Trusts - Trustee Powers and Duties

What are the 2 broad types of powers/duties?

adminstrative (management) and dispositive

What are general administrative powers under the TA (in the absence of express powers under the trust instrument)?

- General power of investment (and are under a duty to invest)

- Power to acquire land

- Power of to delegate their functions (inc investment powers and acquiring land)

What power can a trustee not delegate?

power to distribute property to a beneficiary.

What is the general power of investment under Section 3 TA 2000?

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

- although must carry out general duty of care in carrying out this function

What must trustees consider when exercising the general power of investment?

- They must consider the standard investment criteria in TA

- and take advice in accordance with TA

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

Suitability and diversification.

What does suitability refer to in the context of trust investments?

Trustees must assess both general and specific suitability of proposed investments.

general suitablility = is the investment of a suitable kind?

specific suitability = is this particular investment suitable?

What key factors should trustees consider when assessing suitability?

size of the trust fund,

what is right for that specific fund

intended duration of the trust

rights of different beneficiaries.

What are the Cowan principles on suitability of an investment?

a) trustee obligation to act in the best interests means best financial interests.

b) The trustees must balance the interests of all beneficiaries (current and future).

c) The personal views of the trustees are not relevant to this assessment - must not exercise powers for ulterior purpose.

d) Although the 'best interests' of the beneficiaries could be construed more widely in some cases, allowing trustees to take into account moral and ethical concerns - this will be extremely rare in practice.

e) trustees not bound to follow advice they receive on investments but cannot ignore it simply because they personally disagree

- can only do so if they consider that a reasonably prudent trustee would act in the same way.

In Cowan - what policy of the trust fund did the court disagree with?

coal miners pension fund - not wanting to invest in oil or overseas - not allowed

obligation of trustees was to produce best financial returns for trust fund

but note - Although moral and ethical considerations will not generally be relevant, this does not stop trustees preferring ethical investments if they have a straightforward choice between two investments of economical equivalence.

How do charitable trusts have more choice in choosing investments?

more leeway for trusts for charitable purposes to avoid investments that go against their charitable aims

e.g. cancer research not investing in tobacco companies

- and should also consider whether making equitably questionable investments might put people off donating in the charity

What is modern portfolio theory in relation to diversification of trust investments?

It involves taking an overall approach to the risk profile of the trust fund, allowing for a mix of high and low-risk investments across different asset types

n.b. depends on size of trust fund etc which may limit diversification

What is the duty of trustees regarding the review of investments?

Trustees have a duty to regularly review investments against the standard investment criteria.

What is required from trustees in terms of advice?

trustees are required to obtain and consider 'proper advice' before exercising their powers of investment and when reviewing their investments

n.b. need not seek advice if unnecessary e.g. disproportionate cost of advice or if trustee has significant knowledge or expertise

What is the meaning of 'proper advice'?

provided by a person 'who is reasonably believed by the trustee to be qualified to give it' by their 'ability in and practical experience of financial and other matters relating to the proposed investment'.

Are trustees bound to follow advice on investment?

Trustees are not bound to follow advice but cannot ignore it without reasonable justification.

What is the statutory duty of care for trustees?

- requires trustees to 'exercise such care and skill as is reasonable in the circumstances'.

- assessment takes into account any special knowledge or experience' that a trustee has or holds themselves out as having = higher threshold

- and in case of professional trustees, 'special knowledge or experience' that it is reasonable to expect of a person acting in that capacity is taken into account - always a higher threshold

What is the common law duty of care on trustees?

must exercise the standard of diligence and care expected of an ordinary prudent business person

(no real difference between this and statutory standard)

What are trustees statutory powers in relation to acquiring land?

- trustees have a power to acquire freehold/leasehold property in UK for investment purposes

- and also for other purposes (eg for B to live in)

- buying overseas = breach of trust unless trust instrument says otherwise

- if acquired for investment purposes, must consider standard investment criteria

What are trustees statutory powers in relation to delegation?

- can delegate powers to invest/acquire land

but...

- cannot delegate powers of distribution

- cannot delegate to beneficiaries (even if they are also trustees)

What is required for trustees to delegate their investment powers?

- An agreement evidenced in writing that includes compliance with a written policy statement.

- policy statement should give guidance as to how agent should exercise their functions

- agent is also bound by restrictions on investment that trustee is subject to

What are two primary reasons a trustee might delegate their functions?

- Incapacity to discharge duties temporarily

- or lack of expertise in a specific area.

What must trustees ensure when selecting agents for delegation?

- That the agent is appropriate for the function, the agreement complies with statutory requirements, and arrangement is reviewed regularly

- statutory duty of care applies to selecting agents to delegate to

What happens if trustees don't comply with their duties regarding delegation? (eg they choose an inappropriate agent)

may be vicariously liable for losses caused by the agent's negligence.

What are the three broad circumstances under which trustees distribute trust property?

1. When obligated under the terms of the trust.

2. When directed by beneficiaries with Saunders v Vautier rights.

3. In the exercise of a dispositive power.

What must trustees distinguish between when considering their dispositive duties?

- Trust capital, and the income generated by that capital.

