Learning Outcomes
This article outlines the statutory powers available to trustees concerning the application of trust income for maintenance and the advancement of trust capital to beneficiaries. It explores the scope and limitations of sections 31 and 32 of the Trustee Act 1925, as subsequently amended. After reading this article, you will understand the conditions under which these powers can be exercised, the extent of trustees' discretion, and the key considerations regarding beneficiaries' interests, which are essential for addressing SQE1 assessment questions on trust administration.
SQE1 Syllabus
For SQE1, understanding the practical application of trustees' statutory powers is essential. You will need to know when and how trustees can utilise trust income for a beneficiary's maintenance, education, or benefit, and when they can advance capital before a beneficiary becomes absolutely entitled. Focus on the following:
- The scope and conditions for exercising the statutory power of maintenance under s 31 Trustee Act 1925.
- The rules regarding the accumulation of income for minor beneficiaries.
- The entitlement of adult beneficiaries to income under s 31.
- The scope and conditions for exercising the statutory power of advancement under s 32 Trustee Act 1925.
- The requirement for consent from those with prior interests when exercising the power of advancement.
- The impact of advancements on a beneficiary's final share.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
-
Under s 31 Trustee Act 1925, for which purposes may trustees apply income for a minor beneficiary?
- Maintenance only.
- Education only.
- Benefit only.
- Maintenance, education, or benefit.
-
What happens to income accumulated under s 31 Trustee Act 1925 when a beneficiary with a contingent interest in capital reaches 18?
- It is paid immediately to the beneficiary.
- It is added to the capital of the trust fund.
- It continues to be held at the trustees' discretion.
- It is paid to the beneficiary's parent or guardian.
-
Under s 32 Trustee Act 1925 (as amended), what is the maximum amount of capital that trustees can advance to a beneficiary with a vested interest in the entire fund?
- One-half of their entitlement.
- One-third of their entitlement.
- The whole of their entitlement.
- An amount deemed reasonable by the trustees.
-
When is the consent of a life tenant required for an advancement of capital to a remainderman under s 32 Trustee Act 1925?
- Always.
- Never.
- Only if the life tenant is over 18.
- If the advancement prejudices the life tenant's interest.
Introduction
Trustees manage trust assets according to the terms of the trust instrument and general law. While the trust deed may grant specific powers, statute also confers default powers upon trustees to deal with trust income and capital for the benefit of beneficiaries, particularly where beneficiaries are minors or have contingent interests. The two key statutory powers are the power of maintenance (using income) and the power of advancement (using capital). These powers provide flexibility but must be exercised within specific legal constraints and in accordance with the trustees' fiduciary duties. This article focuses on the scope and application of these statutory powers under the Trustee Act 1925, as amended.
Statutory Power of Maintenance (Section 31 Trustee Act 1925)
Section 31 TA 1925 grants trustees the discretionary power to apply trust income for the maintenance, education, or benefit of a beneficiary who is under 18 (a minor) and has an interest in that income. This power applies unless excluded or modified by the trust instrument.
Conditions for Exercise (Maintenance)
The power under s 31 can only be exercised if the beneficiary has an interest (vested or contingent) in the income generated by the trust property. It cannot be used if another beneficiary has a prior right to that income, such as a life tenant who is entitled to receive all the income as it arises.
Key Term: Vested Interest An interest that is unconditional. The beneficiary's right to the property is certain, although enjoyment might be postponed (vested in interest) or immediate (vested in possession).
Key Term: Contingent Interest An interest that depends on the occurrence of a future uncertain event (a condition precedent), such as attaining a specific age or surviving another person.
Application of Income
Trustees have discretion ('may, at their sole discretion') regarding whether to apply income and how much income to apply for the minor's maintenance, education, or benefit. 'Benefit' is interpreted broadly. Payments should not be made directly to the minor, as they cannot give a valid receipt. Instead, trustees should pay the supplier directly (e.g., school fees) or pay the parent or guardian for the minor's benefit.
Accumulation of Surplus Income
Any income not applied for the minor's maintenance, education, or benefit must be accumulated (invested and added to the capital) during their minority (s 31(2)). Trustees can resort to these accumulations in later years to make payments for the minor's benefit if needed.
Entitlement at Age 18
The trustees' discretion under s 31 ends when the beneficiary turns 18. The beneficiary's entitlement thereafter depends on the nature of their interest:
- Vested interest in income (e.g., life interest): The beneficiary is entitled to receive all income arising after their 18th birthday, plus any income accumulated during their minority.
- Vested interest in capital and income: The beneficiary is absolutely entitled at 18 and receives the capital along with all accumulated income.
- Contingent interest in capital: The beneficiary is entitled to receive the income arising after their 18th birthday until the contingency is met (or fails). Any income accumulated during their minority is added to the capital and vests only when the contingency is met (s 31(2)(ii)). If the beneficiary dies before the contingency is met, the accumulated income and capital pass according to any gift-over provisions in the trust or, failing that, back to the settlor's estate via a resulting trust.
Trusts Created Before 1 October 2014
For trusts created before 1 October 2014, the power was slightly more limited. Trustees could only apply income 'as may, in all the circumstances, be reasonable' and had to consider factors like the minor's age and other available income sources. These limitations were removed by the Inheritance and Trustees' Powers Act 2014 for trusts created on or after that date.
