TRUSTEES’DUTIES AND POWERS

Question 1

2

FIDUCIARY OBLIGATIONS OFTRUSTEES

Answer 1

1. Duty Not to Proft from Trusteeship
2. No Self-Dealing—Duty Not to Purchase
   Trust Property

Question 2

Duty Not to Proft from Trusteeship

Answer 2

Where any such profit is made, equity imposes a constructive trust on the trustee which will force the trustee to turn the proft over to the trust.

Question 3

3

Duty Not to Proft from Trusteeship
Directors’ Fees

Answer 3

1. A trustee who obtains paid employment by virtue of the trusteeship holds the funds they are paid on constructive trust for the trust benefciaries.
2. This principle has been applied most commonly to cases where a trustee has been appointed to be a company director by virtue of the fact that they hold shares in the company as trustee.
3. However, if it can be shown that the trustee would have been appointed as a director even without the voting rights attached to the company shares, the rule does not apply.

EXAMPLE
A trust holds 40% of the shares in a family company, X Co Ltd. The trustee holds a further 5% of the shares in his personal capacity, and the remaining 55% are held by other family members. The trustee is voted in as a director (a paid position) by a 60% majority including the votes attached to the trust shares. The trustee holds their director’s fees on trust. If the 60% majority had consisted of the votes of the trustee and the remaining family members, the rule would not apply and the trustee could retain his director’s fees.

Question 4

Profts from Information or Opportunity

Answer 4

1. If a trustee makes a personal proft as a result of opportunities or information gained from their trusteeship, the trustee holds that proft on constructive trust, even where there is no obvious conflict between the interests of the trust and the trustee.

Question 5

5

Remuneration

Answer 5

The general rule is that a trustee may not charge for services as a trustee, although they may recover out-of-pocket expenses. However, the following exceptions apply.
1. Charging Clause
2. Professional Trustee Charges
3. Trust Corporation
4. Consent of Benefciaries
5. Court May Authorise

Question 6

Charging Clause

Answer 6

The trust instrument may include a clause permitting trustees to charge for their services. Such clauses are usually framed so as to permit only a professional trustee to charge at their normal rate.

Question 7

3

Professional Trustee Charges

Answer 7

Under the Trustee Act 2000 (‘Trustee Act’), a professional trustee, other than a trust corporation, may charge reasonable remuneration for their services, provided that:
*They are not the sole trustee;
*The co-trustee(s) give their written consent;** and**
*There is no express provision in the trust instrument relating to the trustees’ charges (whether a charging clause or a prohibition on charging).

Question 8

Renumeration
Consent of Benefciaries

Answer 8

If all the beneficiaries are of full age and capacity, they can agree to a trustee receiving payment.

Question 9

Renumeration
Court May Authorise

Answer 9

The court may authorise payment to a trustee when the trust is exceptionally onerous or when the trustee has performed exceptional services

Question 10

2

No Self-Dealing—Duty Not to Purchase
Trust Property

Answer 10

1. A trustee may not purchase any property owned by the trust—even if the trustee pays full value or the purchase is made inthe open market.
2. Any such purchase by a trustee is voidable(may be set aside) at the instance of the benefciaries.
   Exam Tip
   When faced with a question involving a self-dealing trustee, remember that a trustee’s good faith or actual benefit to the trust is irrelevant.

Question 11

Court May Permit Self-Dealing

Answer 11

In exceptional circumstances, the court has the authority to permit a transaction of self-dealing to go ahead.

Question 12

May Purchase Benefcial Interest—Fair Dealing Rule

Answer 12

1. There is no rule to prevent a trustee from purchasing the beneficial interest of a benefciary, but such a transaction will be voidable if the trustee cannot show that the trustee paid a fair price, made** full disclosure** of all material facts to the benefciary, and in no way abused their position.

