Trust Summary cards Flashcards
Summary in relation to fixed and discretionary trusts
The trustees of a fixed trust have no distributive discretion. Beneficial entitlement is determined by the settlor.
Successive interest trusts involve a series of interests in the same trust property.
* A common example is a life interest trust.
* The lifetime beneficiary (or “life tenant”) is entitled to the income during their lifetime, after which the remainder beneficiary (opr “remainderman) is entitled to the capital.
The trustees of a discretionary trust must exercise the power but have a distributive discretion.
* The objects are determined by the settlor but the trustees have the discretion to determine how to distribute amongst that class of objects.
- The donee of a power of appointment has no obligation to exercise it (although if it is a fiduciary power they must periodically consider it).
- The objects are determined by the donor and the donee has the power to determine whether and how to distribute.
SUMMARY
Beneficial entitlement: Vested and contingent interest
The rights of beneficiaries may be vested or contingent.
Vested interests may be either vested in possession or vested in interest.
Vested in possession means a current right to current enjoyment.
Vested interest means a current right to a future enjoyment.
An interest which is vested in interest will vest in possession in the future.
A contingent interest is conditional upon the occurrence of a future event.
A contingent interest will become vested if the condition is satisfied.
Saunders v Vautier: example 1
* A trustee holds £2,000 for A and B in equal shares, to be distributed when they reach the age of 25.
* A is 17.
* B has just turned 18 and has asked the trustees to transfer their share of the trust fund to them.
Should the trustees transfer B’s share as directed?
- A and B both have vested interest in the trust fund. They have fixed shares of (£1,000 each)
- As an adult beneficiary with vested interest, B has Saunders v Vautier rights so the trustees must comply with B’s request, bring the trust to B for an end.
- They must continue to hold A’s £1,000 on trust.
- One A reaches 18, they will also have Saunders and Vautier rights and can request the capital if they choose to do so.
- If they do not, it will be held on trust until they are 25.
Saunders v Vautier: example 2
* A trustee holds property on trust for A for life, remainder to B.
* A is 50 and B is 17. They have asked the trustees to share the trust fund equally between them.
Should the trustees distribute the trust fund as directed by A and B?
- A has a vested interest in the income and B has a vested interest in the capital.
- Their shares are not severable, and neither can exercise Saunders v Vautier alone.
- As B is a minor, A and B cannot yet exercise Saunders v Vautier together and the trustees must not distribute the capital in accordance with their request.
- Once B reaches the age of 18, they will have Saunders V Vautier rights. If A and B make the request once B turns 18, the trustee must transfer the fund as directed.
- This may require them to sell property in order to divide the proceeds equally.
Summary in relation to the rule in Saunders v Vautier
The rule in Saunders v Vautier allows absolutely entitled adult beneficiaries of sound mind to terminate the trust and take legal title to the capital.
They could alternatively direct the trustees to transfer legal title to a third party.
The rule in Saunders v Vautier can be exercised by trusts with multiple beneficiaries.
In a simple fixed trust, without successive interests, each beneficiary can sever their share of the capital without affecting the interests of others.
In the case of more complex trusts, where shares cannot be severed, Saunders v Vautier can only be exercised if all the beneficiaries are adults of sound mind who agree to collapse the trust. This includes beneficiaries with contingent interests and the objects of discretionary trusts.
Practically speaking, it is unlikely that Saunders v Vautier will be exercised by the objects of a large or complex trust.
The beneficiaries cannot use Saunders v Vautier to interfere in the administration of the trust. They can either collapse the trust (and settle the property on a new trust if they choose to) or leave the trustees to carry out their obligations.
Which of the following is a dispositive power of trustees?
1.Power to sell trust property
- Power of delegation
- Power of appointment
- Power of investment
%. Power to charge trust property
Correct
Power of appointment
A power of appointment involves making a decision as to the distribution of property. This is a dispositive power.
True or false: Trustees must provide beneficiaries with reasons for the way they have exercised their powers.
False
Trustees have no obligation to provide reasons for the exercise of their powers.
A trustee holds a trust fund on trust for A for life, remainder to B and C in equal shares. The trustee is considering how to invest the trust fund.
What should the trustee be trying to achieve from their investment strategy?
- Income only
- Capital growth only
- Income and capital growth
Income and capital growth
Correct
The trustee must attempt to strike a fair balance between the life tenant who is entitled to the income and the remaindermen who are entitled to the capital.
A trustee of a life interest trust decides that they will invest £500,000 of trust money in a property for the life tenant to live in. The trustee decides to buy a property in the north of France, where the life tenant is currently living. The trust instrument does not contain any express provisions relating to the acquisition of land.
True or False: the Trustee has acted in breach of trust.
True
Correct
The land is abroad and therefore is not an authorised investment. See section 8 Trustee Act 2000.
