Trustees: Power of Advancement Flashcards
Which of the following statements best describes the power of advancement under section 32 Trustee Act 1925?
A. It allows trustees to lend capital to any beneficiary of their choosing
B. It allows trustees to advance capital to themselves for future reimbursement
C. It allows trustees to invest capital in high-risk schemes to benefit the trust
D. It allows trustees to advance part of a beneficiary’s share of capital before they are absolutely entitled
D. It allows trustees to advance part of a beneficiary’s share of capital before they are absolutely entitled
Explanation: Under section 32 TA 1925, trustees may advance capital for a beneficiary’s benefit even if they’re not yet entitled to it. This is subject to conditions, including limitations on the amount and potential consents.
For trusts created after 1 October 2014, what is the maximum percentage of a beneficiary’s share that can be advanced under the statutory power?
A. 25 percent
B. 50 percent
C. 75 percent
D. 100 percent
D. 100 percent
Explanation: The Trusts (Capital and Income) Act 2013 increased the limit to 100 percent for trusts created after 1 October 2014. For earlier trusts, the 50 percent cap still applies unless amended by the trust instrument.
The trustees wish to advance capital to a minor beneficiary to fund private education. What must they do to comply with their duty?
A. Pay the money to the minor’s parent or guardian and ensure it is used properly
B. Pay the amount directly into the minor’s bank account
C. Delay the payment until the minor reaches 18
D. Obtain consent from all other beneficiaries, regardless of their interest
A. Pay the money to the minor’s parent or guardian and ensure it is used properly
Explanation: Trustees can pay capital to a parent or guardian for a minor’s benefit, but must monitor how the money is used. They are personally liable if funds are misapplied.
A trust provides a life interest for A and remainder to B. The trustees wish to advance capital to B. What must they do first?
A. Do nothing, as advancement powers override life interests
B. Obtain written consent from A
C. Obtain consent from all residuary beneficiaries
D. Apply to the court for authorisation
B. Obtain written consent from A
Explanation: If a prior interest exists (here, A’s life interest), trustees must obtain written consent before advancing capital to B. This ensures A’s interest is protected.
Which of the following is a valid use of the power of advancement under case law?
A. Paying the trustee’s professional fees from trust capital
B. Avoiding inheritance tax through early distribution of capital
C. Giving a beneficiary a loan with no repayment terms
D. Transferring capital to a charity for tax relief
B. Avoiding inheritance tax through early distribution of capital
Explanation: In Pilkington v IRC, the court accepted that using the power of advancement for tax planning (such as IHT mitigation) could be valid if it was genuinely for the beneficiary’s benefit.
When trustees advance capital to a beneficiary, what must they do when later distributing the estate?
A. Ignore the advancement if under £10,000
B. Deduct the amount from the gross value of the trust
C. Bring the advancement into account against the beneficiary’s share
D. Give the beneficiary their full share in addition to the advanced amount
C. Bring the advancement into account against the beneficiary’s share
Explanation: The advanced amount must be deducted from the beneficiary’s entitlement. This can be done by deducting a strict sum or calculating the proportion already received.
Trustees advanced £50,000 to a beneficiary’s parent to pay school fees, but the money was spent on a holiday. What is the consequence?
A. The beneficiary is liable to repay the money
B. There is no breach as the intention was correct
C. The parent is automatically imprisoned
D. The trustees are personally liable for breach of trust
D. The trustees are personally liable for breach of trust
Explanation: Trustees must supervise the use of advanced funds. If the money is misused and they failed to take reasonable precautions, they are liable for breach of trust (Re Pauling’s Settlement Trusts).
Which of the following examples would fall outside the scope of the statutory power of advancement?
A. Paying for a beneficiary’s university tuition
B. Giving a deposit on a home for a beneficiary
C. Donating money to a charity in the beneficiary’s name without their input
D. Providing funds to help a beneficiary start a business
C. Donating money to a charity in the beneficiary’s name without their input
Explanation: Advancing capital to a charity for no clear beneficiary benefit is not permitted unless the beneficiary would have done so themselves (see Re Clore’s Settlement Trusts).