Question 13

10

FURTHER DUTIES OF TRUSTEES

Answer 13

1. Equitable Duties
2. Duty to Observe Terms of the Trust
3. Duty of Care
4. Dutyto Act Jointly
5. Duty to Act Personally
6. Duty to Take Possession ofTrust Property
7. Duty to Keep Accounts and Disclose Information
8. Duty to Act Impartially
9. Duty of Confdentiality
10. Duty to Invest

Question 14

Equitable Duties

Answer 14

A trustee must enquire as to the trust property, **take control **of it, and ensure its preservation. This includes seeing that legal title is vested in all trustees and that all trust property is properly segregated from the trustees’ personal assets. Failure to so segregate would be a breach of trust.

Question 15

Duty of Care

Answer 15

a.Statutory Duty of Care
1. The statutory duty of care is imposed in certain specifc cases, most notably when the trustees are exercising their powers of** investment** and their powers to **appoint agents. **

2. Under the statutory duty, the trustees must exercise “such care and skill as is reasonable in the circumstances” taking into account any special knowledge the trustee has, or holds himself out as having.
3. Professional Trustees
   Professional trustees will be held to a higher standard than lay trustees

b.General Standard of Care
1. When the statutory duty does not apply, the traditional test remains. Trustees are under a duty to act with the** “prudence of an ordinary man of business” **acting in relation to their own affairs.
2. This standard applies, for example, where trust-ees are exercising their statutory powers of maintenance and advancement.

In either case, it is open to the settlor to modify the relevant standard in the trust instrument.

Question 16

Dutyto Act Jointly

Answer 16

If there is more than one trustee, they must act jointly. This means that each trustee must remain active in the running of the trust, and the trustees must act** unanimously **in the exercise of their discretions.

Question 17

Duty to Act Personally

Answer 17

Trustees must act personally and have no general power to delegate their functions. However, the following statutory exceptions apply:
a.Exception—Administrative Functions
Under this power, trustees might delegate, for example, the preparation of tax returns, accounts, or legal documents on behalf of the trust, but they may not del-egate the exercise of discretions.

b.Exception—Investment Decisions in Certain
Circumstances
Trustees, acting together, may delegate investment deci-sions, provided that various conditions are met.

c.Exception—All Functions by Power ofAttorney
An individual trustee may delegate all their functions to an-other individual or a trust corporation by executing a pow-er of attorney to endure for a fixed term not exceeding 12 months. The trustee remains liable for the acts and omissions of the attorney as if they had acted personally.

Question 18

Duty to Take Possession ofTrust Property

Answer 18

Trustees must ensure that all the trust property is in their joint possession and control. If there is more than one trustee and trust property is left in the control of one of them, the co-trustees will be liable if that trustee misappropriates the
property.

Question 19

Duty to Act Impartially

Answer 19

1. Dealing impartially with the benefciaries is more difcult when the benefciaries are entitled to successive benefts. If, for example, A receives income for life, and B receives the trust capital at A’s death, the trustee has a duty to A to see that the trust property produces income. The trustee violates their duty to A if the trust property is not income-producing. On the other hand, to carry out their duty to B, the trustee must ensure that the trust property will not depreciate in value.

Question 20

4

Duty to Invest

Answer 20

Trustees must ensure that:
1. The investments they select are **authorised **either by statute or the trust instrument;

2. They take into account the relevant criteria in selecting investments;
3. They take any necessary advice in making investments; and
4. They keep their investments under** appropriate review**.

Question 21

Authorised Investments

Answer 21

1. General Power of Investment—Power of Benefcial Owners
2. Power to Acquire Land
3. Provisions in Trust Instrument

Question 22

General Power of Investment—Power of Beneficial Owners

Answer 22

As noted earlier, trustees may make almost any kind of investment that they could make if they were absolutely entitled to the trust assets. This is known as the ‘general power of investment’.

Question 23

2

Power to Acquire Land

Answer 23

1. In addition to other investments, trustees may acquire freehold or leasehold land in the UK, for occupation by a beneficiary or for any other reason.
2. Note, however, that the purchase of land
   outside the UK, whether as an investment or for any other reason, is not authorised unless the trust deed provides otherwise.

