Trustees: powers and duties

Question 1

What is the difference between trustee powers, trustee duties and fiduciary duties?

Answer 1

• Trustee powers = what a trustee may do
• Trustee duties = what a trustee must do
• Fiduciary duties = what a trustee must not do

Question 2

What are the 2 sources of trustee powers and duties? How do they work together?

Answer 2

1. Trust instrument contains express provisions setting out powers/duties (modifies default statutory rules)
2. Trustee Act 1925 and Trustee Act 2000 (default rules which can be modified by instrument)

Question 3

What are the 2 categories of powers and duties?

Answer 3

• Administrative - management of trust property while it is held on trust e.g. investment, delegation, buy and sell property, change trust property
• Dispositive - distribution of trust property in accordance with its terms e.g. power of appointment, maintenance, advancement

Question 4

What does it mean that the Ts role is custodial in nature?

Answer 4

Ts have obligation to safeguard the trust property i.e. produces income and capital growth

Hence administrative powers

Question 5

How are T’s administrative powers curtailed?

Answer 5

Curtailed by associated duties - in accordance with prescribed standard of care and skill

E.g. power of investment under duty to seek advice etc.

Question 6

What if there are no express administrative powers in the trust instrument?

Answer 6

There are default powers in Trustee Act 2000 - should check whether they have been amended/excluded

Question 7

How will a T breach the trust?

Answer 7

Acting outside their powers or failing to comply with duties

Question 8

Are Ts under an obligation to provide Bs with reasons for the way they have exercised their powers?

Answer 8

No

Question 9

What 3 default powers are set out in the Trustee Act?

More are set out - just focusing on these ones

Answer 9

1. General power of investment (s3)
2. Power to acquire land (s8)
3. Power of delegation (s11)

Question 10

What is the T’s general power of investment?

As if they were…

Answer 10

T may make any kind of investment they could make if they were absolutely entitled to assets of the trust

Question 11

What 2 things must Ts consider when exercising the general power of investment? Are these set in stone?

Answer 11

1. The standard investment criteria (s4)
2. Taking advice (s5)

These duties can be restricted, excluded or extended and must act in accordance with general DOC when exercising

Question 12

At what 2 points do Ts have a duty to consider the standard investment criteria?

Answer 12

When deciding whether to make investment in first place and when regularly reviewing investments to decide whether they should be varied

Question 13

What are the 2 key components of the standard investment criteria?

Answer 13

1. Suitability - of proposed investments
2. Diversification - the need to diversify investments (extent necessary depends on size/nature of particular trust)

Question 14

What are the two key questions when considering suitability of investment?

Answer 14

1. General suitability - is investment of a suitable kind?
2. Specific suitability - is particular invstment suitable?

Highly fact-specific; suitable for 1 trust fund may not be for other

Question 15

What duties are balanced when determining the suitability of an investment?

In terms of the trust property

Answer 15

The key duty to preserve trust assets against need to produce appropriate growth

Question 16

What key issues should be considered when deciding suitability of investment?

3 things

Answer 16

• Size of trust fund
• Period of time for which trust intended to subsist
• Respective rights of different B

E.g. large commercial trust fund (great degree of freedom and long-term growth) v small family trust (short period)

Question 17

What should the T make sure to do when investing for trusts that include both a life and remainder interest?

Answer 17

Ensure that investments produce income for life tenant and capital growth for remainderman; must act even-handedly between Bs

Question 18

What is required by diversification from the standard investment criteria? Is it the same for all funds?

What theory?

Answer 18

That investments reflect modern portfolio theory: investing across range of different types so not overly exposed to risk of losses in one sector

Again fact-specific; larger and smaller funds will differ

Question 19

What does the diversification requirement ultimately allow Ts to do?

Answer 19

Invest in mixture of high and low risk investments, rather than exclusively low risk (and probably low yield) investments

Question 20

Should small trust funds still diversify?

Answer 20

Yes - may not be able to diversify in same way as a larger commercial fund but should consider investing in investment funds (pool assets of multiple investors and allow them to obtain benefit of diversification)

Question 21

Are the ‘best interests’ of B - which Ts should act on behalf of when considering suitability of investments - restrained to financial interests?

Answer 21

• Generally ‘best interests’ of Bs will mean best financial interests
• But can be construed more widely to account for moral/ethical concerns where Bs are all adults/sound mind/agree (but this will be rare)

E.g. Bs do not wish to benefit from immoral/unethical investment

Question 22

Do current or future Bs take priority when considering investments?

