Trustees' Duties Flashcards
what are trustees duties?
- duty of care
- duties of new trustees
- duty to act impartially between Bs
- duty to act carefully and distribute assets correctly
- duty to act personally and unanimously
- duty to exercise powers properly
- duty to provide information
- duty to invest
- fiduciary duty
what powers do Bs have in relation to Ts duties?
- Bs can compel Ts to perform their duties (but not powers)
how can S impact T’s duties?
they can limit / exclude T’s liability for breach/loss in the trust
explain duty of care
Standard of care (objective) > T must act as a reasonably-prudent business man would and take such precautions as they would their own affairs
i.e. taking professional tax advice. If T failed to do this and resulted in loss to the trust, Bs could sue in negligence.
- The standard of care would be higher if a paid professional was being used
T would be expected to exercise care and skill reasonably expected of their profession
re: duty of care
what is the standard of care?
Standard of care (objective) > T must act as a reasonably-prudent business man would and take such precautions as they would their own affairs
The standard of care would be higher if a paid professional was being used
T would be expected to exercise care and skill reasonably expected of their profession
what duties do new trustees have?
These apply whether T is appointed at the start or part way through. T must:
o Ensure they have been properly appointed;
o Ascertain the TP and take reasonable steps to obtain control of it (i.e. ensuring the new T has legal title to the property)
o Ensure there is an inventory for any chattels held on trust;
o Review the trust and paperwork to understand it (the Ts must provide it);
o Enquire into trust history and remedy any breaches
re: duties of new trustees
when might they be liable?
If T does not take this action and it causes loss to the trust, T may be liable
explain ‘duty to act impartially between Bs’
Where two Bs interests’ conflict and T must choose a B, T must act impartially
T cannot benefit one B at the expense of the other
give an example re: duty to act carefully and distribute assets correctly
- i.e. in a life interest trust, not advancing capital to the remainderman without permission of the life tenant
re: duty to act impartially between Bs
what does this not require?
This does not require:
o T to give Bs equal treatment;
o T to consult either or both Bs; or
o T to give either B a fair hearing
However, T cannot benefit one B at the expense of the other
explain the duty to act personally and unanimously
- Co-Ts must take decisions unanimously (unless the trusts provides otherwise)
- Ts must be personally active in running the trust (unless they have appointed a deputy)
re: duty to act personally and unanimously
when would T be in breach of this duty?
Ts must be personally active in running the trust, i.e. a T cannot:
o Leave matters to the co-Ts without enquiry
o Allow TP to be in the sole control of one T
o Fail to monitor and correct (where necessary) conduct of co-Ts
o Fail to act if they know a co-T is about to or is committing a breach
re: duty to act personally and unanimously
when would a T be liable?
Give an example
- Passive Ts may be liable to remedy any loss
i.e. John sets up a trust. He tells Ts to make certain early payments (in accordance with the trust) and they do. The Ts would be in breach because they must act personally and not be dictated but someone else.
Ts can take professional advice but Ts are ultimately responsible for the decision
explain ‘duty to exercise powers properly’
If Ts exercise a power, they must do so rationally, in good faith and for the purposes it was created, with regard to:
o Relevant materials and facts; and
o Any legitimate expectation B might have that a power be exercised
re: duty to exercise powers properly
what must Ts have regard to when exercising this duty?
o Relevant materials and facts; and
o Any legitimate expectation B might have that a power be exercised
re: duty to exercise powers properly
do Ts need to give reasons for their decisions?
Give an example
- Ts do not need to give reasons for their decision, but if they do the court can enquire into their soundness
- However, if Ts are going to exercise their discretion in a way that is different to as expected, they need to give reasons and advance warning
i.e. Ts have been giving Ada advance capital for 10 years. They cannot stop this without giving warning and Ada the opportunity to persuade them.
re: duty to provide information
what information are Bs entitled to see?
Bs are entitled to see the following documents:
o Trust / will
o Trust accounts
o Documentation which shows how TP has been
re: duty to provide information
what documents are Bs not entitled to? How would they obtain these?
Bs do not have a duty to provide the below. They would need to apply to the court for disclosure:
o Reasons for their decisions
o Documents not listed above i.e. records of deliberations, trust diaries, meeting minutes, letters of wishes
re: duty to provide information
when will the court order disclosure? when might the court refuse?
- Disclosure will not be ordered unless it is in the sound administration of the trust (i.e. there is evidence Ts may have breached the trust)
- The court may refuse if disclosure may lead the family to fall out or if it would reveal confidential information about the health or finances of Bs
re: duty to invest
what is the general position regarding liability?
