Introduction
Trusteeship is the role undertaken by individuals or entities appointed to manage trust property on behalf of beneficiaries, guided by statutory provisions and fiduciary principles. The statutory power of maintenance, established under Section 31 of the Trustee Act 1925, permits trustees to apply trust income for the benefit of beneficiaries who have not yet attained a vested interest. This article examines the mechanisms of trustee appointment, the scope of their duties and powers, and their liabilities, with a focus on the statutory power of maintenance as it operates within trust law.
Appointment, Retirement, and Removal of Trustees
The administration of a trust depends on the actions of trustees, making their appointment, retirement, and removal processes key components of trust law. These processes are governed by both the terms of the trust instrument and statutory provisions, particularly within the Trustee Act 1925.
Appointment of Trustees
Trustees can be appointed through several mechanisms, ensuring that the trust is managed effectively and in accordance with the settlor's intentions.
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Express Provisions in the Trust Instrument: The trust deed may specify who is to be appointed as a trustee or the method by which trustees are to be selected.
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Statutory Authority: Under Section 36 of the Trustee Act 1925, existing trustees can appoint new trustees in situations such as when a trustee dies, wishes to be discharged, or refuses to act.
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Court Appointment: In certain circumstances, the court has the power to appoint trustees under Section 41 of the Trustee Act 1925, particularly when it is inexpedient, difficult, or impractical to do so without court intervention.
For example, in Re Schar's Settlement Trusts [1951] Ch 280, the court appointed additional trustees to ensure the proper administration of the trust, demonstrating the judiciary's role in maintaining trust integrity when standard appointment methods are insufficient.
Retirement of Trustees
Trustees may retire from their role, provided certain conditions are met to safeguard the trust's continuity and the beneficiaries' interests.
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Express Provisions: The trust instrument may outline the procedure for a trustee's retirement.
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Statutory Provisions: Section 39 of the Trustee Act 1925 allows a trustee to retire provided there will be at least two trustees remaining (or a trust corporation).
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Court Approval: With the court's permission under Section 41 of the Trustee Act 1925, a trustee may retire even if the statutory requirements are not fully satisfied.
Consider a trustee who wishes to retire due to ill health. If the trust deed permits, they may step down following the specified procedure. If not, they might rely on Section 39, ensuring that the trust's administration is not compromised by their departure.
Removal of Trustees
The removal of a trustee is a serious matter, often necessitated by a breach of duty or inability to perform their role effectively.
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Express Provisions: The trust instrument may contain clauses that allow for the removal of a trustee under certain conditions.
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Statutory Powers: Section 36 of the Trustee Act 1925 permits the removal of a trustee in specific circumstances, such as incapacity or unfitness to act.
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Court Intervention: Under Section 41 of the Trustee Act 1925, the court can remove a trustee when it is expedient to do so.
In the case of Letterstedt v Broers (1884) 9 App Cas 371, the court emphasized that the welfare of the beneficiaries is the main consideration when deciding whether to remove a trustee, particularly if there is evidence of misconduct or neglect of duty.
Duties and Powers of Trustees
Trustees are bound by fiduciary duties that require them to act in the best interests of the beneficiaries. These duties are fundamental to trust law and are essential knowledge for those studying for the SQE1 FLK2 exam.
Fiduciary Duties
Central to trusteeship is the fiduciary duty of loyalty and good faith. Trustees must place the interests of the beneficiaries above their own and avoid any conflicts of interest.
Key fiduciary duties include:
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Compliance with the Terms of the Trust: Trustees must administer the trust strictly in accordance with the trust deed.
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Impartiality: They must treat all beneficiaries fairly, balancing competing interests where necessary.
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Duty of Care: Trustees are expected to exercise reasonable care and skill in managing the trust property.
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No Unauthorized Profit: They must not profit from their position unless expressly authorized.
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Accountability: Trustees must keep accurate records and provide information to beneficiaries upon request.
In Bristol and West Building Society v Mothew [1998] Ch 1, Lord Millett described a fiduciary as someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
Powers of Trustees
Trustees possess certain powers that enable them to manage the trust effectively. These powers may be derived from:
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Express Provisions in the Trust Instrument: The settlor may grant specific powers to the trustees within the trust deed.
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Statutory Powers: Legislation such as the Trustee Act 1925 and the Trustee Act 2000 provides trustees with additional powers.