Answer 22

Must balance the interests of both

Question 23

Are personal views of Ts relevant to assessment of investment?

Answer 23

No - must exercise powers fairly and honestly and for no ulterior purpose

E.g. Cowan v Scargill - Ts were part of National Union of Mineworkers who did not want to invest in oil or overseas despite investments being permitted by the trust - court held that obligation of Ts was to produce best financial return for trust fund (to preserve value of pensions of current and future members of pension scheme)

Question 24

Does that mean moral and ethical concerns will be completely irrelevant to T decisions?

Answer 24

No…

• Ts can still prefer ethical investments if they have a choice of economical equivalence
• Ethical views of Bs - who are of sound mind and all agree - also make it okay

Question 25

How are non-financial interests considered in the case of charitable trusts?

Answer 25

• Charitable Ts may refrain from investments that might conflict with aim of charity/hamper its work e.g. Ts of cancer research charity would not invest in tobacco industry even if most profitable
• Ts required to balance risk to charity of financial loss from not making ivnestment against the disadvantages to charity of making investment

Question 26

Are Ts bound to follow the advice they receive on investments? To what extent can they ignore?

Answer 26

No - but can only ignore if they consider a reasonably prudent T would act in the same way; cannot ignore simply because they disagree

Question 27

What must Ts consider before exercising powers of investment and when reviewing their investments?

Answer 27

‘Proper advice’ as per s5

Question 28

What is meant by ‘proper advice’ in s5?

Answer 28

Advice provided by a person who is reasonably trusted by T to be qualified to give it by their ability in and practical experience of financial and other matters relating to the proposed investment

Question 29

When will it be permissible for Ts to not obtain advice?

Answer 29

Where it is unecessary to do so e.g. where cost of advice outweighs benefits of obtaining it (T may have sufficient knowledge/expertise to make decision without it)

Question 30

How does the statutory duty of care - found in s1 of the Trustee Act - impact on how certain Ts must act in their role? Will lay Ts always be held to a lay T standard?

‘Exercise such care and skill as is reasonable in the circumstances’

Answer 30

• Professional Ts held to higher standard of care as they are being paid
• Lay Ts will be held to higher standard if they have been appointed on the basis of having (or purporting to have) particular skills that would make them desirable Ts

So it is important for people to decide whether to take on role!!

Question 31

How does the common law duty of care apply differently to the statutory one? What is expected from Ts?

Answer 31

Applies more broadly; requires Ts to exercise standard of diligence and care expected of an ordinary prudent business person

Question 32

What is the statutory power to acquire land (s8) limited to?

I.e. what land

Answer 32

Freehold or leasehold land in the UK (not overseas)

Question 33

Can the power to acquire land only be exercised for investment purposes?

Answer 33

• No - can be more widely e.g. occupation by a B
• If acquired for investment purposes - Ts must consider standard investment criteria + advice requirements

Question 34

What can Ts delegate and not delegate under the s11 power of delegation?

Powers of investment, power to acquire land, ability to delegate

Answer 34

• Can delegate their powers of investment and to acquire land
• Cannot delegate distributive obligations

Question 35

How must Ts delegate their investment powers and what should they include when doing it?

Answer 35

• By an agreement evidenced in writing
• Inc a term ensuring compliance with a written ‘policy statement’ prepared by Ts - give guidance as to how agent should exercise their functions ensuring they are in line with. best interests of Bs

Question 36

What is the agent to whom a function is delegated bound by?

Answer 36

The same restrictions the T would be bound by

Question 37

Why would a T wish to delegate their functions?

2 reasons

Answer 37

1. T may be incapable of discharging duties for a limited period
2. T lacks expertise to discharge particular responsibility (prefers an expert does it)

Question 38

How should Ts observe the statutory DOC re delegating investment powers to agents?

3 things

Answer 38

Ts should ensure:

• Appropriate agent is selected for the function
• The agreement complies with their requirements under statute
• The arrangement is reviewed regularly

Question 39

When will Ts not be vicariously liable for loss caused by agent acting negligently?

Answer 39

When they comply with their duties when exercising power of delegation!

Question 40

In what 3 situations whill Ts distribute trust property?

Answer 40

1. Obligation to do so under terms of trust (dispositive duty)
2. When directed to do so by Bs with SvV (dispositive duty)
3. In exercise of dispositive power like power of appointment, maintenance, or advancement (dispositive powers)

Question 41

What 2 things should be distinguished when considering the dispositive duties of Ts?

