Whether trustees can be compelled to exercise their powers or discretion

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A settlor established a private trust to benefit several family members, appointing two professional trustees to manage diverse assets. The trust deed grants these trustees broad discretionary powers, including the authority to allocate income and authorize advancements of capital. Recently, one beneficiary requested funds for an urgent medical treatment, and the trustees have refused to respond. Another sibling has threatened legal action, arguing that the trustees must at least address the request instead of ignoring it. The trustees assert that their discretionary authority prevents any court intervention, claiming they are not obligated to deliberate on each request.


Which statement most accurately explains the extent to which trustees can be compelled to exercise their powers of advancement in this scenario?

Introduction

Trustees play an indispensable role in trust law, holding and managing property for the benefit of beneficiaries as per the terms of the trust instrument and the law. The discretionary powers given to trustees enable them to make critical decisions affecting the administration and distribution of trust assets. Legal principles govern these powers and define the situations under which trustees may be compelled by courts to exercise their discretion. This examination considers the appointment of trustees, their fiduciary duties, the scope of their discretionary powers, and the legal avenues available when trustees fail to act appropriately.

Appointment of Trustees

The establishment of a trust requires the selection of trustees to administer the trust property. The trust instrument typically specifies the initial trustees and may outline procedures for appointing successors. In the absence of such provisions, statutory mechanisms under the Trustee Act 1925 apply:

  • Section 36: Allows for the appointment of new trustees in situations of death, incapacity, or retirement of existing trustees.
  • Section 41: Authorizes the court to appoint new trustees when it becomes necessary.

In Re Skeats’ Settlement (1889), the court emphasized that appointments must be made in good faith, with the primary consideration being the beneficiaries' interests. For example, when a trustee becomes incapacitated without a designated successor, beneficiaries may apply to the court under Section 41 for the appointment of a suitable trustee to ensure the trust's proper administration.

Duties of Trustees

Trustees are bound by fiduciary duties that require them to act with the utmost good faith and loyalty towards the beneficiaries. These duties are established through a combination of equitable principles, statutory obligations, and case law precedents.

Duty of Loyalty

Trustees must place the interests of the beneficiaries above their own and avoid conflicts of interest. They are prohibited from profiting from their position unless expressly authorized. In Keech v Sandford (1726), the trustee was held accountable for renewing a lease in his own name, highlighting the strict enforcement of this duty.

Consider a scenario where a trustee has personal investments in a company that the trust is considering as an investment opportunity. The trustee must disclose this interest and refrain from participating in the decision-making to prevent a conflict.

Duty of Care

Under the Trustee Act 2000, trustees are required to exercise such care and skill as is reasonable in the circumstances, considering any special knowledge or experience they possess. Professional trustees are held to a higher standard due to their knowledge and skills. Failure to uphold this duty may result in liability for losses incurred by the trust.

Duty to Act Impartially

Trustees must balance the interests of different classes of beneficiaries, such as income beneficiaries and remaindermen. In Re Londonderry’s Settlement (1965), the court discussed the importance of trustees not favoring one beneficiary over another without proper justification.

Duty to Account

Accurate record-keeping and transparency are essential. Trustees must keep beneficiaries informed and provide accounts upon request. In Armitage v Nurse (1998), the importance of accountability in trusteeship was affirmed.

Powers of Trustees

Trustees' powers stem from the trust instrument, statutory provisions, and common law. These powers enable trustees to effectively manage the trust but must be exercised within legal boundaries.

Express Powers

The trust deed may grant specific powers, such as the power to invest, to delegate certain functions, or to determine how trust income and capital are applied. These powers must be used in accordance with the trust objectives and fiduciary duties.

Statutory Powers

Statutes provide trustees with default powers, which apply unless excluded by the trust instrument.

  • Power of Sale: Under Section 13 of the Trustee Act 1925, trustees may sell trust property as necessary.
  • Power to Insure: Section 19 of the Trustee Act 1925 permits trustees to insure trust assets.
  • Power to Appoint Agents: The Trustee Act 2000 expands trustees' ability to delegate functions, allowing them to appoint agents, nominees, or custodians in managing the trust.

For instance, trustees managing a trust with a diverse investment portfolio may appoint a professional investment manager under these statutory powers to ensure prudent investment decisions.

Discretionary Powers

Discretionary powers provide trustees with flexibility in responding to changing circumstances.

