Trustees Flashcards

Question

But who appoints the trustee in such cases?

Answer 1

a) The trust instrument may contain an express power to appoint trustees. b) If there is no express power, or it cannot be exercised, the disclaiming trustee has the power under ss 36(1) and 36(8) Trustee Act 1925 (‘TA 1925’) to appoint their own replacement. c) If the disclaiming trustee does not wish to exercise this power: • Beneficiaries with Saunders v Vautier rights have a power to appoint trustees under s 19 Trusts of Land and Appointment of Trustees Act 1996 (‘TLATA’). • As a last resort, the court has a statutory power to appoint trustees under s 41 TA 1925. These statutory provisions are covered in more detail later in this element as they can also be used in cases involving the appointment of replacement or additional trustees. You may wish to have copies of these statutory provisions in front of you when reading the remainder of this element.

Answer 2

In order to understand the following discussion, it is helpful to appreciate how testamentary trusts take effect: a) The testator names their executors in their will. b) If the executors are able and willing to act, they will take legal title to the testator’s entire estate. If they are not able and willing to act, administrators will be appointed instead. c) The personal representatives (ie the executors or administrators) then administer the estate. Once they have paid any liabilities of the testator, they must distribute the property in accordance with the will. This includes ensuring that legal title is vested in the intended trustees of any trusts. d) Sometimes the will provides that the personal representatives should also be the trustees of any trusts in their will. In such cases, they will now hold the legal title to the trust property in their capacity as trustees instead of as personal representatives. e) If the testator has named someone different as trustee, the personal representatives must transfer the property to them.

Answer 3

Although the testator may have named their intended trustees, we have already seen that trusteeship is a voluntary office and the named trustees may decline the role. It may also be impossible for the named trustees to act. The most obvious example is the situation where the trustees predecease the testator. In such cases, the personal representatives will temporarily hold the property on trust until the new trustees are appointed.

Answer 4

The answer to this question is similar to the position for inter vivos trusts. It is necessary to look for an express power first, before considering ss 36 TA 1925, s 19 TLATA (appointment by beneficiaries) and s 41 TA 1925 (appointment by the court). It is worth looking in a little more detail at s 36 TA 1925 at this stage. The position is slightly more complicated than for inter vivos trusts as it depends on the reason why the named trustee is not taking up the role: • If the testator named their executors as trustees but the named executors want to renounce their position (ie not become executors), they have the power to appoint new trustees in their place (s 36(5)). • If the testator named a third party as a trustee, but that person has predeceased the testator or is unable to act, the personal representatives will temporarily become trustees. They then have the power under s 36(1) to appoint permanent trustees. • If the testator named a third party as a trustee, but that person wishes to disclaim the trusteeship, s 36(8) gives the disclaiming trustee the power to appoint their own replacement. If the disclaiming trustee does not wish to exercise this power, the personal representatives also have a power to appoint permanent trustees, in the same way as in cases involving dead or incapable trustees. This section is considered in further detail below as it can also be used to add to appoint replacement or additional trustees of a subsisting trust.

Answer 5

There is another situation in which the personal representatives of an estate may need to appoint trustees. Where a legacy is given absolutely to a minor, they cannot pay it to the beneficiary until they reach 18 because a minor cannot give valid receipt. (A married minor can give receipt for income but that is outside the scope of this module). The personal representatives therefore need to hold the relevant assets on trust for the minor, investing these assets in accordance with their statutory powers of investment and utilising powers of maintenance and advancement until the minor attains 18. However, under s 42 Administration of Estates Act 1925, the personal representatives could instead appoint trustees (usually the minor’s parent/guardian) and give the legacy to those trustees rather than retaining it. Under this section, it is necessary to appoint at least two (but no more than four) trustees or a trust corporation.

Answer 6

It is sometimes necessary or desirable to change the trustees of a subsisting trust. This might entail the replacement of an existing trustee or the appointment of additional trustees. Such changes may be initiated by the trustees themselves or by the beneficiaries. Once the settlor has created the trust, their involvement ceases and they do not automatically have the right to name replacement trustees (and in the case of testamentary trusts this would of course be impossible). Instead, replacement trustees may be appointed in one of the following ways: a) By anyone given an express power to appoint trustees by the trust instrument. b) By current or outgoing trustees, using the statutory powers in s 36 TA 1925 to appoint trustees. c) By beneficiaries, using the statutory powers in exercising their Saunders v Vautier rights. d) By the Charity Commission, in the case of charitable trusts. e) By the court, as a last resort.

Answer 7

A trust instrument may contain powers to appoint new trustees. Sometimes a settlor will reserve such a power for themselves, giving them a degree of continued control over the trust. Example: Express power to appoint trustees: The Settlor and, after the Settlor's death, the Settlor's wife has the power to appoint trustees of this trust given by section 36 of the Trustee Act 1925.”

Answer 8

As we saw above (in the context of appointing the trustees of new trusts) there is a statutory power to appoint trustees in s 36 TA 1925. The power can be used for the following purposes: a) To replace existing trustees (s 36(1)). b) To appoint additional trustees (s 36(6)).

Answer 9

This power can be exercised in the following cases: a) On the death of a trustee. b) If a trustee is abroad for over a year. c) If an appointed trustee is a minor or otherwise lacks capacity to act. d) If a trustee wishes to retire, refuses to act or is unfit to act. The power to appoint trustees under this section must be exercised in writing.

Answer 10

Under s 36(2), trustees that have been removed from their role are treated in the same way as trustees who have died. Similarly, corporate trustees that have been dissolved are deemed to be incapable of acting (s 36(3)). Under s 36(8), references to the death of a trustee in s 36(1) include the situation where the trustees of a testamentary trust predecease the testator. As we saw above, this means that the personal representatives can appoint alternative trustees.

Answer 11

Section 36 (8) also clarifies that references to a continuing trustee include a ‘refusing or retiring trustee’ if they are ‘willing to act in the execution of the provisions of this section’. As discussed above, this means that the named trustees (of either a testamentary or inter vivos trust) who decide not to accept the role of trustee may appoint the person to take their place.

Answer 12

If an additional trustee is to be appointed, and none of the current trustees are being replaced, s 36(6) TA 1925 provides that the power to appoint the new trustee(s) (in writing) lies with: • the person named for this purpose by the will or trust deed; or • if there is no such person able and willing to act, the current trustee(s). This power cannot be used to increase the number of trustees beyond four (unless there is an express clause permitting this in the trust instrument).

Answer 13

If all the beneficiaries of a trust have Saunders v Vautier rights, they can use those rights to change the trustees of the trust. Traditionally, Saunders v Vautier only gives the beneficiaries the power to collapse the trust. Therefore, if they wanted to change the trustees, the beneficiaries would need to exercise their Saunders v Vautier rights to collapse the trust and then declare a new trust with new trustees. This is not ideal from an administrative perspective and may have tax consequences. There is therefore now also a statutory power in s 19 TLATA which gives beneficiaries with Saunders v Vautier rights the power to direct the trustees to appoint a new trustee. This power must be exercised in writing and cannot be exercised in cases where the trust instrument contains an express power to appoint trustees.

Answer 14

It is a core principle that equity will not allow a trust to fail for want of a trustee. For this reason, if a trust would be without a trustee because there is nobody authorised who is able and willing to make the appointment, the court can make the appointment instead. The court’s power to do this is found in s 41(1) TA 1925. The power in s 41 is extended to the Charity Commission in the case of charitable trusts: s 69(1)(b) Charities Act 2011.

Answer 15

When exercising its statutory power, the court will consider the following principles: a) The court should consider the wishes of the settlor or testator (if such wishes are expressed or evidenced in the trust instrument). b) The court should not appoint a trustee where there is a dispute between the beneficiaries as to whether that person would be appropriate. c) The court should consider whether the appointment will promote or impede the trust administration. This means the court should take into account the views of the existing trustees but must consider whether those views are reasonable.

