The obligations on trustees are onerous and exacting. They require the utmost integrity and honesty. The scenarios that arise in the administration of trusts can be complex and leave the trustee with difficult choices between the competing needs and interests of various beneficiaries.
A trustee may be a private unpaid individual. He may be (although rarely is) the person who created the trust or a person connected to that person. In some cases, the trustees may be a beneficiary, although this leads to conflicts of interest issues. For practical and legal reasons, there are usually two or more trustees.
Banks and other financial institutions offer corporate trustee services. Other professional corporate trustees, some of which were formerly divisions of financial institutions, offer trustee service. Solicitors, accountants and other professional may offer personal trustee services. Corporate and professional trustees require remuneration for their services, which in effect requires that there be a provision in the trust deed providing for remuneration.
There has been some reform of the law on the administration of trusts under the Land and Conveyancing Law Reform Act. That legislation provides for the variation of trusts. More comprehensive reform has been proposed, which is expected to be enacted in the near future.
Duties of Good Faith
The trustee is obliged to ascertain the nature and extent of the trust assets. He must ensure that he understands the trust documents and understands his duties as trustee. The trustee should get “in” the trust assets so that they are under his control. This will usually involve taking legal title to them. He should satisfy himself that there are no existing breaches of trust or matters that need to be rectified.
Trustees have an overriding duty to act in good faith and to exercise their powers properly. Trustees will commonly have a degree of discretion in relation to the manner in which their powers are exercisable The degree of discretion will depend on the terms of the trust. Discretion may be given within fixed bounds.
Trustees must act in accordance with proper and relevant considerations. They must apply their mind in accordance with the terms and criteria upon which any discretion is granted. They must not act in accordance with irrelevant consideration.
They must acquaint themselves with the relevant matters, prior to making their decisions. They must act in good faith. Provided that trustees so act, the courts will not substitute its decision for that of the trustees.
Unless the trust deed so permits, the primary consideration is financial. Ethical, moral or political considerations may be considered if the trust deed so allows.
Discretion & Balance
The trustee is obliged to be fair as between the beneficiaries and must endeavour (in broad terms) to treat them equally. Beneficiaries may have present or future entitlements. Beneficiaries may be unborn. Strict equality is unlikely to be possible, but equity and fairness must be maintained between the classes and within the classes, depending on and relative to the nature of the particular trust.
When the trustees can be shown to have exercised their discretion improperly, the courts may set aside the trustee’s decision on the matter. Their decision may be set aside if it is made for an improper motive. A decision may be void if it is highly irrational and unreasonable. If the decision is made in good faith, the courts will not intervene unless the decision is so unreasonable that if falls outside the scope of the power under the trust deed.
Trustees are under a duty to protect and safeguard the trust assets. This requires that insurance be taken out, in the case of mostly real property and many other assets. It requires that the assets be properly maintained and repaired.
Accounts must be maintained. Separate accounts may be required where there are different classes of beneficiaries.
Legal proceedings may be required to recover assets, whose title has been challenged. However, it is prudent for a trustee to obtain court approval for the decision to commence litigation, in order to ensure that he has a reasonable cause of action so that he is entitled to be indemnified from the trust assets for the costs incurred.
Where the trustee proceeds without court consent, he must show that the cost was reasonably incurred. Where the risk to the trust fund is very high, litigation may not be justified, even if there are objective grounds which would justify taking proceedings, if more resources were available.
Trustees must invest the trust assets with a view to producing an income while preserving the capital value for beneficiaries. This default rule may be varied by the terms of the trust deed. The default position permits limited types of (apparently) high-grade investments only. Trusts instruments usually grant wider investment powers to the trustees. Many trusts make the power as wide as possible, in order to allow flexibility.
If the trust instrument does not provide an investment clause, then trustees may invest only in permitted investment under the Trustees Act 1893 and the Trustees (Authorised Investments) Act 1958, as amended and extended by statutory instruments. Until relatively recently, the default permitted investments were relatively limited in scope.
The permitted securities were formerly limited to securities of the British or Irish government, certain real securities, shares stocks and debenture in state bodies, publicly quoted industrial and commercial companies of a certain size and specified type of deposit accounts. Real securities cover investments in mortgage securities but not in land or by way of secured lending.
