Unit Six Flashcards
Which ONE of the following is NOT an aspect of the law relating to a trustee’s fiduciary duties?
(A) Fiduciaries must not make an unauthorised profit from their position.
(B) Strict liability.
(C) Fiduciaries must not allow their personal interest to conflict with their duties.
(D) The remedy where a trustee has made a personal profit in breach of fiduciary duty is always based on the loss which the trust has suffered.
The answer is D. The remedy for breach of fiduciary duty is that the trustee must give up their profit. The beneficiaries can recover the profit whether or not the trust has suffered loss (see for example, Boardman v Phipps).
All the others are fundamental aspects of a trustee’s fiduciary duties to the beneficiaries.
Fred and James are trustees for Alice and Ben. There are no clauses in the trust instrument relevant to this question. Fred wishes to purchase some land from the trust.
Which ONE of the following statements is CORRECT?
(A) Trustees can never buy property from the trust due to the conflict of interest.
(B) There is nothing to stop Fred buying the land from the trust if he buys it at auction because he will pay a fair price.
(C) An unauthorised sale to Fred would be voidable by the beneficiaries within a reasonable time.
(D) A sale of the land to Fred with James’ agreement could not be challenged.
The answer is C. Without authorisation, the sale of trust property to one of the trustees gives rise to a conflict of interest (the trustee acting as both seller and buyer in the transaction). Under the ‘self-dealing rule’, the beneficiaries can set the transaction aside if they wish to do so, provided they do so within a reasonable time.
A is not correct because trustees can buy land from the trust if there is a clause permitting them to do so in the trust instrument, the court consents, or all the beneficiaries are sui juris and agree with knowledge of all the material facts.
B is not correct because, on the face of it, any sale to a trustee, regardless of the circumstances of the sale, is a breach of their fiduciary duty because there is a conflict of interest, and the principle of strict liability arises. It will not matter that the trustee pays a fair price for the property, or if the sale takes place at an auction.
D is not correct because the agreement of the other trustee(s) does not validate the sale
Which ONE of the following statements in CORRECT?
(A) Beneficiaries can sue trustees for a breach of fiduciary duties only if the trust had suffered loss as a result of the breach.
(B) Beneficiaries can recover an unauthorised profit made by a trustee even if the trust could not have gained the profit itself.
(C) Beneficiaries cannot obtain proprietary remedies for a breach of fiduciary duties.
(D) A trustee has a complete defence to an action for breach of fiduciary duties if the trustee was honest.
The answer is B. The fact that the trust could not have made the unauthorised profit is not a defence to a successful claim for a breach of fiduciary duty (see Keech v Sandford).
A is not correct because an action for breach of fiduciary duty can be successful even though the trust suffered no loss (see Boardman v Phipps).
C is not correct because beneficiaries can bring a proprietary claim to recover property owned by the trustees which represents the unauthorised personal profit they received.
D is not correct because when considering a breach of fiduciary duty, strict liability applies.
Kyle and Jonathan are trustees for Xavier and Penny. There are no clauses in the trust instrument relevant to this question. Kyle is an accountant and regularly advises trustees on tax and investment matters. Jonathan is an architect.
Which ONE of the following statements is CORRECT?
(A) Kyle can charge reasonable fees for acting as trustee if Jonathan agrees in writing.
(B) Jonathan can charge reasonable fees for acting as trustee if Kyle agrees in writing.
(C) If Jonathan dies leaving Kyle as the sole trustee, Kyle can charge fees for acting as trustee.
(D) Neither Kyle nor Jonathan can charge fees unless there is a charging clause in the trust instrument.
The answer is A. Under s29 Trustee Act 2000, trustees who act in a professional capacity are allowed to charge reasonable fees if the other trustees agree in writing. Kyle acts in a professional capacity because he acts in the course of a profession or business which consists of or includes the administration of trusts generally or a particular aspect of trust work (s28 Trustee Act 2000).
B is not correct because Jonathan cannot charge fees because he does not fall within the definition in s28 Trustee Act 2000.
C is not correct; a sole trustee acting as a professional trustee cannot charge fees because there is no other trustee to agree to those fees as required by statute (s29 Trustee Act 2000).