Answer 16

If appointing a trust corporation, the court has the power to authorise the payment of remuneration to that corporation (s 42 TA 1925). Trustees appointed by the court have the same powers as if they were the originally appointed trustees (s 43 TA 1925). If the court cannot find a suitable willing trustee, it may as a last resort appoint the Public Trustee to administer the trust. The Public Trustee was created by the Public Trustee Act 1906 to provide a mechanism for enforcing trusts where no other person is willing to take on the role. The Public Trustee is entitled to charge for its services.

Answer 17

✓ Trustees are usually appointed by a settlor when they establish a lifetime trust or a testator when they create a trust by will. ✓ If a trustee is unable or unwilling to act, it may be necessary to appoint a new trustee, either at the commencement of the trust or at a later date. ✓ The trust instrument may contain powers to appoint trustees. ✓ There is a general statutory power to replace trustees in recognised circumstances. ✓ This statutory power is exercisable by the persons who have express powers to appoint trustees or, if there are no such powers, by the existing trustees. This includes any disclaiming trustees. ✓ The court also has the power to replace and appoint trustees, as does the Charity Commission where the trust is charitable. ✓ Beneficiaries with Saunders v Vautier rights have a statutory power to appoint new trustees.

Answer 18

This chapter explores the powers and duties of trustees. In order to understand the role of trustee, it is necessary to distinguish trustee powers from trustee duties. 1.Trustee powers are permissive: They determine what a trustee may do. They are acts that are authorised but not compulsory. 2.Trustee duties are mandatory: They determine what a trustee must do. Trustees also have a further set of duties which stem from the fiduciary nature of their relationship. Fiduciary duties control how trustees go about performing their role and are framed in the negative. They are about what trustees must not do. Fiduciary duties are not just applicable to trustees. They apply to all fiduciaries and are covered in the topic on the fiduciary relationship.

Answer 19

If the terms of the trust are contained in a written document (whether that’s a trust deed, will or something else) then that document (known as the ‘trust instrument’) is your first port of call. The trust instrument may well contain express provisions setting out the powers and duties of the trustees. It is also important to check whether it expressly excludes or modifies any default statutory rules.

Answer 20

Many trustee powers and duties have their basis in statute or common law and apply as default rules unless excluded, restricted or extended by the settlor. The key statutes you need to be aware of for these purposes are: •Trustee Act 1925 (‘TA 1925’) •Trustee Act 2000 (‘TA 2000’) In practice, you may also come across other legislation governing particular types of trust. A good example is pension trusts, which are subject to their own specialist legislation.

Answer 21

Many trustee powers and duties have their basis in statute or common law and apply as default rules unless excluded, restricted or extended by the settlor. The key statutes you need to be aware of for these purposes are: •Trustee Act 1925 (‘TA 1925’) •Trustee Act 2000 (‘TA 2000’) In practice, you may also come across other legislation governing particular types of trust. A good example is pension trusts, which are subject to their own specialist legislation.

Answer 22

Although the precise powers and duties of trustees will vary depending on the particular trust, they can be divided into two broad categories: •Administrative powers and duties, which relate to the management of the trust property while it is held on trust; and •Dispositive (or ‘distributive’) powers and duties, which relate to the distribution of trust property in accordance with its terms.

Answer 23

The primary duty of a trustee is to comply with the terms of the trust. While the property is held on trust, their role is custodial in nature. They have an obligation to safeguard the trust property. In many cases, this will mean that the trustees have an obligation to ensure that the trust fund produces income and capital growth ie a duty to invest. Trustees therefore have administrative powers which enable them to carry out this function. It is common for trustees to have a power of investment, which is designed to produce income for the trust. They will typically also have broader powers to buy and sell property (which they might need to do for a range of reasons). They may also have the power to raise money by charging existing trust property. Trustees commonly also have powers to delegate some of their functions, including their investment powers.

Answer 24

Trust instruments will usually contain express administrative powers but, if not, there are default powers in TA 2000. It is important to check whether these rules have been amended or excluded. These rules are considered in detail later in this chapter. Administrative powers relate to the management and protection of the trust property while it is held on trust. They do not affect the beneficial interest arising from the trust.

Answer 25

These administrative powers are typically curtailed by associated duties. Trustees have a duty to exercise their administrative powers in accordance with a prescribed standard of care and skill. They are also usually required to comply with specific rules when exercising their powers.

Answer 26

Dispositive duties relate to the distribution of the trust property to beneficiaries or other objects. They therefore affect the beneficial interest arising from the trust. As a basic rule, trustees are required to distribute the trust property in accordance with the terms of the trust. In some cases they are required to accumulate income and add it to the trust capital, to be paid out along with the capital when the capital vests in possession. In other cases, they are required to distribute income as it arises but continue to hold the trust capital until it is time to distribute it to the beneficiary.

Answer 27

Trustees will also often have dispositive powers which give them the ability to distribute income or capital. An example we have already come across is a power of appointment, which is more flexible than a discretionary trust because the trustees do not have to exercise it at all. Trustees also commonly have powers of maintenance (allowing them to apply trust income to maintain minor beneficiaries) and / or powers of advancement (allowing them to pay some or all of the trust capital before a beneficiary’s interest vests in possession). These rules are considered in detail later in this element.

Answer 28

There is a clear relationship between powers and duties. Trustees may only act within their powers. When exercising those powers, they are subject to duties which relate to the proper exercise of the powers. A trustee will breach the trust if they either act outside their powers or fail to comply with their duties. Examples of breach of trust therefore include making an unauthorised investment, failing to act in accordance with their duty of care when making an investment and distributing property to someone who is not a beneficiary. Breach of trust is considered in more detail in the topic on liability of trustees.

Answer 29

It is important to be able to distinguish fiduciary duties from trustee duties because breach of fiduciary duty is a different cause of action with different consequences to a breach of trust. A trustee might also breach their fiduciary duties, whether or not they have breached the trust. In some cases, a trustee may be liable for breach of fiduciary duty even though they have done everything right in terms of their trustee duties and seemingly caused no harm to the trust fund. An example is a trustee who uses their powers of investment to benefit both the trust fund and themselves (perhaps by investing in their own business). Although the investment might be a good one for the trust, the trustee may still have breached their fiduciary duties by putting themselves in a position of conflict or by personally profiting from the opportunity. Fiduciary duties are considered in detail in the topic on fiduciary relationships.

Answer 30

Many express trusts confer extensive administrative powers on trustees. These powers are often set out in the trust instrument. In the absence of such express powers, there are default powers set out in the Trustee Act 2000 (‘TA 2000’). The Act also sets out the duties that apply to the exercise of those powers. These powers and associated duties can be excluded or modified by the settlor. In this section we will explore the following statutory powers and associated duties: • General power of investment (s 3 TA 2000) • Power to acquire land (s 8 TA 2000) • Power of delegation (s 11 TA 2000)

Answer 31

Section 3 TA 2000 sets out the general power of investment. Under this provision, a trustee may make any kind of investment that they could make if they were absolutely entitled to the assets of the trusts. When exercising the general power of investment, trustees must: • Consider the standard investment criteria set out in s 4 TA 2000 • Take advice in accordance with s 5 TA 2000 In carrying out these functions, trustees must act in accordance with the general duty of care set out in s 1 TA 2000. This duty can be restricted, excluded or extended by the terms of the trust instrument (Sch 1 TA 2000).

