#3130 - Trustees' Powers, Maintenance & Advancement And Variation - GDL Equity and Trusts

Introduction

- Powers of trustees:

• 1. power of sale;

• 2. power to give receipts;

• 3. power to insure trust property – s34(1) Trustee Act 2000.

• 4. power to maintain minors – s31 Trustee Act 1925.

• 5. power to advance capital – s32 Trustee Act 1925.

• 6. power to delegate in certain circumstances.

- Source of power: trust document + Trustee Act 1925.

• Trustee Act 1925: powers implied in trusts.

  • s31: apply income for maintenance + accumulate surplus income during minority.

  • s32: advance capital to beneficiaries.

• trust instrument: can extent/restrict powers – overrules statutory provisions (often done).

  • s69(2) TA 1925: express provisions/contrary intention prevail over implied powers.

  • e.g. Re Turner’s WT [1937]: trust for grandchildren who attain age 28; express power to maintain from age 21 + instruction to accumulate surplus; 1 b. died at 24 no vested interest: contrary intention in instrument (to accumulate income) overruled s31(1)(ii).

Maintenance from Income: s31 Trustee Act 1925

- s31: power to apply income for maintenance + accumulated surplus income during minority.

• minority: 18 (since Family Reform Act 1969; previously 21).

• 2 possible situations where s31 applies:

  • 1. b. is unmarried minor (‘infant’).

  • 2. b. has attained majority or earlier married + has contingent interest.

Present income (from current year):

- Beneficiary under 18: s31(1)(i) – ts. can pay/apply income for maintenance, education or benefit.

• b. has no right to income under 18: even if interest vested.

  • minors cannot give valid receipt: ts. should never pay money directly to b. under 18.

  • tax implications: Stanley v IRC [1944]: infant life tenant, trustee accumulated income until majority, on majority: b. assessed to surtax on accumulated income paid to him [Ld Greene]: income ‘not his in any real sense’ during minority; ‘title held in suspense’ + destroyed if b. dies before 18 ‘for all practical purposes in same position as if interest contingent’.

• exercise: can pay to parent/guardian or otherwise apply income (e.g. pay school fees directly).

  • b. can have any interest: vested or contingent (or vested but liable to divesting).

  • may use whole or part of income: any income not used accumulated – s31(2).

    • accumulations: may be used for b’s benefit in addition to income in subsequent years of minority – s31(2)(ii).

  • subject to any prior interests/charges: e.g. if b. remainderman, no income until life tenant life tenant dies or surrenders interest.

  • no obligation: ts. must consider ‘all the circumstances’ (inc. b’s age + requirements).

    • should consider exercise: no automatic payments – Wilson v Turner [1883].

    • in practice: if ts. act in good faith, court unlikely to interfere.

  • may incidentally benefit another: if ts. exercising discretion in best interests of b.

    • Fuller v Evans [2000]: ts. paid b’s school fees; indirect benefit to father: responsible under consent order in divorce proceedings allowed.

- When beneficiary reaches 18 (or marries): s31(1)(ii) – b. entitled to income (trustees lose discretion).

• even if interest contingent: e.g. ‘to A if he reaches 25’ – 18: right to income; 25: capital vests.

• calculation of income: based on capital + any accretions to capital.

• tax implications: e.g. Re Turner’s WT: trust for grandchildren who reached 28, 1 died at 24 IRC trying to rely on s31(1)(ii) to charge estate duty on vested income (but overruled by instrument here).

Accumulated income: any surplus income not paid/applied to maintenance under s31(1).

- Accumulation when b. under 18: s31(2) – can be used for b. as if income.

• accumulation of income not paid out: reinvested as capital to produce further income.

• can be used for maintenance in subsequent years during minority: in addition to income of that year – s31(2)(ii).

- When beneficiary reaches 18 (or marries): 3 poss. situations – s31(2)(i) + s31(2)(ii) (ts. lose discretion).

• beneficiary entitled to accumulations if:

  • 1. b. had vested interest in income during minority (e.g. ‘to A for life’) – s31(2)(i)(a).

    • (N.B. if A dies before 18: A/A’s estate NOT entitled to accumulations).

  • 2. b. acquires vested interest in capital on 18 (e.g. ‘to A absolutely at 18’) – s31(2)(i)(b).

• 3. all other situations: accumulations added to/follow capital – s31(2)(ii).

  • e.g. ‘to A if he reaches 25, but if he dies before attaining a vested interest, to B’ if A reaches 25: A entitled to capital + accumulations; if A dies before 25: capital + accumulations vest in B.

Advancement of Capital: s32 Trustee Act 1925

• N.B.: consider income first – easier if b’s needs can be met from income without advancement.

