Trustee Powers

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Powers

Trustees have 4 main powers:

  1. The power of investment
  2. The power to maintain
  3. The power to advance
  4. Miscellaneous

Trustees’ Powers of Investment

Introduction

There is a power and DUTY to invest i.e. trustees must invest the trust property

The main source of the trustees’ powers is the trust instrument

  • In other words, the main guidance on how to invest the trust property comes from the trust instrument

Sometimes the aim of the trust will be to keep property (e.g. keep family property in family hands): so power to invest is limited

Sometimes, the principal aim of the settlor will be to provide income and capital to his or her family. In that case, the trustees’ overriding duty is to protect the value of the property and to maximise the income and capital growth, for the beneficiaries

  • Income: monetary return on my investment → so it is the income I receive from my investment
  • Capital: money that isn’t really mine until sold e.g. I will have to sell my investments (e.g. shares) to make my return on investment

Investment of Trust Property

The Trustee Act 2000 must be born in mind when investing trust property...

Trustee Act 2000

s.3(1) Subject to the provisions of this Part, a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust.

s.4(3) The standard investment criteria, in relation to a trust, are—

  • (a) the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and
    • I.e., this means that the proposed investments must be suitable for a trust of that type that the trustees are managing → so if it is a small family trust, safer investments are most suitable
  • (b) the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.
    • Portfolio theory: if an investor invests in a number of different investments, the impact of any individual market or investment suffering from a fall in value is balanced by investments made in other markets which will not have suffered from that particular fall in value
    • Diversification would also require investment in a number of different types of investments e.g. bonds, derivatives, land, commodities, shares
    • Although if the trust instrument limits types of investment, trustee must adhere to that

The trust instrument will override s.3(1)

By s.5 Trustee Act 2000, trustees must also take professional advice, unless they reasonably feel that such advice is unnecessary or inappropriate. They are not obliged to follow the advice, but they must consider it.

Types of Investment

Broadly speaking, investments fall into three main types: land; financial instruments and interest bearing accounts; chattels

Land

Before 1996, and the TOLATA 1996, the only trusts of land allowed were settlements, under the Settled Land Act 1925: all other trusts of land were trusts for sale.

  • In reality, most trustees for sale postponed the sale of the land, often indefinitely, and allowed the beneficiaries to enjoy the land

TOLATA 1996 provided land could be held on trust other than under the provisions of the Settled Land Act 1925; and the Trustee Act 2000 s.8 says trustees can acquire land as an investment

Financial Instruments e.g. stocks, bonds, etc.

This will be the primary form of investment for most trust capital.

Government bonds (gilts) are safest form of investment, but do not provide the greatest return

Before the Trustee Act 2000, trustees, unless given specific powers of investment under the trust instrument, were restricted in their investment strategy: Trustee Investments Act 1961 provided that at least 50% of the capital should be invested in government bonds (as they were safe). However, now, trustees can invest more widely

The general power of investment provided by the Trustee Act 2000 allows trustees full discretion as to how they invest the capital.

Chattels

Chattels may be held in trust as family heirlooms; Re Montagu’s settlement Trust 1987

  • In this case, for example, the 10th Duke of Manchester received a large number of chattels (including furniture) from a family trust

Some chattels (antiques, works of art, wine etc) may also be investments: they may provide a good rate of capital growth, though will not provide an income.

The Law Commission Report ‘Trustees’ powers and duties’ (1999, Law Com. 260): “Trustees might invest in antique silver or paintings in the expectation they will increase in value.”

Duty to Disregard Personal, Ethical and Political Considerations

While you are exercising your power of investment you have to disregard three considerations: personal, ethical, and political considerations

So you must subordinate your own beliefs and do what is best for the trust

See the case of Cowan v Scargill [1985]: the duty of trustee is to generate the best available return on the trust fund regardless of other considerations

See the case of Harries v Church Commissioners [1993]: it was held the trustees could take non-financial considerations into account as long as this didn't hinder the profitability of investments

  • So charitable trustees must maximise returns on the trust, but can avoid making investments where there are ethical considerations (an exception to Cowan v Scargill) so long as that does not affect the trust’s profitability

‘Ethical Investment’:

Many organisations and individuals have adopted ‘ethical investment’ strategies. These strategies are available to trustees, as long as the strategy does not reduce the return available. The onus is on the trustees to satisfy themselves that the return on investments is not compromised by the strategy.

Charity Commission (2011) says for charities, investing in conflicting industries (E.g. cancer charity trustee investing in tobacco shares) could mean the charity loses support; however, there may be a legitimate reason to get a large shareholding of a tobacco company as a cancer charity (e.g. to influence the decision making within the company, rather than just profit)

Standard and Breach

Re Chapman [1896]: trustees who act honestly, with ordinary prudence within the limits of their trust are not liable for mere errors of judgment (per Lindley LJ)

Nestle v Nat West Bank [1994]: Nestle (a man, NOT the company Nestlé) left money under his will for his granddaughter. She was expecting a lot more money to be left for her as he was a rich man. She subsequently found out that the bank did not use the full scope of its investment powers → it had left the money in safe trustee stock when in fact the trust instrument had given them the power to invest in potentially more profitable investment

  • It was held that the trustee (bank) should have familiarised itself with the trust instrument; if they did they would have known scope of its investment power. HOWEVER, although the bank did a bad job, there wasn't any loss so it was okay