Answer 32

The standard investment criteria are found in s 4 TA 2000. Trustees must consider the criteria when deciding whether to make an investment (s4(1)) in the first place. Trustees also have a duty to regularly review investments with reference to the standard investment criteria and decide whether they ought to be varied. There are two key components to the criteria: 1. Suitability (s4(3)(a)): Trustees must consider the suitability of the proposed investments. There are two key questions to consider: • General suitability: Is the investment of a suitable kind? • Specific suitability: Is the particular investment suitable? 2. Diversification (s4(3)(b)): Trustees must also consider the need for diversification of trust investments. The extent to which diversification is needed will depend on the size and nature of the particular trust.

Answer 33

The question of suitability will be highly fact specific. A suitable investment for one trust fund may be entirely unsuitable for another. In considering this question, trustees must balance the duty to preserve the trust assets against the need to produce appropriate growth on the investment. Key issues that trustees will need to consider when assessing suitability include: • The size of the trust fund • The period of time for which the trust is intended to subsist • The respective rights of different beneficiaries The trustees of a large, commercial trust fund which is intended to subsist for many years will have a greater degree of freedom to invest in assets which are intended to produce long-term growth, compared to the trustees of a small family trust which is only intended to last for a short period of time. If the family trust includes both life and remainder interests, the trustees will also need to ensure that any investments produce income for the life tenant as well as capital growth for the remainderman. Trustees must act even-handedly between beneficiaries.

Answer 34

A key case on investment is Cowan v Scargill [1985] Ch 70, which sets out the following principles: a) When considering the suitability of trust investments, the trustee obligation to act in the best interests of beneficiaries means their 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. Trustees must exercise their powers fairly and honestly, and not for any 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 (such as in cases where all beneficiaries are adults of sound mind who share those concerns and would not wish to benefit from an investment they consider immoral or unethical) this will be extremely rare in practice. e) Although trustees are not bound to follow the advice they receive on investments, they cannot ignore it simply because they personally disagree with it. They can only do so if they consider that a reasonably prudent trustee would act in the same way. Cowan itself involved a pension trust for British coalmine workers. Although such investments were permitted by the terms of the trust, the trustees wanted to adopt a policy of refusing to invest in oil or overseas. This decision was said to be made on the basis of principle and in accordance with the policy of National Union of Mineworkers (representatives of whom made up half of the pension trust management committee). The court disagreed with this policy. The obligation of the trustees was to produce the best financial return for the trust fund, in order to preserve the value of the pensions of the current and future members of the pension scheme. ‘I find it impossible to see how it will assist trustees to do the best they can for their beneficiaries by prohibiting a wide range of investments that are authorised by the terms of the trust. Whatever the position today, nobody can say that conditions tomorrow cannot possibly make it advantageous to invest in one of the prohibited investments. It is the duty of trustees, in the interests of their beneficiaries, to take advantage of the full range of investments authorised by the terms of the trust, instead of resolving to narrow that range.’ (Sir Robert Megarry V-C).

Answer 35

The requirement to consider diversifying the trust investments reflects the principles of modern portfolio theory. This involves taking an overall approach to the risk profile of the trust fund rather than considering each investment on an individual basis. It allows trustees to invest in a mixture of high and low risk investments, rather than investing exclusively in low risk (and therefore probably low yield) investments. Trustees should also invest across a range of different types of assets, so that the trust fund is not overly exposed to the risks of losses in a particular sector. Again, the extent to which trustees can diversify the investments will depend on the size and nature of the trust fund, with larger funds able to spread their investments across a wider range of assets. Smaller trust funds may not be able to diversify in the same way but the trustees may consider investing in investment funds, which pool the assets of multiple investors and allow them to obtain the benefits of diversification.

Answer 36

Although moral and ethical considerations will not generally be relevant to trustee decisions, this does not stop trustees preferring ethical investments if they have a straightforward choice between two investments of economical equivalence. As we have already seen, the trustees can also take into account the ethical views of beneficiaries, where the beneficiaries are all of sound mind and agree on the decision. There is also more scope to take non-financial considerations into account in the case of charitable trusts. In particular, charitable trustees may refrain from making investments which might conflict with the aims of the charity or hamper its work. For example trustees of a cancer research charity would not be expected to invest in the tobacco industry, even if this was the most profitable investment available. Trustees can also consider whether making ethically questionable investments is likely to undermine the work of the charity (e.g. by deterring potential donors from supporting the charity). Trustees would be required to balance the risk to the charity of financial loss from not making the investment against the detriment and disadvantages to the charity of making the investment.

Answer 37

Under s 5 TA 2000 trustees are required to obtain and consider ‘proper advice’ before exercising their powers of investment (s 5(1)) and when reviewing their investments (s5 (2)). The advice must relate to how the power should be exercised, with reference to the standard investment criteria. ‘Proper advice’ is defined in s 5(4) as being 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’. There is an exception set out in s 5(3) which provides that trustees need not seek advice if they reasonably conclude that in all the circumstances it is unnecessary to do so. This will depend on the circumstances but might, for example, include situations where the cost of the advice outweighs the benefit of obtaining it or cases where the trustee has sufficient knowledge and expertise to make the decision without advice.

Answer 38

The statutory duty of care is found in s 1 TA 2000 and requires trustees to ‘exercise such care and skill as is reasonable in the circumstances’. • Section 1(1)(a) requires the assessment to take into account ‘any special knowledge or experience’ that a trustee has or holds themselves out as having. • Section1(1)(b) applies to professional trustees and requires the assessment to take into account the any ‘special knowledge or experience’ that it is reasonable to expect of a person acting in that capacity. In other words, the standard of care is always higher for professional trustees, because they are being paid to provide a service. It is also raised for lay trustees who may have been appointed on the basis of having (or purporting to have) particular skills that would make them desirable trustees. This is why it is important for individuals to think carefully about whether to accept the role of trustee, as their actions will be assessed objectively. The statutory duty of care does not apply to all acts of a trustee, but only to those set out in Sch 1 TA 2000

Answer 39

There is also a common law duty of care which applies more widely. Broadly, it requires trustees to exercise the standard of diligence and care expected of an ordinary prudent business person. Case law on investment predating the TA 2000 applies the common law duty of care. It is generally considered that there is no difference between the two standards (with the TA 2000 codifying the duty of care in certain circumstances). Earlier case law therefore remains useful in assessing whether a trustee has complied with the statutory duty of care.

Answer 40

Section 8 TA 2000: Trustees have a statutory power to acquire freehold or leasehold land in the UK (but not overseas). This power may be exercised for investment purposes but also more widely (including for occupation by a beneficiary). If the land is acquired for investment purposes, the trustees must consider the standard investment criteria and take advice in accordance with ss 4 and 5 TA 2000 respectively. The statutory duty of care applies to all trustee powers to acquire land, whether they arise under s 8 or otherwise, and whether the land is acquired for investment or other purposes.

Answer 41

Section 11 TA 2000 provides trustees with broad powers of delegation. Although there are some functions which trustees cannot delegate (such as their distributive obligations) they are permitted to delegate their powers of investment and powers to acquire land. There are restrictions on the persons to whom powers may be delegated (s 12). Crucially, trustees cannot delegate decisions to beneficiaries (even if they are also trustees). Trustees cannot delegate their investment powers except by an agreement evidenced in writing (s 15 TA 2000). This agreement should include a term ensuring compliance with a written ‘policy statement’ to be prepared by the trustees. The ‘policy statement’ should give guidance as to how the agent should exercise their functions ensuring they are in line with the best interests of the beneficiaries. The agent to whom the function is delegated is bound by any restrictions on the exercise of its investment powers in the same way the trustee would be (s 13(1) TA 2000).

Answer 42

There are two primary reasons why a trustee might wish to delegate their functions: a) The trustee may be incapable of discharging their duties for a limited period. b) The trustee lacks the expertise to discharge the particular responsibility and prefers to have an expert do this. Trustees are required to comply with the statutory duty of care both with respect to selecting agents and entering into agreements with those agents. As such the trustees should ensure: • An appropriate agent is selected for the function • The agreement complies with their requirements under statute • The arrangement is reviewed regularly If trustees comply with their duties when exercising the power of delegation, they will not be vicariously liable for any loss caused by the agent acting negligently.