D is not correct because s29 applies to all trusts unless the trust instrument excludes or contains its own provisions for charging remuneration.
A trust holds 40% of the shares in a private company. At a shareholder meeting, one of the trustees uses the votes attached to the trust’s shareholding to become a director of the company. The company pays the trustee a salary.
Which ONE of the following statements is CORRECT?
(A) The trustee has not placed themself in a position of a conflict of interest.
(B) The trustee can keep the salary if they are a professional trustee.
(C) The trustee can keep the director’s salary if this is authorised by the trust instrument.
(D) The trustee would never have been able to keep the salary because of the conflict of interest.
The answer is C. Although, the trustee has breached their fiduciary duty, a trustee is not liable if the trust instrument authorises the action (here, the retention of any payment from a third-party source).
A is not correct because by using the trust’s shareholding in the company to achieve the personal benefit of becoming a director, the trustee is in a position of a conflict of interest (see Re Macadam).
B is not correct because the professional status of the trustee is an irrelevant consideration when considering breaches of fiduciary duty.
D is not correct because if over 50% of the other shareholders by value voted in favour of the trustee becoming a director, they would have achieved the position (and the salary) independently of the trust’s holding. In this circumstance, they would be able to keep the salary.
Is the following statement TRUE or FALSE?
Strict liability applies to the rule that a trustee must not put themself in a position of conflict of interest and is accountable for any profit made. It is no defence for the trustee to say they were honest, or that the trust suffered no loss.
The statement is true. The court will not consider the honesty of the trustee nor whether the trust has suffered loss. Strict liability applies. The existence of this rule means that the trustees will not be tempted to make profits from their position and, therefore, will always give the trust impartial advice untainted by any thoughts of self -advancement.
Kishen and Amit are trustees. The trust’s investment adviser recommends the purchase of shares in X plc because there are rumours of an imminent takeover, and the shares are likely to increase in value. Kishen buys some shares using his own money and makes a big profit when he sells them six months later.
Which ONE of the following statements is CORRECT?
(A) Kishen will not have to account for the profit if the trust could not have made the profit itself because it did not have the funds to buy shares in X plc.
(B) Kishen will have to account for the profit because there was a possibility of a conflict of interest.
(C) Kishen could keep the profit if he made a full disclosure to his co-trustee, Amit.
(D) Kishen can keep the profit if, having spoken to the investment adviser, he retired and then bought the shares.
The answer is B. Kishen will be accountable for the profit because of his use of information which he received in his capacity as trustee (see Boardman v Phipps)
A is not correct because the fact that the trust could not have purchased the shares is not a defence (see Keech v Sandford, Boardman v Phipps).
C is not correct because Kishen’s honesty and a full disclosure to co-trustees are irrelevant considerations. Strict liability applies.
D is not correct, because the conflict of interest arose while Kishen was a trustee. He cannot escape a liability to account by retiring.
Which ONE of the following could NOT give rise to a potential liability for a breach of trust or fiduciary duty?
(A) A trustee, who is going abroad for six months, transfers all the trust property to their cotrustee so that they can deal with trust business in the absence. During that absence, the cotrustee sells a trust asset and disappears with the sale proceeds.
(B) A trustee receives and keeps commission from an insurance company for insuring the trust property with them.
(C) The trustee of a discretionary trust refuses to give a member of the class of objects reasons why they have not been selected to receive a share of the trust fund.
(D) With the consent of only the adult beneficiaries, the trustees of a discretionary trust for the settlor’s children and grandchildren, invest trust money in a risky venture which has led to the loss of the sum invested.
The answer is C. Trustees do not have a duty to provide beneficiaries with reasons as to why they have exercised a discretion in a particular way.
A is not correct because by acting in this way, the trustee would have breached their duty of care to the trust. By not keeping the trust property secure, he has not acted “as an ordinary, prudent businessman”.
B is not correct because a conflict of interest would have arisen; the trustee cannot make an impartial choice when selecting the insurance company. The trustee would have to account to the trust for the commission.