- s32(1): ts. can pay/apply capital for advancement or benefit of any b. (of any age) entitled to capital.

• b. can have any interest in capital: absolute/contingent, possession/remainder/reversion.

• b’s interest must be in capital: i.e. cannot be exercised in favour of life tenant (interest in income).

• no obligation: trustees have absolute discretion.

• subject to express terms of trust instrument – s69(2).

- Purposes of advancement: ‘advancement or benefit’.

• wide definition: to improve b’s material situation or position in life.

  • Pilkington v IRC [1964]: [Viscount Radcliffe]: ‘some step that would contribute to the furtherance of his establishment’.

  • Lowther v Bentick [1874]: [Jessell MR]: ‘preferment and advancement are both large words, but benefit is the largest of all’.

• wide application: not just financial benefit.

  • Lowther v Bentick [1874]: payment of b’s debt.

  • Re Kershaw’s Trusts [1868]: payment allowing b’s husband to move from Far East.

  • Re Long’s ST [1869]: transfer investments from UK to NZ (where b. moved) NOT benefit (but dubious).

  • Re Clore’s ST [1966]: donation to charity relieved b. of moral obligation to donate himself.

    • but cf. X v A [2005]: v. large donation (beyond b’s own resources) NOT benefit.

  • Pilkington v IRC: resettle money on new trusts to save b. tax benefit.

- Resettlement: trust property advanced into new trusts for different purposes.

• acceptable form of advancement under s32 – Pilkington v IRC [1964].

  • [Viscount Radcliffe]: not unauthorised delegation.

  • perpetuity issue: new trust extension of old – cannot extend beyond perpetuity period.

• but poss. NOT to discretionary/protective trust – Re Wills’ WT [1959] + Re Hay’s ST [1981].

  • unauthorised delegation: giving other trustees discretion re: distribution.

  • (unless trustee explicitly authorised to delegate – Re Wills WT).

- Power subject to 3 restrictions – s32(1)(a)-(c).

• 1. no more than 50% presumptive/vested share or interest may be advanced – s32(1)(a).

  • 50% of original share: not taking into account accumulations.

  • even resettlement: no more than 50% share can be advanced on resettlement.

  • Marquess of Abergavenny v Ram [1981]: once full share advanced, no further advancement even if fund later increases in value (although in this case limited by trust instrument also).

  • exception: court order – CD (a minor) v O [2004]: court used powers under Variation of Trusts Act 1958 to allow 100% presumptive share to be advanced for school fees (b. solely entitled + would have been able to collapse trust if older).

• 2. any amount advanced brought into account when b. absolutely entitled – s32(1)(b).

  • e.g. trust of 300k equally to A, B + C on age 25; 10k advanced to A before 25; on 25: A receives further 90k, B + C 100k.

  • but: if b. never acquires vested interest – no need to repay sum.

• 3. power cannot be exercised so as to prejudice interests of person with prior life/other interest, unless that person is of full age + consents in writing – s32(1)(c).

  • Re Forster’s Settlement [1942]: multiple payments of capital affecting income generated, but beneficiaries agreed acceptable.

- Trustees’ duties under s32.

• money ‘paid or applied’: to b. (if full age) / to b’s parent/guardian (if minor) / applied on b’s behalf.

• conscious exercise of discretion – Wilson v Turner [1883]: ts. had power to use income for maintenance of minor, paid all income to father without thought breach of trust.

• responsibility for money advanced (for particular purpose) – Re Pauling’s ST [1964]: Mrs. P. (beneficiary) married naval Cdr Young-Husband; husband convinced wife to ask ts. for advancement ostensibly for children; used money for own benefit instead breach of trust.

  • [Wilmer J]: exercise fiduciary – trustees must try to ensure money applied as stipulated.

• avoid conflict of interest + duty – Molyneux v Fletcher [1898]: t. paid out money to b. knowing that money would be used by b’s husband to pay off debt to t. breach of trust: held to account.

Variation of Trusts

- General rule: terms of trust cannot be altered once trust constituted.

• trustees bound by trust instrument: breach of trust if not administered according to terms.

• settlor + trustees cannot alter terms: unless express power in instrument.

- Variation by power in trust instrument.

• common in modern trusts: power to settlor, trustees or even beneficiaries.

  • potential tax issue: if power reserved to settlor (not really disposed?)

• s32 Trustee Act 1925: trustee has effective power to vary terms of trust in relation to 50% b’s presumptive entitlement can make advancement or resettlement.

  • modern trusts: power usually expressly extended to 100% b’s entitlement.

- Variation by agreement: Saunders v Vautiers.

• requires: all beneficiaries sui juris, together absolutely entitled, all agree.

• if trustees unwilling: beneficiaries can collapse trust (Saunders v Vautiers) or appoint...