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The trustee cannot deal with the property as his own because even though he may have
legal title to the trust property, real entitlement rests with the beneficiaries.
Trustees actions are, therefore, policed and controlled and the parameters of the trustees
duties and powers are closely regulated.
The rights and responsibilities of the trustee are as prescribed by the trust instrument,
imposed by equity and set out in statutory form. The extent of a trustees duties also
varies according to the nature of the trust e.g. whether it is a CT, a bare trust or a pension
trust. The more onerous duties fall upon the trustee of an express trust. The failure to
discharge the duties of trusteeship may mean that the trustee will incur personal liability
to the beneficiaries.
Millet L.J. Armitage v Nurse there is an irreducible core of obligations owed by the
trustees to the beneficiaries and enforceable by them which is fundamental to the concept
of a trust. If the beneficiaries have no rights enforceable against the trustees there are no
trusts
The duty of the trustees to perform the trusts honestly and in good faith for the benefit
of the beneficiaries is the minimum necessary to give substance to the trusts
The trustees duties may be divided into 3 categories:
(1) General Duties
The general duties owed by a trustee in relation to the running of the trust (i.e. the
administrative and managerial obligations).
o Trustee must both hold and deal with the property in a fashion that furthers and
protects the interests of the present and future beneficiaries overarching duty
= to administer the trust for the benefit of all the beneficiaries.
o In doing so, the trustee must act impartially and in the best interest of all the
beneficiaries requires that trustee manage the trust in a way that safeguards
the capital value of the property and generates an income for the beneficiaries
the trustee is able to employ agents (e.g. an accountant or a solicitor) to carry
out key administrative tasks.
(2) Fiduciary Duties
The fiduciary duties automatically arise from the relationship of trustee and
beneficiary.
o As all trustees stand in a fiduciary relationship with the beneficiaries (which
entails that the trustee must always act in utmost good faith), an obligation of
loyalty and faithfulness is expected of the trustee.
o The trustee is not, therefore, permitted to advance the interests of one
beneficiary at the expense of another or profit from his position as trustee or to
place himself in a position where his interests conflict with those of the trust.
(3) The distributive or dispositive obligations of the trustee
o This duty concerns the distribution of capital and income in favour of the
beneficiaries.
o The trustee will have to dispose of the trust property according to the directions
of the settlor and must not distribute trust money to someone who is not
entitles.
o If the trust is discretionary, the trustee must exercise his discretion sensibly and
responsibly while taking on board relevant matters and disregarding irrelevant
concerns.
Paid (i.e. professional) trustees and corporate trustees = additional and higher standard of
care judged by standards they professed and which had led to their employment as
trustees. Objective standard applicable at common law depended upon the presence of
payment, the nature of the trustee and the special skills that he claimed (Bray v Ford)
not the most straightforward test to employ and took no account of the subjective
standard that the trustees would actually have adopted in relation to his own affairs.
Common law duty of care replaced by Trustee Act 200 which imposes a new duty of care
on trustees. This new duty applies to the activities carried out by the trustees as listed in
Sch.1. Ambition was to produce a uniform duty that would apply across the spectrum of
trustees duties and, thereby, instil more certainty and consistency into the regulation of
the trustees behaviour. The listed activities include, for example, the making of
investments, the acquisition of land, the employment of agents, the taking out of
insurance, the carrying of the valuations of the trust property and beneficial interests and
the auditing of trust accounts. This prescription, therefore, encompasses all of the
trustees key functions. The list is not, however, exhaustive and omits reference to a
trustees functions concerning the custody and management of trust property other than
land and the commencement and defence of legal proceedings by or against the trust.
Where a few activities are not listed, the common law yardstick will still operate. The
statutory duty can be excluded and in such cases the common law duty will be
reactivated.
Subject to exclusion by the trust instrument, s1(1) lends the objective with the subjective.
It requires a trustee to exercise such care and skill as is reasonable in the circumstances.
In determining what is reasonable, particular regard in to be had to:
o Any special knowledge or experience that he has or holds himself put as having
the personal characteristics of a trustee can assume relevance. The standard is
geared not only to the expertise that the trustee actually has, but it also reflects the
expertise that the trustee claims to have. The claim must somehow have been
communicated to the settlor, an appointing trustee or the beneficiaries. The claim
could emerge from conversation, publicity material, advertisements and the like;
and
o Whether the trustee acts in the course of a business or profession and, if so, any
special knowledge or experience reasonable expected of such a person in the same
business or profession. This must entail that a higher standard of care is expected
from paid trustee who specialises in trust work that from, say, an accountant or a
solicitor who acts as a trustee as part of his general practice.
