Trustees: appointment, duties, powers, and liabilities - Appointment, removal, and retirement of trustees

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Overview

The appointment, duties, powers, and liabilities of trustees are fundamental aspects of trust law, key for the SQE1 FLK2 exam. This area covers the legal framework governing trustee selection, fiduciary responsibilities, scope of authority, and potential consequences for breaches of trust. Understanding these aspects is essential for aspiring solicitors to ensure effective trust management and safeguard beneficiaries' interests. This guide explores the legal principles and statutory provisions that define trustee roles, highlighting their significance for the SQE1 FLK2 exam.

Appointment of Trustees

The process of selecting trustees is guided by both common law and statutory provisions, mainly the Trustee Act 1925 and the Trustee Act 2000.

Methods of Appointment

  1. Trust Instrument: Typically, the trust instrument itself names initial trustees and may outline mechanisms for future selections.

  2. Statutory Powers: Section 36 of the Trustee Act 1925 provides for appointing new or additional trustees in situations such as:

    • Death or discharge of a trustee
    • Mental incapacity preventing action
    • Absence from the UK exceeding 12 months
    • Refusal to act

  3. Court Appointment: Section 41 of the Trustee Act 1925 gives the court the authority to appoint new trustees when necessary and if appointing without court intervention proves impractical.

Qualifications and Restrictions

Trustees must have legal capacity and be capable of fulfilling their duties effectively. Key restrictions include:

  • Minors (under 18) cannot be trustees
  • Individuals lacking mental capacity are disqualified
  • Bankrupt individuals are generally unsuitable

Example: In Re Schar's Settlement [1951] Ch 280, the court deemed a bankrupt person unsuitable to serve as a trustee due to conflicts between personal financial interests and fiduciary responsibilities.

Duties and Powers of Trustees

Trustees are bound by a network of duties derived from both common law and statutes. These duties are essential to fiduciary relationships and are rigorously tested in the SQE1 FLK2 exam.

Fiduciary Duties

  1. Duty of Loyalty: Trustees must prioritize beneficiaries' best interests and avoid conflicts of interest.

  2. Duty of Care: Defined in Section 1 of the Trustee Act 2000, this requires trustees to exercise reasonable care and skill.

  3. Duty to Act Impartially: Trustees must balance the interests of different beneficiaries.

  4. Duty to Account: Trustees must maintain clear records of trust transactions and provide regular accounts to beneficiaries.

Statutory Powers

The Trustee Act 2000 notably broadened trustees' powers, particularly in investment areas. Key powers include:

  1. Investment Power: Section 3 grants trustees investment powers as if they owned the trust fund outright, subject to any trust instrument restrictions.

  2. Power to Acquire Land: Section 8 permits trustees to buy freehold or leasehold land in the UK for investment, beneficiary occupation, or other purposes.

  3. Power to Appoint Agents: Section 11 allows trustees to delegate certain functions to agents, including investment management.

Example: A trust with a diverse asset portfolio hires a professional investment manager under Section 11 of the Trustee Act 2000 to handle investments. This delegation requires regular review to ensure beneficiaries' best interests.

Liability of Trustees

Trustees may face personal liability for breaches of trust, making it a vital study area for the SQE1 FLK2 exam.

Breaches of Trust

A breach occurs when a trustee fails to perform a duty imposed by the trust instrument, statute, or common law. Common breaches include:

  • Unauthorized investments
  • Incorrect distribution of trust property
  • Self-dealing or profiting from the trust

Remedies for Breach

  1. Compensation: Trustees might need to restore the trust fund to its pre-breach state.

  2. Account of Profits: Any unauthorized profits must be surrendered to the trust.

  3. Rescission: Transactions made in breach of trust may be nullified.

Defenses and Protections

  1. Statutory Relief: Section 61 of the Trustee Act 1925 may relieve trustees from personal liability if they acted honestly and reasonably.

  2. Consent or Release: Beneficiaries who consent to or release a trustee from liability may be barred from claims.

  3. Limitation: Breach of trust claims typically have a six-year limitation period under the Limitation Act 1980.

Example: In Re Pauling's Settlement Trusts [1964] Ch 303, trustees made unauthorized investments resulting in losses. The court partially relieved them under Section 61 of the Trustee Act 1925, as they acted honestly and reasonably.

Removal and Retirement of Trustees

Trustee removal or retirement is governed by both the trust instrument and statutory provisions.

Removal

  1. Express Power: Trust instruments may include clauses for trustee removal.

  2. Statutory Power: Section 36 of the Trustee Act 1925 allows for removal in certain conditions, like incapacity or absence from the UK for over 12 months.

  3. Court Order: The court can remove trustees if it's in the trust and beneficiaries' best interests.

Retirement

  1. With Replacement: Section 39 of the Trustee Act 1925 allows trustees to retire if at least two trustees or a trust corporation remain.

  2. Without Replacement: Section 39(2) allows retirement without replacement if all beneficiaries with capacity agree and are entitled to the trust property.

Example: In a family trust, Trustee A chooses to retire due to ill health. Under Section 39 of the Trustee Act 1925, A can retire, provided Trustees B and C remain. If B also retires, leaving only C, court approval or simultaneous appointment of a new trustee is required.

Case Study: The Entrepreneurial Trust

A trust supports innovative business ideas within a startup community. It appoints three trustees with skills in finance, technology, and law. One trustee, an entrepreneur, resigns for an overseas opportunity.

Trust provisions allow for a smooth transition:

  1. Remaining trustees appoint a new trustee with relevant skills.
  2. A thorough vetting process ensures no conflicts of interest.
  3. The departing trustee provides a full handover, including project documentation.
  4. The new trustee undergoes training on fiduciary duties and the trust's objectives.

This example shows how well-crafted trust instruments can handle trustee changes effectively, aligning with entrepreneurial goals and minimizing disruption to beneficiaries.

Conclusion

Trustee roles in English trust law are governed by a combination of common law principles, statutory provisions, and specific trust instrument terms. Success in the SQE1 FLK2 exam requires a thorough understanding of:

  1. Trustee appointment processes and qualifications
  2. The scope and limitations of their powers and duties
  3. Fiduciary responsibilities