Worked Example 1.1
A trust created in 2016 holds £100,000 for Ben contingent on him reaching age 25. Ben is currently 16. The trust generates £3,000 income annually. Ben's parents ask the trustees to pay £2,000 per year towards Ben's school fees. Can the trustees comply?
Answer: Yes, the trustees can comply. Ben has a contingent interest that carries the right to intermediate income. Section 31 allows trustees, at their discretion, to apply income for a minor beneficiary's education. Paying school fees falls within this. They should pay the school directly or the parents. The remaining £1,000 income must be accumulated. When Ben turns 18, he becomes entitled to receive the £3,000 annual income directly until he is 25. The accumulated income will be added to the capital.
Statutory Power of Advancement (Section 32 Trustee Act 1925)
Section 32 TA 1925 gives trustees the discretionary power to pay or apply trust capital for the advancement or benefit of a beneficiary before the beneficiary becomes absolutely entitled to it under the terms of the trust. Like s 31, this power applies unless varied or excluded by the trust instrument.
Conditions for Exercise (Advancement)
- Interest in Capital: The beneficiary must have an interest (vested or contingent) in the capital of the trust fund. A life tenant, who only has an interest in income, cannot benefit from an advancement of capital.
- Advancement or Benefit: The payment must be for the beneficiary's 'advancement or benefit'. This is interpreted widely to mean any use of money that improves the material situation of the beneficiary (e.g., setting up a business, buying a house, paying educational fees, or even making a settlement on the beneficiary's marriage).
- Limit on Amount: For trusts created on or after 1 October 2014 (following amendment by the Inheritance and Trustees' Powers Act 2014), trustees can advance up to the whole of the beneficiary's vested or presumptive share. For trusts created before that date, the limit was one-half.
- Bringing into Account: Any capital advanced must be brought into account against the beneficiary's share when they ultimately become entitled to the capital. This ensures fairness between beneficiaries.
- Consent of Prior Interests: If paying capital to a beneficiary would prejudice someone with a prior interest (typically a life tenant entitled to income from that capital), that person's written consent must be obtained, provided they are of full age and capacity (s 32(1)(c)).
Key Term: Advancement A payment or application of capital intended to establish a beneficiary in life or make permanent provision for them.
Key Term: Benefit A broad term covering any use of capital that improves the material situation of the beneficiary, even if not strictly an 'advancement'.
Exercise of Discretion
The power of advancement is purely discretionary. Trustees must consider whether to exercise it, taking into account the beneficiary's circumstances and the potential impact on other beneficiaries, but cannot be compelled to make an advancement.
Worked Example 1.2
A trust created in 2010 holds £200,000 for Amy for life, remainder to her son Carl absolutely. Carl is 28. He asks the trustees for £50,000 to put down a deposit on his first house. Amy is supportive. Can the trustees advance the capital?
Answer: Yes, the trustees can advance the capital, but subject to conditions. Carl has a vested interest in the capital (in remainder). Buying a house constitutes 'advancement or benefit'. As the trust was created before 1 October 2014, the trustees can only advance up to half of Carl's entitlement (£100,000), so £50,000 is within the limit. However, Amy has a prior life interest, and the advancement of £50,000 will reduce the capital generating income for her. Therefore, her written consent must be obtained before the advancement can be made. The £50,000 must be brought into account when Carl eventually receives the capital on Amy's death.
Worked Example 1.3
A trust created in 2019 holds £300,000 for the children of the settlor, David and Emily, contingent on them reaching 30, in equal shares. David is 26 and Emily is 22. David asks the trustees for £160,000 to start a new tech company. Can the trustees comply?
Answer: No, the trustees cannot advance the full £160,000. David has a contingent interest in the capital. Setting up a business qualifies as 'advancement or benefit'. The trust was created after 1 October 2014, so trustees can advance the whole of a beneficiary's presumptive share. David's presumptive share is currently one-half (£150,000). Therefore, the trustees can only advance up to £150,000, provided they consider it appropriate in their discretion. The request for £160,000 exceeds his share. No consents are required as there are no prior interests.
Revision Tip
Always check the date the trust was created (or the date of death if it's a will trust) to determine whether the pre- or post-October 2014 rules apply to the s 32 power of advancement limit (half or whole share).
Key Point Checklist
This article has covered the following key knowledge points:
- Section 31 TA 1925 allows trustees discretion to apply income for a minor beneficiary's maintenance, education, or benefit.
- Income not applied under s 31 must be accumulated.
- Adult beneficiaries with contingent interests are entitled to income arising after age 18 under s 31.
- Section 32 TA 1925 allows trustees discretion to pay or apply capital for a beneficiary's advancement or benefit before their interest vests absolutely.
- The limit for advancement under s 32 is the whole share (for post-1 Oct 2014 trusts) or half the share (for pre-1 Oct 2014 trusts).
- Advancements must be brought into account on final distribution.
- Consent from beneficiaries with prior interests is required under s 32 if their interest is prejudiced.
- Both powers are discretionary and subject to the trustees' duty of care and fiduciary duties.
Key Terms and Concepts
- Vested Interest
- Contingent Interest
- Advancement
- Benefit