Provided that the trustee crosses the minimum threshold applicable, he will not be liable
for subsequent loss that occurs. The trustee is able to apply to the High Court for
directions prior to the taking of any act that might compromise his position as trustee. If
the trustee does not take such pre-emptive action, it is still possible to apply to the court
for relief under s.61 Trustee Act 1925. This enables the court to exonerate (in whole or in
part) a trustee who has acted honestly and reasonably and who ought fairly to be excused
for the breach and the failure to obtain directions of the court. Case law demonstrates that
an unpaid trustee is more likely to be released from liability than his professional
counterpart.
trust fund, the trustee should consider whether to reinvest elsewhere otherwise he will be
liable for the failure to review Re Medland.
Except where expressly allowed in the trust instrument, the trustee should never lend
trust money or allow it to remain outstanding on an unsecured basis -Pickard v
Anderson[1872].
If the trust property into chattels, the trustee should also obtain an accurate inventory.
The trustee is expected to ensure that all securities and chattels are in safe custody Re
Millers Deed Trusts [1978].
Land - the trustee should ensure that it is secure and free from the adverse claims of a
trespasser.
There appears to be NO DUTY TO INSURE the trust property (RCC v Peter Clay
Discretionary Trust [2008])
The investment of trust funds is a major aspect of the administration of trusts and will be
a feature of all but the lost primitive of trusts. If the subject matter of the trust is money
the trustee will be under a duty to invest the trust fund to the advantage of the
beneficiaries. Investment is an attractive option as it should shield that trust fund from the
depreciating effects of inflation. Investment of capital should also ensure that there is an
income stream from which interim payments can be made to the beneficiaries (which is
especially pertinent where there is a beneficiary who enjoys merely a life interest).
Although there is usually a duty to invest the trustee is not given an unbridled ability to
invest as he wishes, the choice of investment is governed by administrative powers to
invest. The power is subject to regulation by Parliament, the courts and the trust
instrument.
The first port of call is to examine the trust instrument in many contemporary trusts
there will be found an express investment clause. This will reflect the vision of the settlor
as to how the trust property is to be invested for the better advantage of the beneficiaries.
If no express power of investment is contained in the trust instrument, the trustee is given
a statutory power to invest which is now to be found in the Trustee Act 2000.
Express powers
Common practice = insert an express investment clause into the trust instrument- may
operate to narrow the field of investments opens to a trustee or broaden the choice
beyond that which is permissible under statute(usually this) for example, such a clause
might allow the trustees, to invest in or upon such investments as to them might seem fit
and as is they were the absolute owners of the fund offers the trustees the utmost
flexibility as to how and where they may invest trust money but this does not give a
trustee the right to do exactly what he wishes. The trustee remains subject to the general
duty to take care and the other duties imposed by Trustee Act 2000
An express power must be carefully drafted so as to be clear, understandable and capable
of enforcement (e.g. Re Kolbs WT where a provision allowing investment in blue chips
was void for uncertainty).
Traditionally, the clause is to be construed strictly with the onus on the trustee to establish
that the investment is within its scope. Hence, in Bethel v Anderson a clause offered the
trustees a wide discretion to change investments from time to time. Jessell M.R. held
that this did not enable the trustees to make certain speculative and substantive
investments of a type substantially different from the investments chosen by the settlor
before his death.
Nevertheless, and as demonstrated in Re Hararis ST, the court will strive to give an
investment clause a plain and ordinary meaning. In that case, the settlor gave his trustees
the power to invest trust money in or upon such investments as to them which may
seem fit Existing investments included certain Egyptian binds and securities, which at the
time, were not authorised investments. The court had to determine whether the express
power was to be limited to the statutorily permitted range of investments or whether the
trustees could lawfully invest outside that limited range. Jenkins J could see no justification
for reading into the clause such a restriction and added, I think the trustees have power,
under the plain meaning of those words, to invest in any investment which...they
honestly think are desirable investments...
The 1996 Act allows trustees of land ( not personalty (moveable property)) to purchase
land for occupation by a beneficiary or for any other purpose e.g. a house may be
acquired initially for resale at a profit, but subsequently the trustee may decide instead to
allow the beneficiary to reside therein.
