EQUITY AND TRUSTS

1. EQUITY AND TRUSTS TRUSTEES 2

2. Other duties and powers • Duty to distribute: must make correct payments of income / capital as they are due or otherwise risk breach of trust (non-delegable) • Duty to maintain equality between beneficiaries • Duty to provide accounts and information NBRe Londonderry and P/C decision in Schmidt v Rosewood [2003] UKPC 26 • Duty to terminate the trust (rule in Saunders v Vautier) • Duty to act personally, fiduciary duties and powers of maintenance and advancement under TA 1925

3. DELEGATION

4. Delegation • No delegation rule See Turner v Corney (1841) 5 Beav 515 Lord Langdale: “trustees who take on themselves the management of property for the benefit of others have no right to shift their duty on other persons: and if they employ an agent, they remain subject to responsibility toward their cestui que trust, for whom they have undertaken the duty”.

5. Delegation This can be modified. As stated in Pilkington v IRC [1964] AC 612. “the law is not that trustees cannot delegate: it is that trustees cannot delegate unless they have authority to do so” (per Lord Radcliffe). When does a trustee have authority to delegate? 1. Express clause in the trust instrument see e.g. trust deed paras 15 & 18 of schedule   2. No express clause then statute.

6. TA 2000 Delegation S11 governs delegation but note pre-TA 2000 position under the TA 1925, particularly the problems with ss 23 and 30 and the decision of Maugham J. in Re Vickery [1931] 1 Ch 572.S.23 authorised (collective) delegation of duties; permitted delegation of administrative duties only; Still needed to select agent within the usual scope of his business and exercise discretion in selecting the agent – Re Vickery; Liability: Under s.23 the trustee “shall not be responsible for the acts of such agent if employed in good faith.”

7. S23 and S30 TA 1925 S23 had to be read in conjunction with 30 TA 1925: a trustee is answerable only for his own acts receipts neglects or defaults and not for those of any other trustee … nor for any other loss unless the same happened through his own wilful default. Vickery construes wilful default as a consciousness of default or breach of duty or recklessness in performance of a duty. Thus a trustee would only be liable for his acts if conscious or reckless of his breach – a low standard – trustees could almost delegate without responsibility – poor protection to beneficiaries.

8. Delegation • S23 permitted delegation of administrative acts. Discretions non-delegable but some statutory exceptions: • S25 TA 1925 – delegation of “trusts, powers and discretions” but note requirements, power of attorney, written notice to other trustees etc AND liability remains liable for acts defaults of attorney subs(7) • S9 TLATA delegation to beneficiary under s.9. Delegation by power of attorney for any period. No liability if reasonable care taken in deciding to delegate to the attorney. However, note the change to liability by virtue of s1 TA 2000 now applies – trustee only liable for act or default if trustee fails to comp,y with duty of care or in carrying out duties in s9(a)(3) • S34 Pensions Act 1995 Gives trustees of an occupational fund power to delegate decisions about investments to a fund manager. • S. 1 Trustee Delegation Act 1999 allows a beneficial owner/trustee to delegate his trusteeship to another The donor remains liable for the acts of the donee (s.1 (4)).

9. Delegation S23 gave collective power to delegate • S.25 TA 1925 (as amended by the Trustee Delegation Act 1999) deals with delegation of powers and discretions by individual trustees. • Full liability for the acts of the donee under S.25(7) • Delegation of trusteeship for up to one year by power of attorney • S.1 TDA 1999 delegation by beneficial owner/trustee (see 7 below).

10. Delegation under TA 2000 S.11 gives trustees a collective power to delegate (some of) their functions. What can be delegated? Trustees can delegate their “delegable functions” to an agent (s. 11(1)) including both powers and duties s. 39 except those listed at s11(2) – trustee “core” functions, dispositive powers and powers to appoint agent. The range of delegable functions varies according to whether the trust is charitable or not.

11. Delegation under TA 2000 S12 S. 12 governs who can be appointed as an agent. Can appoint one or more of their own number. Where there is more than one person acting as an agent they must act jointly. The agent cannot be a beneficiary. No other statutory restrictions on choice of appointee.

12. Protection Agents exercising a trustee function are subject to the same specific duties and restrictions as the trustee (S. 13) so e.g. agent investing subject to ss 4 & 5 TA 2000 S14 – terms of the agency: Trustees cannot appoint an agent on a term permitting the agent to appoint a substitute or a term restricting the liability of the agent or his substitute to the trustees or the beneficiaries or a term permitting the agent to act in circumstances capable of giving rise to a conflict of interest. But note “get out” under subs (2) t can allow such term if reasonably necessary.

13. Protection S15 restrictions on asset management functions Asset management includes investment, the acquisition and disposal of property and the management of property (s. 15(5)) and subject to restrictions under s15.