Answer 41

• Trust capital
• Income generated by that capital

In some cases different Bs entitled to both (e.g. a life interest trust), in others same B might be entitled to both but not at same time

Question 42

Can Ts wait for Bs to demand payment when distributing income or capital?

Answer 42

No - must do so ASAP and not wait for Bs to demand payment - delay in distributing is a breach of trust

Question 43

What might have an effect on the time it takes T to distribute capital?

Answer 43

The nature of trust property and rights of different Bs e.g. Ts hold land for multiple Bs - selling and distributing may take months

Cf chattel - should be much quicker

Question 44

What obligations will the T have if trust property is generating income?

Answer 44

Either…
1. Distribute income as it arises
2. Accumulate income

Depends on terms of trust

Question 45

What happens where the trust instrument does not specify whether income should be distributed or accumulated? Does it differ for adults, those with contingent interests or minors?

Answer 45

• For adult Bs: Ts must distribute income to adult Bs as it arises inc Bs with contingent interests which carry the intermediate income
• For minor Bs: Ts must accumulate income that arises before they turn 18 - will be added to capital and distributed along with it (will begin receiving income after they turn 18)

Both subject to any contrary terms in trust instrument

Example of minor

Question 46

What are the T’s obligations re distribution of capital and income with successive interests?

E.g. T holds property on trust for A for life, remainder to B

Answer 46

• A has vested (in possession) interest in income - T distributes income to A as it arises
• B has vested future interest in capital - will distribute trust property to B upon A’s death bringing trust to end

A and B can exercise SvV - distribute shares to them as they agree

Question 47

What are the T’s obligations re distribution of capital and income with contingent interests?

E.g. T holds £1,000 for A (14) if they reach 21, and if not, to B

Answer 47

• Ts must continue to hold capital on trust and accumulate income
• Once A reaches 18: Ts can distribute income to A as it arises (or can exercise SvV with B)
• Once A reaches 21: Ts must distribute capital (and accumulated income) to A

Question 48

What are the T’s obligations re distribution of capital and income with adult and minor Bs?

E.g. T holds £2,000 for A and B in equal shares to be distributed when they reach 18. A is 14 and B has just turned 18

Answer 48

• Both have vested interests: A in interest, B in possession
• Ts continue to hold A’s £1,000 on trust until they reach 18 and accumulate income generated by A’s share / Ts distribute B’s £1,000 plus any accumulated income ASAP (bringing trust for B to end)

Another example!

Question 49

What is the statutory power of maintenance (s31)?

Answer 49

Ts have the power to pay income for maintenance, education or benefit of minor B

Instead of accumulating it

Question 50

When will the statutory power of maintenance apply and when will it not?

Answer 50

• Will apply to Bs with vested and contingent interest which carry intermediate income (i.e. is being accumulated)
• Will not apply in cases where someone else has prior interest in income (i.e. successive trust)

Question 51

Will the statutory power of maintenance always be available?

Answer 51

Only if the trust instrument does not exclude it or contain express powers of maintenance

Question 52

What is the availability of the statutory power of maintenance in a life interest trust? Does the availability ever change?

Ts hold trust fund worth £50,000 on trust for A (50) for life remainder to B (14)

Answer 52

• Will not be available for as long as life tenant is alive (as they have prior interest)
• If life tenant dies and remainderman still a minor, Ts must accumulate income but the statutory power of maintenance will become available
  (If life tenant dies and remainderman is not a minor, they are absolutely entitled to capital)

Question 53

What is included in ‘maintenance, education and benefit’? How is it different for trusts created before 1 Oct 2014?

Answer 53

• Common uses include: school fees or training, medical bills, food, clothing and rent, leisure and holidays
• Before 1 Oct 2014: Ts could only apply such income as is ‘reasonable in the circumstances’

Non-exhaustive list

Question 54

Does the statutory power of maintenance permit the Ts to pay the income directly to the minor B?

Answer 54

No - they cannot give good receipt - should be paid to child’s parent/legal guardian or directly to provider of goods/services that are being acquired on. behalf of B (e.g. school)

Question 55

What are the implications of the power of maintenance being a fiduciary power?

Answer 55

Ts must consciously consider exercise of the power - if they choose to exercise it they must act in good faith in interests of B

Question 56

Does it matter if the power indirectly benefits the parent/legal guardian?