So long as Ts have followed the right process, they cannot be liable for loss if an investment performs badly
the trust may contain an exclusion clause meaning the trustees limiting their liability for loss
re: duty to invest
explain the position regarding types of investment
The trust may specify what Ts can/can’t invest in
If permitted, Ts should consider the following when choosing an investment:
o B’s interest i.e. vested, contingent, successive
o Length of trust and investments i.e. short or long term investments
o Size of trust fund
o Tax position of trust and Bs
re: duty to invest
what should trustees consider when picking an investment type?
o B’s interest i.e. vested, contingent, successive
o Length of trust and investments i.e. short or long term investments
o Size of trust fund
o Tax position of trust and Bs
re: duty to invest
name some investment types
shares
bonds and gilts
property
cash in the bank
re: duty to invest
explain the capital and income returns in relation to shares
income - Y – dividends
capital - Y – rise in value of shares
re: duty to invest
explain the capital and income returns in relation to bonds and gilts
income - Y – the coupon
capital - N – unless sold on secondary markets
re: duty to invest
explain the capital and income returns in relation to property
income - Y (if let) – rent
capital - Y – rise in property value
re: duty to invest
explain the capital and income returns in relation to cash in the banks
income - Y - interest
capital - N
re: duty to invest
what are the points to consider re shares?
- Longer investment = greater return
- Investments should be spread
- PLC & blue chip companies = safer
Higher risk = greater returns
re: duty to invest
what are the points to consider re bonds and gilts?
loan which is repaid to investor with interest
Gilts = less risky
re: duty to invest
what are the points to consider re cash in the bank?
Safest form of investment
re: duty to invest
what things are not investments?
o Run around car cars depreciate in value. A high end car but produce capital but this is a risk
o Placing bets on horses
o Unsecured loans Ts cannot give loans unless permitted by the trust
re: duty to invest
what is T’s liability in relation to uninvested property?
Ts may be liable for any losses if the TP is left uninvested for an unreasonable amount of time
re: duty to invest
what are T’s investment powers?
General power to invest T can make any kind of investment they could make if they were absolutely entitled to the assets of the trust (not inc. land)
Power in relation to land T can acquire freehold or leasehold in the UK if:
o It is an investment;
o It is for the occupation of B; or
o For any other reason
re: duty to invest
explain T’s investment power in relation to land
T can acquire freehold or leasehold in the UK if:
o It is an investment;
o It is for the occupation of B; or
o For any other reason
re: duty to invest
what are the specific investment duties?
T’s have a duty to:
- exercise reasonable skill and care when investing
- duly and promptly invest capital and income which is not being distributed to Bs
- take professional advice from someone they reasonably believe to be qualified when considering selling or purchasing investments, unless Ts consider this unnecessary/inappropriate (i.e. one T is a financial advisor)
- have regard to the ‘standard investment criteria’ (SIC) when purchasing or reviewing investments
- review investments ‘from time to time’ and consider whether they should be varied in accordance with SIC
- act impartially to Bs
- secure the best returns for Bs.
re: duty to invest
explain the duty to exercise reasonable skill and care when investing in this context
o Professional Ts will be held to a higher standard
re: duty to invest
what is the standard investment criteria?
- Investments must be suitable for the trust
- Investments must be diversified, in so far as it is appropriate
re: duty to invest (standard investment criteria)
what are the considerations under ‘investments must be suitable for the trust’?
Is the investment type suitable?
* (i.e. investment in shares vs. size and duration of trust)
Is the entity they are investing in a good choice?
(i.e. is the company high / low risk
re: duty to invest (standard investment criteria)
what are the considerations under ‘investments must be diversified, in so far as it is appropriate’?
Diversification includes type of investment and entities (i.e. shouldn’t be only, and particularly not in only 1 sector)
re: duty to invest
how long is ‘from time to time’?
o No definition of ‘time to time’, will need to be done when appropriate i.e. if there is an economic downturn
re: duty to invest
explain ‘duty to act impartially to Bs with different interests’
Ts need to strike a balance between Bs with different interests, i.e. LT is interested in income and R is interested in capital
re: duty to invest
explain ‘duty to secure the best returns’
This doesn’t necessarily mean the highest return as such an obligation would impose too much risk
re: duty to invest
how are ethics relevant to this duty?
When exercising their duties, Ts should not be guided by their own ethical or moral view, but ethics are relevant as follows:
o Where unethical investments would be more beneficial than ethical concerns, Ts cannot refrain from investing in the unethical option
o Re charitable trusts, Ts can refuse to invest in things that oppose the charitable purpose / might alienate supporters
re: duty to invest
when and to whom can T’s delegate this duty?
Ts can collectively delegate their investment functions to either:
o A qualified third party (who can be paid a reasonable sum); or
o One of the Ts (if they are suitably qualified)
re: duty to invest
who can Ts not delegate this duty to?
- Ts cannot delegate to a B
re: duty to invest
what must Ts do when they are delegating functions?
Must comply with the following when delegating functions:
o Ts must select a suitably qualified person
o Have a written agreement with the agent.
o Ts must prepare a policy statement setting out how the agent should exercise the functions in the best interests of the trust
o The agent must comply with the above investment duties
o Ts must regularly review the arrangement and revise the policy if necessary
re: duty to invest
how must the ‘suitably qualified person’ Ts intend to delegate to be chosen?
They must be selected with reasonable care and skill
re: duty to invest (delegation)
what are the requirements in terms of the written agreement and policy statement?
the written agreement must include a term that they will agree to the policy statement.
Ts must exercise reasonable care and skill when preparing the policy statement
re: duty to invest (delegation)
what must Ts do if the agent is not adhering to the policy?
