Running a trust : Fiduciary duties Flashcards
Which ONE of the following is NOT an aspect of the law relating to a trustee’s fiduciary duties?
Fiduciaries must not make an unauthorised profit from their position.
Strict liability.
Fiduciaries must not allow their personal interest to conflict with their duties.
The remedy where a trustee has made a personal profit in breach of fiduciary duty is always based on the loss which the trust has suffered.
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The answer is D. The remedy for breach of fiduciary duty is that the trustee must give up their profit. The beneficiaries can recover the profit whether or not the trust has suffered loss (see for example, Boardman v Phipps).
All the others are fundamental aspects of a trustee’s fiduciary duties to the beneficiaries.
Fred and James are trustees for Alice and Ben. There are no clauses in the trust instrument relevant to this question. Fred wishes to purchase some land from the trust.
Which ONE of the following statements is CORRECT?
Trustees can never buy property from the trust due to the conflict of interest.
There is nothing to stop Fred buying the land from the trust if he buys it at auction because he will pay a fair price.
An unauthorised sale to Fred would be voidable by the beneficiaries within a reasonable time.
A sale of the land to Fred with James’ agreement could not be challenged.
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Well done. The answer is C. Without authorisation, the sale of trust property to one of the trustees gives rise to a conflict of interest (the trustee acting as both seller and buyer in the transaction). Under the ‘self-dealing rule’, the beneficiaries can set the transaction aside if they wish to do so, provided they do so within a reasonable time.
A is not correct because trustees can buy land from the trust if there is a clause permitting them to do so in the trust instrument, the court consents, or all the beneficiaries are sui juris and agree with knowledge of all the material facts.
B is not correct because, on the face of it, any sale to a trustee, regardless of the circumstances of the sale, is a breach of their fiduciary duty because there is a conflict of interest, and the principle of strict liability arises. It will not matter that the trustee pays a fair price for the property, or if the sale takes place at an auction.
D is not correct because the agreement of the other trustee(s) does not validate the sale.
Which ONE of the following statements in CORRECT?
Beneficiaries can sue trustees for a breach of fiduciary duties only if the trust had suffered loss as a result of the breach.
Beneficiaries can recover an unauthorised profit made by a trustee even if the trust could not have gained the profit itself.
Beneficiaries cannot obtain proprietary remedies for a breach of fiduciary duties.
A trustee has a complete defence to an action for breach of fiduciary duties if the trustee was honest.
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Sorry. The answer is B. The fact that the trust could not have made the unauthorised profit is not a defence to a successful claim for a breach of fiduciary duty (see Keech v Sandford).
A is not correct because an action for breach of fiduciary duty can be successful even though the trust suffered no loss (see Boardman v Phipps).
C is not correct because beneficiaries can bring a proprietary claim to recover property owned by the trustees which represents the unauthorised personal profit they received.
D is not correct because when considering a breach of fiduciary duty, strict liability applies.
Kyle and Jonathan are trustees for Xavier and Penny. There are no clauses in the trust instrument relevant to this question. Kyle is an accountant and regularly advises trustees on Tax and investment matters. Jonathan is an architect.
Which ONE of the following statements is CORRECT?
Kyle can charge reasonable fees for acting as trustee if Jonathan agrees in writing.
Jonathan can charge reasonable fees for acting as trustee if Kyle agrees in writing.
If Jonathan dies leaving Kyle as the sole trustee, Kyle can charge fees for acting as trustee.
Neither Kyle nor Jonathan can charge fees unless there is a charging clause in the trust instrument.
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Sorry. The answer is A. Under s29 Trustee Act 2000, trustees who act in a professional capacity are allowed to charge reasonable fees if the other trustees agree in writing. Kyle acts in a professional capacity because he acts in the course of a profession or business which consists of or includes the administration of trusts generally or a particular aspect of trust work (s28 Trustee Act 2000).
B is not correct because Jonathan cannot charge fees because he does not fall within the definition in s28 Trustee Act 2000.
C is not correct; a sole trustee acting as a professional trustee cannot charge fees because there is no other trustee to agree to those fees as required by statute (s29 Trustee Act 2000).
D is not correct because s29 applies to all trusts unless the trust instrument excludes or contains its own provisions for charging remuneration.
A trust holds 40% of the shares in a private company. At a shareholder meeting, one of the trustees (Mr Hurst) uses the votes attached to the trust’s shareholding to become a director of the company. The company pays him a salary.
Which ONE of the following statements is CORRECT?
Mr Hurst has not placed himself in a position of a conflict of interest.
Mr Hurst can keep the salary if he is a professional trustee.
Mr Hurst can keep the director’s salary if this is authorised by the trust instrument.