E.g. reduces costs they would otherwise incur

Answer 56

This does not matter, so long as the income is used for the primary benefit of the minor B

Question 57

What will be an improper exercise of power regarding payment to the minor’s parent or guardian?

Answer 57

Unquestioningly paying to them assuming they will use it for the minor’s benefit

Question 58

Must the statutory power of maintenance be used in respect of current or accumulated income?

Answer 58

Can be either i.e. Ts not restricted to using income that is generated by trust fund after making decision to exercise power of maintenance (can also use income previously accumulated)

Question 59

What is good practice re the statutory power of maintenance for Bs with contingent interests?

Answer 59

To use the power shortly before the B turns 18; the power only applies during their minority and if not exercised, the accumulated income will become part of the trust capital and the B will not be able to access it unless/until their interest in capital vests

Question 60

What is the statutory power of advancement?

Answer 60

T have power to pay capital for advancement of B whose interest has not yet vested in possession (for both minor and adult Bs) for their ‘advancement or benefit’

NB double meaning of advance: 1) Ts use power for ‘advancement of B but also 2) power involves ‘advancing’ capital!

Question 61

When is the statutory power of advancement available?

Who can use, what interest is needed, prior interests?

Answer 61

• Available to be used by both adult and minor Bs
• Applies to both vested and contingent interests
• Applies where another B has prior interest (with their consent)

Question 62

How much capital can be paid using the statutory power of advancement? How is the rule different for trusts created before 1 Oct 2014?

Answer 62

• Can pay up to 100% of B’s prospective entitlement to capital (even if they have a contingent interest!)
• Before-2014: Maximum of 50% of B’s prospective share could be advanced

Question 63

As Ts can pay up to 100% of B’s entitlement, is the use of the power in this way essentially the same as the B using SvV to collase the trust?

Answer 63

No - unlike when Bs exercise SvV, Ts have no obligation to distribute capital if a request is made to use the power

Ts have a dispositive discretion, not duty

NB for trusts created before 1 Oct 2014, a maximum of 50% of B’s prospective share of capital could be advanced

Question 64

What is meant by ‘advancement or benefit’ of the B to be able to use statutory power of advancement?

Improve, avoid, give…

Answer 64

• Immediate financial benefit; ‘any use of money which will improve material situation of B’
• Avoiding inheritance tax liability (Pilkington)
• Giving money to charitable purpose provided B would have otherwise used their own resources for such purposes (Re Clore’s)

Question 65

To whom should the capital be paid? What responsibility do Ts have upon payment?

Answer 65

• Adult B = directly to them (but must ensure it is used for requested purpose!); Ts could alternatively use capital to purchase asset/services on B’s behalf
• Minor B = to parent/legal guardian or directly to provider

Question 66

How should Ts ensure capital is used for correct purpose, and what should they do if B does not do this? Is it a breach if money had not been applied for correct purpose?

Answer 66

• Can pay money directly to third party for advancement of B
• If B does spend money on someting else, Ts should pay no further money to them
• If not applied for correct purpose (see below) = breach!

Re Pauling’s - bank made number of advancements to children, but were actually used for parent’s benefit - held that Ts were obliged to check money had been applied for correct purpose it was advanced for; failure to do so = breach

Question 67

How can the statutory power of advancement be used where there are Bs with a prior interest? In what form does this take?

E.g. life interest trust

E.g. Trust fund worth £50,000 on trust for A (50) for life remainder to B (14) - B has askd Ts for £5,000 to purchase equipment for home gym

Answer 67

Power can only be exercised with written consent of Bs (who are of full age and sound mind)

As the exercise of power may prejudice them!

Ts can only exercise power of advancement in favour of B with A’s written consent (as providing B with capital will prejudice A e.g. requesting 100% will extinguish A’s life interest! Smaller will not destroy it but means there will be a smaller capital fund from which to generate A’s income)

Question 68

How should consent be obtained from Bs with a subsequent interest? What if the requesting B has a contingent interest?

E.g. recipient of a gift-over

E.g. Estate worth £25,000 on trust for A if they reach 21 and if not for B (25) - A asks for advancement…

Answer 68

Does not need to be! Even if the other B has a contingent interest

E.g. Estate worth £25,000 on trust for A if they reach 21 and if not for B (25). If A asks for advancement, consent of B is not required even though A’s interest is contingent

Question 69

Is consent needed from other Bs with a vested (not prior) interest?