S 8 Trustee Act 2000 is modelled upon the 1996 Act provision and allows the trustee of
personalty to purchase freehold or leasehold land as an investment, for occupation by a
beneficiary or for any other reason. It does not have to be intended to generate a rental
income. It might, therefore, simply be purchased to provide a home for a beneficiary.
On acquiring land, the trustee under both schemes has the same powers as would an
absolute owner and this allows the trustee to sell, mortgage, lease or otherwise deal with
the land.
The application of s8 can be excluded in the trust instrument and, if not so excluded,
operates regardless of when the trust was created.
Investing in mortgages of land
S 3 200 Act permits the trustee to invest in land by means of providing a loan secured on
the land (i.e. the granting of a mortgage).
The mortgage may be legal or equitable but private mortgages are now uncommon and
not an attractive form of investment.
Where the trustee complies with statutory guidance in regards to this form of investment,
he will be protected as regards to any loss that arises from an incorrect valuation of the
mortgaged property.
The Trustees duty of care
o At common law, the duty placed upon a trustee when investing trust funds was higher
than that imposed on him when carrying out his other administrative functions.
o Trustee must invest the trust property wisely acting as an ordinary prudent man making
investments.
o CA Learoyd v Whiteley Lindley LJ: The duty of a trustee is not to take such care only as a
prudent man would take if he had had only himself to consider; the duty rather is to take
such care as an ordinary prudent man would take if he were minded to make an
investment for the benefit of other people for whom he felt morally bound to provide. The
distinction is framed around the acceptance that a prudent man of business might still
invest is risky ventures but it is the duty of trustees to confine themselves to the class of
investments which are permitted by the trust, and likewise to avoid all investments of that
class which are attended with hazard(Lord Watson).
o However, the test is ill suited to developing investment practices. The objective standard
of a prudent businessman became relatively meaningless in a complex commercial
environment where businessmen display varying degree of skill and aspire to different
objectives.
o Hoffman J in Nestle v National Westminster Bank Plc advocated the portfolio theory
entails that, as trustees will often introduce an element of diversity in their investment
portfolio, they are to be judged on their overall performance and not on the failure or
success of a particular investment.
Modern trustees acting within their investment powers are entitled to be judged by the
standards of the current portfolio theory, which emphasises the risk level of the entire
portfolio rather than the risk attaching to each investment taken in isolation.
o The standard of care expected of a trustee has been redefined in s1 Trustee Act 2000.
o Subject to exclusion in the trust instrument, s 1 provides that the trustee must exercise
such care and skill as is reasonable in the circumstances having regard first, to any special
knowledge or experience that he has or holds himself out as having instils subjective
element into test.
o If he acts as a trustee in the course of a business or profession, regard must be had to any
special knowledge or experience that it is reasonable to expect of a person acting in the
course of that business or profession instils objective element into test.
o The standard of care prescribed in the 2000 Act confirms that a professional trustee is
expected to show a higher degree of care than a lay trustee. A lay trustee who makes
investments will, therefore, be judged against a different standard of reasonableness than
will his professional counterpart.
o
o
Bartlett v Barclays Bank Trust co Ltd a trust company with specialist staff will be judged
on a different level to an unpaid, family trustee Schindler = case marked a radical
departure from the single standard of competence expected from trustees.
Bartlett the trustee bank allowed a management company to invest trust money in two
ambitious development projects describes as a very good gamble. The Bank did not ask
for or receive much info about the transaction. Subsequently, the beneficiaries sued the
Bank as trustees for breach of trust for the substantial losses that were incurred by the
failure of the two projects. The Bank attempted to shield itself behind the management
company, claiming it should be entitled to rely on the expertise and skills of the
companys experienced board of directors.
Brightman J accepted that there was an element of risk inherent in any investment, but
noted that, The distinction is between a prudent degree of risk on the one hand, and
hazard on the other. This was such a hazardous investment that it should not have been
made without express authorisation in the trust instrument. The judge considered the
Banks position as if, first, it had been an ordinary trustee and, secondly, as a specialist
trustee. The Bank had failed in its duty whether it was judged by the standard of the
prudent businessman or the skills of a trust corporation. It was held that a prudent man of
business would have been more proactive and sought out more info about the activities of
the management company. The Bank should have overseen the companys use of trust
money. The judge concluded that the Bank was an expert trustee and, therefore, owed a
higher level of care.
entitled to the trust fund (then worth 269,000). The investment portfolio had throughout
been managed by the Bank as trustee. Thee granddaughter claimed that the Bank was in
breach of trust because it had mismanaged the trust investments by failing to diversify
and to review the portfolio. She argued that, had the Bank not acted in an overly cautious
manner, the fund should have been worth more than 1 million.
