tenancy) to the Spouse B, and when B dies (or perhpas remarries or revokes the liferent in whole or in part) the estate (or “fee”) passes to x & Y , their children, who are known as the “liars”.

Question 10

An INTER VIVOS Trust is set up

Answer 10

By a living person in a Trust deed and is usually a discretionary Trust set up to remove part of the Truster’s Estate and to put it in charge of Trustees - usually for children or grandchildren. The Trustees have the power to accumulate income, and to pay the proceeds to the beneficiaries at a specified age, or earlier for certain purposes - eg education or marriage.

Question 11

An inter vivos trust may also be set up for charitable purposes or in contemplation of Marriage. What is the name for such a marriage trust

Answer 11

A Marriage Contract Trust.

Question 12

Charitable Trust since 2006 is regulated by

Answer 12

Scottish Charities Regulator

Question 13

Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 came into force on

Answer 13

29th July 1992

Question 14

What does it require of Charities

Answer 14

To produce annual accounts and to provide a statement of their pupose. Members of the public may as a matter of right obtain copies of these documents from the charity on payment of the appropriate fee.

Question 15

What does it permit the INland Revenue to do

Answer 15

To disclose whether a body is recognised by them as a Charity

Question 16

Who can represent themselves to the public as a charity

Answer 16

Only those charities recognised by the IR or the Scottish Chartities COnmmission (or its English Equivalent.

Question 17

Criminal Law and the Law Reform Miscellaneous Provisions) (Scotland) Act 1990

Answer 17

The Lord Advocate can investigate alleged misconduct and mismanagement of charities.

It is a criminal offence for persons convicted for dishonesty, undischarged bankrupts, and persons disqualified under the 1990 Act, to be involved in the running of charities.

Question 18

THe Office of the Scottish Chartieis Regulator (OSCR) was set up by which Act?

Answer 18

The Charities and Trustee Investment Powers (Scotland) Act 2005.

Question 19

Do the Inland Rev & the OSCR apply the same test for “charitable status”?

Answer 19

NO - best to check with both first that Charitable Status will be given as it is possible for HMRC to bestow this status but not OSCR which can cause real difficulties.

Question 20

A Marriage Contract Trust

Answer 20

Largely historical - it provides an alimentary benefit to one spouse and places the Fund beyond the creditors of the other spouse. Used to be set up for daughters so that neither the husband or his creditors would be able to touch the money.

Question 21

what does “alimentary” mean

Answer 21

enough income to keep body and soul together.

Question 22

Pension Fund Trust

Answer 22

Is another form of trust - where eer and ee make contributions to the Trust which is set up to pay Pensions to Eees. Trust must meet approval of IR.

Question 23

The TRUST DEED - what is in the Narrative

Answer 23

1. who the granter is
2. what the granter is intending to do
3. it appoints Trustees
4. It gives the Trustees the power to appoint new Trustees
5. It directs that a majority and quorum of Trustees can sign deeds and act generally for the Trust (in line with the Trusts (Scotland) Act 1921 s 3(c) which provides tha a majority may act, unless the Trust Deed provides differently, which would be unusual.

Question 24

What does the Operative Clause of Trust Deed do?

Answer 24

It transfers the Trust property to the Trustees and states what are the purposes of the Trust.

Question 25

The purposes of the Trust must not be

Answer 25

vague - “The test is whether a trustee, approaching the matter with proper care and properly advised, would be able to carry such an instruction out” (Hood v Macdonald’s Trustees 1949)

too wide - “The testator must make his will for himself. He cannot leave it to trustees to make a will for him. He must define and identify sufficiently in his will the objects which he wishes to benefit. The underlying reason is that trustees should be able to select within certain defined limites instead of being given an unlimited discretion.” (Rintoul’s Trustees v Rintoul

illegal - eg a trust to finance criminal activities or in the civil law sense - if it sought to evade the law against successive liferents or accumulations of income.

immoral - ie not illegal but against morality as defined from time to time/in the circumstances.

against public policy - eg McCaig v The Uniiversity of Glasgow putting up statues or artistic towers etc.

Question 26

Powers and Duties of Trustees are written under the

Answer 26

Are then contained in the ancilliary clauses - so first narrative clause, 2nd operative clause and then the ancilliary clauses.

Question 27

The powers and duties of trustees are mainly laid down by

Answer 27

Common Law and Statute - but the Truster may wish to extend on these.