In the late 1990s, the permitted investments were widened to include certain units trusts and collective investment schemes, certain annuity assurance contracts and the equity share of companies quoted on recognised stock exchanges.
The Trustee Act provides that a person who lends funds on the security of property under the statutory power to invest, is protected from liability for breach of trust by reason only of the loan to value, provided that the loan to value at commencement was less than two thirds, and that the loan was made on the basis of competent valuation advice.
The trustees are obliged to review investments at least regularly. Review every six months is desirable as a rule of thumb.
Duties of Care
In addition to the general power to invest in authorised securities, the trustee owes a general duty of care and prudence. He must not act in breach of trust or in breach of his obligations of good faith. The duty of care of a trustee is not only that which he would exercise if he acted on his own behalf but that which he should exercise for the benefit of persons for whom he is morally bound to provide. He must, in effect, be more cautious than with his own money. In broad terms, the trustee should avoid hazardous speculative investments.
The standard of care required of the trustee depends on his experience and background. All trustees must meet a minimum duty of care, irrespective of their capacity. A professional trustee, such as a corporate trustee which specialises in investment management, will be expected to meet a higher standard.
In accordance with the principles of negligence generally, professional trustees must exercise the degree of care which they profess. The duty must be interpreted in light of the powers in the trust instrument.
Maintaining Balance and Equivalence I
The duty to maintain equality over time is reflected in two outdated default principles, which are usually dis-applied in trusts and wills. Under a trust for sale, which was common until the 2009 legislation, there was commonly an obligation to covert trust assets into cash, with an option to postpone the conversion indefinitely.
Where assets are wasting, future in nature or consist of unauthorised securities, they should be converted into permanent income bearing securities, so as to maintain fairness between the beneficiaries currently entitled, and those who will be entitled in the future.
The principle applies to general bequests in a will. The rule may be excluded expressly or by implication, where it is clear that it is intended that the beneficiaries are to enjoy the assets in kind. The objective is to ensure that future beneficiaries are not prejudiced by wasting on unauthorised (presumed risky) securities. Where there is an obligation to sell the above type of assets, the person entitled for life is presumed to enjoy the income until this occurs.
Trust assets must be apportioned between the persons entitled at present and in the future, until conversion into an authorised asset. Where the assets are wasting, hazardous or unauthorized, there is presumed to be an undue benefit for the life tenant/present owner, at the expense of the future owner. The high level of income is presumed to be made at undue risk of erosion or determent to capital.
Under the apportionment, the trustees should ensure that the current beneficiaries receive only income equivalent to the yield on authorised investments. Other income is added to the capital. Where there is power to postpone conversion to a liquid form, this is presumed to be retrospective to the date of death. Where there is no power to postpone the sale, it is retrospective to the date of sale or one year after death (the executor’s year) if no sale has taken place by then.
Maintaining Balance and Equivalence II
Where there is no current income, the life tenant is disadvantaged because he does enjoy the benefit of the asset. In this case, the rule requires that the assets be reinvested in a form which yields income for the present owners so as to maintain equity, with future owners. The trustee should calculate a safe authorised investment rate of return and re-apportion the future interest as if it is yielded to the current owner.
Under another old equitable rule, the holder of the current interest is charged in respect of interest accumulated on debt, during the period in which it is unpaid. The interest charged is that which would have been avoided, if the debts had been paid on the date of death.
A number of other rules operate to achieve fairness as between persons with a present right to the income of the assets for the future where securities are held, sold and are not sufficient to pay the amounts of interest in principle. An apportionment is made between the interest unpaid and the principal unpaid.
Where repairs must be carried out due to ordinary wear and tear, this is generally taken out of the income of the assets and met by the current life or limited term owner. Where there is an improvement by way of capital expenditure, it is deducted from the capital of the assets.
Similar considerations arise in respect of assets held as shares. The distribution of bonus shares is presumed to be for the benefit of capital. Some of the rules as declared by the courts are arbitrary in that distributions of capital profits may be regarded as distributions of income. Equally payments and purchases of shares with dividend accrued is presumed to be capital.
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