PastPaperHero | Trustees: appointment, duties, powers, and liabilities

Learning Outcomes

This article explains the trustees' statutory power to apply trust income for the maintenance, education, or benefit of beneficiaries, particularly minors, as outlined in section 31 of the Trustee Act 1925. For the SQE1 assessment, you need to understand the conditions under which this power arises, its discretionary nature, the requirement to accumulate surplus income, and how the rules change when a beneficiary reaches the age of majority. A clear understanding of these principles is essential for applying them to SQE1-style problem scenarios involving trust administration for minor beneficiaries.

SQE1 Syllabus

For SQE1, you are expected to understand the practical application of trustees' powers, including the statutory power of maintenance. Questions may require you to identify when the power is available, assess the scope of the trustees' discretion, and determine the consequences of its exercise or non-exercise. You should pay attention to:

The requirements for the statutory power of maintenance under s.31 Trustee Act 1925 (as amended).
The distinction between vested and contingent interests in relation to the power.
The trustees' discretion in applying income and the duty to accumulate surplus.
The entitlement of adult beneficiaries to income.
How the statutory power can be varied or excluded by the trust instrument.

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, when can trustees apply income for a minor beneficiary?
1. Only if the beneficiary has a vested interest.
2. Only if the beneficiary has a contingent interest.
3. If the beneficiary has either a vested or contingent interest carrying the right to intermediate income.
4. Only if expressly permitted by the trust instrument.
True or false: Trustees must apply income for a minor beneficiary's maintenance if the conditions under s.31 TA 1925 are met.
What must trustees do with trust income generated for a minor beneficiary if they decide not to apply it for maintenance, education, or benefit?
1. Distribute it to the settlor.
2. Accumulate it and add it to the capital.
3. Distribute it to the minor beneficiary directly.
4. Hold it in a separate account until the beneficiary is 18.
A beneficiary has a contingent interest in capital, conditional on reaching age 25. What happens to the trust income generated after the beneficiary turns 18 but before they turn 25?
1. The trustees must continue to accumulate it.
2. The trustees have discretion to apply it for the beneficiary's benefit.
3. The trustees must pay it to the beneficiary as it arises.
4. The income entitlement ceases until the beneficiary reaches 25.

Introduction

Trustees managing trust property for beneficiaries, especially minors, often face situations where beneficiaries require financial support before they become fully entitled to the capital. The Trustee Act 1925 provides statutory powers enabling trustees to use trust funds for beneficiaries in certain circumstances. This article focuses specifically on the statutory power of maintenance under section 31 of the Trustee Act 1925 (TA 1925), as amended by the Inheritance and Trustees’ Powers Act 2014. This power allows trustees to apply trust income for the benefit of beneficiaries who have not yet attained a vested interest, typically minors. Understanding the scope, limitations, and application of this power is important for advising trustees and beneficiaries.

The Statutory Power of Maintenance (s.31 TA 1925)

Section 31 TA 1925 grants trustees a discretionary power to apply trust income for the ‘maintenance, education, or benefit’ of a beneficiary who is under the age of 18 (a minor). This power is subject to certain conditions and can be modified or excluded by the trust instrument.

Conditions for Exercise

The power under s.31 arises only if the beneficiary has an interest (vested or contingent) in the income generated by the trust property.

Key Term: Vested Interest An interest that is unconditional. The beneficiary is certain to receive the trust property, although their enjoyment might be postponed (e.g., until they reach 18).

Key Term: Contingent Interest An interest that depends on a future event occurring, which may or may not happen (e.g., reaching a specific age like 25, or surviving another person).

Critically, the power cannot be exercised if there is a prior interest affecting the income. For example, if property is held on trust for A for life, remainder to B (a minor), the trustees cannot use the income for B's maintenance during A's lifetime, because A has the prior right to all the income.

Scope of Application: 'Maintenance, Education, or Benefit'

The terms ‘maintenance, education, or benefit’ are interpreted broadly by the courts.

Maintenance relates to supporting the beneficiary's living needs.
Education includes schooling, tuition fees, and related expenses.
Benefit is a wide term encompassing anything that improves the beneficiary's material situation or well-being.

Trustees must exercise their discretion reasonably when deciding how much income to apply. For trusts created on or after 1 October 2014, trustees can apply the whole or such part of the income as they think fit. For trusts created before that date, the application was limited to such amount as was reasonable in all the circumstances.

Discretionary Nature

The power under s.31 is discretionary, not obligatory. Trustees must consider whether to exercise the power, but cannot be compelled to do so by the beneficiary or their parents/guardians. If trustees decide not to apply the income, or only apply part of it, they have a duty regarding the unapplied income.

Duty to Accumulate Surplus Income

Any income not applied for the minor beneficiary's maintenance, education, or benefit must be accumulated. This means the surplus income should be invested, and the resulting income from these accumulations should itself be accumulated (s.31(2) TA 1925).