Answer 43

• The TA 2000 contains administrative powers which will apply as default rules unless excluded, restricted or amended by the trust instrument. • Under the TA 2000 trustees have broad powers of investment and a power to acquire land for the trust (other than land overseas). • In exercising their powers of investment, trustees must consider the standard investment criteria (suitability and diversification) and must also obtain and consider proper advice. • Once trustees have made an investment, they must keep it under review, again with reference to the standard investment criteria. • Trustees have a statutory power to delegate these functions to an agent. Trustees must keep the agency arrangement under review. • A statutory duty of care applies to the trustee powers of investment, acquisition of land and delegation. There is also a more general common law duty of care which applies when trustees exercise other functions.

Answer 44

In this element we will explore liability for breach of trust and fiduciary duty. We will consider the ways in which a trustee might be liable for breaching their obligations and the consequences of doing so, including • the measure of liability; • the different types of remedy that may be sought; • the ways in which a trustee might be protected from liability. • the respective liability of co-trustees and the possibility of apportioning liability between them and/or third parties who are also liable in respect of the same loss.

Answer 45

As we have seen in the topic on trustee powers and duties, it is important to be able to understand the relationship between trustee powers and duties, as well as distinguish trustee duties from fiduciary duties of trustees. In this section, we are going explore the link between powers, duties and breach. Examples of breach There are a number of different ways in which a trustee can be liable for breaching their duties: • If a trustee acts outside their powers, their act will be unauthorised and therefore a breach of trust. Examples include misapplications of trust funds such as wrongful distribution and making unauthorised investments. Misappropriation of trust funds (ie using funds for a trustee’s own purposes) will also clearly be a breach of trust.

Answer 46

• Even if the actions of the trustee are authorised (i.e. they do something within their powers), they will still be liable for breach of trust if they fail to comply with any applicable duties. For example, a trustee who makes a permitted investment but fails to consider the standard investment criteria or take proper advice will have committed a breach of trust. Other examples include failing to monitor investments or making decisions that are not in the best interests of the beneficiaries. • Finally, a trustee will be liable for breach of fiduciary duty if they breach the no-conflict or no-profit rule, or if they self-deal. This will be the case even if they have complied with all relevant trustee duties. As an example, a trustee who makes an authorised, and profitable, investment on behalf of the trust will nonetheless be liable for breach of fiduciary duty if it transpires that they have also made an unauthorised personal profit (for example by taking a secret commission).

Answer 47

If there has been a breach, what are the consequences? And what remedy might the beneficiaries want?

Answer 48

If there has been a breach of trust, the key question will be whether that breach has caused a loss to the trust fund. It will be important here to look both at income and capital. Importantly, this does not just mean that the trust fund has produced less income than before, or that the capital has gone down in value. Trustees have an obligation to safeguard and invest a trust fund so loss may involve the trust fund not having produced as much income or capital growth as it should have done if the trustee had acted in accordance with their duties. Breach of trust is considered in detail later in this element.

Answer 49

If there has been a breach of fiduciary duty you might be looking for loss or, more commonly, you might be seeking to establish that the trustee has made an unauthorised profit. Breach of fiduciary duty was considered in detail in the element on the fiduciary relationship.

Answer 50

The remedy sought will depend on the nature and consequences of the breach. Sometimes a beneficiary will be seeking to make a personal claim against the trustee (either for compensation for loss or an account of profits). Sometimes they may be seeking to make a proprietary claim over an asset held by the trustee (or, in some cases, a third party). Equitable remedies and the processes of following and tracing are covered in detail in the topic on equitable remedies and tracing. If such a remedy is obtained, it will usually be to restore the trust fund rather than payable to an individual beneficiary (unless, for example, the claim is for income or capital which should already have been distributed to that beneficiary). Sometimes it is possible to rescind a transaction ie unwind it. This is rarely possible in cases involving a third party. It is more likely where the trustee has been personally involved in the transaction.

Answer 51

If there is no loss or profit, does that mean there is no remedy? Sometimes the answer is yes: Sometimes there may be a technical breach of trust but it hasn’t actually had any impact on the trust fund (indeed it may have had a positive impact). In such cases, the beneficiaries may simply choose to do nothing or to affirm an unauthorised act. Even if a breach has not resulted in a monetary remedy, the beneficiaries may still have lost confidence in the trustee and seek to remove or replace them. Alternatively, if they have Saunders v Vautier rights, they may decide to bring the trust to an end

Answer 52

It is important to ascertain who has committed a breach as this impacts who the beneficiaries may take action against. Often a trust will have more than one trustee. Although trustees are only liable for their own breaches, co-trustees must act together. All trustees should take an active role in the trust and failure to do so may result in them being liable for breach of trust. It is also possible that a court may conclude that some, but not all, trustees have a defence available that precludes liability for breach. Co-trustees who are found to have committed a breach of trust will be jointly and severally liable.

Answer 53

If a trustee has breached their fiduciary duties, it is less likely that their co-trustees will be liable. A fiduciary is liable for their own breaches of fiduciary duty and often will act alone in doing so. In particular, if there has been a breach of the no-profit rule, it is the trustee who receives the profit who will be liable for it. However, if a breach of fiduciary duty causes a loss to the trust fund, it may be the case that there are other breaches there too. A breach of fiduciary duty resulting in a loss may well also have involved a breach of trust (both by the trustee who has breached their fiduciary duties and by their co-trustees who have enabled them to do so). It is also worth mentioning here that there may be other people liable for loss caused by a breach of trust or fiduciary duty. Strangers to the trust may be liable if they have assisted a breach or knowingly received the traceable proceeds of a breach. Liability of strangers is considered in the topic on liability of strangers.

Answer 54

How might a trustee be protected against liability for breach of trust or fiduciary duty? Firstly, it’s essential to check the trust instrument carefully to see whether it authorises an act which would otherwise be a breach. This would mean that there was no breach at all. The trust instrument might also contain an exclusion clause, reducing the liability of trustees in some way for a breach. Breaches might also be authorised by the beneficiaries or by the court. If a trustee is unsure of whether a course of action is permitted, they could seek court directions before going ahead. There are also statutory defences available to breach of trust and a statutory limitation period. Finally, although not a defence as such, trustees may take out insurance to protect themselves against the financial effects of liability for breach of trust. This does not mean that they are not liable but will hopefully mean that the insurer, rather than the trustee, picks up the bill. Defences and protection of trustees are considered in greater detail later in this element.

Answer 55

When there are multiple individuals liable in respect of the same loss, the beneficiary cannot recover more than once. They may sue all the potential defendants together, and join them in the same action, or they may choose to sue just one for the full amount. This is the benefit of joint and several liability from the claimant’s perspective. Often they will join as many parties in the action as possible, particularly when there is uncertainty as to who is actually liable. But there may be cases when it is concluded that it is not worth suing a particular defendant, and that it may be worth choosing to sue those from whom they are most likely to recover. From the perspective of the defendant, this means they may end up compensating the trust fund for the full amount even though they are not the only person liable. In such cases, they may seek an indemnity or contribution from their co-trustees. (The same action can also be brought by others liable for the same loss, for example a third party who has been found liable as an accessory and ended up having to pay the full amount). Crucially, this is a separate action between those people who are potentially liable for the same loss. It does not prevent the beneficiary recovering from whoever they choose to sue.

Answer 56

In order to establish liability for breach of trust two questions should be asked: a) Did the trustee(s) act in accordance with their powers? b) If so, did they comply with their trustee duties?

Answer 57

• Making an unauthorised investment. • Wrongful distribution. • Misappropriation of trust property. (This would also be a breach of fiduciary duty). These are generally quite straightforward to establish as the trustee will have done something they are not allowed to do.