14. Protection • Subs (1) – delegation must be by an agreement (in / evidenced by writing) • Subs (2)(a) – policy statement needed • EN 62 – p.s. need not be in any particular form, provided it constitutes a record of the trustees’ policy on how the functions in Q should be exercised.

15. Protection • E.g. if delegating powers of investment, p.s. should outline the trust’s investment objectives, include considerations affecting the investment policy – balance of capital growth and income yield to meet the needs of the trust, any restrictions on the types of investment • Subs (4) – p.s. Must be in/evidenced in writing.

16. Section 22 duties • Subs(1)(a) – to keep under review the arrangements under which the agent acts, and how those arrangements are being put into effect • By subs(1)(b) – must consider intervention • By subs(1)(c) – must do so.

17. Section 22 duties If trustees delegate any asset management functions then under subs(2) need to keep the policy statement under review – revise or replace and check the agent’s compliance.

18. Liability of trustee • S23 determines the question of liability for acts/defaults of the agent • Liability for failure to comply with the soc applicable to him under Sch1, paragraph 3. D of C applies to t when entering into arrangements for agent, when selecting, when determining any terms, and if agent is to exercise asset management functions when preparing policy statement under s 15 • D of C also applies when carrying out review duties under s22.

19. Liability of trustees • Ss 22 and 23 review requirements and liability for agents apply whether trustees exercise an express power of delegation or the statutory default power (s21) • s23 is important because it limits trustee liability for the acts of their agents. Thus the TA 1925 provisions are defunct. Trustee liability will depend on whether t has fulfilled the D of C when entering into arrangements and reviewing – this depends on compliance with S 1 TA 2000.

20. The duty of care • Set out in section 1 TA 2000. • Standard of care applies to delegation, investment, acquisition of land, compounding of liabilities, insurance and exercising powers in relation to reversionary interests (schedule 1). • Applies to the powers given under the 2000 Act - Schedule 1 • Applies whether exercising express or default power.

21. What is the standard of care? Flexible so phrased in quite general terms: • S1(1) “such care and skill as is reasonable in the circumstances” • Allows nature, composition and purposes to be taken into account (EN13) • Liability likely to turn on application of paras (a) and (b) (see below) knowledge/experience of the trustee and adherence to professional standards for paid trustees = the criteria for deciding issues of liability.

22. Standard of care • Subs (a) – reference to the special knowledge trustee has or holds himself out as having • Subjective reference but trustee will be judged in light of that expertise. Prevents impossibly high standards from being imposed while preserving high expectations of professional trustees. Includes trustees with no experience must act with reasonable skill and care.

23. S1(1)(a) • Different standards will be applied according to character of individual trustee. Different standard would be expected of artist of teacher with no experience of investment than an accountant or solicitor who must apply relevant skills to the powers in schedule 1 • Whether a trustee is paid for services is irrelevant to liability under this paragraph • This provision may raise standard expected of lay trustees with knowledge unrelated to qualifications / occupation. May discourage unpaid trustees from acting • Exemptions clauses maybe more important.

24. S1(1)(b) • Paragraph (b) – standard of care expected from a professional trustee must exercise knowledge / skill reasonably to be expected of such a person • More required by (b) provisions than those in (a). • Issues of liability will be settled by reference to trust instrument. Professional trust instruments normally contain express exclusion clause. Note possible effects of express exclusion clauses.

25. Other Powers • Note position on liability on powers not granted under the Act but by the trust instrument or default powers granted by other statutes e.g. TA 1925 e.g. maintenance and advancement • Still governed by the standard of care under Speight v Gaunt (ordinary prudent man of business). • Where powers granted by trust instrument liability and standard of care usually governed by express exemption clause.

26. Trustees’ Powers Trustees subject to fiduciary duties – see lecture Trustees 3 - Fiduciary Duties. Will now consider powers given to trustees to effectively administer the trust.

27. Trustees’ Powers • Have considered key duties imposed on trustees but also need certain powers to administer trust in interests of the beneficiaries • E.g. investment, delegation – allow trustees to take care of fund and to delegate their power of investment (formerly restricted by ss 23 and 25 TA 1925). TA 2000 has widened these powers to allow for wider investment but also to delegate to e.g. a fund manager. • New powers very useful but bring certain duties e.g. s4 standard investment criteria and s5 advice, need for policy statement, also various review duties. • Other powers – concerning management and mainly under TA 1925 • Professional trust instrument normally allows additional powers. Statutory powers more relevant to older trusts.

28. Basic powers under statute • Sale – land, Ss.6&4 TLATA 1996; chattels; s.12 TA 1925 • Receipts s.14 TA 1925 • Compound liabilities/settle claims s.15 TA 1925 • Insure s. 19 TA 1925 but note its amendment under the TA 2000.