Mr Hurst would never have been able to keep the salary because of the conflict of interest.
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Sorry, The answer is C. Although, Mr Hurst has breached his fiduciary duty, a trustee is not liable if the trust instrument authorises the action (here, the retention of any payment from a third-party source).
A is not correct because by using the trust’s shareholding in the company to achieve the personal benefit of becoming a director, Mr Hurst is in a position of a conflict of interest (see Re Macadam).
B is not correct because the professional status of the trustee is an irrelevant consideration when considering breaches of fiduciary duty.
D is not correct because if over 50% of the other shareholders by value voted in favour of Mr Hurst becoming a director, he would have achieved the position (and the salary) independently of the trust’s holding. In this circumstance, he would be able to keep the salary.
Is the following statement TRUE or FALSE?
Strict liability applies to the rule that a trustee must not put himself in a position of conflict of interest and is accountable for any profit made. It is no defence for the trustee to say he was honest, or that the trust suffered no loss.
True
False
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Sorry. The statement is true. The court will not consider the honesty of the trustee nor whether the trust has suffered loss. Strict liability applies. The existence of this rule means that the trustees will not be tempted to make profits from their position and, therefore, will always give the trust impartial advice untainted by any thoughts of self -advancement.
Kishen and Amit are trustees. The trust’s investment adviser recommends the purchase of shares in X plc because there are rumours of an imminent takeover, and the shares are likely to increase in value. Kishen buys some shares using his own money and makes a big profit when he sells them six months later.
Which ONE of the following statements is CORRECT?
Kishen will not have to account for the profit if the trust could not have made the profit itself because it did not have the funds to buy shares in X plc.
Kishen will have to account for the profit because there was a possibility of a conflict of interest.
Kishen could keep the profit if he made a full disclosure to his co-trustee, Amit.
Kishen can keep the profit if, having spoken to the investment adviser, he retired and then bought the shares.
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Sorry. The answer is B. Kishen will be accountable for the profit because of his use of information which he received in his capacity as trustee (see Boardman v Phipps)
A is not correct because the fact that the trust could not have purchased the shares is not a defence (see Keech v Sandford, Boardman v Phipps).
C is not correct because Kishen’s honesty and a full disclosure to co-trustees are irrelevant considerations. Strict liability applies.
D is not correct, because the conflict of interest arose while Kishen was a trustee. He cannot escape a liability to account by retiring.
Which ONE of the following could NOT give rise to a potential liability for a breach of trust or fiduciary duty?
A trustee, who is going abroad for six months, transfers all the trust property to his co-trustee so that she can deal with trust business in his absence. While he is away, she sells a trust asset and disappears with the sale proceeds.
A trustee receives and keeps commission from an insurance company for insuring the trust property with them
The trustee of a discretionary trust refuses to give a member of the class of objects reasons why he has not been selected to receive a share of the trust fund.
With the consent of the adult beneficiaries, the trustees invest trust money in a risky venture which has led to the loss of the sum invested.
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Well done. The answer is C. Trustees do not have a duty to provide beneficiaries with reasons as to why they have exercised a discretion in a particular way.
A is not correct because by acting in this way, the trustee would have breached his duty of care to the trust. By not keeping the trust property secure, he has not acted “as an ordinary, prudent businessman”.
B is not correct because a conflict of interest would have arisen; the trustee cannot make an impartial choice when selecting the insurance company. The trustee would have to account to the trust for the commission.
D is not correct because the fully informed consent of beneficiaries who are all adults is a defence to a breach of trust action.
Is this statement TRUE or FALSE?
A trustee makes an unauthorised personal profit from the use of trust property. The trustee then goes bankrupt. It could be pointless for the beneficiaries to claim the profit because the claim would rank alongside the claims of ordinary unsecured creditors on the bankruptcy and the beneficiaries would be unlikely to recover much.
True
False
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The statement is false. The unauthorised profit will be held on constructive trust for the beneficiaries. As an alternative to a personal action for the trustee to account for the profit, the beneficiaries can bring a proprietary claim and the latter will have priority on the trustee’s bankruptcy.
Trustees hold a trust fund. One trustee is an accountant who advises on trust financial and taxation matters. The other trustee is a fitness instructor. Both trustees want to keep the reasonable commission which an insurance company has promised in return for insuring trust property with them. There are no relevant provisions in the trust instrument.
Which of the following best describes the position regarding the commission?
The trustees cannot keep the commission.
The accountant can keep the commission as a professional trustee.
The fitness instructor can keep the commission with the accountant’s written consent.
As the commission is reasonable, both trustees can keep the commission.
Trustees are always allowed to retain this kind of payment as it is linked to their obligations as trustees.
