Topic 10 - Regulation & Legislation to Trustees Flashcards
Duty of Care
What duty of care does a trustee have under the Trustee Act 2000?
What is reasonable?
The Trustee Act 2000 states that:
- must exercise such care and skill as is reasonable in the circumstances, having regard in particular:
- any speical knowledge or experience he has or holds himself as having
- if acting as trustee in course of business or profession, to any special knowledge or experience that is reasonable to expect of a person in that business or profession
Meaning of Reasonable - Court examples:
Speight v Gaunt (1883): A trustee is required to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own.
Re Whitely (1886): (referring to Speight v Gaunt) The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary, prudent man would take if he were minded to make an investment for the benefit of people for whom he felt morally bound to provide. That is the kind of business the ordinary prudent man is supposed to be engaged in, and unless this is borne in mind the standard of a trustee’s duty will be fixed too low.
Re Godfrey (1883): It is the duty of a trustee, in administering the trusts of a will, to deal with property intrusted into his care exactly as any prudent man would deal with his own property. But the words in which the rule is expressed must not be strained beyond their meaning. Prudent businessmen in their dealings incur risk. That may and must happen in almost all human affairs.
It is therefore acceptable – and often expected – for a trustee to take a sensible degree of risk, but unacceptable to move beyond what is deemed prudent.
Trustee Investment Powers
Give a brief history of investment powers given to Trustees and how they were governed?
What does the Trustee Act 2000 state about investment powers to Trustees?
Prudent and unacceptable risk.
Prior to trustee act 2000 - investment powers governed by Trustee Investments Act 1961 which unless trust deed stated restricted trustees to lower risk investments.
Trustee Act 2000 gives trustees much wider investment powers -
‘…a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust. In exercising any power of investment …a trustee must have regard to the standard investment criteria.”
What is the standard Investment Criteria for Trustees?
Suitablity
Consider suitability of investment in relation to trust’s purpose, beneficiaries’ needs and existing portfolio as well as whether another investment might be mroe suitable. Will include:
- Size of each holding
- Level of risk
- Whether it meeds trust’s need to provide income, growth or balacne
- Ethical requirements in trust deed
Diversification
Ensure appropriate level of diversification, given trust’s purpose, beneficiaries’ needs and overal context of portfolio
Other Considerations
Obtain & consider ‘proper’ advice before exercising powers
‘Proper’ = someone qualified to do so by virtue of ability & experience in type of investment being considered
Exemption from this requirement if ‘reasonably concludes’ that it is unnecessary or inappropriate to do so
Requirement for regular reviews for suitability, diversification and whether investments should be varied
“General power of invstment is … subject to any restriction or exclusion imposed the trust instrument…”
Must be clear on the different distinction between trustee duties and powers when it comes to investment.
(Georgina) Nestlé v National Westminster Bank plc 1994
What was this case and why was it important?
What important points did it establish with regards to trustee investment?
Although important for trustees to be prudent - risk of being too cautious or inert with trust property.
Case example of this trust - origins in 1922 in testator’s Will, with Natwest as trustee. Will provided life interest in family home and annuity for widow, and annuities between ages 21-25 and life interest in half of trust for two sons. Granddaughter, Georgina named as remainderman.
When Georgina became entitled trust fund in 1988, she claimed it was worth some £1.5m less than it would have been had it been invested appropriately starting claim for breach of trust against trustees based that investments neither suitable nor sufficiently diversified. Nearly exclusively invested in gilts, primarily for tax reasons because of sons.
Court found in bank’s favour but went to appeal. Appeal judge criticsed trustees for misunderstanding their investment powers, failure to carry out regular reviews and failing to maintain real value of fund.
However to prove breach of trust, she would have to show that their action caused a loss. Breach of duty only occur if trustees defulted on their obligations, rather than merely failing to invest successfully.
The case established some important points in relation to trustee investment.
- Important to look at trust’s portfolio as a whole, rather tahn individual components, when assessing suitability. Impllying use of modern portfolio theory.
- Trustees must act fairly to balance interests of life tenants and remaindermen and consider consequences for all parties. Doesn’t mean treating each equally and the idea of fairness must take into account that investments may perform worse than expected.
- Trustees’ discretion allows them to decide treatment of beneficairies and consider their circumstances such as making sure investments provide:
- Income for a widow rather than preserving or growing capital for relatively affluent remaindermen
- Income for a life tenant who was a close relative, rather tha providing capital growth for more distantly related remaindermen
- Preservation or capital growth for remaindermen,, rather than maximising income for life tenant with independent or other means to meet their needs.
Cowan v Scargill (and others) 1986
Trustees of National Coal Board Pension Scheme.
Half trustees appointed by NCB and half by National Union of Mineworkers whose presidents Arthur Scargill was a trustee.
Union appointed trustees refused to allow pension fund to invest in overseas investments & industries that competed with coal industry believing it was against the interests of the scheme members.
Opinion referred to aa a ‘moral consideration’
This opinion was referred to as a ‘moral consideration’. The National Coal Board appointed trustees who disagreed with the union’s policy and took the matter to court (Swarb, 2018).
Ruling
Justice Megarry ruled that the interests of a beneficiary are mainly considered to be financial and rarely involve moral or ethical consideration. The trustees’ duty is to obtain the best return on the fund regardless of other considerations. The union’s trustees were deemed to be placing their own moral considerations above those of the members and, as such, were breaching their duty to place the beneficiaries’ interests above all other
What legislation governs the idea of apportionment and conversion for trusts established before 1 October 2013?
