Trustee Powers and Duties

Question 1

How can trustee powers and duties be distinguished?

Answer 1

Trustee powers - permissive, they determine what a trustee may do. They are acts that are authorised but not compulsory

Trustee duties - mandatory, they determine what a trustee must do

Question 2

What are the sources of trustee powers and duties?

Answer 2

• trust instrument - may well contain express provisions relating to powers and duties of trustees or modifying any default statutory duties
• statute - many duties and powers have basis in statute (trustee act 1925 and 2000)

Question 3

What are administrative powers and duties?

Answer 3

Powers and duties that relate to the management of the trust property while it is held on trust.

Do not effect the beneficial interest arising from the trust

Question 4

What are dispositive powers and duties?

Answer 4

Powers and duties that relate to the distribution of trust property in accordance with its terms

They affect the beneficial interest arising from the trust

Question 5

What is the general power of investment that trustees have under statute?

Answer 5

Trustee may make any kind of investment that they could make if they were absolutely entitled to the assets of the trusts

Question 6

What must trustees consider when exercising their general power of investment?

Answer 6

• consider the standard investment criteria
• take advice in accordance with their duty
• their general duty of care

Question 7

What is the standard investment criteria?

Answer 7

When making an investment, trustees must consider:

• suitability of the proposed investments including: (i) general suitability of the investment and (ii) specific suitability of this particular investment
• diversity - trustees must consider the need for diversification of the trust investments which will vary depending on size and nature of the particular trust

Question 8

Do trustees have an ongoing duty in relation to investments?

Answer 8

Yes - they have an ongoing duty to regularly review investments with reference to the standard investment criteria and decide whether they ought to be varied

Question 9

What should trustees take into account when deciding the suitability of an investment under the standard investment criteria?

Answer 9

• trustees should balance the duty to preserve the trusts assets against the need to produce appropriate growth
• size of the trust fund
• period of time for which the trust is intended to subsist for
• the respective rights of different beneficiaries eg life tenant vs remainderman

Question 10

How will the suitability of investments change where there is a small short-term family trust compared to a large long-term commercial trust?

Answer 10

Larger long-term commercial trusts more likely to have greater freedom to invest in assets which are intended to produce long-term growth whereas trustees of small short-term family trusts are going to be more constrained as to the assets they can invest in

Question 11

How will the respective rights of different beneficiaries impact the investment suitability?

Answer 11

Trustees must act even-handedly between trustees.

If both life tenant and remainderman, they will need consider need to produce income for life tenant and need to grow capital for remainderman

Question 12

In Cowan v Scargill, what other factors did the court consider were important in deciding the suitability of investments?

Answer 12

• trustees’ obligation to act in the best interests of beneficiaries means their best financial interests
• trustees must balance the interests of all beneficiaries (current and future)
• the personal views of trustees are not relevant to the assessment - trustees must exercise their powers fairly and honestly and not for any ulterior purpose
• best interests of beneficiaries could be construed more widely in certain cases, allowing trustees to take into account moral and ethical concerns (such as where all beneficiaries are of sound mind who share those concerns and would not wish to benefit from an investment they consider immoral or unethical) (will be very rare in practice)
• although trustees are not bound to follow the advice they receive on investments, they cannot ignore it simply because they personally disagree with it. They can only do so if they consider that a reasonably prudent trustee would act in the same way

Question 13

What happened in the case of Cowan and Scargill with regards to the suitability of investments?

Answer 13

Trust for British coalminers was not allowed to adopt a policy whereby it could not invest in oil or overseas.

Obligation on trustees was to produce the best financial return for trust fund, in order to preserve the value of the pensions of the current and future members of the scheme.

The policy would be contrary to this obligation

Question 14

What should trustees take into account when deciding the diversity requirement of investments under the standard investment criteria?

Answer 14

Trustees need to take an overall approach to the investments of the trust fund, with regards to risk, yields and sizes across range of assets.

Aim is trust fund is not overly expose to risks of losses in particular sector.

Will depend on size and nature of trust

Question 15

Can trustees express a preference towards ethical investments?

Answer 15

Yes - where straightforward choice between two investment of economical equivalence can choose more ethical one

Question 16

When can trustees take into account the ethical views of beneficiaries for investment purposes?

Answer 16

Where the beneficiaries are all of sound mind and agree on the decision

Question 17

What non-financial considerations can trustees take into account when making investments on behalf of a charitable trusts?

Answer 17

• charitable trustees may refrain from making investments which might conflict with the aims of the charity or hamper its work
• trustees can consider whether making ethically questionable investments is likely to undermine the work of the charity

Question 18

When taking into account ethical considerations in relation to investments on behalf of a charitable trusts, what must trustees bear in mind?