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Option A is correct. A conflict of interest will have arisen as the trustees cannot make an impartial choice when selecting the insurance company – are they acting in the best interests of the trust by insuring trust property with the company or because of the promised commission? The trustees would have to account to the trust for any commission they receive. This applies to all trustees regardless of whether they act in a professional capacity or not (so Option B is wrong), or whether the amount of the proposed commission is reasonable in the circumstances (so Option D is wrong).
Option C is wrong because a professional trustee is not authorised to consent to such payments to a lay trustee (it is a lay trustee who could consent in writing to reasonable remuneration from the trust for a professional trustee under ss28 and 29 Trustee Act 2000. However, the commission is not remuneration).
Option E is wrong because trustees are not permitted to retain incidental profits from third parties unless there is authorisation - in the trust instrument, by consent from all the beneficiaries (who must be legally competent) or by a court order.
The trustees of a trust are a solicitor specialising in trust administration and a retired teacher. The trust instrument contains no charging clause. The solicitor would like to charge the trust for her time and expertise in dealing with trust matters. The teacher is agreeable to this as the solicitor’s proposed fees are not unreasonable.
Is the solicitor entitled to charge the trust?
No, because there is no authorisation in the trust instrument.
No, because trustees can never charge for their time and expertise.
No, because trustees can only be paid for out-of-pocket expenses.
Yes, because the solicitor is a professional trustee.
Yes, because the teacher has consented.
Option D is wrong because merely being a professional trustee does not automatically entitle that trustee to remuneration. They must obtain the appropriate authorisation.
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Option E is correct. As there is no charging clause, the solicitor must rely on the Trustee Act 2000 for authorisation. As a professional trustee (see s28 Trustee Act 2000), s29 Trustee Act authorises the professional trustee to receive reasonable remuneration provided the other trustees consent.
Option A is wrong because while a charging clause in a trust instrument is conclusive as to whether trustees can charge for time and expertise, the absence of such a clause does not preclude such remuneration. It may be authorised by statute (see Option E), by the beneficiaries or by the court. Options B and C are therefore also wrong for similar reasons.
A doctor and a teacher are trustees holding on trust for two beneficiaries currently aged 32 and 16 years respectively. The doctor bought some land belonging to the trust at auction six months ago using an inheritance. The doctor has since obtained planning permission to build a house on the land.However, the adult beneficiary wants the land restored to the trust.
Can the beneficiary get the land restored to the trust?
Yes, because trustees can never purchase trust property
Yes, because such a sale is voidable by the beneficiaries.
No, because the beneficiaries will be time-barred by statute from bringing any action.
No, because the land was sold at auction.
No, because the trustee used their own money to buy the land and the trust suffered no loss.
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Option B is correct. Without authorisation, the sale of trust property to one of the trustees gives rise to a conflict of interest (the trustee acting as both seller and buyer in the transaction). Under the ‘self-dealing rule’, the beneficiaries can set the transaction aside if they wish to do so, provided they do so within a reasonable time.
Option A is wrong because, despite the “self-dealing”, it is possible for the trust instrument to allow for the purchase of trust property by a trustee or for the court to allow such a transaction.
Option C is wrong because there is no statutory limitation period under which an action can be brought. The equitable doctrine of laches will apply in the circumstances. This doctrine seeks to guard against beneficiaries allowing too much time to elapse before starting any action. In these circumstances (the sale took place only six months ago and there is a minor beneficiary), laches is unlikely to be an issue.
Option D is wrong because the fact that the trustee was able to purchase the property at an auction is irrelevant. The self-dealing rule is one of strict liability.
Option E is wrong for the same reason, strict liability. The fact that the trust itself has not suffered a loss does not preclude the beneficiaries a remedy.
Two trustees hold a trust fund on trust for two beneficiaries who are aged 22 and16 respectively. The trust fund contains a 30% holding in a private family company. At the request of the adult beneficiary, one of the trustees was asked to become a director of the family company so as to safeguard the trust’s investment. At a recent shareholder meeting, the trustee was voted onto the board of directors and was awarded a salary from the company. The decision at the meeting in favour of the appointment was by a 55% majority comprising the shares attached to the trust’s holding and one other shareholder.
Can the trustee retain the director’s salary?
Yes, because one of the beneficiaries consented to the trustee being a director.
Yes, because trustees have a duty to safeguard trust investments and are entitled to keep any payment they receive for doing so.
No, because trustees are never entitled to retain incidental profits arising from their trusteeship.
No, because the votes attached to the trust’s shareholding were used to enable the trustee to be appointed.
No, because the other trustees have not consented.