Power of Maintenance

Allows trustees to apply trust income for the benefit of beneficiaries, particularly minors, for their education or maintenance.

Power of Advancement

Permits trustees to advance capital to beneficiaries before their entitlement arises. The Trustee Act 1925, Section 32, regulates this power, limiting advancements to not more than half of the beneficiary's presumptive share.

Power of Appointment

In discretionary trusts, trustees have the authority to select which beneficiaries will benefit and to what extent. This power must be exercised in good faith and in accordance with the trust purposes.

Whether Trustees Can Be Compelled to Exercise Their Powers or Discretion

Generally, trustees are expected to exercise their discretionary powers without interference. The courts are reluctant to compel trustees to act in a particular way, respecting the autonomy granted to trustees by the settlor.

Judicial Non-Intervention

In Re Beloved Wilkes’s Charity (1851), it was established that courts will not interfere with trustees’ discretion unless it is improperly exercised. This principle protects the trustees' judgment from unwarranted intrusion.

Circumstances Leading to Court Intervention

However, the courts may intervene in specific situations:

Failure to Exercise Discretion

When trustees refuse or neglect to exercise their discretion altogether, beneficiaries may seek the court's assistance. In Tempest v Lord Camoys (1882), the court indicated that it could compel trustees to consider exercising their powers if they unreasonably fail to do so.

Improper Use of Discretion

If trustees act in bad faith, consider irrelevant factors, or disregard relevant ones, the exercise of discretion may be challenged. The principle from Re Hastings-Bass (1975) provides that if trustees' decisions are based on incorrect legal assumptions or fail to take into account essential considerations, the court can set aside their actions.

For example, if trustees distribute assets based on a misunderstanding of the beneficiaries' entitlements, the court may intervene to rectify the situation.

Breach of Fiduciary Duty

Trustees who act in breach of their duties, such as by exercising discretion for an improper purpose, may be compelled by the court to reverse their actions or be held liable for any losses.

The Supervisory Role of the Court

The court's supervisory jurisdiction ensures that trustees act within the law and the terms of the trust. In McPhail v Doulton [1971], the House of Lords affirmed that while trustees have discretion, they must properly survey the range of possible beneficiaries and consider the appropriateness of distributions.

Variations in Trustee Roles and the Impact on Discretion

The nature of the trust affects the scope and exercise of trustees' discretion.

Fixed Trusts

In fixed trusts, the trustees have little discretion, as the beneficiaries and their entitlements are predetermined. The trustees' role is primarily administrative, and failure to distribute as required can lead to compulsion by the court.

Discretionary Trusts

Discretionary trusts grant trustees significant latitude in deciding who among the potential beneficiaries will receive benefits and in what amounts. Courts are particularly cautious about interfering with this discretion unless there is clear evidence of misuse.

Charitable Trusts

Trustees of charitable trusts must ensure that the trust's purposes provide a public benefit. The Charity Commission oversees these trusts, and trustees may be directed to act in alignment with regulatory requirements.

Pension Trusts

Pension trustees hold responsibilities under both trust law and specific pension legislation. They must balance the interests of current and future beneficiaries, and statutory regulation can impact how discretion is exercised.

Liabilities and Remedies

Trustees may face personal liability if they breach their duties or improperly exercise their powers.

Breach of Trust

Trustees are liable for losses resulting from breaches, such as unauthorized investments or misapplication of funds. Remedies include restoration of the trust fund and reimbursement of losses.

Defenses and Protections

  • Exemption Clauses: Trust instruments may contain clauses limiting trustees' liability, although these cannot exclude liability for fraud or dishonesty (Armitage v Nurse [1998]).
  • Statutory Relief: Under Section 61 of the Trustee Act 1925, trustees may be relieved from liability if they acted honestly and reasonably.
  • Limitation Periods: Beneficiaries must bring claims within prescribed time limits, generally six years from the date of breach.

Conclusion

The complex interaction between trustees' discretionary powers and the courts' supervisory jurisdiction highlights the detailed nature of trust law. Trustees must exercise their discretion within the confines of equitable principles, statutory obligations, and fiduciary duties. Case law, including McPhail v Doulton and Re Hastings-Bass, demonstrates circumstances under which courts may compel trustees to act or set aside their decisions. The interaction of these doctrines delineates the extent of trustees' autonomy and the legal mechanisms available to beneficiaries seeking redress. Precise compliance with fiduciary duties and careful exercise of discretion are essential for trustees operating within the trust law framework.

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