Answer 18

Trustees must balance the risk to the charity of financial loss from not making the investment against the detriment and disadvantages to the charity of making the investment

Question 19

What requirement is there for trustees obtaining advice in relation to investments under statute?

Answer 19

Trustees are required to obtain and consider ‘proper advice’ before exercising their powers of investment and when reviewing their investments

Question 20

What is ‘proper advice’ in relation to investments?

Answer 20

• advice must relate to how the powers of investment should be exercised with reference to standard investment criteria
• should be provided by person who is reasonably believed by the trustee to be qualified to give the advice by judging their ability in and practical experience of financial and other matters relating to the proposed investment

Question 21

When can trustees not seek and consider proper advice in relation to investment duties?

Answer 21

Need not when they reasonably conclude that in all the circumstances it is unnecessary to do so

Eg cost of advice outweighs benefit of obtaining it

Or trustee has sufficient knowledge and expertise to make decision without advice

Question 22

What is the statutory duty of care?

Answer 22

Trustees must exercise such care and skill as is reasonable in the circumstances

• assessment is to take into account ‘any special knowledge or experience that a trustee has or holds themselves out as having
• applies to professional trustees and requires the assessment to take into account any ‘special knowledge or experience’ that is reasonable to expect of a person acting in that capacity

Question 23

Under the statutory duty of care, who is subject to a higher standard of care?

Answer 23

• professional trustees
• lay trustees who have been appointed on the basis of having particular skills that would make them desirable trustees

Question 24

What acts does the statutory duty of care apply to?

Answer 24

Not all acts of the trustee

Only those set out in schedule one of the Trustee Act 2000 unless expressly excluded. They are:

• power of investments
• acquisition of land
• delegation
• compounding of liabilities
• insurance
• reversionary interests, valuations and audits

Question 25

What is the common law duty of care for trustees?

Answer 25

Trustees must exercise standard of diligence and care expected of an ordinary prudent businessman

Applies more widely than statutory duty

Question 26

What statutory power do trustees have to acquire land?

Answer 26

• statutory power to acquire freehold or leasehold land only in UK
• may acquire land for investment and other purposes (eg for beneficiaries to live in)
• if land is investment, must also consider investment criteria

Question 27

What powers can trustees delegate under statute?

Answer 27

• trustees cannot delegate their distributive obligations
• can delegate investment powers and powers to acquire land

Question 28

Who can trustees delegate their powers to?

Answer 28

They can delegate their powers to an appropriate agent.

Cannot delegate powers to beneficiaries

Question 29

What must trustees do if they wish to delegate their investment powers?

Answer 29

• must evidence agreement in writing
• prepare a written policy statement which agent is bound by
• policy statement should give guidance as to how agent should exercise their functions ensuring they are in line with the best interests of beneficiaries

Question 30

Are agents bound by any restrictions in making investment decisions?

Answer 30

• bound by policy statement
• bound by any restrictions trustees would be in making investment decisions

Question 31

In order to comply with statutory duty of care, what must trustees do when delegating investment powers to agents?

Answer 31

• select appropriate agent
• agreement with agent complies with duties under statute
• arrangement is reviewed regularly

Question 32

What three broad circumstances will require trustees to distribute trust property?

Answer 32

• when trustees have an obligation to do so under terms of trusts
• when directed to do so by beneficiaries with Saunders v Vautier rights
• in the exercise of dispositive power such as a power of appointment, maintenance or advancement

Question 33

When should trustees distribute income or capital?

Answer 33

As soon as possible in relation to when beneficiary becomes entitled.

Trustees should not wait until beneficiary demands payment. Delay as to distributing is a breach of trust.

Question 34

How will the nature of the trust property affect distribution?

Answer 34

Some trust property may take a long time to sell before proceeds can be distributed such as land.

Whereas chattels could be transferred almost immediately.

Question 35

What two duties could trustees have in relation to income?

Answer 35

• distribute income as it arises
• accumulate income

Question 36

What must trustees do in relation to income and adult beneficiaries?

Answer 36

Subject to the deed trust saying anything to the contrary, income should be distributed to adult beneficiaries as it arises

This include adult beneficiaries whose interest is contingent if it carries the immediate income

Question 37

What must trustees do in relation to income and minor beneficiaries?

Answer 37

Subject to the deed trust saying anything to the contrary, trustees must accumulate income for the minor beneficiaries until they turn 18. On turning 18, accumulated income is added to the capital and distributed when the capital is

Question 38

What must trustees of discretionary trusts do in relation to distribution?

Answer 38

The must exercise their discretion and distribute the trust property within a reasonable time

Question 39

What is the interaction between statutory dispositive powers and the trust instrument?