29. Power of sale Trustees do not necessarily need a power of sale over the trust assets but usually do. Trust assets held subject to trust for sale in respect of personalty or trust of land for realty Land held either by absolute owner / under a trust of land / or before TLATA abolished it: under a strict settlement. If property held under a strict settlement then power of sale held by tenant for life not trustee. If land under trust of land legal estate vested in trustees Other property generally subject to express duty to sell. Can be implied under rule in Howe v Earl of Dartmouth.

30. Receipts • S14 TA 1925 written receipt of sole trustee is good discharge for payer. Such receipt of sole trustee acceptable despite anything to contrary in trust instrument. • Where more than one trustee all must sign. • Trust property is land receipt must be signed by two or more trustees or sole trustee trust corporation.

31. S15 TA 2000 S15 TA 1925 confers wide discretion on trustees for settling compromising disputes trustees must act together but may accept: any reduced payment of liability extend period for repayment Accept security for debt Abandon claim TA 2000 Sch 1(4) provides for new stand of care for this power.

32. Insurance • S19 TA 1925 replaced by s34 TA 2000 • S19 provided for insurance but trustees could only insure max 75% of value of trust property. New powers allow to insure for any risk at any level they think fit. • NB new stand applies to this discretion • Proceeds of policy is capital to be dealt with according to terms of trust.

33. Maintenance and Advancement Why powers of maintenance and advancement are needed. Beneficiaries right to property is normally postponed by settlor – maybe circumstances where income / capital of trust could be used e.g. for education or housing or career. The power of maintenance. There are three authorities for the trustees to apply income arising under a trust for the maintenance of a beneficiary: • Authority from the court; • Statutory authority, see section 31 Trustee Act 1925 • Express authority in the trust instrument.

34. Authority from the court The power of the court to award maintenance is not commonly sought, because of the cost, and the existence of the statutory power. It should however be remembered if all else fails. Express maintenance clauses found in some trusts but section 31 Trustee Act 1925 make such clauses unusual, except in discretionary trusts, to which section 31 does not apply. Express clauses are more usually used to modify the statutory power S.31 gives the trustees discretion to make maintenance payments. Trustees must make payments as result of active exercise of their discretion (Wilson v Turner (1883) 22 Ch D 521). Section 31 applies where any property is held by trustees for a person for any interest, whether vested or contingent. So makes no difference to the statutory power that beneficiary has to satisfy some contingency before being able to take.

35. Maintenance • Applies during infancy of beneficiary only • Applies whether interest is vested or contingent e.g. if £10,000 on trust for Paul aged 10 gift is vested but if £10,000 on trust for Paul when he reaches 21 then if he is 10 gift is contingent. • Payment made to parent or guardian or otherwise applied for education maintenance or benefit of infant.

36. Maintenance • Power subject to test of reasonableness. Such part, if any, of the income as may in all the circumstances be reasonable • Proviso to s31: trustees in deciding whether whole or any part of income of property is to be applied for education maintenance or benefit must have regard to age and circs of case and other income applicable for some purposes • Reasonableness can be removed by trust instrument in favour of more subjective test and omission of proviso.

37. Maintenance • Trustees power to use income is subject to any prior interests • If income produced by property given to someone else e.g. life tenant s31 cannot apply because ben not entitled to income produced by property • Power stops at bens majority • Aged 18 ben is entitled to income unless contrary intention e.g. direction to accumulate in Re Turner’s WT • Age at which income vests is commonly raised • Any income not used is accumulated • Ben entitled to accumulations at 18 is entitled to capital • Accumulations otherwise held as accretion to capital can be used as if income arising in current year.

38. Intermediate income The gift must carry the intermediate income. Directions of the settlor /testator always prevail , so check the instrument first. Vested gifts generally carry the right to the intermediate income (unless the income has been given to someone else). The position with contingent gifts, however, is more complex. In the absence of express provision then a combination of s.31(3) TA 1925, s.175 LPA 1925 and case law decide which contingent gifts carry the intermediate income. Note that the effect of these complex provisions is that a contingent interest arising from an inter vivos settlement carries income provided the contingency = the age of majority or some event before that age, and generally all testamentary gifts except contingent pecuniary legacies carry the intermediate income. NB three exceptions: where legacy given by father of child legatee so long as no other fund for maintenance and contingency is attainment of majority (ii) where testator shows intent to maintain (iii) where testator has set aside legacy as separate fund for legatee.

39. Express terms The power of maintenance (and advancement below) subject to any express terms of the trust instrument and may be varied or restricted by the trust instrument (S.69 T.A. 1925) Considered earlier how power often extended to remove reasonableness requirement / s31 criteria / age of vesting. Powers under the Act apply only in so far as a contrary intention is not expressed in the trust instrument and entitlement to maintenance under section 31 is subject to any such contrary intent – can be express or by implication. See Re Stapleton [1946] 1 All ER 323: trustees told MUST accumulate the income until the beneficiaries reached a certain age. This was held to deny the power which would otherwise have been implied by section 31, that they might use (some of) it to maintain the infant beneficiaries.