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Implied Powers: In some cases, powers may be implied to ensure the trust can function as intended.
Statutory powers include:
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Investment: Under Section 3 of the Trustee Act 2000, trustees have a general power of investment, allowing them to invest in any kind of property as if they were the absolute owners.
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Acquisition of Land: Section 8 of the Trustee Act 2000 permits trustees to acquire freehold or leasehold land in the United Kingdom for investment or other authorized purposes.
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Delegation: Section 11 of the Trustee Act 2000 allows trustees to delegate certain functions, such as investment management, provided they comply with the statutory requirements.
For instance, trustees may invest trust funds in a diversified portfolio to balance risk and return, acting prudently to protect the beneficiaries' interests.
Statutory Power of Maintenance
The statutory power of maintenance is a significant provision that permits trustees to apply income for the benefit of beneficiaries who have not yet become entitled to the trust capital. Established under Section 31 of the Trustee Act 1925, this power ensures that the needs of beneficiaries, particularly minors, can be met from trust income.
Scope and Application
Under Section 31, trustees may:
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Apply Income for Beneficiaries' Maintenance, Education, or Benefit: Trustees can use trust income to cover expenses related to a beneficiary's upbringing and welfare.
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Accumulate Unapplied Income: Any income not applied must be accumulated and added to the trust capital.
This power is typically used when a beneficiary is entitled to the capital of the trust upon reaching a certain age, but requires financial support before that time.
Practical Example
Consider a trust established for the benefit of a granddaughter, Emily, who is to receive the trust capital when she turns 25. At age 18, Emily wishes to attend university and requires financial assistance for tuition and living expenses. The trustees can use the statutory power of maintenance to allocate income from the trust to support her education, considering it for her maintenance, education, or benefit.
Trustees' Considerations
When exercising this power, trustees must:
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Assess the Beneficiary's Needs: Determine the appropriate amount necessary for the beneficiary's maintenance or education.
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Balance Interests: Consider the potential impact on other beneficiaries, ensuring fairness and impartiality.
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Act Prudently: Make decisions that are in the best interests of the beneficiary and in accordance with the terms of the trust.
Trustee Liabilities and Responsibilities
Trustees can be held personally liable for breaches of trust, emphasizing the importance of understanding their duties and exercising their powers correctly.
Breach of Trust
A breach occurs when trustees fail to follow their duties or exceed their powers. Common breaches include:
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Unauthorized Investments: Investing in assets not permitted by the trust or statute.
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Failure to Diversify: Neglecting to spread investments, leading to unnecessary risk.
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Incorrect Distribution: Paying trust funds to individuals not entitled under the trust.
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Exceeding Delegated Authority: Delegating responsibilities beyond what is permissible.
In Nestle v National Westminster Bank plc [1993] 1 WLR 1260, trustees were criticized for failing to review the investment portfolio adequately, resulting in lower returns for the beneficiary.
Consequences of Breach
Trustees who breach their duties may face:
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Personal Liability: They may be required to compensate the trust for any losses incurred.
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Restoration of Trust Property: Replacing any property lost due to the breach.
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Removal from Office: Being removed as a trustee to protect the trust's interests.
Defenses and Relief
Trustees may be relieved from liability if:
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Acting Honestly and Reasonably: Under Section 61 of the Trustee Act 1925, the court may relieve a trustee if they acted honestly and ought fairly to be excused.
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Beneficiary Consent: If all beneficiaries, being of full age and capacity, consented to the action.
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Limitation Periods: If the breach occurred outside the statutory limitation periods.
In Re Pauling's Settlement Trusts [1964] Ch 303, the court considered whether trustees could be relieved from liability when they had acted under the influence of a beneficiary and believed they were acting in the beneficiaries' best interests.
Conclusion
The interaction between trustees' duties, powers, and liabilities establishes a complex framework that governs the administration of trusts. The statutory power of maintenance under Section 31 of the Trustee Act 1925 illustrates how trustees can balance legal obligations with practical considerations for beneficiaries' welfare. Trustees must manage these responsibilities diligently, ensuring compliance with the trust instrument and statutory provisions while acting in the best interests of all beneficiaries. Understanding these concepts is essential for anyone studying trust law, as they reflect the practical applications of fiduciary principles in managing trust property effectively.