If the agent is not adhering to the policy, the retainer must cease
re: duty to invest (delegation)
when are Ts liable for the acts of the agent?
- Ts are not liable for the act or default of the agent unless T has breached their duties and this has caused a loss
i.e. did Ts properly retain the agent? Were they suitably qualified? Did Ts keep the arrangement under review?
re: duty to invest (delegation)
what can Ts do if the agent is negligent?
- If the agent is negligent Ts can bring a claim on behalf of the trust
re: fiduciary duty
what is a fiduciary?
someone who acts for or on behalf of someone else in circumstances that give rise to a relationship of trust and confidence
what type of relationship is T / B?
fiduciary relationship
re: fiduciary duty
what is the core duty?
no conflict rule and no profit rule
There are certain acts Ts must avoid as they will breach these rules
re: fiduciary duty
what is the no-conflict rule?
T must not put self in a position where their interests conflict the principals
re: fiduciary duty
what is the no profit rule?
- cannot make unauthorised personal profit from their position or use the principal’s property to make profit
- If T makes unauthorised profit, they will be obliged to account for this
re: fiduciary duty
what approach do courts have to the no profit rule?
- Court’s adopt strict liability approach i.e. they don’t look at T’s honesty or if the trust could have taken the opportunity but chose not to
re: fiduciary duty
when can profits be kept?
Profits can only be kept where (this is applicable to all the acts below):
o It is authorised in the trust;
o All the Bs are over 18, been given all the facts and agree; or
o It is ordered by the court or statutory provision
re: fiduciary duty
what acts must T avoid to avoid being in breach of this duty?
- self-dealing
- competition with the trust
- renumeration of trustees
- incidental profits
- use of information or oppurtunity
re: fiduciary duty
what is self-dealing?
selling / purchasing TP to themselves
re: fiduciary duty
what is the self-dealing rule?
the transaction is not immediately void, but Bs can set it aside for any reason within a reasonable time
‘reasonable time’ will be more generous if B is a minor
re: fiduciary duty
how is the self-dealing rule applied by the court?
- This is applied strictly by the courts (as above) and even if T has retired
re: fiduciary duty (self-dealing)
what happens if the transaction is set aside?
the transaction is set aside, T will need to reconvey the TP back to the trust
re: fiduciary duty
explain competition with the trust
If the trust includes a business, T cannot set up a business in competition
re: fiduciary duty
what happens if T sets up a business in competition with the trust?
what actions could B take?
- T would be liable to pay any profits they make to the trust
- Bs could obtain an injunction if they became aware T was doing this
what compensation are all Ts entitled to?
All Ts are entitled to be reimbursed for expenses incurred when acting on behalf of the trust (i.e. travel fees to attend T meeting)
re: fiduciary duty
when will a T be entitled to reasonable renumeration?
Ts are only entitled to reasonable renumeration if:
o The trust permits (i.e. charging clause)
o All Bs consent
o It is court ordered
o They are a Trust corporation or professional T (TA 2000)
o T is acting in a professional capacity certain requirements are met
re: fiduciary duty (renumeration)
explain ‘all Bs consent’
o All Bs consent (they must all be over 18 and given all the info)
If not, the agreement can be set aside in the future
re: fiduciary duty (renumeration)
explain ‘court ordered’
the court will order this if it is in the interests of Bs i.e. the trust needs skill of a particular T
re: fiduciary duty (renumeration)
what are the requirements for a professional T to receive renumeration? what is meant by ‘professional capacity’
o T is acting in a professional capacity, and:
They are not the sole T; and
It has been agreed by the other Ts in writing
Professional capacity = acting in the course of business which involves the provision of services connected to the trust
i.e. Mark and Sam are Ts. Sam is a financial advisor. He gives the trust financial advice. He could be paid if agreed by Mark.
re: fiduciary duty
what are examples of incidental profits?
commission and director’s salary
re: fiduciary duty (incidental profits)
explain the position regarding commission
if T receives commission when instructing a firm on behalf of the trust, they must account for this to the trust unless this is authorised by the trust, Bs or the court
re: fiduciary duty (incidental profits)
when might T receive a directors’ salary?
if a trust has shares in a company, a T might become a D to oversee management.
re: fiduciary duty (incidental profits)
what is the position if T receives a director’s salary?
give an example
T must pay the salary to the trust, unless:
o T is authorised to keep the salary by the trust, Bs or the court; or
o T did not acquire the directorship by virtue of the trust’s shares; or
Deduct the trust’s % vote from the overall % to work this out
o T was a D of the company before they became a T
i.e. trust has 35% shares in a company. At the SH meeting, 90% of SHs vote in favour of Tess becoming a D. Tess can keep the salary because Tess would have been appointed even without the trust’s vote. Conversely, if only 65% of SHs voted, then she could not keep the salary.
re: fiduciary duty
explain the position regarding use of information or opportunity
- T will be liable to account for profits they receive as a result of exploiting information belonging to the trust unless authorised by the trust, Bs or court
re: fiduciary duty (use of information or opportunity)
how do the courts approach this?
- This is applied strictly, it does not matter if the trust took advantage of the information or not