Question 24

3

Investment
Provisions in Trust instrument

Answer 24

1. The statutory powers may be extended or restricted by the trust instrument.
2. The most common special provisions are to restrict the choice of investments so as to exclude investment in certain sectors, such as the tobacco or arms industries, usually for ethical reasons.
3. Where such special provisions are included, trustees who invest in prohibited companies are acting in breach of trust.

Question 25

2

Standard Investment Criteria

Answer 25

1. The suitability to the trust of the type of investment proposed and the particular investment under consideration; and
2. The need for diversifcation of investments of the trust so far as appropriate to the particular circumstances of that trust.

Question 26

Review of investment

Answer 26

Trustees must keep their investments under review and consider whether, having regard to the standard investment criteria, they should be varied.

Question 27

Standard of Care
investment

Answer 27

The statutory standard—to act with** such care and skill as is reasonable** in all the circumstances—applies when trustees are making investment decisions.

Question 28

Delegation of Investment Decisions

Answer 28

Under the Trustee Act, trustees have the power to del-egate the choice of investments to an asset manager. There are detailed provisions requiring the preparation of a written policy statement for the asset manager to follow, which must include full details of the trusts and the investment objectives. This policy statement must be** incorporated into the
contract** between the trustees and the asset manager.

Question 29

Liability for Performance of Investments

Answer 29

Provided that the trustees have complied with all the require-ments set out above, they will not be liable to the benefcia-ries for losses where trust investments go down in value or fail to appreciate in line with infation.

Question 30

POWERS OF MAINTENANCE AND ADVANCEMENT

Answer 30

1. The statutory powers of maintenance and advancement enable the trustees to apply** income and capital** for the benefit of the benefciaries in specifc circumstances.
2. As with many other statutory powers, the powers of maintenance and ad-vancement may be amended or excluded by the settlor in the trust instrument.
3. In any case, these are discretionary powers—the trustees are under no obligation to exercise them.

Question 31

4

Power to Pay Maintenance Out of Income

Answer 31

1. Income is the money generated by the investment of the trust property.
2. A minor benefciary (that is, a benefciary below the age of 18)** has no right **to income during minority.
3. However, the Trustee Act gives trustees discretionary power to use trust income for a minor benefciary rather than accu-mulate it during the benefciary’s minority.
4. Accumulation of income means not using the income, such that it can be kept for future use.

EXAMPLES
1) Trustees are holding a fund on trust for Ben, to be distrib-uted when Ben attains the age of 25. Ben is 15 years old.
Ben has an interest in the income, and the power of maintenance applies. The trustee may use the income from the trust assets to support Ben until he is 18.
2) Trustees are holding a fund on trust for Lucy for life, with remainder to Ben. Lucy is 45 and Ben is 15. Lucy is entitled to the income of the fund, and the trustees must pay it to her. Ben has no interest in the income, and so the power of maintenance does not apply. If Lucy dies before Ben is 18, he will then have an interest in the income and the power will apply.

Question 32

3

Applying Income for Maintenance, Education, or
Benefit

Answer 32

1. Where the power applies, the trustees may pay or apply the income for the child’s maintenance, education, or beneft as they see ft, and must accumulate any surplus income.
2. The trustees may not simply pay the income to the benefciary because the beneficiary is not capable of giving a valid receipt.
3. The income must be applied directly to the purpose required or to a parent or guardian for use in the beneficia-=ry’s interest.

Question 33

Accumulations While Benefciary Is Under 18

Answer 33

While the beneficiary is under 18, the trustees may use income accumulated in earlier years for the child’s mainte-nance, education, or beneft. The accumulated income also may be reinvested to generate future income.

