Trustee Powers: Maintenance and Advancement

Question 1

What powers do trustees have to apply trust income for minor beneficiaries, and under what conditions can they exercise these powers under s 31 of the TA 1925?

Answer 1

Trustees may apply income for a minor beneficiary’s maintenance, education, or benefit under s 31 if:

1. No contrary provisions exist in the trust deed. If the settlor has explicitly restricted this power, trustees must follow those limitations.
2. The minor beneficiary has a vested or contingent interest in income, meaning they are entitled to receive income at some point, subject to conditions.
3. No prior interests in income exist, such as a life tenant’s entitlement. If someone else has a current entitlement to income (e.g., the life tenant), the trustees cannot redirect that income for a minor.

Additional Considerations:

• Trustees cannot pay income directly to minors, as minors cannot provide legal receipts. Instead, they may pay income to:
• The minor’s parent or guardian.
• A third party directly providing maintenance, education, or benefit (e.g., a school or tutor).
• Trustees must act with discretion and prudence, ensuring that the expenditure aligns with the minor’s genuine needs and the trust’s terms.

Question 2

Are trustees obligated to use trust income for a minor beneficiary’s maintenance, education, or benefit under s 31 of the TA 1925? What happens if they decide not to use it?

Answer 2

Trustees are not obligated to apply trust income under s 31. The decision is at their absolute discretion.

If trustees choose not to apply the income:
* The unused income must be accumulated (i.e., invested) and added to the trust capital.

• This accumulated income will later form part of the trust property, which is distributed when the minor’s interest vests (e.g., upon reaching the age specified in the trust, such as 18 or 25).

Key Examples:

• If income is applied: Trustees use income to pay for tuition or living expenses, ensuring the expenditure is aligned with the minor’s well-being.
• If income is not applied: The income is invested for the minor’s future use and is not immediately accessible. Trustees must account for such accumulations to the minor when their interest vests.

Question 3

What changes occur when a minor beneficiary becomes an adult (18 years) but has a contingent interest in the trust property?

Answer 3

When a minor beneficiary turns 18:

1. The trustees’ discretionary power under s 31 ceases.
2. Trustees are obligated to pay income to the adult contingent beneficiary as it arises, even though the beneficiary’s full interest in the trust property has not yet vested.

Key Example:

• A trust states, “to Charles if he attains the age of 25.”
• When Charles turns 18, he is entitled to receive income from the trust but cannot demand the capital.
• Trustees must ensure regular payments of income to Charles, but they retain control over the capital until he satisfies the condition (attaining age 25).

Question 4

What happens to trust income and capital if an adult contingent beneficiary dies before meeting the vesting condition?

Answer 4

If an adult contingent beneficiary dies before their interest vests:

• Their estate receives nothing.
• Any income already paid to the beneficiary during their lifetime cannot be reclaimed.
• The capital and accumulated income revert to the trust and are distributed according to the trust’s terms, often to alternate or residuary beneficiaries.

Example:
If a trust states “to Ulrika at 25,” and she dies at 23, neither her estate nor any dependents can claim the trust property.

Question 5

Under what conditions can trustees advance trust capital to a beneficiary under s 32 of the TA 1925?

Answer 5

Trustees may advance capital under s 32 if:

1. The beneficiary has a vested or contingent interest in capital.
2. The advancement serves the beneficiary’s advancement or benefit, such as education, starting a business, or purchasing a home.
3. The advancement does not exceed the beneficiary’s presumptive share in the trust property. For trusts created after 1 October 2014, trustees can advance up to 100% of the presumptive share.

Key Points:

• Trustees cannot be compelled to advance capital; it is a matter of discretion.
• Payments should be made directly to third parties (e.g., a university or builder) to avoid misuse.

Question 6

Can a trustee advance capital to one beneficiary without consulting others? Can trustees deny requests?

Answer 6

Trustees may advance capital to one beneficiary without consulting others because:

1. Beneficiaries without prior interests (e.g., contingent beneficiaries) have no right to approve or veto decisions.
2. The trust terms govern the trustees’ power, and they act solely in the trust’s best interests.

Denial of Requests:
Trustees can refuse requests if:

• The requested purpose does not align with “advancement or benefit” (e.g., funding a hobby or luxury item).
• The advancement might jeopardize the financial health of the trust fund.

Example:
Trustees may approve paying Fabien’s university fees but deny Gabriella’s demand for a jet ski.