What cases in the courts have had an impact on these areas and how?
What is considered income within an IIP trust for the purposes of apportionment?
Trustees must act partially between beneficiaries balancing rights of life-tenant and remaindermen.
The Apportionment Act 1870
Still applies to trusts established before 1 October 2013. 2 key elements:
- Only income recieved by trust can be paid to life life tenant, only capital and be accrued for and paid to remaindermen.
- INCOME
- Share dividends
- savings
- loan interest
- trust property rent
- CAPITAL
- Everything else
- Beneficiary’s entitelment to income on a time basis. Meaning they only get income deemed to have accrued during their period of entitlement. Must calculate notional entitelment if income is in middle of these times which is complex, time consuming and disadvantages may beneficiaries.
Trust Law also takes account of three cases:
Howe v Earl of Dartmouth Part 1:
Estate left to Interest-in-Possession trust in Will, may contain assets:
- Of a wasting nature
- Provide reversionary or future benefit
- Of a temporary nature
- Unauthorised by trust statute or term of the Will
Unless specifically provisioned for in Will, this part 1 ruling creates an implied ‘trust for sale’. Trustees must convert (seel & reinvest) these assets into non-wasting assets such as cash, shares or property.
Howe v. Earl of Dartmouth Part 2:
2nd part of ruling compensates remaindermen for loss while assets are being converted. For example could recive interest.
The other way around, the Re Earl of Chesterfield’s Trusts Investments ruling applies to interest in succession trust which compensates the life tenant for assets held that don’t yield inocme where trustees use power to defer sale.
The Allhusen v Whittell
Ruling here apportions debts, liabilities, legacies and other charges payable from estate between capital and income beneficiaaries.
What legislation governs the idea of apportionment and coversion for trusts set up after 1 October 2013?
Why was the new legislation needed?
What were the two key changes in the new legislation?
Trusts (Capital and Income) Act 2013
Trustees still have duty to consider best interests of all beneficiaries and to adjust imbalance with apportionment.
Removes some old and complex rules and simplify some positions.
Two key elements relevant to private trusts;
- Cancels following parts of 1870 act:
- Rule requiring apportionment of income on time basis - so now applies as it arises.
- Rules established by How V Earl of Dartmouth, Re Earl of Chesterfield’s Trust Investments & Alihusen v. Whitell judgements
- Trustees must compensate income beneficiary by payments from capital as corporate distributions are treated as capital
Perpetuities and Accumulations Act 2009
What are the main provisions of the act?
How long can a trust continue for?
What legislation governed perpetuities and accumulations before the act?
Perpetuities and Accumulations Act 2009
Subject to trusts set up after 6 April 2010 - amended Perpetuities & Accumulation Act 1964. Trusts set up betwen 1964 - 2010 under previous rules. Before 1964 then subject to common law.
Main Provisions:
Maximum perpetuity period is 125 years. Prevents private trusts continuing indefinitely.
End of period, trust and trustees powers become void and ceases, trust property must be distributed according to default provisions. Many pension & charity trusts are exempt.
Private trusts can accumulate income for whole term of trust but trust deed can specify shorter period. Previously maximum 21 years.
Charitable trusts may accumulate income for a period of 21 years.
Perpetuities & Accumulation Act 1964
What legislation was in place before this act to govern perpetutities and accumulation of income?
What were the perpetutity and accumulation rules under this act?
Prior to the 1964 Act, the rules on perpetuities were set out in common law, with the Act bringing them into the legislative regime.
Perpetuities
Setlor can select perpetuity period either life of life in being plus 21 years or a fixed period of 80 years from date the trust was established.
Life in being is someone identified in trust deed as living at the time the trust was established.
Accumulations
Income can accumulate either:
Over settlor’s lifetime
21 years from date trust was created
21 years from settlor’s death
The minority of any person alive at death of settlor
What case provided the ruling that allowed beneficiaries to bring a trust to an end or vary it’s terms?
What criteria must be met to execute a deed of variation?
Saunders v Vautier (1841) - provided the ruling that allowed deeds of variation.
All beneficiaries must be:
- aged 18 or over;
- mentally capable;
- in agreement;
- entitled to all the trust property.
Variation of Trusts Act 1958
What does this act give the courts the jurisdiction to do?
Applies to trusts set up before and after act.
Gives jurisdiction to courts where the beneficiaries do not meet criteria set out in Saunders v Vautier. Cannot vary trust if beneficiaries meet criteria.
- Unborn
- Infancy
- Other incapacity
How does trust law differ around the World and Europe?
Concept of equitable law has passed to legal systems of many countries
USA - Trust law has developed in line with English common-law principles.
Australia - Law of equity remains overriding principle of trust law
Western Europe - Have Civil Law developed from Roman Law, which has a codified system rather than the judge-made precedent English Civil Law. As such concept of a separation between legal ownership (trustee) & equitable ownership (Beneficiary) is alien to most European states.
Hague Convention - Law Applicable to Trusts and on their Recognition - 1 January 1992 - Gives state the power to recognise a trust, even if it can’t introduce into it’s legal system.
Recent atempts have been made to introduce trusts by legislatio into European Law and discussions & research have looked at way of incorporating structures into European Civil Law thata achieve similar objectives to trusts.