D is not correct because while the fully informed consent of beneficiaries is a defence to a breach of trust action, that consent must be from all the beneficiaries and minor beneficiaries are not considered sui juris to give such consent. Consequently, these trustees would not be able to rely on this defence to their breach of their investment duties (s4 Trustee Act 2000).
Is this statement TRUE or FALSE?
A trustee makes an unauthorised personal profit from the use of trust property. The trustee then goes bankrupt. It could be pointless for the beneficiaries to claim the profit because the claim would rank alongside the claims of ordinary unsecured creditors on the bankruptcy and the beneficiaries would be unlikely to recover much.
The statement is false. The unauthorised profit will be held on constructive trust for the beneficiaries. As an alternative to a personal action for the trustee to account for the profit, the beneficiaries can bring a proprietary claim and the latter will have priority on the trustee’s bankruptcy.
The trustees of a trust are a solicitor specialising in trust administration and a retired teacher. The trust instrument contains no charging clause. The solicitor would like to charge the trust for their time and expertise in dealing with trust matters. The teacher is agreeable to this as the solicitor’s proposed fees are not unreasonable.
Is the solicitor entitled to charge the trust?
(A) No, because there is no authorisation in the trust instrument.
(B) No, because trustees can never charge for their time and expertise.
(C) No, because trustees can only be paid for out-of-pocket expenses.
(D) Yes, because the solicitor is a professional trustee.
(E) Yes, because the teacher has consented.
Option E is correct. As there is no charging clause, the solicitor must rely on the Trustee Act 2000 for authorisation. As a professional trustee (see s28 Trustee Act 2000), s29 Trustee Act authorises the professional trustee to receive reasonable remuneration provided the other trustees consent.
Option A is wrong because while a charging clause in a trust instrument is conclusive as to whether trustees can charge for time and expertise, the absence of such a clause does not preclude such remuneration. It may be authorised by statute (see Option E), by the beneficiaries or by the court. Options B and C are therefore also wrong for similar reasons.
Option D is wrong because merely being a professional trustee does not automatically entitle that trustee to remuneration. They must obtain the appropriate authorisation.
A doctor and a teacher are trustees holding on trust for two beneficiaries currently aged 32 and 16 years respectively. The doctor bought some land belonging to the trust at auction six months ago using an inheritance. The doctor has since obtained planning permission to build a house on the land.However, the adult beneficiary wants the land restored to the trust.
Can the beneficiary get the land restored to the trust?
(A) Yes, because trustees can never purchase trust property
(B) Yes, because such a sale is voidable by the beneficiaries.
(C) No, because the beneficiaries will be time-barred by statute from bringing any action.
(D) No, because the land was sold at auction.
(E) No, because the trustee used their own money to buy the land and the trust suffered no loss.
Option B is correct. Without authorisation, the sale of trust property to one of the trustees gives rise to a conflict of interest (the trustee acting as both seller and buyer in the transaction). Under the ‘self-dealing rule’, the beneficiaries can set the transaction aside if they wish to do so, provided they do so within a reasonable time.
Trustees hold a trust fund. One trustee is an accountant who advises on trust financial and taxation matters. The other trustee is a fitness instructor. Both trustees want to keep the reasonable commission which an insurance company has promised in return for insuring trust property with them. There are no relevant provisions in the trust instrument.
Which of the following best describes the position regarding the commission?
(A) The trustees cannot keep the commission.
(B) The accountant can keep the commission as a professional trustee.
(C) The fitness instructor can keep the commission with the accountant’s written consent.
(D) As the commission is reasonable, both trustees can keep the commission.
(E) Trustees are always allowed to retain this kind of payment as it is linked to their obligations as trustees.
Option A is correct. A conflict of interest will have arisen as the trustees cannot make an impartial choice when selecting the insurance company – are they acting in the best interests of the trust by insuring trust property with the company or because of the promised commission? The trustees would have to account to the trust for any commission they receive. This applies to all trustees regardless of whether they act in a professional capacity or not (so Option B is wrong), or whether the amount of the proposed commission is reasonable in the circumstances (so Option D is wrong).
