Trusts Law

Question 1

Who can be a trustee?

Answer 1

Most adults with mental capacity. Except, there are certain statutory disqualifications in relation to more specialised trusts, e.g. pension trusts.

A company can also act as a trustee, so long as it is authorised to do so by its constitutional documents.

Question 2

How many trustees does a trust over land need?

Answer 2

At least two human trustees or a sole trust corporation.

This is to make sure that any beneficial interests can be overreached.

Trusts over land cannot have more than four trustees.

Question 3

How many trustees do trusts of personalty need?

Answer 3

These can have a sole trustee, although as a practical matter it is generally better to appoint more than one to ensure that each trustee can supervise what the other is doing.

Trusts of personalty can have more than four trustees.

Question 4

How many trustees should an express trust have?

Answer 4

As express trusts can involve a mixture of both land and personalty, always best to have been two and four trustees.

Question 5

In what act are the powers that trustees can exercise set out?

Answer 5

Trustee Act 1925

Question 6

In what act are the powers that beneficiaries can exercise set out in?

Answer 6

Trusts of Land and Appointment of Trustees Act 1996

Question 7

How can a trustee retire?

Answer 7

(1) The trust instrument may contain an express power for trustees to retire but this is unusual.

(2) Section 39 TA 1925 allows a trustee to retire without being replaced. Conditions:
- there will be two trustees or a trust corporation left
- the trustee retires by deed
- the other trustees consent by deed

(3) Section 36(1) TA 1925 says that a retiring trustee must be replaced by the appointment of a new trustee. Who appoints the new trustee?:
(a) the person nominated in the trust instrument to exercise the s36 power, but if none
(b) the continuing trustee(s) (which includes the retiring trustee if they are willing to join in the appointment).
s36 states that the appointment must be in writing. It is advantageous to use a deed because under s40 a deed automatically vests the trust property (apart from company shares and some other limited forms of property) in the continuing and new trustee.

Question 8

Is a trustee who has retired liable for breaches of trust?

Answer 8

A retiring trustee remains liable for their own breaches but will not be liable for future breaches unless they retired to facilitate the breaches.

Question 9

How can a trustee be removed?

Answer 9

(1) The trust instrument may contain an express power to remove and/or replace trustees but this is unusual.

(2) s36(1) TA 1925. Grounds for replacing a trustee:
- death
- remains outside UK for more than 12mths
- desires to be discharged (retire)
- refuses to act (disclaims)
- is unfit to act
- is incapable of acting
- is a minor
Who effects the replacement? Either the person nominated in the trust instrument if any, then the continuing trustees but if they are all dead the PRs.

(3) s41 TA 1925. Grounds? The court will replace a trustee if it is expedient to do so and it is otherwise inexpedient, difficult or impractical to appoint without the court’s assistance.
The court makes the appointment following an application by the trustees or the beneficiaries.
The court will only replace a trustee if it is not in the best interests of the trust for them to continue. Mere dislike of a trustee is generally insufficient.

(4) s19 TLATA 1996 allows beneficiaries to serve a written direction on a trustee or trustees to retire and appoint the person specified in the direction.
s19 does not apply if the trust instrument:
- excludes it
- nominates someone to appoint new trustees.
s19 only applies if the beneficiaries are of full age and capacity and taken together are absolutely entitled to the trust property.
The trustee then retires by deed (subject to the retirement conditions).

Question 10

How can additional trustees be appointed?

Answer 10

(1) The trust instrument contains an express power to appoint new trustees but this is unusual.

(2) s36(1) TA 1925 - person nominated or continuing trustees

(3) s41 TA 1925 - court

(4) s19 TOLATA 1996 - beneficiaries

Question 11

What happens if a trustee dies?

Answer 11

If two or more trustees are appointed, they will hold legal title to trust property as joint tenants, with the result that if one dies, the legal title will devolve to the surviving trustees.