A trust fund is worth £500,000. It has two trustees, who are both property lawyers. The trustees decide to invest £50,000 of trust money in company shares. They discuss the matter together and decide to make the investment. The trust instrument does not contain any express provisions relating to investment.
Which ONE of the following best describes the position?
- The trustees have breached their statutory duties because they have not obtained proper advice with regards to the investment.
- The trustees have breached their statutory duties because they have not diversified their investments
- The trustees have breached their statutory duties because company shares are not a suitable investment for this trust fund.
- The trustees have not breached their statutory duties because they have a statutory power to invest in company shares.
- The trustees have breached their statutory duties because they do not have the power to make this kind of investment.
The trustees have breached their statutory duties because they have not obtained proper advice with regards to the investment.
Correct
The trustees are required to take proper advice in accordance with section 5 Trustee Act 2000 unless they reasonably consider it unnecessary to do so in the circumstances. There is nothing in the fact pattern that suggests that this is an investment where it would not be necessary to take advice.
Which of the following powers are trustees permitted to delegate using their statutory powers of delegation?
- Powers of investment only
2.Powers of investment and powers to distribute trust property to beneficiaries
- Powers to distribute property to trust beneficiaries only
- Powers to acquire land and powers to distribute trust property to beneficiaries
- Powers of investment and powers to acquire land
- Powers of investment and powers to acquire land
Trustees can delegate their powers of investment and powers to acquire land but cannot delegate their powers to distribute property to a beneficiary.
Ten years ago, a trustee used money from a trust fund to purchase a house for themselves. The beneficiary has only just discovered the breach.
True or false: The beneficiary cannot recover the trust property because the limitation period has expired
False
Correct
This would be a proprietary claim (for the trust property itself), rather than a personal one and therefore would not be subject to the limitation rules.
This may also be considered a fraudulent act.
A trust has three trustees. One of the trustees is a solicitor, another a doctor and the third is an accountant.
The solicitor is a director of the company in which the trust has a significant shareholding. The solicitor has not attended board meetings for some time and, as a result, was unaware of a number of poor business decisions which were made by the board. The value of the company shares has decreased significantly as a result of these decisions.
The company accounts have been circulated to the three trustees on an annual basis. It has been very clear from the accounts that the company has been in financial difficulties for several years and that the share value has been decreasing year on year. The trustees have not taken any action to try and improve the position of the company or sell the shares.
Which of the trustees is likely to be found liable for breach of trust?
- All three trustees
- None of the trustees
- Only the solicitor and accountant
- Only the solicitor
- Only the accountant
- All three Trustees
Correct
This is the most likely outcome. All the trustees have failed to properly monitor the investment in the company shares. Although the solicitor may appear more culpable than the others (and the accountant could be expected to have a better understanding of the accounts) none of them has exercised the requisite standard of care and skill in respect of this investment. All had access to the accounts and should have reviewed them.
A trustee holds a fund on trust for A for life, remainder to B (18) and C(12). A wants the trustee to purchase land in Spain for A to live in. The trust instrument does not give the trustee the power to acquire land overseas.
Which of the following represents the best advice to the trustee?
- The trustee can purchase the land in Spain as long as they obtain the fully informed consent of A and B. C’s consent is not needed because they are a minor.
- The trustee can purchase the land in Spain as long as they obtain proper advice and are confident it is a suitable acquisition which is in the interests of all the beneficiaries. Although purchasing the land is unauthorised, the trustee should not worry about this as they will only be liable to compensate the trust fund if the breach causes a loss.
- The trustee should not purchase the land in Spain. It is not permitted by the terms of the trust and obtaining A’s consent is insufficient to prevent the trustee being liable for breach of trust.
- The trustee can purchase the land in Spain as they have A’s consent. B and C’s consent are not needed because their interests have not yet vested in possession.
- The trustee can purchase the land in Spain as long as they obtain the fully informed consent of all three beneficiaries.
The trustee should not purchase the land in Spain. It is not permitted by the terms of the trust and obtaining A’s consent is insufficient to prevent the trustee being liable for breach of trust.
This is an unauthorised investment and would require the fully informed consent of all beneficiaries. C cannot consent.
In which of the following circumstances might it be appropriate for trustees to surrender their discretion to the court?
- When the trustees are unsure of how to interpret a trust term.
- When the trustees cannot obtain beneficiary consent to a proposed course of action because some or all of the beneficiaries are under 18.
- When the trustees are deadlocked over the exercise of a duty.
When the trustees are deadlocked over the exercise of a duty.
Correct
Surrender of discretion is an exceptional course of action and can only be sought in relation to a specific problem which requires addressing, such as where the trustees have an obligation to exercise a discretion but do not agree as to how to exercise it.