Two trustees were appointed to manage a trust fund comprising the freehold of a block of flats in Lincolnshire. The trustees secured an independent, professional valuation on the premises, which concluded that the current freehold value was £425,000 but that the local real estate market was in difficulty and that the value was likely to drop considerably in the future. Having considered the interests of the beneficiaries, the trustees decided that it would be in their best interests to sell the freehold and buy other investments more likely to generate capital growth.
The trustees decided to sell the freehold at auction two months ago. The auction was conducted by an independent, professional firm of auctioneers with experience of selling real estate. One of the trustees decided to take part in the auction and made the highest bid for the property at £450,000.
The beneficiaries have just found out about this.
Which of the following best describes whether the beneficiaries can set aside the sale of the block of flats?
(A) The sale must be set aside because the trustees failed to get the beneficiaries’ prior approval.
(B) The sale can be set aside by the beneficiaries, so long as they do so within a reasonable time frame.
(C) The sale cannot be set aside by the beneficiaries because the trust has not suffered a loss, the purchase price being higher than the current market value for the property.
(D) The sale cannot be set aside by the beneficiaries because the trustees secured professional advice on the valuation of the property and its sale.
(E) The sale cannot be set aside by the beneficiaries because the property was sold by auction, which ensures that the trust got best value for the sale.
Option B is correct. This is an example of ‘self-dealing’ – one of the trustees has sold trust property to themselves. The transaction can be set aside at the request of the beneficiaries, so long as that decision is taken within a reasonable time frame.
Option A is wrong. Whether or not the beneficiaries set aside the transaction is a matter for them – they are not obliged to do so (and might not as the purchase price was higher than current market value).
Options C, D and E are wrong. Beneficiaries are allowed to set aside a ‘self-dealing’ transaction regardless of how honest the trustee’s actions were or how fair the transaction is. Such matters are irrelevant. The fact that the trust has not suffered a loss, that professional advice was obtained, and that the sale was conducted via auction do not provide the purchasing trustee with any kind of defence.
Two trustees hold a trust fund on trust for two beneficiaries who are aged 22 and16 respectively. The trust fund contains a 30% holding in a private family company. At the request of the adult beneficiary, one of the trustees was asked to become a director of the family company so as to safeguard the trust’s investment. At a recent shareholder meeting, the trustee was voted onto the board of directors and was awarded a salary from the company. The decision at the meeting in favour of the appointment was by a 55% majority comprising the shares attached to the trust’s holding and one other shareholder.
Can the trustee retain the director’s salary?
(A) Yes, because one of the beneficiaries consented to the trustee being a director.
(B) Yes, because trustees have a duty to safeguard trust investments and are entitled to keep any payment they receive for doing so.
(C) No, because trustees are never entitled to retain incidental profits arising from their trusteeship.
(D) No, because the votes attached to the trust’s shareholding were used to enable the trustee to be appointed.
(E) No, because the other trustees have not consented.
Option D is correct. If the votes attached to the trust holding have been used against the proposed appointment, the trustee would not have been appointed a director (only 25% would have been in favour). The trustee, therefore, will became a director and will receive the salary as a result of being a trustee, using trust property. This is a breach of the fiduciary duty not to profit from the trust; the trustee will have to account for the salary to the trust.
A solicitor specialising in trust advice and an office manager are trustees of a family trust. The trust fund is currently valued at £500,000 and is being held on trust for the settlor’s spouse for life, remainder to the settlor’s three children, a son aged 25 years and two daughters aged 16 and 14 years respectively. The trust instrument contains no express powers for the trustees.
Which of the following best describes an authorised use of trust funds?
(A) The purchase of a beach restaurant in Greece to let to tenants.
(B) Payment of reasonable remuneration to the solicitor with the office manager’s written consent.
(C) Payment of one third of the income earned on trust investments to the son as he is over 18 years of age.
(D) A one-off payment of £100,000 from the trust fund to the spouse.
(E) An investment of £400,000 in a start-up private design technology company.
Option B is the correct answer. Under s29 Trustee Act 2000, trustees who act in a professional capacity are allowed to charge reasonable fees if the other trustees agree in writing. The solicitor acts in a professional capacity because they are a solicitor specialising in trust advice so are acting in the course of a profession or business which consists of or includes the administration of trusts generally or a particular aspect of trust work (s28 Trustee Act 2000).