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Option D is correct. If the votes attached to the trust holding have been used against the proposed appointment, the trustee would not have been appointed a director (only 25% would have been in favour). The trustee, therefore, will became a director and will receive the salary as a result of being a trustee, using trust property. This is a breach of the fiduciary duty not to profit from the trust; the trustee will have to account for the salary to the trust.
Option A is wrong because while it is possible for beneficiaries to consent to the retention of such incidental profits, all the beneficiaries must agree, and they must be legally competent to give such consent. Here there is a minor beneficiary. (Also, the adult beneficiary merely asked the trustee to become a director; it is questionable whether they were also consenting to the receipt of a salary.)
Option B is wrong because while trustees do have a duty to safeguard the trust fund and it is suggested that trustees should become involved in the management of any private company in which the trust has a substantial holding, so as to oversee the trust’s investment (Bartlett v Barclays Bank), there is no automatic entitlement to retain any moneys received for taking up such a safeguarding management position.
Option C is wrong because if there is authorisation (in the trust instrument, from the court, or from the beneficiaries), it is possible for trustees to retain such incidental profit.
Option E is wrong because it is irrelevant whether or not other trustees consent to the retention of such incidental profit.
A solicitor specialising in trust advice and an office manager are trustees of a family trust. The trust fund is currently valued at £500,000 and is being held on trust for the settlor’s spouse for life, remainder to the settlor’s three children, a son aged 25 years and two daughters aged 16 and 14 years respectively. The trust instrument contains no express powers for the trustees.
Which of the following best describes an authorised use of trust funds?
The purchase of a beach restaurant in Greece to let to tenants.
Payment of reasonable remuneration to the solicitor with the office manager’s written consent.
Payment of one third of the income earned on trust investments to the son as he is over 18 years of age.
A one-off payment of £100,000 from the trust fund to the spouse.
An investment of £400,000 in a start-up private design technology company.
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Option B is the correct answer. Under s29 Trustee Act 2000, trustees who act in a professional capacity are allowed to charge reasonable fees if the other trustees agree in writing. The solicitor acts in a professional capacity because they are a solicitor specialising in trust advice so are acting in the course of a profession or business which consists of or includes the administration of trusts generally or a particular aspect of trust work (s28 Trustee Act 2000).
Option A is wrong because although s8 Trustee Act 200 authorises trustees to purchase land as investment, that land must be within the United Kingdom.
Option C is wrong because while the settlor’s spouse is alive, the son does not have an interest in any income earned from the trust investments. It must all be paid to the spouse as life tenant.
Option D is wrong because, as life tenant, the spouse’s interest in limited to the income; they have no interest in the capital. The trustees have no power to advance capital to them under s32 Trustee Act 1925 and the trust instrument also does not authorise this.
Option E is wrong because although s3 Trustee Act 2000 gives trustees power to invest as if absolutely entitled, when investing trustees have a duty to consider the standard investment criteria – that the proposed investment is suitable (both generally and specifically for the needs of the trust) and that the investment is diversified. Investing 80% of the trust fund in a new, private company in a high-risk sector is neither suitable (as it is likely to produce little income at this early stage and any capital value would be difficult to gauge) nor diverse given the risk involved in the high percentage of the investment in one asset.
While taking advice on trust investments, the trustees learnt of a valuable investment opportunity in a new company. The trust contains no express powers for the trustees. The trustees agreed that, without selling some investments, the trust did not have sufficient cash available to take advantage of the opportunity. One of the trustees retired and then bought shares in the new company with his own money and has made a large profit.
Which of the following best describes the position regarding the profit?
The trustee cannot retain the profit as this can only be authorised by the trust instrument.
The trustee cannot retain the profit because there was a possibility of a conflict of interest.
The trustee can retain the profit as the co-trustees were aware of the opportunity and he used his own money.
The trustee can retain the profit as the trust could not afford to buy the shares.
The trustee can retain the profit as he bought the shares after he retired.
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Option B is correct. The trustee will be accountable for the profit because of the conflict of interest which arose when the trustees were discussing the investment opportunity. Would the trustee have been able to discuss matters impartially with his co-trustees as to whether the trust should have invested in the new opportunity? (He could also be liable on the basis of his use of information which he received in his capacity as trustee - see Boardman v Phipps.)
Option A is wrong because the trustee could have retained the profit with the beneficiaries consent or by court order; the fact that there is no authorisation in the trust instrument does not preclude this.
Option C is wrong because it is irrelevant that the other trustees were aware of the opportunity, and he used his own money. Strictly liability applies.
Option D is wrong because the fact that the trust could not have purchased the shares is not a defence to a breach of fiduciary duty.
Option E is wrong because the conflict of interest arose (and information obtained) while the trustee was a trustee. Liability cannot be avoided by retiring.