Answer 39

The statutory powers can be amended or excluded by the trust instrument

Question 40

What is the statutory power of advancement?

Answer 40

Trustees have the power to use capital for the advancement or benefit of a beneficiary before the beneficiary become absolutely entitled to the property

Question 41

When is the statutory power of advancement available?

Answer 41

• may be used for both adult and minor beneficiaries
• applies to both vested and contingent interests
• can be modified or excluded by the trust instruments

Question 42

How much capital can be paid out under the statutory power of advancement?

Answer 42

Up to 100% of the beneficiary’s prospective entitlement to the capital (even if they have a contingent interest)

Only 50% if trust created before 1 October 2014

Question 43

How does the statutory power of advancement differ from Saunders v Vautier rights?

Answer 43

The power of advancement can be available in situations where beneficiaries do not have Saunders v Vautier rights.

Unlike Saunders v Vautier rights, the trustees have no obligation to distribute capital if requested by beneficiary

Question 44

What is the meaning of advancement under the power of advancement?

Answer 44

Advancement - providing immediate financial benefit for a beneficiary

‘any use of money which will improve the material situation of the beneficiary’

Question 45

Does advancement under the power of advancement include the improvement of the beneficiary’s moral well-being?

Answer 45

Yes - includes giving the money for charitable purposes but only to extent that the beneficiary would have otherwise used their own resources for such purposes

Question 46

If using their statutory power of advancement, whom should capital be paid to?

Answer 46

Adult beneficiary - then directly to them or directly to provider of service/seller of asset on beneficiary’s behalf

Minor beneficiary - cannot be paid directly to them as they cannot give good receipt. It should be paid either to the child’s parent or legal guardian or directly to the provider of the goods or services that are being acquired on behalf of the beneficiary

Question 47

What must trustees do following the exercise of the power of advancement?

Answer 47

Trustees must ensure the money is being used for the purposes that it was provided.

If money is not being used for purposes stated, trustees should not further any more money to them (can pay directly to third party for advancement of beneficiary instead)

Question 48

In what circumstances may the consent of other beneficiaries be required for the power of advancement to be used? Who can provide consent?

Answer 48

If there are beneficiaries with prior interest to the capital, then their consent is required.

Consent of beneficiary with a subsequent interest is not required though.

Consent can be provided by beneficiaries who are of full age and sound mind

Question 49

What is meant that any payment under power of advancement must be brought into account?

Answer 49

When beneficiary become absolutely entitled, they will receive their interest less the capital they have already received.

Trustees can decide whether to deduct proportionate share of the overall trust value or strict monetary value of advancement

Question 50

What is the statutory power of maintenance?

Answer 50

Trustees have power whereby they can pay trust income (including any previously accumulated income) for the maintenance, education or benefit of minor beneficiaries

Question 51

When is the statutory power of maintenance available?

Answer 51

Available where there are minor beneficiaries with vested or contingent interests in the capital and no other beneficiaries have a prior interest in the income

Must not be excluded/varied by trust deed

Question 52

What is covered by ‘maintenance, education or benefit’ of the minor beneficiary under statutory power of maintenance?

Answer 52

Trustees have very broad discretion. Non-exhaustive list:

• school fees or other training
• medical bills
• food, clothing and rent
• leisure and holidays

Question 53

How is the statutory power of maintenance different for trusts created before 1 October 2014?

Answer 53

Power is more limited.

Trustees:

• can only apply income as is ‘reasonable in the circumstances’
• must take into account all the circumstances including any other trust income available for the same purpose

Question 54

Whom should trust income be paid to under the statutory power of maintenance?

Answer 54

Trustees should not pay income to a minor beneficiary as minor cannot give good receipt

Should be paid either to child’s parent/legal guardian or directly to provider of goods/services

Question 55

What effect does the power of maintenance being a fiduciary power have?

Answer 55

It means the trustees must consciously consider the exercise of the power and if they choose to exercise it, they must act in good faith in the interests of the beneficiary

Question 56

Can the maintenance benefit anyone else indirectly?

Answer 56

Yes - provided the primary benefit is for the minor beneficiary, it does not matter if others are indirectly benefitted

Question 57

Can trustees unquestionably pay maintenance to a minor’s parent or guardian on assumption that they will use it for the minor’s benefit?

Answer 57

No - this would an improper exercise of the power

Question 58

What should trustees consider doing before a minor beneficiary turns 18?

Answer 58

They should consider exercising their power of maintenance as after they turn 18 all the accumulated income will become part of the trust capital and the power can no longer be used.

The beneficiary will not be able to access it unless and until their interest in the capital vests