Answer 58

The second type of breach involves the trustee falling below the standard of behaviour expected of them as trustee. Some such breaches will involve a straightforward failure to carry out a positive duty such as not distributing trust property, but many will require a more careful analysis of the specific facts, such as: • Failure to take into account the standard investment criteria or properly consider advice when exercising investment powers. • Failure to comply with the duty of care when exercising investment powers. • Failure to properly monitor investments.

Answer 59

Where a trust has more than one trustee, it is necessary to identify which of the trustees has committed the breach. As trusteeship is a joint office it will often be the case that more than one trustee will be liable, although they may be liable for breaches in different ways. For example, one trustee may misapply trust property and be actively responsible for a breach while the other trustees may be liable for failing to monitor the actions of their co-trustees. Where multiple trustees have breached the trust, they will be jointly and severally liable.

Answer 60

A is a professional trustee and breaches their duty of care by authorising an investment without considering the standard investment criteria. B is a co-trustee and lay person, who agrees to the investment on the basis that A has suggested it. Both trustees have breached the trust. A has actively breached it by making the investment while B has breached it by failing to properly turn their own mind to the matter.

Answer 61

A trustee will not be liable for a breach of trust which took place before the trustee was appointed (see Re Strahan (1856) 8 De GM & G 291). On appointment, if a trustee discovers that a breach of trust occurred, they should commence proceedings in order to recover from the former trustee. Failure to take such action may result in the new trustee becoming liable for their own breach of trust.

Answer 62

A trustee will continue to be liable for any breaches committed during the time that they acted as a trustee, even after they have retired. A trustee will only be liable for breaches of trust that occur after they retire in two cases: 1. Where the trustee retired to facilitate the breach; or 2. The trustee parts with trust property in retiring without due regard, so loss is suffered when the property is transferred to the new trustees (see Head v Gould [1989] 2 Ch 250, 272).

Answer 63

If it is concluded that there has been a breach of trust, it is necessary to consider the following issues: a) Did the breach cause any loss? b) Are there any defences available to exclude or limit the liability of the trustee(s)? c) If more than one trustee is liable, how should liability be apportioned between them?

Answer 64

Once a breach of trust has been established, it is necessary to consider the claim the beneficiaries can make. This will depend on the nature and consequences of the breach: •If the trustee has misapplied or misappropriated trust property, the beneficiaries may seek to recover the property itself (or its traceable proceeds). Proprietary claims are covered in detail in the element on equitable claims and tracing. •If it is not possible or desirable to recover the trust property, or if the breach has not involved a misapplication of trust property, the beneficiaries may instead seek equitable compensation to reflect the loss caused (if any) to the trust fund. Trustees are not liable for losses unless they have breached their duties. They are not insurers. So, for example, if a trustee makes a prudent investment (and has complied with their obligations to consider the standard investment criteria and consider proper advice) they will not be liable if it happens to fall in value (e.g. due to market forces beyond the trustee’s control). This is not the fault of the trustee and the trust fund must bear the loss. However, the trustee may become liable if they continue to hold the investment notwithstanding its poor performance. This would be a breach of their duty to review investments and consider whether to vary them.

Answer 65

Where there has been a breach of trust the trustees will be liable to account to the trust fund for the consequences of that breach. Loss is assessed at the date of the trial, rather than the date of breach, and involves ‘taking an account’ to determine the expected value of the trust fund. If the actual value of the trust fund is lower than the expected value, the trustees will be personally liable to compensate the trust fund for the difference. So how does the court assess the expected value of the trust fund when taking an account?

Answer 66

Before the decision in Target Holdings v Redferns [1996] AC 421 it was clear that different principles applied to assessment of loss depending on whether the relevant breach of trust involved: (i)a misapplication of trust funds (eg making an unauthorised investment); or (ii)a different type of breach (eg a breach of the s1 TA 2000 duty of care when making an authorised investment).

Answer 67

Traditionally, the court would “falsify” the account in the case of a misapplication of trust funds. This requires the trustees to return the trust fund to the position it would have been in if the misapplication had not occurred, ideally restoring the same type of property to the fund. You may also see this described as ‘reconstituting’ the trust fund. If it is not possible to restore the same type of property, the trustees will need to pay equitable compensation in lieu (to the value of the property that should have been restored). If the misapplication has resulted in a profit to the trust fund (eg the trustees make an unauthorised but profitable investment) the beneficiaries can instead elect to affirm the transaction.

Answer 68

Trustees wrongfully distribute 100 shares in a company to an individual. The shares were worth £1,000 at the date of distribution. At the date of trial, the shares are worth £2,000. Falsifying the account, you would expect the trust fund to contain 100 shares in the company. The trustees would therefore be required to purchase 100 shares in the company for the trust fund. If they are unable to purchase shares, they would instead need to pay equitable compensation of £2,000 to reflect the loss to the trust fund.

Answer 69

Trustees invest £5,000 in 100 units in a unit trust. The trust instrument prohibits investment in unit trusts, making the investment unauthorised. At the date of the trial, the 100 units are worth £4,000. Falsifying the account treats the trustees as having bought the units in their personal capacity instead of on behalf of the trust. The trustees should therefore sell the 100 units and pay the £4,000 proceeds into the trust fund. They will also need to compensate the trust fund for the remaining £1,000 shortfall (plus an amount representing interest on the £5,000 between the date of the investment and the date of trial).

Answer 70

Where the breach does not involve a misapplication of trust funds, taking an account is known as ‘surcharging’. In this case, the court will be looking to assess the expected value of the trust fund if the breach had not occurred. In other words, the trustees will be required to pay equitable compensation for loss of which the breach can be shown to be a ‘but for’ cause. You may also see this described as a ‘reparation’ claim. Assessment of loss in such cases can be quite complicated and will be assessed by reference to what a hypothetical prudent body of trustees would have done in the circumstances. In cases involving lots of interrelated transactions, it may be necessary to look very carefully at the facts to identify the loss that can be attributed to the breach.

Answer 71

Following the case of Target Holdings v Redferns, [1996] AC 421, the courts have taken a less rigid approach to the distinction between falsification and surcharging and it is unclear to what extent the traditional approach has survived Target. The facts of Target are complicated but, broadly, they involved a commercial transaction under which a solicitor was holding funds on trust for a mortgage lender until the parties were ready to complete the transaction. Upon completion, the solicitor was supposed to release the funds to the borrower, who would grant security over the property. The solicitor breached the trust by releasing the funds early to a third party intermediary. This was technically a misapplication of the trust funds because the solicitor did not have the authority to release the funds to the intermediary. Ultimately, however, the funds were received by the borrower and the lender obtained the expected security interest. So why did the lender go on to sue the trustee? The modern approach to causation The problem in Target was not really that the solicitor had misapplied the trust funds. The issue was that the borrower had fraudulently overstated the value of the property over which the mortgage was granted. The borrower went insolvent and the lender was unable to fully recover the loan money via the security. So they also sued the solicitor for breach of trust arguing that the trust fund should be falsified because the solicitor had misapplied the funds. The House of Lords held that no loss had been caused by the breach because the claimant had ultimately received the expected security for the money loaned. In justifying this conclusion, Lord Browne-Wilkinson drew a distinction between (i) traditional trusts and (ii) bare commercial trusts. The modern approach to causation The suggestion here is that the traditional approach to causation still applies to traditional trusts that subsist following the breach, but not to bare commercial trusts that only subsist during the course of an underlying commercial transaction. This sort of trust is very common in property transactions, where a solicitor will often hold funds on trust temporarily until the parties are ready to proceed to completion. The reasoning in Target was that the bare trust completely falls away once the commercial transaction has been completed, meaning the trustee (ie the solicitor in this case) has no continued obligation to reconstitute the trust fund. Target was endorsed and applied by the Supreme Court in AIB Group (UK) plc v Redler and Co [2014] UKSC 58. In light of this line of case law, it appears that falsification is still relevant when assessing loss caused by misapplication of trusts funds by the trustees of a traditional trust, but loss caused by breach of a bare commercial trust will be assessed on a ‘but for’ basis.

