Topic 4 - Duties and Powers of Trustees Flashcards
Trust Background and Basic Rules
From Medieval Times. Based on Law of Equity. Common Law courts couldn’t help could petition king who would delegate complaints to chancellor - chancellor courts - law of equity based on fairness.
Law of Equity - Recognises two titles to an estate. Legal ownership (trustees) equitable ownership (beneficiaries)
Trustees legally responsible for asssets but cannot use as personal property. Carry out wishes of settlor for beneficiaries so have fiduciary duty towards then.
A trustee may be an individual or a trust corporation. Over age 18 and of sound mind.
Any number of trustees but prudent to have two+ to ensure continutiy on death or surrender of duty. If corporation then ‘enduring entity’, which means it will carry on regardless of changes in personnel.
If land held in trust - it is Trust of Land under Trusts of Land and Appointments of Trustees Act (1996) and held on joint tenancy basis.
The Law of Property Act 1925 dictates that there can be a minimum of 2 and maximum of four legal owners (trustees). Not appliacable to public trusts.
What are the Roles of a Trustee?
- Maintain the trust property in accordance with a will, trust deed or as required by statute
- Ensure that the legal ownership of assets is correctly registered
- Make investment decisions regarding trust assets
- Make any income or capital distributions to which a beneficiary is entitled.
- Manage the trust on an ongoing basis, for example by paying trust expenses and taxes.
Describe the different ways trustees can be appointed, removed or replaced?
Replacement Trustees
Trust deed may name appointer who can appoint/replace trustees. If not then personal representatives of last surviving trsutee can appoint a new trustee.
If three or less trustees, new appointment can go over 4 trustees.
Death of Trustee
Surviving trustees take over. If sole trustee then personal representatives take over power. Must be minimum of two trustees if land.
Retirement of Trustee
Retiring trustees can be replaced or if other trustees agree then do not need to replace if there are at least two remaining trustees or a remaining trust coorperation. May also be able to retire if there is such provision in trust deed. A court can also sanction through a court order.
Removal of Trustee
Trustee Act 1925 allows removal/replacement of trustees if:
Provision in trustee deed under specific circumstances
S36 of Trustee Act 1925 can be removed with their agreement. Such as Trustee dying, being out of UK more than 12 months, unfit to act or uncapable of carrying out duties.
Court has the power to remove a trustee.
What instances might involve a breach of trust from trustee?
Trustees jointly and severally liable for losses from breach.
- Distributing trust assets to ‘beneficiary’ not entitled to receive them
- Not investing assets in way permitted by trust deed or by statutory requirements.
- Failing in their fiduciary duties – acting for their own advantage or making a profit from their activities.
- Not meeting requirements of common law, or failing to meet statutory duty of care.
What are some Trust Breach Defences?
Exemption or exoneration clause in trust deed - Protects against breaches of faith except fraud. Still have duty to carry out role with honesty and good faith and not protected if knowingly act against beneficiaries’ best interests.
Limitation - Limitations Act 1980, breach claims may time barred if not made 6 years of breach. Not covered by fraud or for recovery of assets where trustees taken assets for their own benefit.
If fraud or concealed facts then 6 year limit starts from when claimant discovered or using ‘reasonable dilligence’ should have discovered cause of claim.
Equitable doctrine of lashes - (original French for slackness or negligence). Claimant unreasonably delays claim and trustee’s position been prejudiced by delay.
Beneficiary Consent - If capacity (18+ and sound mind) and freely gave informed consent to breach then trustees can defend on basis of consent.
Court Discretion - If appears trustee acted honestly and reasonably and should be excused from liability. Prove they treated property as if they would their own. Doesn’t apply to negligance.
Powers of Trustees
What are the powers of trustees?
What are the statutory powers of trustees?
Duties of trustees reflect what they must do under law.
Powers of trustees reflect what they can do as matter of course or what they feel necessary.
Statutory Powers which can be modified by trust deed.
- Remuneration -
- Entitled to payment if set out in trust deed or acting as a corporation or professional capacity.
- Entitled to reimbursement for expenses
- Includes remuneration and expenses of agents, nominees and custodians acting on behalf of trustee
- Delegation - Under rule of equity, trustee powers cannot be delegated except Power of Attorney for maximum of 12 months. Statue law now allows:
- Individual delegation fi trustee cannot act for period of time.
- Collective delegation - trustees agree to delegate certain functions to attorney such as investment manager. Cannot delegate decisions to distribute assets, decisions on how fees paid i.e. income or capital or appoint trustees/custodians etc.
- Investment - If not specific instructions in trust deed, Trustee Act 2000 gives general power of investment.
- Can make any kind of investment as if it were their own including freehold and leasehold land.
- Does not apply to pension funds, authorised unit trusts or certain charitable trusts.
Other Powers set out by trust deed.
Give some Case Law examples of Trustee Error?
Hastings-Bass case 1974
Trustees of trust, acting in good faith and what they thought were best interest of beneficiaries, transferred funds to another trust to avoid estate duties. Their action caused other tax charges. Sought court judgement to allow error to be voided.
Lord Justice Brown said:
“Where a trustee is given discretion as to some matter under which he acts in good faith, the court should not interfere with his action, notwithstanding that it does not have the full effect which he intended unless 1) what he has achieved is unauthorised by the power conferred on him or where he has acted outside of the power conferred on him or 2) it is clear that he would not have acted as he did a) had he not taken into account considerations which he should not have taken into account or b) had he not failed to take account considerations which he ought to have taken into account.”