Question 7

What is the difference between income and capital in a trust, and how does it affect trustees’ decision-making?

Answer 7

• Trust Income: Regular returns generated by the trust property, such as dividends, interest, or rent. Typically used for the maintenance, education, or benefit of beneficiaries.
• Trust Capital: The underlying property itself (e.g., land, investments). Trustees may advance capital for a beneficiary’s advancement or benefit under s 32.

Key Considerations for Trustees:

• Income is often spent or distributed, while capital is preserved and only advanced under strict conditions.
• Mismanagement of either can lead to legal liability for trustees.

Question 8

How do trustees balance competing requests from beneficiaries and apply the powers under s 31 and s 32 of TA 1925?

Answer 8

Trustees balance competing interests by:

1. Assessing the beneficiary’s entitlement: Does the requesting beneficiary have a vested or contingent interest in income or capital?
2. Evaluating the purpose of the request: Does it align with maintenance, education, or advancement?
3. Considering long-term trust sustainability: Will the payment compromise the fund’s ability to meet future obligations?
4. Exercising impartiality: Trustees must treat all beneficiaries fairly, taking into account their respective interests.

Example:

• Trustees approve advancing £50,000 from Fabien’s presumptive share for university fees.
• They deny Gabriella’s jet ski request, as it does not enhance her material situation.

Question 9

What are the statutory conditions for advancing capital under s 32 of the Trustee Act 1925, and how are they applied?

Answer 9

A: Trustees may advance trust capital under the following conditions:

1. No contrary provisions in the declaration of trust
   * Example: If a life tenant is entitled to income, trustees must adhere to the terms and cannot advance capital unless allowed by the trust deed.
2. The beneficiary must have an interest in capital

• Includes both:
  (i) Beneficiaries with a vested interest (e.g., beneficiaries entitled in possession or remainder).

(ii) Beneficiaries with a contingent interest (e.g., those awaiting specific conditions to vest their interest).

• Example: Trustees cannot advance capital to a minor if a life tenant (e.g., Rajesh) is entitled to the income unless the life tenant consents.

3. The payment must be for the beneficiary’s advancement or benefit

• The purpose must improve the material situation of the beneficiary (e.g., education, housing, or business setup).
• Trustees must ensure that the payment does not solely benefit someone else.
• Example: Advancing capital to a parent to clear debts (Re Pauling’s Settlement Trusts [1964]) would breach this condition.

4. The amount advanced must not exceed the beneficiary’s presumptive entitlement
   * For trusts created:
   * After 1 October 2014: The advance payment must not exceed the beneficiary’s entitlement.

• Before 1 October 2014: Up to 50% of the presumptive share can be advanced.
• Example: Yvonne (a minor beneficiary) can only receive up to £30,000 from her £60,000 entitlement under a trust created in 2008.

5. The payment must be considered when the beneficiary becomes entitled to the capital

• The amount advanced will be deducted from their final entitlement (“hotchpot” rules).
• Example: Britney, aged 19, receives £15,000 as an advancement. When she reaches 21 and calls for her half-share, the £15,000 is deducted.

6. If another beneficiary has a prior interest
   * Advancing capital to a secondary beneficiary requires the prior interest-holder’s written consent (if they are an adult).

• Example: Trustees can only advance capital to Elma if Catrina (a life tenant) consents in writing, as advancing capital could reduce the income Catrina is entitled to.

Question 10

What is the process trustees follow when a beneficiary requests money early, and what are the key considerations?

Answer 10

1. Check the declaration of trust:
   * Determine if any terms explicitly address early payment. If no relevant terms exist, proceed with the following steps.
2. Does the beneficiary have an interest in income?

• If under 18: Trustees may apply income for the minor’s maintenance, education, or benefit. Payments are made to a parent or third party, not the minor directly.
• If 18 or older: Trustees must already pay income directly to the beneficiary.

3. Does the beneficiary have an interest in capital?

• The payment must serve the beneficiary’s advancement or benefit.

4. How much capital can be advanced?

• For trusts created after October 2014: Up to 100% of the beneficiary’s presumptive share can be advanced.
• For trusts created before October 2014: Up to 50% of the beneficiary’s presumptive share can be advanced.

5. If there is a prior interest (e.g., a life tenant):

• Trustees must obtain written consent from the prior interest-holder, provided they are an adult.

Key Point: Trustees have discretionary power and cannot be compelled to release money early. Beneficiaries have no automatic right to demand early payments.