#2539 - Trust Administration - Trusts and Equity

Trust Administration

Sources of Powers and Duties

1. Express terms in the trust deed –

A trust is a voluntary relationship between the settlor (S) and the trustee (T). S is in fundamental control but bargaining occurs. Trusts are not a pre-packaged set of rights and obligations – they differ from trust to trust. Ts can negotiate and demand certain clauses. Generally there are default rules which apply too but these rules can be changed by the trust instrument itself (Re Wragg [1919]).

+ Maitland (1936): First stated that a trust is like an informal contract between T and S.

+ Langbein: Highlight the understanding of the trust as a bargain – ‘contractarian basis’.

2. Supplementary powers provided by the general law –

Trustee Act 2000 confers powers on Ts. These are default rules which supplement and define the scope of what the trustees can do. They can be bargained around.

E.g. S.6 Trustee Act 2000: “(1) The general power of investment is –

1. in addition to powers conferred on trustees otherwise than by this Act, but

2. subject to any restriction or exclusion imposed by the trust instrument or by any enactment or any provision of subordinate legislation.”

3. General equitable and statutory duties that T has

Powers come with duties that qualify how the powers can be exercised. Does T have a power? Has he complied with his power?

Three main types of duties:

a) Fiduciary duties – Designed to promote loyalty in Ts. They are implied in as limits on powers, unless the trust instrument makes it absolutely clear the fiduciary powers are ousted.

• Mothew [1998]; “The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes, disloyalty or infidelity. Mere incompetence is not enough.” Acting carelessly is not a breach of fiduciary duty.

b) Duties of care and skill – Dictate a standard of care about how T should act. These are equitable duties. The standard of care has changed over time as trust management has become a professional business:

Traditional objective standard: “As a general rule the law requires of a trustee no higher degree of diligence in the execution of his office than a man of ordinary prudence would exercise in the management of his own private affairs.” (Learoyd v Whiteley (1887)).

Modern standard: Trust management is a business – Ts invest but charge a fee for their services. Sets a minimum standard of care. Hence expected standard of care has risen:

c) Good faith and proper purposes - aspect of the doctrine of fraud on a power. Fraud here means using your power for a purpose it was not given for.

• Cloutte v Storey [1911];

Facts: T and his wife had life interests under the trust but also had power of appointment to give trust assets to their children. Decided to exercise their power and gave 4000 to their eldest son. Problem was they gave him the 4000 only 12 days after he reached the age of majority and he could do what he likes. He used it as he felt fit and gave it to his father.

Decision: This was a fraud on the power becuase the arrnagament where the son gave money back to the father was a pre-existing arrangement – the parents were not objects of the power of appointment. That was not the purpose that the power was given for as they benefitted themslves and not their son.

• Tempest v. Lord Camoys (1882);

Facts: Here there were 3 trustees - 2 wanted to buy a property, but 1 did not.

Decision: Court held that T3 had not acted imprudently, he is entitled to his decision. Would not force T to enter the transaction as he had not done anything wrong. Only if he has done something wrong will the court get involved and remove his discretion.

If the Court does get involved the decision is procedural – get Ts to decide again if they have done it wrong. Courts do not usually make the decisions for the trustees. The aim is just to make the decision-making process legitimate.

General Administrative Duties

(i) Duties upon acting trusteeship

a) Inspection of trust documents - Hallows v. Lloyd (1888): T needs to examine the documents to clarify what property the trust consists of and what his obligations are. As a new T, he is entitled to require old Ts to hand papers over, including minutes of meetings, accounts, and letters of S’s wishes.

b) Getting trust property in - T must place all trust property in his joint name and the name of the other co-trustees because all Ts are liable for what happens to the trust property.

• Lewis v Nobbs (1878);

Facts: Here the problem was that the 2 trustees split the bonds half and half between them. One T ran off with his half of the bonds.

Decision: D (Nobbs) did not carry out his duty by letting the other T hold half of the bonds so was liable – the property was meant to be held in both names. Unless you employ a legitimate method of delegation you are liable for property.