40. Discretionary trusts • Section 31 is not implied into discretionary trusts because the property is not held for such beneficiaries. If power to maintain such persons is desired, must be inserted expressly • Usually power to distribute income during the continuance of the trust is discretions afforded to the trustees in this type of trust.

41. Advancement Advancement is the power to pay over some of the capital of the fund for the “advancement or benefit” of a beneficiary, in advance of when it would be otherwise due. Authorities for the power to advance: a) the court – can cover capital advancements b) statutory power under section 32 TA 1925 – enables trustees to advance capital for the "advancement or benefit" of beneficiaries ( adults and infant beneficiaries) who are or will be entitled to capital. Thus statutory power cannot be used for the benefit of a person entitled only to income, nor for objects under a discretionary trust. Does not matter that capital entitlement is contingent or a future interest. Power not limited to minor beneficiaries – can be used for the benefit of any "capital" beneficiary. If advance made to beneficiary who never gets a vested interest in capital then neither he, not his estate has to repay.

42. Limitations in subs (1): • S32(1)(a) – only up to one half of the presumptive share can be advanced • S32(1)(b) – when the beneficiary becomes entitled the payment must be brought into account • S32(1)(c) – the payment must not prejudice any person with a prior interest unless the person agrees in writing to the payment • Express clauses used to curtail statutory provisions.

43. The meaning of “advancement or benefit “Advancement or benefit" appear in the statutory provision but put there because invariably used in express provisions prior to 1925. They appear to have the following meanings.   Advancement = setting the beneficiary up in life e.g. use of the funds to purchase a business, a commission, or a house upon marriage would be within this word.   Benefit is extremely wide and has few constraints upon its interpretation.SeeLord Radcliffe in Pilkington v I.R.C. (below) The whole phrase "advancement or benefit," is to be interpreted disjunctively, and appears to encompass "any use of the property which will improve the material situation of the beneficiary." Re Clore’s Settlement [1966] 2 All ER 272 where the power was held to extend to making of charitable donations at request of beneficiary.

44. Problems with the statutory power Wide interpretation of "advancement or benefit" is found in statutory power, because of use of those specific words. Some problem areas remain: 1. Does "benefit" permit advancement to person who has no need, or does it carry a prerequisite of disadvantage? 2. To what extent can trustees exercise the statutory power in order to resettle the advanced funds on different trusts from the original? 3. If trustees can resettle, to what extent can they create a protective, or discretionary fund out of advanced money? May be seen as an attempted delegation of discretions because it affords dispositive powers to the trustees of the sub-trust.

45. Pilkington v I. R. C. [1964] A.C. 612 Two trusts were set up. The first by a testator, who ordered that shares of his estate should be held on trust for his nephew Richard on protective trusts. After his death, Richard's share to go to his own children, one of whom was Penelope. Second trust set up by advancing one half of Penelope's share in trust 1, to trustees of trust 2. Required Richard's consent. Was to be held for Penelope on reaching 30 with gifts over to any of her children.   • Trustees of the first trust wished to advance • Trustees of both settlements were the same people. The real object was to save estate duty on Richard's death.

46. Pilkington Could the trustees advance at all? • HL held requirement of benefit to beneficiary does not denote some condition of underlying need. This removes one possible restrictions on operation of the power sought by the Commissioners of Inland Revenue • Also held that a gift could be of benefit to the beneficiary, even though terms more stringent than original trust where the whole of the package is beneficial to her even if persons other original beneficiary take a possible interest.

47. Express provisions Express provisions for advancement uncommon given but are used to extend mechanical provisions of the statutory power : i) Often widened to allow advancement of up to 100% of potential beneficiary's share of the capital. ii) The requirement for the recipient beneficiary to bring the advance into account upon the occasion of the final distribution may be removed. iii) Need for consent of a holder of a prior life interest may be removed iv) To permit advancement to a life tenant.

48. Re Pauling’s Settlement • To what extent do trustees have to ensure the money is used for the purposes which the advancement is being made? • See Re Pauling’s Settlement [1964] Ch 303 CA held that trustee could hand over capital to ben if they thought they could be trusted or if advance for stated purpose then pay if over if R thought ben could be trusted.

49. Standard of care to be applied These are not TA 2000 powers so common law standard applies. Standard of care in the exercise of the powers is that of the ordinary prudent man of business in managing his own affairs. See Speight v Gaunt NB where powers are granted by trust instrument or TA 1925, all issues of standard of care and liability will most commonly be governed by an express exemption clause.

50. In conclusion In this lecture we have identified: • Duties on trustees in administration of the trust • Powers trustees have to run the trust • Standard of care relating to these duties and powers