Answer 72

In general, trustees are not permitted to set off the losses caused by a breach of trust against profits they have made on other investments or transactions. Trustees are held to the same high standard every time they exercise their functions, so it is no excuse to a breach of trust that they have performed their duties better on other occasions. They are not assessed on their average performance. However, it is possible to offset losses against profits where they arise from the same transaction or course of dealing. This is well illustrated by Bartlett v Barclays Bank Trust Co Limited [1980] Ch 515. In Bartlett, the trustees had a majority shareholding in a company but failed to properly supervise it. The company made two investments in property, one of which was profitable but the other made a large loss. The trustees could offset the profit against the loss as they arose from the same breach (ie the failure to monitor the company’s speculative investments).

Answer 73

Even if there has been a breach of trust or fiduciary duty, there may be defences available to mitigate or even exclude liability altogether. In this section we consider the following defences: •Exemption clauses. •Beneficiary instigation / consent / acquiescence. •Statutory limitation rules / defence of laches. •Statutory relief under 61 TA 1925.

Answer 74

Trust instruments will often contain exemption clauses that have the effect of limiting or excluding trustee liability for particular sorts of breach. The duty still exists but the trustees will be protected from personal liability if they breach it. An exemption clause can exclude liability for any sort of breach other than a fraudulent breach. A trustee cannot rely on an exemption clause if they have acted dishonestly (Armitage v Nurse [1998] Ch 241).

Answer 75

Trustees will not be liable for a breach of trust or fiduciary duty if they received the fully informed consent of all the beneficiaries. If only some of the beneficiaries have consented, the trustees will not be able to fully escape liability but will have a partial defence against those beneficiaries. Trustees will also have a defence against beneficiaries who instigate or request the breach. Again, this will only provide a partial defence if there are other beneficiaries who did not. Finally, even if the beneficiaries did not consent to the breach before it was carried out, they may subsequently affirm the action of the trustees. A trustee who has committed a breach may therefore have a defence of acquiescence against beneficiaries who have indicated (by their words or actions) after a breach that they consent to the action taken.

Answer 76

Where a beneficiary instigates or requests a breach, the trustees will only have a defence against that particular beneficiary. However, they may also be able to impound the beneficiary’s interest. This means using some or all of the instigating beneficiary’s share of the trust fund to indemnify the trustees against a claim by the other beneficiaries. The court has discretion to impound a beneficiary’s interest in such circumstances under s 62 TA 1925. There is no requirement to show that the instigating beneficiary benefitted from the breach. This codifies an existing common law discretion. The statutory power to impound beneficial interests also applies to cases where the beneficiary has consented to the breach but only where the consent was provided in writing. Again, there is no requirement for the beneficiary to benefit from the breach. The courts also have a common law discretion to impound a beneficial interest in cases of consent. The common law discretion does not require the consent to be in writing but does require the beneficiary to have benefitted from the breach.

Answer 77

As with other civil law claims (such as claims in tort or for breach of contract) there are limitation periods applicable to claims for breach of trust. Under s21(3) Limitation Act 1980 the limitation period for bringing a claim for breach of trust is six years from the breach. However, this only applies to claims by beneficiaries with interests vested in possession. For beneficiaries with future interests, the limitation period only starts to run when their interest vests in possession. The limitation period does not apply to fraudulent breaches or proprietary claims against the trustee (i.e. claims to recover trust property or its traceable proceeds from trustee). If a trustee is also a beneficiary, and receives an unfairly large distribution from the trust, only the excess can be recovered after the normal six year period (unless the trustee acted dishonestly or unreasonably in making the distribution, in which case it may be possible to make a claim for the full amount of the payment).

Answer 78

In cases where the statutory limitation period has not yet expired, trustees may still be able to rely on an equitable doctrine known as ‘laches’ to argue that a beneficiary has waited too long to bring a claim. Whether a defence of laches will be successful is highly fact-specific. It requires the trustees to demonstrate that the beneficiary knew of a breach but has delayed their claim unacceptably, making it unconscionable for the beneficiary to assert their beneficial interest.

Answer 79

If none of the protections above apply, trustees may seek to obtain relief under s 61 TA 1925. This gives the court discretion to excuse a trustee in circumstances where the trustee ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust’. The trustees bear the burden of establishing the three requirements ie: 1.They ought ‘fairly’ to be excused. 2.Reasonableness. 3.Honesty. The court then has a wide discretion to consider all the circumstances of the case. The court will not use s 61 lightly, as it may deny the beneficiaries a remedy (although note that it can be used to excuse individual trustees while others remain liable).

Answer 80

The most likely use for s 61 is in cases where a trustee has inadvertently acted outside their powers, for example by making an unauthorised investment or by distributing to the wrong person. It is more likely to be successful in cases involving lay trustees (rather than professionals) because although a professional trustee may easily establish that they acted honestly, it will be harder to prove that they have acted reasonably or that it is fair to grant them relief (thereby prejudicing the beneficiaries). In particular, if a lay trustee has sought advice before taking action they may be able to rely on s 61. Taking advice will not necessarily guarantee relief under s 61, but it will clearly be an important consideration. See, for example, Re Evans [1999] 2 All E.R. 777 where an individual acted as the executor of her father’s estate. Believing a missing beneficiary (her brother) to be dead, she sought legal advice and took out missing beneficiary insurance before distributing the estate. It transpired that her brother was alive and the insurance policy did not fully cover the loss. In the circumstances, the court agreed that it was appropriate to grant her relief under s 61 TA 1925.

Answer 81

As trustees are jointly and severally liable for breach of trust it is possible that one trustee may end up compensating the trust fund for the entire loss. That trustee is then likely to seek a contribution from their co-trustees under the Civil Liability Contribution Act 1978.

Answer 82

A claim can be made under s 1(1) where two or more parties are liable for the same damage. The court has a discretion to require one party to make a ‘just and equitable’ contribution to another (s2 (1)). While the court will presume equal responsibility they may depart from this presumption where the facts indicate that it would be fair to do so. Unequal contributions will reflect differing levels of culpability for the loss. The trustees may, for example, have delegated a particular function to a particular trustee. While they all remain responsible for ensuring that function is properly executed, the trustee with responsibility may be seen to be more at fault for any resulting breach. This would be particularly the case if a higher standard of care applied to that trustee because they had particular expertise or were acting as a professional trustee alongside lay trustees.

Answer 83

In very rare cases, the court may even award a contribution amounting to a full indemnity (s2(2)). This is likely only in cases where: - A particular trustee is morally culpable for the breach, such as cases where the trustee has misappropriated trust property for their own benefit. - A trustee is also a beneficiary. - A trustee acts as solicitor to the trust and the breach is committed in reliance on their advice. The court will not necessarily grant an indemnity in such circumstances, as demonstrated by comparing the following cases involving solicitor trustees.

Answer 84

In Re Partington (1887) 57 LT 654 a testamentary trust had two trustees. One was a solicitor and the other was the testator’s widow. The solicitor took sole responsibility for the administration, failed to properly inform the widow and negligently made an unauthorised investment. The court awarded a full indemnity on the basis that it was reasonable for the widow to have relied on the advice. In contrast, no indemnity was awarded in Head v Gould [1898] 2 Ch, where the lay trustee took an active role in the breach of trust. The solicitor trustee did not have a controlling influence over their co-trustee so an indemnity was inappropriate.