Question 34

Beneficiary Entitled to Income at 18

Answer 34

The power of maintenance ends on the beneficiary’s 18th birthday. From that date the benefciary is entitled to claim the income as of right. The implications depend upon the nature of the benefciary’s interest.
1. Vested Interests
* If the benefciary has a vested interest in the income, such as a life interest, they are entitled to claim the income arising after their 18th birthday and also any in-come accumulated during their minority.
EXAMPLE
Trustees are holding a fund on trust for Lisa for life with remainder to Richard. Lisa has just reached the age of 18.
During Lisa’s minority, the trustees have been applying some of the income for Lisa’s maintenance and accumulating the surplus. Now that Lisa is 18, the trustees must pay all future income to Lisa, including the income accumulated while she was under 18.
* Vested Interest in Income and Capital
If the beneficiary has a vested interest in the capital as well as the income, the trust will end on the beneficia-ry’s 18th birthday, and the trustees must transfer all the trust property, including any accumulated income, to the benefciary.
EXAMPLE
Trustees are holding a fund on trust for Bill absolutely. Bill is 16 years old. There are no conditions attached, so Bill’s interest is vested. Whilst Bill is under the age of 18, the powerof maintenance applies. The trustees have power to usethe income for Bill’s maintenance, education, or beneft and must accumulate any surplus income. Once Bill is 18, he isentitled to claim the whole fund, including the accumulatedincome.

2. Contigent interests in Capital
   If the benefciary has an interest in capital which is contingent on attaining an age greater than 18, the benefcia-ry is entitled to claim all the income arising after their 18th birthday. Any remaining income accumulated during the benefciary’s minority will accrue to capital.
   EXAMPLE
   Trustees are holding a fund on trust for Beth provided she attains the age of 25 (a contingent interest). The fund produces £100 of income per month. Beth just turned 16 years of age. The trustees use £80 per month for Beth’s educational costs and accumulate the extra £20 per month income for 24 months (until Beth reaches the age of 18). At that point the trustees must pay all £100 per month income to Beth. However, the £480 of income (£20 per month x 24 months) that the trustees accumulated during Beth’s minori-ty accrues to capital, which means that Beth will not receive it until she is 25.
   If Beth dies before she is 25, her contingent interest fails. The fund, including the £480 income the trustees accumu-lated during Beth’s minority, will pass under any substitution-al gift in the trust instrument. If there is none, the trustees will hold the fund on resulting trust for the settlor or the settlor’s estate if the settlor is dead.
3. Trust Instrument MayAlter Power
   It is open to the settlor to alter the statutory power by making a specifc provision in the trust instrument at the time when the trust is created. The most common amendment is to post-pone a benefciary’s entitlement to income beyond the age of 18, giving the trustees power to decide how much income the benefciary receives until the benefciary has attained a specifed age.

Question 35

2

Power to Advance Capital

Answer 35

1. Benefciary Must Have Interest in Capital
   If a beneficiary has an interest in the capital of a trust fund—whether that interest is in possession or in remainder, vested or contingent—the trustees have the discretionary power to advance trust capital to the beneficiary up to the amount of the benefciary’s presumptive entitlement

EXAMPLES
1) Trustees are holding a fund on trust for Lisa for life with remainder to Ruth. Lisa is entitled to the income of the fund;she has no interest in the capital. Ruth has a vested interest in remainder; that is, she has an interest in the capital of the fund and there are no conditions attached. The trustees have the power to advance capital funds to Ruth but not to Lisa.
2) Trustees are holding a fund on trust for Beth provided she attains the age of 25. Beth has a contingent interest in the capital of the fund. The trustees have the power to advance capital to Beth.

2. Benefciary’s Advancement or Beneft
   When the power of advancement applies, the trustees may ‘pay or apply’ capital sums for the beneficiary’s advancement or beneft in the trustees’ absolute discretion.
   EXAMPLE
   Trustees are holding a fund on trust for Beth provided she attains the age of 25. Beth is 18 and she wishes to go to uni-versity. The income is insufficient to pay her fees. The trust-ees have power to use the capital for this purpose, either by paying it to Beth or by using it directly to pay the fees.

