Trustee Dispositive Powers
Trustee Investment
Trustees frequently have the power to invest or apply trust capital and assets to benefit the fund.
The Source of the Powers
If the trust instrument expressly grants investment powers, it is the first guide as to the scope of that power. If not, and the trust instrument does not evidence a contrary intention, the Trustee Act 2000 implies a default investment power into each trust: s.3.
The Trustee Act 2000 default power allows the trustee to ‘make any kind of investment that he could make if he were absolutely entitled to the assets of the trust’: s.3(1).
s.8 adds a power to purchase a freehold or leasehold estate. Trustees may also be parties to a mortgage. Otherwise, however, the s.3 investment power excludes investments in land.
Duties in Investment
Though the trustee has the power of an absolute owner, they cannot invest as they please. They are accountable to the beneficiaries for their investments. However, the trustee is not liable for every loss nor bound to achieve a particular outcome: Nestle v National Westminster Bank plc [1988] 10(4) TLI 112.
Trustees are only be liable if they breach their duties. These duties are specific manifestation of the trustee’s general duties in managing the trust.
The trustees must exercise sound discretion. They must must consider all relevant matters and ignore irrelevant ones: Balls v Strutt (1841) 1 Hare 146. They may not abdicate or unduly fetter their responsibility for decision-making: Orr-Ewing v Orr-Ewing (1884) 11 R 600.
Trustees must be prudent in choosing, managing or retaining investments. Trustees should focus on the level of risk incurred by the whole portfolio, and whether this is appropriate for the particular trust: Nestle v National Westminster Bank plc [1988] 10(4) TLI 112. This means that it is often acceptable to have a mix of high and low risk investments. However, trustees must not invest in ‘hazards’: Bartlett v Barclays Bank Trust (No 1) [1980] Ch 515.
s.4 of the Trustees Act 2000 provides ‘standard investment criteria’ to which trustees must have regard. These are: a) the suitability of that kind of investment and that investment in particular to the trust; and b) the need to diversify, in so far as appropriate to the trust: s.4(3).
Trustees must obtain and consider proper advice before exercising their powers: Trustee Act 2000, s.5. They must obtain this advice from a person who the trustee reasonably believes ‘to be qualified by his ability in and practical experience of financial and other matters relating to the proposed investment’: s.5(4).
If one of the trustees meets the criteria for a proper advisor, the trustees are entitled to collectively rely on that trustee’s advice: s.12(1).
A trustee may dispense with the need to obtain proper advice if they reasonably conclude that it is unnecessary or inappropriate: s.5(3).
In some trusts, there may be a conflict between the interests of different beneficiaries: such as between the life interest-holder and the remainderman.
In these situations, the trustee must act fairly between them. This does not mean the trustee must treat them equally, however: McPhail v Doulton [1971] AC 424.
Liability for Breach
That a trustee has breached their duties does not mean that the beneficiary can easily obtain a remedy. There are obstacles to this:
- Staughton LJ in Nestle v National Westminster Bank plc [1988] 10(4) TLI 112 suggested that even if a trustee fails to fulfil a duty, the court will not find a technical breach unless the decisions made as a result of the breach were bad. If so, for example, a trustee who abdicated their decision-making would not be liable if doing nothing was a justifiable thing to do in the circumstances.
- Before the court can force the trustee to account for the breach, the beneficiary must show that the trust fund was caused loss: Nestle v National Westminster Bank plc [1988] 10(4) TLI 112. Notably, it is not enough that the trust suffered loss due to the decision to invest/not invest. Rather, the loss must be specifically because of the breach.
- Often beneficiaries only notice breaches during a period where there are other possible causes of loss, such as a downturn in the market. In these circumstances, it will be difficult to show that the trustee’s breach was the specific cause of the loss.
Ethical Investment
Trustees must act to benefit the fund even if it goes against their own personal morality or politics: Cowan v Scargill [1985] 1 Ch 270; Re Wyvern Developments Ltd [1974] 1 WLR 1097. They cannot select investments based on their ethical preferences.
Problems arise in two scenarios. The first is where the beneficiaries of a private trust pressure the trustee to act based on moral or political concerns. The second is where the trust is charitable and based around certain ethical principles. It would strange, for example, if trustees of a charity fighting climate change could not exclude oil companies from the portfolio.
The law depends on whether the trust is charitable or non-charitable:
The Charities (Protection and Social Investment Act 2016 allows charitable trustees to apply or invest the trust’s assets to both further the charities’ purposes and make a return as long as it does not use the charity’s ‘permanent endowment’ in an impermissible manner: s.292B. So, trustees can make investments in line with the charity’s underlying ethics.
Private trustees cannot make investment decisions based on the beneficiary’s ethical preferences: Cowan v Scargill [1985] 1 Ch 270. This may even be the case even if the trustee is choosing between two equally-profitable investments. However, proving that selecting one based on its ethical merits specifically caused loss may be difficult.
The Trustee Act 2000 may have modified these principles in relation to private trustees. It requires trustees to consider the ‘suitability’ of an investment, and the explanatory notes states that this includes ‘any relevant ethical considerations as to the kind of investments which it is appropriate for the trust to make’: n 23. The explanatory notes are not binding on the courts, however.
Advancement
The power of advancement allows trustees to dispose of trust capital to benefit adult or infant beneficiaries. For example, a trustee might use trust capital to support the beneficiary’s new apprenticeship or buy them a business interest.