In other words, if trustees act within the terms of discretion given to them through the trust deed, but the effect of their action is different from that intended, a court could ‘interfere’ (rule that their actions were void). This would only apply if it was clear that they:
- failed to consider things that should have been taken into account, and would not have taken the action if they had considered them; or
- considered things that should not have been considered or were irrelevant, and would not have taken the action had they not considered them.
Futter v Futter, and Pitt v Holt -Supreme Court appeal cases where the plaintiffs originally relied on the Bass-Hastings judgement to win a case against HMRC who appealed decisions.
The Supreme Court ruling provided clarity to the application of Bass Hastings, establishing the following:
Actions taken by trustees that are outside their powers will be void and can be set aside by anybody, including trustees.
Trustees acting within their powers will be in breach of their fiduciary duty if they fail to take into account things they should have considered, or they take into account irrelevant or incorrect considerations.
In this case a court could void the actions, but only on application by those affected by the problem, not the trustees themselves.
If the trustees act within their power, seek advice from an apparently competent and reputable professional and make a decision based on that advice, they will not be in breach of their fiduciary duty if the advice later proves to be incorrect.
This means the action cannot be voided but the trustees cannot be held liable for the consequences. The trustees or beneficiaries would need to take action against the adviser.
Trust Investment Requirements
What are the two main investment requirements of a trustee regarding investment and what do these entail?
Can the trusee delgate investments powers, if so how?
The Trustee Act 2000 contains specific requirements to ensure trustees act with care. However, Trust deed may contain exclusions or restrictions. Standard criteria are:
Suitability and diversification - Consider in relation to trust’s purpose, beneficiaries’ needs and the existing trust portfolio, and whether another type of investment might be more suitabe.
Must consider ‘proper’ advice before exercising powers - including reviewing investments.
Proper advice - Someone qualified due to ability and experience in type of investment being considered.
Exempt from seeking advice if trustees think it unnecessaary.
Delegation
May delegate investment powers to 3rd party. Confirmed in a written policy statement and contain guidance on how to carry out role. Policy statement must be reviewed regularly. Trustees not liable for default of 3rd party.
What are the 11 duties of a trustee?
- Act in good faith, and with honesty and integrity.
- Exercise skill and care taking into account any special knowledge or experience they might have
- Comply with the terms of the trust document.
- Take control of, and safeguard, trust property – they should register their legal ownership of the assets, and the Trustee Act 2000 gives a trustee a right to insure assets.
- Act impartially between beneficiaries - investments do not favour one particular beneficiary and needs of different types of beneficiary are balanced. For example, to provide a reasonable income for the life tenant of an interest in possession trust while preserving the capital for the remainderman.
- Act in the best interests of the trust and the beneficiaries at all times, and avoid conflicts of interest.
- Invest trust property as appropriate. The Trustee Act gives trustees wide investment powers to invest in anything they would be allowed to invest if the funds belonged to them personally. The trust deed may exclude certain investments, or restrict the investment choice, in which case those instructions must be followed. If there are no specific directions, the trustees have wide powers but must observe the requirements set out in the Trustee Act 2000 regarding investment.
- Act unanimously when making all trust related decisions.
- Perform the role personally, although the Act allows delegation if it is authorised by the trust deed, or if the beneficiaries authorise it, providing they are all 18 or over and between them absolutely entitled to the trust property. Trustees can also delegate most administrative functions as appropriate, to transfer the trust property and income to the correct beneficiaries.
- Keep proper records and accounts, and submit required trust tax returns.
- Consult beneficiaries and give effect to their wishes, and provide them with information about the trust on request.
Describe the rules of conversion and apportionment? Give a case example?
Conversion & Apportionment
Trustees must act impartially between beneficiaries. For example in the case of an Interest in Possession Trust.
Howe v Lord Dartmouth - trustees had to convert unauthorised and wasting investments such as copyrights if potential for value of asset to diminish in order to protect rights of ramindermen. Later abolished on 1 Januar 2014 by Trusts Act 2013 but trustees still have duty. Income producing assets can be proportioned to account for each other without selling investments.
Trustees are legally responsible for the assets of a trust and are required to carry out the settlor’s wishes for the beneficiaries’ benefit. What is the name of the duty they have to the beneficiaries?
This is called the fiduciary duty.
A trustee can be an individual or a trust corporation. What are the two main requirements for an individual trustee to be eligible for the role?
An individual needs to be aged 18 or over and of sound mind to be eligible for a trustee role.
Where the trust property is land, what is the usual minimum and maximum number of trustees that can look after this?
Where land is held in trust there must usually be a minimum of two trustees (unless one trustee is a trust corporation) and a maximum of four. However, there is no maximum number of trustees if land is held in a trust for public purposes (charitable trust).
State three reasons why a replacement trustee can be appointed?
- They are dead;
- They remain outside the UK for more than a year;
- They want to be discharged from all/any of their powers;
- They refuse to act;
- They are no longer capable of acting or are unfit to do so;
- They are an infant (minor).
Under what circumstances is a trustee entitled to receive payment?
A trustee is entitled to payment if there is a provision in the trust deed entitling them to do so for the services they offer or the trustee/trust corporation is acting in a professional capacity. Unless the trust deed states levels of remuneration then the levels paid to a professional trustee or trust corporation must be reasonable for the work carried out. A trustee is also entitled to be reimbursed for expenses incurred when acting for the trust.