Principle: Bonds should not be transferable without the action of both.

c) Inquiries into possible earlier breaches of trust – Generally new Ts are not liable for losses caused by breaches of trust before he or she was appointed.

Exception: T will be liable if there has been a previous breach of trust and he failed to remedy it because you failed to investigate suspicious circumstances. In such a case T will have failed in his duty to protect the trust fund so will be liable for his own breach. The most obvious indicator is if the trust fund has fallen in value for no obvious reason (i.e. recession). If you find wrongdoing you are expected to sue the former Ts.

• In re Strahan (1856);

Facts: Involved a marriage settlement trust covering 2 sorts of funds: 1) original trust property; and 2) settlor had covenanted to settle further property into the trust if and when he acquires it. He acquired property later but failed to put it into the trust. Ts failed to sue settlor for that breach of covenant. All happened before Strahan was made a trustee. Strahan failed to enquire into whether the settlor had settled the after acquired property.

Decision: Held; S not liable simply for failing to make enquiries because there was nothing suspicious to suggest that the settlor might have failed to comply with the covenant.

(ii) General duties during administration of the trust

There are 3 main duties that Ts are under which overlap:

a) Duty to obey lawful directions in the trust deed

• Craven v. Craddock [1868];

Facts: Trust document stated that the trust fund must be invested in real estate. As the shares in the bank were producing income the Ts left it there and failed to invest in real estate. Bank later wound up and calls were made on the shares (rule: when you buy a share you did not pay full amount of share upfront – liable for the rest if called upon).

Decision: Court held Ts liable personally to pay those amounts because loss was caused by their failure to abide by terms of the trust deed.

• Fry v. Fry (1859);

Facts: Testamentary trust terms required Ts to sell trust property as soon as convenient. Ts failed to sell the inn as soon as they could. A railway line was put in past the inn so people stopped staying at the inn, so the inn dropped in value dramatically.

Decision: Ts strictly liable as they failed to comply with the direction in the trust deed. Irrelevant whether they had a good reason. Imprudence could be another breach.

• Clough v. Bond (1838);

Decision: Liability for failure to comply with the terms of the trust deed is strict liability. “Such personal representative will be liable to make it good, however unexpected the result, however little likely to arise from the course adopted, and however free such conduct may have been from any improper motive.”

b) Duty to pay correct beneficiaries - Ts must indicate who has to be paid what out of the trust fund. These directions are strictly enforced. Must pay the right amount.

• Eaves v. Hickson (1861);

Facts: Trust set up for children of 2 children. Ts correctly paid half money out to children. Later paid other half to children of William – a different man – because he showed them a marriage certificate. The marriage certificate was forged; all his children were illegitimate. So payment out of the trust fund was unauthorised, so children not entitled to half of the fund. Decision: Was unauthorised for Ts to pay them money so they were held strictly liable to replace fund. Irrelevant that the Ts were deceived by the forgery – that is no defence.

NB. Strictly speaking the obligation is not itself strict: if there is good reason for the Ts not to know to whom they ought to pay the money, they are not liable for paying the wrong people. In some circumstances it is reasonable for the Ts not to know who they are expected to pay. Ts are deemed to know what the trust deed says – but rarely they won’t know what is in the trust deed. But textbooks say it is strict liability and it is for all practical purposes. Bs will sue Ts first as it is easiest to get a remedy from them, rather than third parties.

c) Duty to account to the beneficiaries –

1. Ts must provide formal accounts to B if the Bs request them. Must show Bs the trust instrument. Designed to ensure the Bs can enforce Ts’ duties.

• Armitage v Nurse [1998]; “If the beneficiaries have no rights enforceable against the trustees there are no trusts.” (LJ Millett).

2. Ts must tell Bs that they are beneficiaries and have an interest under the trust. Makes Ts duties enforceable.

Specific Examples of Duties: Investment Powers and Duties

(i) Powers to Invest

Trustee Act 2000; s.3 (general power of...