Bartlett v Barclays Bank [1980]: the trustees allowed a company, in which most of the trust fund was invested, to make speculative and loss-making investments. The trustees were held liable for lack of suitable care: the court said they didn't think it was necessary to get a position on the board, but had to do more than just sit there

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CONTENT

Delegation of Powers

Trustees may delegate their power of investment to another → however, even if you do delegate the power to invest you are still liable, as trustee, for default

Speight v Gaunt (1882): where the delegation of power was what an ordinary prudent man of business would do in that it would be best for the trust fund, then that is okay e.g. to delegate administrative and legal duties to a solicitor → this makes sense because a solicitor is good at those things and a trustee might not be

However, in Fry v Tapson (1884), the trustees had delegated the choice of a valuer to a solicitor. In this case, the choosing of valuers was not a normal business function of a solicitor, so the trustees were held liable

The Trustee Act 2000 Part IV gives a general power to delegate powers of investment to agents

  • S.22 of the Act imposes a duty of review on the trustees delegations of power. S.23 provides that a trustee will not be liable for the acts of a person delegated to carry out investments, as long as they have not failed in their duty of care in appointing an agent and keeping the delegation under review.

Power to Maintenance

Overview

As a general rule, where property is held in trust for a minor, the trustees have the power to advance money from the trust income for the:

  • Maintenance; Education, and; Benefit of the beneficiaries

Even where no such power is included in the trust instrument.

Power to Maintenance arises from precedent and statute (Trustee Act 1925 s31). The power under s.31 (TA 1925) may be excluded by the trust instrument

The Tspanustees must focus upon the best interests of the minor beneficiary and these will vary according to the age of the minor and his family circumstances

As long as the trustees act in a bona fide manner, and periodically consider whether or not the power should be exercised, the court will not interfere: In re Bryant [1894]

The payments made may exhaust the entire trust income

Re Turner’s Will Trusts [1937]: once an infant attains the age of majority, but still has only a contingent interest in the capital (e.g. trust says their interest is only vested when they reach 25 years old), you can still have access to the income, unless there is a contrary intention in the instrument, such as duty to accumulate the income.

The payments are usually made to the parent or guardian of the child they intend to benefit

Power of Advancement

Overview

The power of advancement allows Trustees to apply capital for the benefit of a beneficiary, even though the beneficiary is an infant or merely has a future or contingent interest. The power may be express or trustees may rely on the Trustee Act 1935 s32, unless excluded in the trust instrument

  • The difference between maintenance and advancement: Maintenance is about income, and advancement is about capital

For trusts created before 1 October 2014, advancement was limited to a maximum of one half the trust capital

Since spanctober 2014, trustees may advance any amount to the beneficiary

s32 (power of advancement)

“Provided that—

(a) property (including money) so paid, transferred or applied for the advancement or benefit of any person must not, altogether, represent more than the presumptive or vested share or interest of that person in the trust property; and

  • I.e. trustees must not advance more than the beneficiary’s whole presumptive or vested share or interest

(b) if that person is or becomes absolutely and indefeasibly entitled to a share in the trust property the money or other property so paid, transferred or applied shall be brought into account as part of such share; and

  • If you get an advancement and are later due a distribution they will subtract that advancement you got previously from the current distribution

(c) no such payment or application shall be made so as to prejudice any person entitled to any prior life or other interest, whether vested or contingent, in the money paid or applied unless such person is in existence and of full age and consents in writing to such payment or application.

  • If a remainder beneficiary asks for an advancement this cannot be done if it would detriment the primary beneficiary

Taylor v Taylor (1875): there must be a reason behind an advancement and it must benefit the beneficiary e.g. to get an education, to get married, etc. (Jessel MR)

Ways that Advancement has been utilised

To finance a career at the bar: Roper-Curzon v Roper-Curzon (1871)

To pay debts: Lowther v Bentinck (1874)

To pay school fees: CD (a child) v O [2004] EWHC 1036 (Ch)

Miscellaneous Powers

Trustees have the power to insure property. They are not under a specific duty to do so. See s.19 of Trustee Act 1925 (as amended by the Trustee Act 2000)

Trustees may give valid receipts for personalty (one trustee – see s.14 of Trustee Act 1925) or real property (two trustees or trust corporation – see LPA 1925 s.27(2)).

Trustees may sell land (s.6(1) of TOLATA 1996).

Powers that may not be delegated

Trustee Act 2000 s.11

11 (2): In the case of a trust other than a charitable trust, the trustees' delegable functions consist of any function other than:

(a) any function relating to whether or in what way any assets of the trust should be distributed,

  • As a trustee if you have a power to distribute things you cannot give that power to anyone else

(b) any power to decide whether any fees or other payment due to be made out of the trust funds should be made out of income or capital,

(c) any power to appoint a person to be a trustee of the trust, or

(d) any power conferred by any other enactment or the trust instrument which permits the trustees to delegate any of their functions or to appoint a person to act as a nominee or custodian.

  • So whatever the trust instrument tells you that YOU have to do, then YOU have to do it → you cannot delegate that power

s.25 Trustee Act 1925: a trustee may, by deed, give a power of attorney for up to twelve months to another person to carry out any powers. (However, it wont be any of the above 4 powers under s11(2) that will be delegated)

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