If there is only one surviving trustee left, that trustee should be advised to appoint a replacement trustee under s36(1) TA to ensure the continuity of trust administration.

Question 12

Can a trustee delegate their duties?

Answer 12

A trustee can delegate their functions in running a trust to an attorney in form described under s25 TA 1925.

Delegation can run for a period of up to 12 months. Written notice of such must be given to all other trustees and any other person with the power to appoint new trustees within 7 days of delegation.

Trustee automatically liable for acts/defaults of attorney.

Question 13

Do trustees have the power to give income to beneficiaries who are minors?

Answer 13

Yes - under s31 TA 1925. They have power to use income to pay for the maintenance, education and benefit of a beneficiary under 18 so long as the following conditions are satisfied:
- there is no contrary provision in the declaration of trust; and
- the trustees can only exercise this power in favour of minors who have some kind of interest in income, whether vested or contingent, but not where there are any ‘prior interests’ to income.

Income should be paid to beneficiary’s parent or guardian or straight to e.g. maintenance provider.

This is not an obligation. Trustees may pay this.

Question 14

Are adult beneficiaries entitle to income?

Answer 14

s31 TA 1925 - adult contingent beneficiaries are entitled to trust income as it arises and trustees must pay that income to them, pending the vesting of their beneficial interests.

If an adult contingent beneficiary dies before the condition is satisfied, their estate will receive nothing - no capital and no accumulated income.

Question 15

Do trustees have the power to pay or apply trust capital early for beneficiary’s advancement or benefit?

Answer 15

Yes. As long as the following conditions are satisfied:

(a) There is no contrary provision in the declaration of trust.

(b) The beneficiary has an interest in capital. Such beneficiaries include:
- beneficiaries with a vested interest in trust capital (whether in possession or in remainder); and
- beneficiaries with a contingent interest in trust capital.

(c) the payment must be for the beneficiaries advancement or benefit.

(d) for trusts created after 1 October 2014, the advance payment must not exceed the beneficiary’s entitlement.
For trusts created on or before 1 October 2014, the trustees can only advance up to half the beneficiary’s entitlement.

(e) the payment is taken into account when the beneficiary becomes entitled to trust capital.

(f) if there is a beneficiary with a prior interest, an advancement to another beneficiary can only take place if the prior interest-holder is an adult and has given written consent to the advancement, e.g. life tenant.

Remember s32 gives them the power to advance trust capital - they do not have to.

Question 16

What is the standard of the duty of care for a trustee when running a trust?

Answer 16

A trustee must take “all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own”.

Standard can be higher for paid, professional trustees.

Question 17

What must a trustee do when faced with a choice between two beneficiaries?

Answer 17

Act impartially.

It doesn’t mean that they have to consult either or both, or give them equal treatment. However, a trustee must not benefit one beneficiary at the expense of another.

Question 18

How do co-trustees make decisions?

Answer 18

Co-trustees must generally take decisions unanimously.

They must also be active in the running of the trust.

Question 19

What are duties that trustees have?

Answer 19

Duty of care

Duty when starting out as a trustee

Duty to act impartially between beneficiaries

Duty to act personally and unanimously

Duty to exercise discretions properly

Question 20

What are beneficiaries entitled to see?

Answer 20

a) the trust document or the will that created the trust

b) the trust accounts

c) a schedule of trust investments or other documents that show how trust property is invested

Question 21

What should trustees consider when deciding their investment strategy for the trust?

Answer 21

a) What sort of interests do beneficiaries have?

b) What are the circumstances of the individual beneficiaries?

c) How long will the trust last for? Are they investing for short-term or long-term?

d) What is the size of the trust fund?

e) What is the tax position of the trust and the beneficiaries?

Question 22

What investments are authorised?

Answer 22

Under s3 TA 2000, a trustee can make any kind of investment that they could make if they were absolutely entitled to the assets of the trust, save for investments in land.