Question 28

Duties of Trustees are: (7)

Answer 28

1. To ingather the Estate

2 To pay Debts owed by the Deceased

3. To make decisions for the benefit of the beneficiaries which should always be made after taking the appropriate professional advice, otherwise the Trustees may be personally liable for any loss suffered by beneficiaries.
4. To keep accounts
5. To invest the estate

6 To distribute the estate at the appropriate time or times

7 To account to the beneficiaries for their actings.

Question 29

The statutory powers of Trustees are contained in:

Answer 29

s4 of the Trusts (Scotland) Act 1921

Question 30

S4 the Trusts (Scotland) Act 1921 (17)

Answer 30

(over 3 slides)

The trustees have power without further authorisation to:

1. sell the trust estate, whether heritable or moveable.
2. to grant feus of heritable property
3. to grant leases of any length
4. borrow money on securiity of any trust assets, heritable or moveable
5. to excamb (ie exchange) heritable property
6. To acquire residential property for the use of a beneficiary.

Question 31

S4 the Trusts (Scotland) Act 1921 continued

Answer 31

7. appoint factors and law agents and pay them
8. discharge Trustees who have resigned
9. Uplift discharge or assign debts
10. compromise all claims against the Trust
11. refrain from doing diligence for a debt owed to the Trust

12 to grant all necessary deeds

13 to pay debts

14 to make abatement or reduction of sums owing to the estate

Question 32

S4 the Trusts (Scotland) Act 1921 continued

Answer 32

15 repay heritable debts

16 concur in certain Company operations - eg reconstruction of the company

17 subscribe for Company securities

Question 33

To clarify a power, check an act is permitted by them or to widen powers, the Trustee can

Answer 33

petition the Court of Session for authority. s5 the Trusts (Scotland) Act 1921

Question 34

The Trust (Scotland) Act 1961 protects

Answer 34

Trustees and parties dealing with them - eg if a 3rd party buys from Trustees, that party is protected if the act is at variance with the trust purposes.

Question 35

The Trustee Investments Act 1961

Answer 35

permits Trustees (and Executors) to invest at least part of the estate (the wider range) in “blue chip” shares, even where the deed is silent. In fact, wide investment powers will probably be given in the Trust Deed.

Question 36

The introduction of the Charities and Trustee Investment Powers (Scotland) Act 2005 largely free dup the powers of trustees…how

Answer 36

Trustees have powers of investment in virtually every form of investment save where this conflicts with the purposes of the Trust Deed itself.

Question 37

Prohibitions on Trustees

Answer 37

1. A trustee must not be “auctor in rem suam” - ie actor in his own cause. - Strictly interpreted and enforced.

Question 38

Auctor in rem suam, involves 3 main aspects - what are they?

Answer 38

1. A Trustee is not entitled to transact with the trust estate unless authorised to do so in clear and specific terms by the Will or Trust Deed. - eg buy from the trust, sell their own property to the trust, borrow money from the trust, lend money to the trust. This applies even if the Trustee steps away from the actual decision making process of his co-trustess and even if the proposed transaction would be to the benefit of the trust estate.

an eg -Clark v Clark’s Executrix (1989)

2. A Trustee must not use their position for personal gain or advantage. Irrelevant whether or not the actings actually harm the estate. Where a Trustee has a power to exercise a discretion , he must never exercise the same in his own favour.
3. A Trustee is not entitled to remuneration. Only if the Will or Trust Deeds specifically and clearly authorise this. So if it instructs that a Solicitor is appointed and paid professional charges, a trustee who is a sol can’t appoint himself and charge for services. the Deed would have to be clear - eg a power to appoint one of their own number or any other party as Sol….and to pay that individual…

Question 39

How can you avoid the effects of the principle of auctor in rem suam?

Answer 39

1. Specific authorisation in the trust deed.NB the terms of the wording have to be ABSOLUTELY clear - see Johnston v MacFarlane 1987
2. Authorisation by the beneficiaries - but all beneficiaries must have capacity to consent to the transaction which might otherwise offence against the principle. There also can be no evidence of any undue pressure being placed o nthe beneficiaries by the Trustees. Onus of satisfying the Court rests with the relevant Trustee (Taylor v Hill house trustees 1901.
3. Resignation- where a trustee wishes to transact with the Trust but not properly authorised, he/she can resign. BUT nb a transaction will be tainted and struck down if the arrangement was entered into whilst the individual was still an Executor/Trustee (Clark v Clark’s Executrix)
4. Authorisation by the court??? - but there are some doubts as to whether or not the Court of Session has power to authorise a transaction which otherwise offends the principle. It does not have such a power under the nobile officium to authorise the trustee to act as auctor (wheras Court of Chancery in England does). The right to challenge a transaction breaching the principle was the province of the beneficiaries themselves and a Scottish Court could not deprive beneficiairies of that entitlement.