Key Term: Accumulation The process of retaining and investing surplus trust income rather than distributing it.

These accumulations can be used for the beneficiary's maintenance, education, or benefit in subsequent years during their minority.

Worked Example 1.1

A trust fund is held for Chloe, aged 10, contingent on her reaching 21. The trust generates £5,000 income per year. The trustees decide to apply £2,000 per year towards Chloe's school fees. What must they do with the remaining £3,000 income each year?

Answer: The trustees must accumulate the surplus £3,000 income each year. This accumulated fund should be invested. In future years, if Chloe's needs increase (e.g., for higher education costs before she turns 18), the trustees could potentially apply funds from these accumulations as well as the current year's income.

Attainment of Majority (Age 18)

The rules under s.31 TA 1925 change significantly when the beneficiary reaches the age of 18.

Entitlement to Income

If a beneficiary has a vested or contingent interest in the trust property, upon reaching 18 they become entitled to receive the income generated by their share of the trust fund as it arises. The trustees' discretion under s.31 to apply income ceases, and they come under a duty to pay the income to the adult beneficiary. This applies even if the beneficiary's interest in the capital is still contingent (e.g., conditional on reaching age 25).

Worked Example 1.2

David is the beneficiary of a trust fund, contingent on him reaching 25. The fund produces £8,000 income annually. David has just turned 18. What are his income rights?

Answer: Now that David is 18, the trustees must pay the £8,000 annual income to him directly as it arises. Their discretion under s.31 has ended. David will continue to receive the income until he reaches 25 (when his interest in the capital vests) or dies before then.

Treatment of Accumulated Income

The destination of income accumulated during the beneficiary's minority depends on the nature of their interest:

Vested Interest: If the beneficiary had a vested interest from the outset (or their interest vested upon reaching 18), they are entitled to both the future income and all the past accumulations when they turn 18.
Contingent Interest: If the beneficiary's interest in the capital is still contingent upon reaching 18 (e.g., on attaining age 25), the income accumulated during their minority is added to and treated as part of the capital (s.31(2)(ii) TA 1925). The beneficiary will receive these accumulations only if and when their interest in the capital vests. If their interest fails (e.g., they die before reaching 25), the accumulations pass with the capital to whoever is next entitled under the trust or on resulting trust.

Worked Example 1.3

Refer to Worked Example 1.1. Assume Chloe's interest vests at age 21. What happens to the income accumulated during her minority when she turns 18?

Answer: Because Chloe's interest in the capital is still contingent at age 18 (she must reach 21), the income accumulated by the trustees during her minority (£3,000 per year plus any income generated from investing those accumulations) will be added to the capital fund. She will receive these accumulations only if she reaches 21. From age 18 until she reaches 21, she is entitled to receive the current income of £5,000 per year as it arises.

Exclusion or Variation by Trust Instrument

The settlor can expressly modify or exclude the provisions of s.31 TA 1925 in the trust instrument. For example, a settlor might postpone the beneficiary's right to receive income until a later age (e.g., 21 or 25), extending the trustees' discretion to accumulate income beyond the age of 18.

Exam Warning

Always check the terms of the trust instrument provided in a scenario. An express clause relating to income will override the statutory provisions of s.31 TA 1925. Also, be mindful of the date the trust was created, as the rules regarding the amount of income trustees could apply were different for trusts created before 1 October 2014. However, SQE1 typically assesses current law.

Distinction from Power of Advancement (s.32 TA 1925)

It is important not to confuse the power of maintenance (s.31) with the power of advancement (s.32 TA 1925).

Maintenance (s.31): Deals with the application of income for maintenance, education, or benefit, primarily for minors.
Advancement (s.32): Deals with the payment or application of capital for the advancement or benefit of a beneficiary with an interest in capital (vested or contingent).

While both are discretionary powers, they apply to different parts of the trust fund (income vs capital) and have different rules and conditions.

Key Point Checklist

This article has covered the following key knowledge points:

The statutory power of maintenance under s.31 TA 1925 allows trustees to apply trust income for a minor beneficiary's maintenance, education, or benefit.
The power is discretionary, not mandatory.
It applies only if the beneficiary has a vested or contingent interest carrying the right to income and there is no prior interest.
Trustees must accumulate any surplus income not applied for the minor beneficiary.
Upon reaching 18, a beneficiary with a vested or contingent interest becomes entitled to the current income as it arises.
Accumulated income vests with the beneficiary at 18 if their interest is vested; otherwise, it is added to capital if their interest remains contingent.
The statutory powers can be varied or excluded by the trust instrument.
The power of maintenance (s.31) applies to income, distinct from the power of advancement (s.32) which applies to capital.

Key Terms and Concepts

Vested Interest
Contingent Interest
Accumulation

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