Answer 85

Trustees who are liable for breach of trust, and find themselves compensating the beneficiaries for the loss caused by the breach, may also seek a contribution from other persons who are liable in respect of the same loss. This might therefore include professional advisers who provided negligent advice which led to the breach. It might also include third parties who have become involved in the breach of trust in some way, such as strangers to the trust (especially those who benefit from the breach such as knowing recipients). Liability of strangers is covered in detail in the topic on liability of strangers. On the other hand, a trustee may also find themselves defending proceedings under the Act in cases where the beneficiaries have recovered from a third party (perhaps an accessory or knowing recipient) who then sues the trustee for a contribution.

Answer 86

Trusteeship is an onerous office and even the most careful trustee may find themselves in a situation where they risk liability for breach of trust because they have inadvertently acted outside their powers or failed to act in accordance with their duties. Such breaches may, of course, also be committed negligently or even intentionally. There are many different ways in which a trustee can be protected from liability for breach of trust, which vary depending on the nature of the breach and the time when the protective action is taken. This element considers the actions that can be taken to protect trustees: 1. When the trust is first established. 2. During the administration of the trust (but before a potential breach is committed). 3. After a breach has been committed. For ease of reference, this element uses the terminology of ‘trustees’ but please note that personal representatives can use the same methods of protection.

Answer 87

Before taking on the role of trustee, it is important to understand the nature of the role and the risk of personal liability for breach of trust. This enables the prospective trustee to take action to mitigate such risks. The easiest way to avoid liability is, of course, to simply avoid becoming a trustee in the first place. If a settlor asks an individual to act as trustee, they can turn down the role. If the intended trustee does choose to act, there are still things that can be done to minimise their future potential liability, such as requiring the settlor to include an ouster or exemption clause in the trust instrument or by taking out trustee liability insurance.

Answer 88

If the trust is created in a formal document such as a trust deed or will, the trustees may be involved in the drafting of that document. This is very common in cases involving professional trustees. In some cases, they may include an ouster clause, which entirely removes a duty that they would otherwise have. Not all trustee duties can be ousted (because this would render the trust meaningless) so they should be used sparingly. A common example in practice is the removal of the duties that ordinarily arise when a trust holds a majority shareholding in a company (under the Bartlett v Barclays Bank line of case law).

Answer 89

It is also possible to exclude or limit liability for breach of trust by way of an exemption clause. This is different to an ouster clause because the duty still exists but the trustees will be protected from personal liability if they breach it. Because the duty still exists, it may still be possible for the beneficiaries to pursue action in respect of the breach (eg by making a proprietary claim or a personal claim against a stranger) but the trustees will be protected against claims. An exclusion clause cannot exclude or limit a trustee’s liability for fraudulent breaches of trust.

Answer 90

Trustees may also choose to take out insurance against personal liability for breach of trust. Such insurance is commonly known as ‘trustee liability insurance’ or ‘trustee indemnity insurance’. Like any insurance policy, it will contain restrictions on when the policy will pay out. Similarly to exclusion clauses, insurance can protect trustees against liability for negligence but not fraudulent breaches of trust. It will often be possible to have the insurance premiums paid out of the trust fund as an expense of the trust.

Answer 91

There may be times when trustees are unsure of their powers or duties. For example, the provisions of the trust instrument may be difficult to interpret, leaving them unclear as to whether they are permitted or required to take a particular course of action.

Answer 92

Where trustees seek legal advice on the interpretation of the trust instrument, they may simply choose to rely on that advice and act accordingly. However, this will not necessarily prevent the trustees from liability for breach of trust if they take action on the basis of the legal advice which turns out to be incorrect (ie the court takes a different view). Good advice will therefore acknowledge how confident the lawyer is that their interpretation is correct and advise the trustees as to further steps they can take to protect themselves. These include: 1. Seeking court directions. 2. Applying to the High Court under s48 Administration of Justice Act 1985 (‘AJA 1985’) to rely on Counsel’s opinion. 3. Surrendering their discretion to the court. 4. Obtaining beneficiary consent.

Answer 93

If the trustees are unsure of their obligations or wish to ensure that their plans for distributing the trust property will not expose them to a claim for breach of trust, the safest thing to do is seek directions from the court. There are many reasons why a trustee may want to take this action. For example, the wording of the trust instrument may be ambiguous, leaving the trustees unsure of the scope of their duties or powers. Similarly, they may be concerned about how to interpret a piece of legislation or apply case law in the context of the trust. To protect themselves from liability for breach of trust, the trustees can apply to the court for guidance on the matter. Trustees who act in accordance with the directions of the court will not be liable even if there is a subsequent claim from a beneficiary.

Answer 94

Although seeking court directions is the safest option when there is uncertainty, it is also an expensive option and trustees need to weigh up the cost of doing so against the risk of being successfully sued for breach of trust if they do not. In some cases, there is a cheaper option available which still involves applying to court but without the expense of a full court hearing. In cases where there is a question about the construction of the terms of a will or trust, AJA 1985 allows the trustees to take the following actions: Step 1: Seek a written legal opinion from a person satisfying s71 Courts and Legal Services Act 1990 (usually a barrister or solicitor with 10 years of experience); and Step 2: Apply for High Court authorisation to rely on that legal opinion. The High Court will grant an order without hearing arguments unless there is a dispute which would make it inappropriate. This course of action is therefore most useful in cases where there is no disagreement between the trustees or beneficiaries but where the trustees simply want clarity as to the interpretation of the trust instrument.

Answer 95

Another reason that trustees may require input from the court is if there is a dispute between the trustees about how they should exercise their powers. For example, the trustees of a discretionary trust may be in disagreement as to how to exercise their discretion. In cases where the trustees are deadlocked, or where they are precluded from acting due to a conflict of interest, they may surrender their discretion to the court. Unlike simply seeking directions from the court (which provide guidance as to a lawful course of action) this course of action involves the court making the decision for them. This is an exceptional course of action and can only be sought in relation to a specific problem which requires addressing. The trustees cannot simply give up all their powers and obligations and leave the court to administer the trust on an ongoing basis.

Answer 96

If trustees are unsure of their powers and duties, or want to do something which they know would be a breach of trust or fiduciary duty, one option that may be available to them is to seek the fully informed consent of the beneficiaries. This will only be an option if all the beneficiaries are known, locatable and are over 18 (and of sound mind). In such circumstances, rather than going to the expense of seeking court directions, the trustees may instead request the consent of the beneficiaries to the action they intend to take. The trustees will only obtain full protection if they obtain fully informed consent from all the beneficiaries: • It is essential that the beneficiaries are given full information to enable them to provide consent. If the trustees withhold important information about their intended actions, they will not be able to rely on the consent obtained. • If consent is only obtained from some beneficiaries, the trustees will have a partial defence to breach of trust against claims by those beneficiaries but not against the other beneficiaries.

Answer 97

If trustees are unable to identify or locate beneficiaries there are a number of options available to them: 1. Seeking a Benjamin order, allowing distribution on the assumption that a missing beneficiary has died. 2. Publishing a notice under s 27 TA 1925 putting unknown beneficiaries on notice of their intention to distribute the fund between known beneficiaries. 3. Retaining a fund to satisfy the claims of missing or unknown beneficiaries. 4. Paying money into court to satisfy the claims of missing beneficiaries. 5. Taking out insurance against wrongful distribution. 6. Seeking an indemnity from the beneficiaries to whom they do distribute.

Answer 98

When it comes to distributing a trust fund, trustees can sometimes run into difficulties because they either cannot identify or locate beneficiaries. Consider the example of trustees who hold a fund on trust for the settlor’s wife during her lifetime, with the remainder to be distributed equally between such of the settlor’s children and grandchildren who are living at the wife’s death. There is no problem with certainty of objects here. But imagine that the wife lives for a further 30 years. How easy will it be for the trustees to identify and locate all of the remainder beneficiaries? If they aren’t sure they have identified and located all of them, how can they distribute equally between them? If the trustees get it wrong, and only distribute between the beneficiaries they can identify and locate, they will be liable to any unknown or missing beneficiaries who later come forward and make a claim. This also exposes the other beneficiaries to a potential claim because they have received more than their rightful share of the trust fund.