CA determined that the Bank was not in breach of trust, even though it had
misunderstood the scope of its investment powers, failed to conduct periodic reviews, did
not diversify effectively and had shown symptoms of incompetence and idleness. The
trustee had nevertheless satisfied the required standard of care. By the undemanding
standard of prudence, the Bank was not shown to have been in breach of its duty. The
granddaughter failed because she was unable to show that the trustees made decisions
which they should not have made or failed to make decisions which they should have
made.
As to consecutive interest, the trustees had attempted to balance the income needs of the
tenant for life with the longer term capital interests of the granddaughter. It is for the
trustee to reconcile this conflict of interest. The trustee has merely to maintain a fair,
impartial and equitable balance between the two, although this does not require the
interests to be evenly balanced (court held that at least 50% of investments should lie in
ordinary shares issued by companies these investments are safest.)
Non financial considerations
The duty of the trustee is to act in the best financial interests of the beneficiaries. This
entails that the trustee must obtain the best rate of return available coupled with
diversification of risks. This is so even where it is against the political, social or moral
views of some of the beneficiaries.
Cowan v Scargill the investment policy of the mineworkers pension fund was
challenged. The fund was managed by 10 trustees, half of whom were appointed by the
National Union of Mineworkers and the rest appointed by the Coal Board. The dispute
concerned investments in foreign energy companies. The trustees appointed by the Trade
Union objected to the investments on the ground that these companies were in direct
competition with the domestic coal mining industry. HC held that the trustees had to act
on the best financial interests of the beneficiaries and, hence, that they would be in
breach of duty id they failed to invest in the overseas energy companies. The trustees,
therefore, had to put aside their personal interest and views if investments that go
against trustees social and political views are more beneficial to the beneficiaries than
other investments, the trustees must not refrain from making investments by reason of
the views that the hold (Mergarry J)
Farrar and Maxton stance adopted by Mergarry = rigid pension scheme was not an
ordinary private trust, it was an extraordinary trust with certain public characteristics set
up under a scheme for nationalization aim to develop the industry in the national
interest and safeguard the welfare of employees perhaps overstates the nature of the
trust and overlooks the fact that the primary aim was to benefit individuals.
Important to appreciate that ethical investment is not prohibited by the decision in Cowan
financial benefit is not paramount but it is still possible for the trust instrument to
sanction ethical investment in certain companies. However, where beneficiaries allow,
trustees may retain the ability to choose ethical investing when the financial returns will
be equivalent to an alternative, non ethical portfolio.
Charitable trusts modified approach adopted trustees are entitled to decline
investments that run contrary to the objectives of that trust.
Nicholls V.C. Harries v Church Commissioners for England There will be some
cares...when the objects of the charity are such that investments of a particular type
would conflict with the aims of the charity e.g. cancer research companies and tobacco
shares
However, the trustees cannot totally disregard the financial implications of their restrictive
decisions making charitable trustees are not allowed to pursue a blanket policy of ethical
investment if thus would be detrimental to the value of the trust fund.
Investment and charitable trust
Powers in regard to investments = broadly similar to those of private trustees.
S3 TA 2000 only assumes relevance where the trust fund is so substantial that
diversification of investment and the associated professional costs can be absorbed.
However, TA 2000 may be unsuitable and inappropriate for smaller charitable trust funds
s24 Charities Act 1993 and the Charity Commission have devised schemes (common
investment schemes) for these types of trusts they allow participating charities to have
their investments pooled under the control of management trustees appointed by the
court aim = to allow separate charitable trusts to be combined into one scheme. S 24
provides that such a scheme can be devised on the request if two or more charities and
this remains so even if the trustees are the same person.
Wilberforce RE University of London Charitable Trust The result of that would be that the
university has power to consolidate any other charitable trusts of which the uni may might
become trustees so as to be part of the combined pool without coming back to court...
Alternative strategy charitable trustees can apply for authorisation of a common
deposit fund which allows the funds to be pooled and placed in an interest bearing
account.