A power of advancement may exist explicitly in the trust instrument. The Trustee Act 1925, s.32, implies a power of advancement into any instrument which is silent on the matter, unless the instrument makes clear this was not intended (s.69(2)). Powers of advancement are subject to fiduciary duties: Re Pauling’s Settlement Trust [1964] Ch 303.
When can the Power be Used?
s.32 gives trustees the absolute discretion to pay or apply trust capital or property for the advancement or benefit of any person entitled to the capital of the trust property:
- Whether they are absolutely or contingently entitled;
- Regardless of whether they are entitled as a vested interest or as a remainderman or in reversion;
- Even if is someone else (such as a remainderman) entitled to the trust after their death or if another event occurs; and
- Even if their entitlement can in principle be defeated or diminished by a power of appointment or revocation of beneficiary-status.
A power of advancement can even incidentally benefit someone other than the beneficiary, such as their spouse or creditors: Pilkington v IRC [1964] AC 612.
However, three conditions must be met in exercising the power:
The money paid must not exceed the beneficiary’s vested or presumptive share of the trust property (s.32(1)(a)).
If that beneficiary becomes absolutely entitled to a share in the trust property, what was paid is treated as part of their share (s.32(1)(b)).
The power cannot be used if it would prejudice a person with a prior interest, unless that person is an adult and gives their written consent (s.32(1)(a)). For example, trust property cannot advance a remainderman at the expense of the life-interest-holder without consent.
What is a Benefit?
The courts have construed ‘benefit’ very broadly. It does not need to be a financial benefit: Re Collard’s Will Trusts [1961] 1 All ER 821; Moxon’s Will Trusts [1958] 1 WLR 165. It can even include fulfilling social or moral needs: Re Clore’s Settlement Trusts [1966] 1 WLR 955.
Resettlement
It is strictly possible to use the power of advancement to put the capital into new trusts. However, the trustee cannot do this ‘merely because they think they can devise better trusts than those which the Settlor has chosen to declare’: Re Wills’ Will Trust [1959] Ch 1. The trustee must honestly believe some circumstances have arisen making it appropriate to resettle the money in this way. The new trust must not delegate the trustee’s powers or discretion over beneficial interests unless the original trust permitted this.
Maintenance of Infants
The Trustee Act 1925, s.31, implies a power into trust instruments regarding the maintenance of infant beneficiaries (vested or contingent).
When does the Power Arise?
The s.31 power only applies to trusts which immediately gift income to the relevant beneficiary: s.31(3). If the trust states this one way or the other, this is determinative. But what if the trust is silent?
If the trust is inter vivos:
- A bare trust of property to B is a gift of immediate income.
- A gift of property to B for life and in remainder for C if an immediate gift of income for B. It is not a gift of income to C.
If the gift is testamentary (left by will), the position depends on whether the gift is absolute.
- If it is absolute, then it is a gift of immediate income.
- If the gift is contingent (e.g. to B if they become a barrister by age 30), then the gift is also treated as a gift of immediate income unless it is a pure pecuniary legacy (i.e. solely a gift of money): Re Raine [1929] 1 Ch 716.
- A contingent, purely pecuniary legacy is only a gift of immediate income if: 1) the testator is the infant’s parent or in loco parentis (s.31(3); the testator demonstrably intended to maintain the infant (Re Churchill [1909] 2 Ch 431); or the legacy is held on a distinct trust from other trusts governing the testator’s property (Re Medlock (1886) 54 LT 828).
- If the infant is only entitled to the residue of the estate, they are immediately entitled to income if their interest in the residue is immediate or contingent: Re Geering [1964] 3 All ER 1043. They are not entitled to income if they have a future interest in the residue: Re McGeorge [1963] Ch 544. So, ‘the residue to B’ or ‘the residue to B if they become a barrister’ is a gift of immediate income. ‘the residue to B when they turn 30’ is not.
In any case, the s.31 power does not arise if the trust instrument demonstrates a contrary intention: Trustee Act 1925, s.69(2).
What does the Power Allow?
The s.31 power grants trustees a discretion to use income from a trust to maintain, educate or benefit any beneficiary under the age of 18. They trustee should pay the money to the child’s parent or guardian or to the individual providing the relevant need.
The only limits on this power are:
The power cannot be used to the extent that it conflicts with a prior-interest-holder’s rights. For example, if the infant is a remainderman, income cannot be applied to maintain them during the vested life-interest-holder’s lifetime.
If the trust was created before 1 October 2014, the power can only be used if the payment is reasonable.
For newer trusts, the money can be used as the trustee thinks fit.
If the trust was created before 1 October 2014 and multiple funds can be used to meet the infant’s needs, the payment should be made pro rated with any other source if practicable.
There is no such limit for newer trusts.
What if the Power is not Used?
If the trustee decides not to use trust income to maintain the infant, they must add it to the trust’s capital year-to-year: s.31(2). In two cases, the trustee must hold the money on trust absolutely for the beneficiary instead of adding it to the trust capital:
- If the beneficiary gained a vested interest in the income before turning 18;
- If the beneficiary had a contingent interest in the income which vested on the date they turn 18.
Inherent Jurisdiction
The court also has a discretion to authorise maintenance of infants in circumstances where the 1925 Act power does not arise. It can be used if there are no other funds from which to maintain the infant: Re Walker [1901] Ch 879.