- there may be different entitlements to the income/capital under the trust (eg in a life interest trust)

What is a trustee's obligation to distribute capital and income in this instance: "property held on trust for minor beneficiary until they turn 25"

age 0-18 - capital held on trust, income accumulates

18-25 - trustees must continue to hold the property on trust unless B exercises S v V rights - if they do this, T must transfer it to them as soon as possible

- income distributed as it arises

age 25 - T must transfer the property as soon as possible, and any remaining income

What is a breach of trust regarding distribution?

Delay in distributing income or capital, or failure to distribute at all is a breach of trust.

What is the obligation of trustees regarding income for adult beneficiaries?

Trustees must distribute income to adult beneficiaries as it arises.

this includes Bs with contingent interests which carry the intermediate income

n.b. subject to contrary term in the trust instrument

What is the obligation of trustees for a minor beneficiary under 18?

The trustees must hold the capital on trust and accumulate income that arises before they reach the age of 18

this income is then distributed with the capital

n.b. subject to contrary term in the trust instrument

What are the 2 obligations a T may have regarding income generated by trust property?

1. Distribute the income as it arises.

2. Or accumulate the income.

n.b. these obligations may be combined with discretionary powers

When must trustees distribute assets?

Trustees must exercise their discretion and distribute the trust property to chosen objects within a reasonable time

- what is reasonable depends on the particular trust

What are dispositive powers?

in absence of express trust provisions, default powers in TA 1925 which can be amended/excluded completely by trust instrument

they are:

1. power of maintenance

2. power of advancement

What is the power of maintenance?

- default power to pay income for maintenance, education for benefit of a minor beneficiary

(can be expressly excluded if needed)

- a way of getting around the usual rule that income must be accumulated for minor Bs

When does the power of maintenance not apply?

- does not apply for life interest trusts where someone else has a life interest to the income

- or where B is not a minor

What can the power of maintenance be spent on?

might include:

- school fees

- medical bills

- food, clothing, rent

- leisure and holidays

(non-exhaustive list)

Power of maintenance - to whom should the income be paid?

- minor cannot give good receipt so income should not be paid directly to them

- trustees can pay to parent/guardian

- or direct to provider e.g. fees paid to school

What must trustees bear in mind when exercising power of maintenance?

- power is a fiduciary one - trustees must act in good faith in interest of B

- income must be used for primary benefit of of minor B, does not matter if indirectly benefits parent/guardian (by replacing one of their costs)

- would be improper use of power to unquestioningly pay to minor's parent/guardian expecting it will be used for minor's benefit

Can the power of maintenance be used for current or accumulated income?

power can be used in respect of current income from the capital, or previously accumulated income

Why is it good practice to start using the power of maintenance just before B turns 18?

- power can no longer be used once B reaches 18, and therefore any accumulated income not paid out will be added to the capital until the interest vests (which might not be for years)

What is the power of advancement?

power to pay capital for 'advancement or benefit' of a B whose interested is contingent or has not yet vested in possession

Do trustees have to use the statutory power of adavancement to do what B wants?

No, may/may not use it, and may/may not use it for the purposes B wants

When is the power of advancement available?

- for both adults and minor Bs

- by Bs with vested or contingent interests

- can be used in trusts where another B has a prior interest (but only with their consent)

- can be modified/excluded by trust instrument

Power of advancement - how much capital can be paid?

up to 100% of B's prospective entitlement to the capital (e.g., £10,000 between 2 beneficiaries = can only advance up to £5,000 each)

- even where they have a contingent interest

- has similar effect to Saunders v Vautier rights, but at the discretion of the trustees

Power of advancement - meaning of 'advancement'?

'any use of the money which will improve the material situation of the beneficiary'

- broad meaning

e.g., to avoid inheritance tax liability, donating to charity (if B would otherwise have used their own resources for this)

To whom should the capital be paid under power of advancement?

if B is an adult - can be paid straight to them but must ensure it has been used for the requested purpose

if B is a minor - cannot give good receipt - paid to parent/guardian or to the provider of goods/services being acquired on behalf of the B

What should T do to ensure money is being used for purpose it was provided?

- Ts are obliged to check whether the money is being spent on the purpose it was advanced for - failure to check is a breach of trust

- if beneficiary (or their parent/guardian) found to be spending on something else, trustees should not pay anything further to them

- may instead pay money directly to third party for advancement of the B

Is consent for power of advancement needed from beneficiaries with a prior interest?

- power may only be exercised with written consent of Bs with prior interest

- as advancing the capital will either totally extinguish B1's interest, or reduce the amount of income they get

- but consent of Bs with a subsequent interest e.g. gift-over is not required

- B must be an adult of sound mind to consent

What does it mean to bring the payment into account?

- any payment to B must be brought into account = the amount B will receive when their interest vests should be reduced proportionately to reflect the proportion of any capital they received early

- trustees have a choice between treating the share advanced as a proportionate share of the overall trust value or its strict monetary value

- which they chose can have consequences for B or other Bs

Example of bringing payment into account:

4 beneficiaries, trust fund has a value of £20,000. £5,000 of that is advanced to B1

- if this is treated as their proportionate share, they will not longer be entitled to anything from the fund, even when it increases. The remaining 3 Bs will be entitled to 1/3 each of whatever the amount ends up being

- if this is treated as its strict monetary value, B1 will still be entitled to more money if the fund increases. E.g, fund increases to £30,000. Split between 4, this is £7,500 each, so B1 will receive an additional £2,500 so that everyone gets the same