E.g. Ts hold £20,000 on trust for A (19) and B (17) in equal shares to be distributed to each B at 25 - B has asked Ts for £5,000 to buy a car

Answer 69

Consent not required, but Ts are required to take their interest into account if they reduce overall size of the trust fund e.g. impact on investment strategy

Question 70

What about the situation where there are others with a vested (not prior) interest as part of a life interest trust?

e.g. trustees hold £50,000 on trust for A for life, remainder to B and C in equal shares if they survive A. B (age 17) has asked the trustees for £25,000 to buy equipment to start a business…

Answer 70

Same rules apply - require written consent of those with prior interest (the life interest) but not others with a vested interest

e.g. trustees hold £50,000 on trust for A for life, remainder to B and C in equal shares if they survive A. B (age 17) has asked the trustees for £25,000 to buy equipment to start a business - will need consent of A but not C

Question 71

What happens when a B asks for an amount via power of advancement that exceed their share of the capital?

Trust worth £20,000 for A (19) and B (16) in equal shares to be distributed once they reach 25 - A has asked for £12,000 for deposit for house

Answer 71

Ts cannot pay that amount as it would exceed their share - can only pay up to 100% of their share

Alternatively, A could collapse their share using SvV (over 18)

Question 72

Is there any difference between exercising advancement to pay 100% of B’s interest and collapsing the trust?

Answer 72

In a case with multipe Bs, it depends on how Ts choose to bring payment into account

Question 73

What does it mean for a payment made under the statutory power of advancement to be ‘brought into account’ once the B becomes absolutely entitled?

Answer 73

The amount the B receives when their interest vests will be reduced proportionately to reflect the proportion of the capital that they received early

Question 74

What choice do the Ts have when a payment is brought into account?

Answer 74

Can treat the share advanced as…
1. A proportionate share of the overall trust value; or
2. Its strict monetary value

Choice could have significant consequences for both B and all other Bs

Question 75

If Ts hold a trust fund worth £20,000 on trust for A, B, C and D in equal shares when they reach 18, and Ts exercise advancement to pay £5,000 to A, what would the difference be in:
1. Treating the £5,000 as A’s proportionate share; and
2. Not treating the £5,000 as A’s proportionate share

If treated as proportionate share, £5,000=100% of A’s share in trust fund

Answer 75

1. **If £5,000 treated as A's proportionate share (1/4)** = A no longer entitled to anything from trust fund, regardless of how much it is worth when A reaches 18 *e.g. if fund grows to £25,000, £8,333 will be shared equally between B, C and D*
2. **If £5,000 not treated as A's proportionate share** = Ts will take A's payment into account (i.e. add it to the current total trust fund) before making distributions *e.g. trust fund wll become £30,000 [added £5,000 to the now £25,000 trust fund continuing from last example]: this is shared between all four Bs - B, C and D receive £7,500, whereas A has received £5,000 already so is entitled to only £2,500*

Question 76

T holds £10,000 for A (17) until they reach 21. A wants to use trust income to pay for driving lessons and £2,000 of capital to buy a car. How are the powers used for this?

I.e. A has a vested interest in both the income and the capital

Answer 76

• Ts have duty to accumulate income - but could use statutory power of maintenance to pay for driving lessons
• Ts have duty to hold capital on trust until A is 21 - but could use statutory power of advancement to buy car for A using capital

Question 77

T holds £10,000 for A (50) for life, remainder to B (17). B wants T to use trust income to pay for driving lessons and £2,000 to pay for car. How are the powers used for this?

Successive interest trust

A’s interest is vested in possession, B’s interest is vested in interest

Answer 77

• Ts must pay income to A; the statutory power of maintenance is not available as A has prior interest in income
• Ts hold capital on trust until A dies, but in meantime could use statutory power of advancement to buy car for B as long as A’s consent is given

Question 78

T holds £10,000 on trust for A (17) if they reach the age of 21 and if not for B (25). A wants Ts to use trust income to pay for driving lesson and £2,000 capital to buy car. How are the powers used for this?

Contingent interest

Answer 78

• The capital interest carries intermediate income - as A under 18, Ts have duty to accumulate income, but until then could use statutory power of maintenance for driving lessons
• Ts under duty to hold capital until the contingency satisfied (A reaches 21 or dies), but in meantime could use statutory power of advancement to buy car for A without B’s consent (as B holds no prior interest)