See also Coat’s Trustees Petitioners

Question 40

Variation of Private Trusts

Answer 40

new sub topic

Question 41

A Trust when set up may be tax advantageous but the law can change and it can then become disadvantageous. Or a trust purpose may have become unfair or undesirable. What can be done?

Answer 41

S 1 of the Trusts (Scotland) Act 1961 allows Trustees or any of the beneficiaries to petition the Court of Session for a variation of the trust purposes.

Question 42

S1(1) Trusts (Scotland) Act 1961

Answer 42

Allows the court to approve any arrangement to vary or revoke the trust purposes, or to enlarge the powers of Trustees to manage or administer.

Question 43

S1(4) Trusts (Scotland) Act 1961

Answer 43

Allows the court to authorise an arrangement that revokes or alters a trust purpose to the effect of allowing a beneficiary who enjoys an alimentary liferent, to convert it onto a more advantageous arrangement.

Question 44

Variation of a Public (or Charitable) Trust - the purpose of these may become inapplicable or inappropriate - eg a trust for the benefit of child chimney sweeps. what can be done?

Answer 44

Present a petition for a cy-pres scheme to the Court of Session. The Court of Session cn allow the Trust purposes to be altered to a more productive use of the funds yet still along the lines contemplated by the granter of the trust.

Question 45

What are the conditions?

Answer 45

1. General Charitable Intention - the Trust must indicate this.
2. Impossibility - The Trustees must show that the purposes have become clearly impossible. In Grigor Medical Bursary Fund Trustees Petitioners 1903 the fund was for young men from Nairn to study medicine. Trustees were finding it difficult to attract suitable male candiates and sought to widen it to include you women. Court refused - Trustees must show that never again would there be sufficient number of eligible male candidates - this decision presents a substantial hurdle for Trustees.
3. Approximation. - the new scheme suggested must bee approximate to the old. Glasgow Royal Infirmary v Magistrates of Glasgow 1888 - trust to build a fever hospital but town council built one so trust unnecessary. Trustees sought to divide the funds between the GRI to build nurses homes and a society for fever and smallpox hospitals. Trust varied for the latter but not the former as not approximate.

Question 46

The rules for variation of a public trust have been widened by which Acts

Answer 46

The Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 s9

Question 47

The Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 s 9 -extension of rules are what

Answer 47

1. jurisdiction to the Sherriff COurt as well as the Court of Session
2. the court may approve a scheme for variation of the Trust if:

• the purposes of the Trust have been fulfilled
• If the purposes of the Trust require the use only of part of the funds
• if the purposes of the trust refers to a class of persons or an area which has ceased to be appropriate
• if the purposes of the Trust are fulfilled or are otherwise provided for and have ceased to be suitable and effective.

Question 48

Charities and Trustee Investment Powers (Scotland) Act 2005 also further altered the position. If a major step in relation to a charity goverend by 2005 Act is proposed …

Answer 48

there must be compliance with S16 of the 2005 Act - which gives the OSCR wide ranging powers in relation to Charitable Trusts.

NB if a public trust is not also goverend by the 2005 Act, S9 of the 1990 Act can still be brought into play.

Question 49

What can trusttes do in a small public Trust and what is the limit of the income?

Answer 49

In a trust with income of less than £5k - Trustees can modify the Trust purposes or wind up the trust, transfer the assets to a similar trust, simply by passing a resolution to that effect. The resolution must be advertised and the Lord Advocate may intervene in the public interest.

Question 50

When the Trust purposes are achieved, what must the Trustees do

Answer 50

Produce a final accounting and a scheme of division of the estate.

draw a form of general Discharge in which the history is briefly narrated, decisions made, esp bad ones, and on what advice they were made.

Present discharge papers to the beneficiaries for signature. Once signed the beneficiaries are discharged and no longer personally liable to the beneficiaries.

Only then should the Trustees pay out the money.

Question 51

What if Beneficiaries will not or cannot grant the Discharge.

Answer 51

s 4(g)of the Trust (Scotland) Act 1921 allows the Court to, if it is satisfied with the Trustee’s actings.

If a chicken and egg situation - won’t sign until you pay, won’t pay out until you sign - joint obligations can be discharged at a meeting between the 2 sides.