When it comes to land, s8 TA 2000 provides that a trustee may acquire freehold or leasehold land in the UK either:
a) as an investment;
b) for occupation by a beneficiary; or
c) for any other reason.

Question 23

What is the ‘standard investment criteria’ which trustees must have regard to when purchasing or reviewing investments?

Answer 23

a) The investments must be suitable for the trust.

c) There is a need for diversification (insofar as is appropriate to the circumstances of the trust).

Question 24

How often should trustees review the investments of the trust?

Answer 24

It is a question of fact and will depend on the circumstances of each trust.

When reviewing, they should receive advice from someone qualified unless unnecessary to do so (e.g. a trustee is a financial advisor).

Question 25

Can trustees delegate duties?

Answer 25

Trustees can delegate investment functions collectively to either a third party or to one of their number.

However, they cannot collectively delegate these functions to a beneficiary.

A third party agent can be paid.

Question 26

What are the processes trustees must comply with when delegating investments to someone else?

Answer 26

a) they must retain the investment agent by written agreement

b) they must prepare a written statement (policy statement) that gives guidance as to how the agent should exercise their asset management functions in the best interests of the trust

c) the written agreement under which the agent is retained must include a term to the effect that the agent will secure compliance with the policy statement

d) the agent must comply with the same statutory and non-statutory investment duties that would otherwise apply to the trustees

e) the trustees must regularly review the arrangements under which the agent is acting and how those arrangements are working

f) the trustees must select a suitably qualified person to whom their asset management functions will be delegated

Question 27

What is the core fiduciary duty?

Answer 27

The fiduciary must not:

a) put themselves in a position where their own interests conflict with the interests of their principal; and

b) make an unauthorised personal profit from their position or use their principal’s property to make such a profit.

Question 28

When can trustees keep personal profits?

Answer 28

If:

a) this is authorised by the declaration of trust;

b) all the beneficiaries are aged 18 years or over, know the full facts and consent; or

c) this is authorised by a court order or by statutory provision.

Question 29

What happens if a trustee sells property to or purchases property from the trust?

Answer 29

The trustee will put themselves in a position of conflict.

If a trustee is involved in this kind of transaction, then the beneficiaries can set the transaction aside at a later date. This is known as the ‘self-dealing rule’.

The transaction is not automatically void, as the beneficiaries may decide that the transaction was a good deal as far as the trust was concerned. However, the beneficiaries can set the transaction aside for any reason within a reasonable period of time.

The self-dealing rule has been applied strictly. The courts do not consider whether or not the trustee has paid fair value for the property or whether the trustee was acting honestly.

Question 30

What can be done if a trustee sets up a competing business to one included in the trust?

Answer 30

The beneficiaries can obtain an injunction to prevent this from happening.

If the trustee does set up such a business, they will be liable to account for any profits made by their competing business.

Question 31

How can trustees demand remuneration?

Answer 31

a) express provision in the trust deed

b) the beneficiaries consenting

c) court order

d) TA 2000. Save where the trust deed makes any provision about remuneration:

i) a trust corporation, or
ii) a trustee who acts in a professional capacity and who is not a sole trustee, and where the other trustees have agreed in writing,

is entitled to receive reasonable remuneration. A trustee acts in a professional capacity if they act in the course of a profession or business that consists of or includes the provision of services in connection with the management or administration of trusts.

Question 32

Can trustees make incidental profits?

Answer 32

Commission must be paid to the trust.

Director salary must be paid to trust if they acquired the directorship only by virtue of being a trustee.

Question 33

What are the remedies if a trustee breaches their fiduciary duty and they are not entitled to keep any personal profit?

Answer 33

The beneficiaries are entitled to bring together:

a) a personal claim that the trustee pays over their unauthorised profit (this does not follow usual loss measures in contract and tort)

b) a proprietary claim. This will seek to recover property owned by the trustee that represents the personal profit they received.