Answer 99

A common type of order sought from the court by trustees is known a Benjamin Order. This is a court order permitting the trustees to distribute on the basis of a particular assumption, which will depend on the circumstances of the particular case. This is useful in the situation where the trustees know of the existence of a beneficiary but are unable to locate them. A Benjamin Order can be granted allowing the trustees to distribute the trust fund on the basis that the missing beneficiary is presumed dead. Before an order is awarded the trustees must make full enquiries to attempt to establish the true position and demonstrate there is no reasonable prospect of knowing the true position without disproportionate expense. The order relieves the trustees from personal liability if they distribute the trust property but the assumption turns out to be incorrect. However, a disappointed beneficiary or creditor can make a claim against other beneficiaries to whom the property had been distributed.

Answer 100

Key case: Re Benjamin [1902] 1 Ch 723 In Re Benjamin [1902] 1 Ch 723 itself the son of the testator had disappeared approximately a year before the testator died. The trustees made an application to the court for directions as to how to distribute the estate. After reviewing evidence that it was highly likely the son had died, a special order was made by the court allowing the trustees to distribute the estate on the basis that the son had not survived. Key case: Re Green’s Will Trusts [1985] 3 All ER 455 The Benjamin order was expanded by Re Green’s Will Trusts [1985] 3 All ER 455, where the testator had expressly left all her property to her son in her will, fully aware that he had gone missing several years previously and was certified presumed dead. The testator set out in her will that should her son not claim the estate before 2020 it would go to charity. Nourse J went against the testator's express wishes and made an order that the executors could distribute the estate to charity.

Answer 101

In some cases, the trustees may be unsure as to whether they have properly identified all the beneficiaries. For example, the trustees may have an obligation to divide trust property equally between a conceptually certain class of individuals (eg the nieces and nephews of the settlor) but be unsure who all those people are. To prevent liability to unidentified beneficiaries, the trustees may publish a notice of their intention to distribute to known beneficiaries two months after the advertisement. This puts unknown beneficiaries on notice that they must identify themselves to the trustees. After the two month notice period, the trustees may distribute to known beneficiaries and will have no personal liability to the unknown beneficiaries. The notice must be placed in (i) the London Gazette, (ii) a newspaper circulating in the area in which any land held on trust is situated, and (iii) any other newspaper which is appropriate (for example, if the deceased owned a business the relevant trade paper may be an appropriate place to advertise).

Answer 102

The options above will have serious implications for a beneficiary who comes forward later. As the trustee will be protected against any personal claims from such a beneficiary, they will not have a right to recover personally from the trustees. Where the property has been distributed the only option for a beneficiary will be a proprietary or personal claim against the recipient of the property. However, if the property has not been fully distributed, it will still be possible for the beneficiary to claim any undistributed property from the trustee.

Answer 103

Another option is for the trustees to retain a fund setting aside trust assets in order to be able to discharge liabilities if missing beneficiaries come forward after distribution. This is useful in cases where the trustees are able to identify all beneficiaries but cannot locate all of them. It allows them to distribute to the beneficiaries they can find, while still having the funds to satisfy the claims of the other beneficiaries if they come forward later. However, it does mean that the trustees may be required to hold the retained fund for a long time, meaning ongoing administrative duties. Retaining a fund is also an option in cases where the trustees remain unsure as to whether they have identified all potential beneficiaries. They may choose to distribute to the known beneficiaries but hold some money back in case other beneficiaries come forward in future. This is quite a risky strategy in cases of unknown beneficiaries as it will be difficult for the trustees to quantify the respective interests of the known and unknown beneficiaries, and could well result in a claim against the trustees for having paid out the wrong amount to the known beneficiaries.

Answer 104

Another option in circumstances where trustees can establish genuine doubt as to the location of beneficiaries is to distribute to those beneficiaries they can find and pay the remaining funds into court: s 63 TA 1925. This gives the court legal control over the funds and effectively allows the trustees to retire. This is likely to be a more attractive option to the trustees than retaining a fund, because it means that they do not have open-ended administrative duties in respect of the trust fund. However, from the court’s perspective this course of action is a last resort which should only be taken if all realistic options for tracing the beneficiaries have failed. It is not an easy route for trustees to free themselves from their obligations.

Answer 105

Trustees may decide to take out insurance to guard against the risk of missing or unknown beneficiaries emerging after the trust fund has been distributed. The trustees may simply take out insurance and then distribute in accordance with the information they have available. If a beneficiary later comes forward, the trustees will be liable to them but can claim on the insurance policy. Obtaining insurance does involve an upfront cost (which can usually be met by the trust fund) so trustees will need to decide whether it is worth paying for the certainty of having the insurance policy to guard against a future claim. It is also significantly cheaper than seeking a Benjamin order. Risk-averse trustees may well choose to use insurance alongside another mitigation measure.

Answer 106

A final option available to the trustees who cannot identify or locate the beneficiaries, but still want to distribute the entire trust fund, is to seek an indemnity from the beneficiaries to whom they plan to distribute. This involves the beneficiaries promising to reimburse the trustees if the trustees are successfully sued by other beneficiaries later. It has the benefit of being cheaper and quicker than some of the options above, as well as avoiding part of the trust fund being tied up on trust for a long period of time. However, like with the insurance option, an indemnity does not actually protect the trustees from claims by beneficiaries who come forward later. It simply gives them someone else they can seek to recover the loss from. Although cheaper than taking out insurance, it is also riskier because an indemnity is only worth anything if the person giving the indemnity is able to pay. There is also a risk that the indemnifying beneficiary will resist payment, resulting in further expensive litigation by the trustees to recover.

Answer 107

Once a breach of trust has taken place, there is not much that a trustee can do to protect themselves but it is important to identify the scope of their liability and consider the availability of any potential defences or reliefs, as well as action that may be taken against third parties. Defences were covered in detail in the element on liability of trustees.

Answer 108

Once a breach of trust occurs, advising a trustee involves assessing the scope of liability and identifying existing protections. The following steps should be taken: 1. Check the trust instrument for an exemption clause. 2. Consider whether any of the following may provide a full or partial defence: • Reliance on court directions. • Instigation / consent / acquiescence. • Statutory limitation rules / laches. • Statutory relief under 61 TA 1925. 5. If there is likely to be a successful claim, check for relevant insurance (and inform the insurer of the claim) or an indemnity from other beneficiaries. 6. Identify whether there are any potential claims against third parties (such as financial or legal advisers to the trustees who may have given negligent advice). 7. If a trustee is required to pay equitable compensation, consider Civil Liability Contribution Act 1978 claims against co-trustees or third parties.

Answer 109

Trustees who find themselves potentially liable for breach of trust might also consider the possibility of taking action against third parties. In particular, we have already considered the situation in which the trustees have acted in reliance upon advice from a professional such as a lawyer or a financial adviser. If that advice was negligent, the trustees should consider making a claim against the adviser in their capacity as trustee. If they identify the negligence early, and take swift action against the adviser, they may be able to prevent a personal claim for breach of trust altogether (because they will have complied with their duties as trustee in taking action and recovering the funds on behalf of the trust). Alternatively, they may need to bring a separate claim against the adviser alongside or following the proceedings for breach of trust. If a trustee is successfully sued for breach of trust and required to pay equitable compensation, they may wish to seek a contribution or indemnity from other liable parties (including their co-trustees). This process was considered in detail in the element on liability of trustees.

Trustees Flashcards

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