Present v Future
In some situations, the duty on trustees to act fairly and proportionately requires them to convert certain assets from one form to another, so as not to jeopardise the interests of certain beneficiaries, in particular, future beneficiaries.
The courts evolved certain rules in this context. They can be excluded expressly or by implication, and are usually excluded in wills which create trusts. Some of these older rules have been reformed in 2009 in the context of trust of land.
The rules apply where a person is to receive income for a certain period (generally the lifetime of the beneficiary) with the provision that entitlement to the capital is to pass to another after that period or upon the beneficiary’s death. The first rule requires the conversion of wasting, risky or unauthorised investments into authorised investments. It applies to lifetime trusts and wills
The default provisions for authorised investments (which would apply where no express powers of investment have been given) provide for a limited category of authorised investments. Broadly speaking, authorised investments are government-backed securities and securities (equity and debt), certain companies shares were presumed (in some cases incorrectly) to be safe and secure from capital loss) together with certain intermediary investment funds, which invest in these and similar products.
The rule does not apply to land. It also does not apply where there is an intention that the asset be enjoyed by the beneficiary in its actual state (in specie). Where the rule applies. the current owner of the income interest is to be entitled to a fair yield on authorised investments. Surplus income received must be added to capital. The date of valuation depends on the date of the document.
In the case of a will, the default position is that valuation and calculation takes place after one year. If the sale of assets does not take place until after one year, the person entitled to income is entitled to interest at a fair rate from that date, until to the date of actual conversion into authorised investments. If the income earned is less than that on authorised investments, the trustees must pay the same to the person entitled to the income interest.
The Succession Act allows for the appropriation of any part of the assets in their actual state, towards satisfaction of any benefit under the will. Certain notices are required to be given.
In certain cases, the consent of trustees or persons entitled to income, is also required. Where this provision applies, no apportionment is required under the rule.
Income v Capital
Another rule, which also applies to wills and which may be displaced, seeks to protect the holder of the income against unfair advantage, which might otherwise accrue to the owner of capital. The rule requires that the holder of the income, is to receive the income which he would have been entitled to, if the asset had been converted into an authorised investment at the date of death.
Where there non-income producing trust assets, the rule may apply to require that person entitled to income receives the equivalent income from capital. The person entitled to the income is also entitled to interest on the equivalent income from the date of death.
There is a presumption (usually excluded in wills) that the person who is entitled to income, is entitled to income on the net estate only, from the date of death. Therefore, if income has been paid or accumulated on the gross estate (part of which is used to pay debt) an adjustment is made, so that the balance on the part representing the debts is paid to or accumulated for the owner of the capital.
Income received before death is capital, so that where there is split in the entitlement to income and capital, it belongs to the owner of capital. Where a dividend is declared after death or other income is earned, in respect of a period both before and after death, the part relating to the pre-death period must be apportioned to the beneficiary entitled to capital.
The part accruing after death is apportioned to the person entitled to income. More difficult situations may arise in respect of sums received after death which include both elements of capital and income.
In some cases sums described as capital must be treated as income and vice versa. In other cases, the courts may not require an apportionment, if the calculations are unduly complex and costly relative to the benefits derived.
Where property or other assets need to be maintained and repaired, the costs should be taken from income. In contrast, capital expenditure should be taken from the capital fund on the basis that it represents a permanent improvement.
Trusts of Land
For many centuries, when land comprises most wealth, it was common for families who owned large landed estates to settle and resettle land from generation to generation. These types of arrangement were very common in the 18th, 19th and early part of the 20th century.
Typically, substantial estates comprising agricultural land and tenanted lands, subject to agricultural or residential tenancies, were vested in the present owner of the estate for life and thereafter to his heirs. Often the settlements were made on marriage.
Each generation typically settled and resettled the land, once a generation with the co-operation of the next generation. The result was that many complex types of rights or interest could exist in a single piece of land.
The mechanism of the trust was commonly employed in settlements, as it avoided some technical common law rules on the creating and vesting of future “legal” interests (interests or rights which would or might come into existence at some future date).
Trust provided much greater flexibility than the common law allowed. Complex successive and layered interests and right could be created for present and future family members. Trusts were themselves subject to the technical rules against perpetuities.
Statuory Powers re Land
By the mid-19th century, many landed estates became insolvent because they were unable to bear the interests, charges and mortgages with which they were encumbered. The desire to retain the land, within the family, reflected in settlements and trusts, had created structures where it was difficult to realise the economic benefit of the land by way of lease or sale. In Ireland, numerous estates were sold through the Landed Estates Court, which cleared all obligation and rights from the title.
Legislation was introduced throughout in the latter half of the 19th century, designed to enhance the powers of the current principal “owner” (typically the person entitled to the income or to the enjoyment of the property in kind for life) to manage and sell the lands. Provision was made whereby the settled or trust land could be sold, leased and converted into monies so that the all present and future interests and rights were “overreached” and attached to the proceed of sale (regardless of whether this was sufficient).
This legislation provided that (typically) the life tenant was given powers, including the power of sale, the power to grant mortgages and power to lease and improve the land, notwithstanding that he was a temporary owner only. Other parties, typically existing trustees, were deemed trustees of the settlement and had a protective role and were required to consent to certain key decisions. In the case of a sale, the monies must be paid to the trustees as capital, (with the life tenant typically receiving the income).
Under the 2009 land law reforms, the ability of to create complex legal rights of ownership, was severely curtailed. All such rights must now exist as beneficial interests (i.e. subsisting under a trust). This has the benefit of facilitating dealing with and sale of the property. An outsider need only deal with the designated or deemed trustees, and need not concern themselves with the terms of the trust are being complied with. .
Where successive interests legal interests exists, or are created after the Act, they are deemed to be subject to the 2009 Act. A trusts of land is deemed to apply, even if there is no express trust. The trustees are given most of the powers of the owner. The Act specifies who the trustees shall be.
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