Trustees: appointment, duties, powers, and liabilities - Trustees' statutory power of advancement

Learning Outcomes

After reading this article, you will be able to explain how trustees are appointed and removed, outline their core duties and powers, and apply the statutory power of advancement under s.32 Trustee Act 1925. You will understand the requirements, limitations, and practical considerations for advancing trust capital to beneficiaries, and identify common pitfalls and exam-relevant issues for SQE1.

SQE1 Syllabus

For SQE1, you are required to understand the statutory framework governing trustees, including their appointment, duties, powers, and liabilities. You must be able to apply the rules on the statutory power of advancement and advise on its use in practical scenarios.

As you work through this article, focus your revision on:

• The process for appointing, retiring, and removing trustees.
• The core fiduciary duties and standard of care required of trustees.
• The statutory power of advancement under s.32 Trustee Act 1925, including its scope, conditions, and limitations.
• How to advise on the use of advancement in different trust situations, and the interaction with other beneficiaries' interests.

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.

1. Which statutory provision gives trustees the power to advance capital to a beneficiary before their interest vests?
   1. s.31 Trustee Act 1925
   2. s.32 Trustee Act 1925
   3. s.1 Trustee Act 2000
   4. s.19 Trusts of Land and Appointment of Trustees Act 1996

2. True or false? Trustees can advance the whole of a beneficiary’s presumptive share of capital under a trust created after 1 October 2014, unless the trust instrument restricts this.

3. What must trustees obtain before advancing capital to a beneficiary if another person has a prior interest in the trust fund?

4. Which of the following is NOT a core duty of a trustee?
   1. Duty to act impartially between beneficiaries
   2. Duty to invest trust assets
   3. Duty to act in the best interests of the settlor
   4. Duty to exercise reasonable care and skill

Introduction

When managing a trust, trustees must follow strict legal rules on their appointment, duties, powers, and liabilities. A key statutory power is the ability to advance trust capital to a beneficiary before their interest becomes absolute. This is known as the statutory power of advancement, found in s.32 Trustee Act 1925. Understanding how and when this power can be used is essential for SQE1.

Appointment, Retirement, and Removal of Trustees

Trustees are usually appointed by the trust instrument (the document creating the trust). If a trustee retires, dies, or is unfit or incapable, a replacement can be appointed by the person nominated in the trust instrument, or otherwise by the continuing trustees or the court.

Key Term: trustee A person or company who holds legal title to trust property and manages it for the benefit of the beneficiaries.

Key Term: beneficiary A person entitled to benefit from the trust property, holding an equitable interest.

Key Term: trust instrument The document (such as a will or deed) that creates the trust and sets out its terms.

Trustees can retire by deed if at least two trustees (or a trust corporation) remain. The court can remove or appoint trustees if it is expedient and cannot otherwise be done.

Core Duties of Trustees

Trustees owe strict duties to the beneficiaries. These include:

• Acting in good faith and for the benefit of the beneficiaries.
• Exercising reasonable care and skill (the standard is higher for professional trustees).
• Acting impartially between all beneficiaries.
• Obeying the terms of the trust and relevant statutes.
• Keeping trust property secure and properly invested.
• Not profiting from their position or allowing conflicts of interest.

Key Term: fiduciary duty The obligation to act loyally and solely in the interests of the beneficiaries, avoiding conflicts and unauthorised profits.

Key Term: duty of care The obligation to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or experience.

Trustee Powers

Trustees derive their powers from the trust instrument and statute. Key statutory powers include:

• The general power of investment (Trustee Act 2000, s.3).
• The power to delegate certain functions (Trustee Act 2000, s.11).
• The power to apply income for maintenance of minors (Trustee Act 1925, s.31).
• The power to advance capital for the benefit of beneficiaries (Trustee Act 1925, s.32).

Trustees must always exercise their powers in accordance with their duties and in the best interests of the beneficiaries.

The Statutory Power of Advancement

The statutory power of advancement allows trustees to pay or apply capital for the advancement or benefit of a beneficiary before their interest becomes absolute.

Key Term: advancement The application of trust capital for the benefit of a beneficiary before their interest vests absolutely.

Key Term: presumptive share The share of trust capital a beneficiary would be entitled to if they became absolutely entitled at the time of advancement.

Key Term: prior interest An interest in the trust fund that takes priority over the interest of the beneficiary seeking advancement (e.g., a life tenant’s right to income).

Scope and Conditions

• The power is found in s.32 Trustee Act 1925.
• For trusts created on or after 1 October 2014, trustees may advance up to the whole of a beneficiary’s presumptive share, unless the trust instrument restricts this.
• For older trusts, the limit is one-half of the presumptive share.
• The advancement must be for the beneficiary’s advancement or benefit (e.g., education, starting a business, buying a home).
• If another person has a prior interest (such as a life tenant), their written consent is required before advancement can be made out of the capital subject to their interest.

Worked Example 1.1

A trust is set up for three siblings, each to receive a share of the capital at age 25. One sibling, aged 21, asks for funds to start a business. The trust was created in 2018. Can the trustees advance the full presumptive share?

Answer: Yes. For trusts created after 1 October 2014, trustees may advance up to the whole of the beneficiary’s presumptive share, unless the trust instrument says otherwise. The trustees must consider the benefit to the beneficiary and obtain written consent from any person with a prior interest.

Worked Example 1.2

A trust created in 2010 provides for two children to receive capital at age 30. One child, aged 24, requests £40,000 of their presumptive share (half the trust fund) to pay for a postgraduate degree. Can the trustees advance this amount?

Answer: For trusts created before 1 October 2014, the maximum advancement is one-half of the presumptive share. The trustees may advance up to this limit if it is for the beneficiary’s benefit and subject to any required consents.

Exam Warning

Trustees must check the date the trust was created and the terms of the trust instrument. If the trust instrument restricts or excludes the statutory power of advancement, trustees cannot override this. Always confirm the trust’s terms before advising on advancement.

Revision Tip

When answering SQE1 questions on advancement, always identify:

• The date the trust was created.
• The terms of the trust instrument.
• Whether there is a prior interest requiring consent.
• The purpose of the advancement and whether it benefits the beneficiary.

Trustee Liability and Protection

Trustees are personally liable for losses caused by breach of trust, such as advancing capital without authority or required consent. However, the court may relieve a trustee from liability if they acted honestly and reasonably (Trustee Act 1925, s.61). Trust instruments may include exclusion clauses, but these cannot exclude liability for fraud or dishonesty.

Key Term: breach of trust A failure by a trustee to comply with their duties or the terms of the trust, resulting in loss or unauthorised gain.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The appointment, retirement, and removal of trustees, and the role of the trust instrument and statute.
• The core fiduciary duties and standard of care required of trustees.
• The statutory power of advancement under s.32 Trustee Act 1925, including its scope, conditions, and limitations.
• The need to check the date of the trust and the terms of the trust instrument before advising on advancement.
• The requirement for consent from persons with prior interests before advancing capital.
• The personal liability of trustees for breach of trust and available protections.

Key Terms and Concepts

• trustee
• beneficiary
• trust instrument
• fiduciary duty
• duty of care
• advancement
• presumptive share
• prior interest
• breach of trust