Question 36

3

3 provisions for capital advancement

Answer 36

1. Amount Must Not Exceed Entitlement
2. Must Be Brought into Account
   Any advances must be brought into account on final distribution of the fund.
3. Consent of Person with Prior Interest Required
   If an advance will prejudice any beneficiary entitled to a prior interest, the power applies only if that beneficiary is of full age and capacity and gives their **written consent. **
   This provision applies when some person is entitled to the income of the interest to be advanced, usually be-cause they have a life interest.

Question 37

Consent of Person with Prior Interest Required

Answer 37

If an advance will prejudice any benefciary entitled to a prior interest, the power applies only if that benefciary is of full age and capacity and gives their written consent.
This provision applies when some person is entitled to the income of the interest to be advanced, usually because they have a life interest
EXAMPLES
1) Trustees are holding a fund on trust for Lisa for life, with remainder to Ruth. The trustees are considering making an advance of capital for the beneft of Ruth. Any such advance will prejudice Lisa because it will reduce the amount of
income she receives. The trustees cannot use their power to advance capital to Ruth unless Lisa consents in writing to the advance.
2) Trustees are holding a fund on trust for those of the set-tlor’s three children, Adam, Ben, and Charlotte, who attain the age of 25. If more than one attains age 25, they are to take in equal shares. When Adam is 22 years old, he asks
the trustees to make an advance of capital to him to help set him up in business. Such an advance could ultimately prejudice Ben and Charlotte because if Adam dies before he is 25, his share will accrue to them. However, they do not have a ‘prior’ interest in Adam’s share, so the requirement
for consent does not apply.

Question 38

3

No Restriction on Benefciary’s Age
the power of advancement

Answer 38

1. The power of advancement applies whether the benefciary is under or over the age of 18.
2. However, a benefciary under the age of 18 cannot give a valid receipt to the trustees, so any advance must either be applied directly for the required purpose, such as the payment of school fees, or paid to the beneficiary’s parent or guardian for a specified purpose.
3. In such a case, the trustees must ensure that the advance is used for the purpose specified.

Question 39

3

CONTROL OF TRUSTEES BY BENEFICIARIES

Answer 39

1. Right to Compel Exercise of Duties
2. No Right to Control Exercise of Discretion
3. Right to Inspect Trust Documents

Question 40

3

No Right to Control Exercise of Discretion

Answer 40

1. Unless the beneficiaries can show that the way in which trustees exercised their discretion was irrational or capricious, the benefciaries have no control over the way in which trustees exercise their discretions, provided that the trustees are acting within their powers.
2. Trustees are not obliged to disclose their reasons for the way in which they exercise their power. This rule applies to powers relating to the disposition of funds (for example, under a discretionary trust) and also to the exercise of administrative powers (for example, choice of investments).
3. Exception—Legitimate Expectation
   If the trustees have given beneficiaries a legitimate expecta-tion that their discretion will be exercised in a particular way, they may be expected to warn the beneficiary if they intend to change their policy. For example, if trustees of a discretionary trust have been paying a beneficiary the same sum each year for the last 10 years, this exception suggests that they should warn the benefiiciary in advance if they intend to discontinue the payments.

Question 41

Right to Inspect Trust Documents

Answer 41

The beneficiaries are entitled to see all the trust documents, such as the trust instrument, trust accounts, and minutes of trustees’ meetings, except where those documents contain
details of the trustees’ discussions in relation to the exercise of their discretions.

Question 42

2

Powers When Benefciaries Are Absolutely
Entitled

Answer 42

1. If all the trust benefciaries are of full age and capacity and between them they are absolutely entitled to the entire equi-table interest, they have two special powers in relation to the trust:
   *They may, by agreement, require the current trustees to retire and** appoint new trustees** of the beneficiaries’ choice; and
   *They may, by agreement, bring the trust to an end and require the trustees to transfer the trust funds to them in the shares they agree.