Chapter 9: Trust Administration

9.1. Introduction

You should have completed the workbook on TRUSTEESHIP before commencing this workbook. From the TRUSTEESHIP workbook you should recall that the court has a general jurisdiction to ensure the good administration of a trust. Hence it will award remuneration to the trustees, allow them to delegate their administrative duties to qualified agents and remove trustees if they are impeding the good administration of the trust.

You should also recall from the TRUSTEESHIP workbook that the Trustee Act 2000, which came into force on the 1st February 2001, has radically reformed the law relating to trustees' powers and duties. We will encounter the 2000 Act at a number of points in this workbook.

In this workbook, we will be examining certain aspects of trust administration in more detail. In particular we will be focussing upon the trustees' powers to invest the trust fund with a view to producing income and capital gains, and the trustees' powers in relation to dealings with the income and capital of the trust (powers of maintenance and advancement). We will also note that proper records must be kept of these dealings, and an account produced to the beneficiaries if requested. We will also consider in detail the various modes by which a trust might be varied so as to grant the trustees greater and more flexible administrative powers.

As part of our study of the variation of trusts we will consider the role of trustees in applications to vary the beneficial interests under trusts. When considering the detail of such applications we will touch on a number of issues which take us briefly out of matters of mere administration and into fundamental questions as to the essence of the beneficial interests under the trusts in question.
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9.2. Investment

9.2.1. Introduction to Investment

Trust funds are always invested. If from the outset the trust fund comprises freehold title to a plot of land, a valuable antique, a portfolio of shares or a hoard of gold, the settlor (or one of his predecessors) has obviously chosen those 'investments' at some point. However, in this workbook we are concerned with the administration of the trust after it has been established. In other words, we are concerned with trustee investments.

Traditionally trustees rarely, if ever, had a range of investment options as wide as that available to the settlor. The Trustee Act 2000 represents a giant step towards the goal of giving trustees the same investment options that are available to absolute owners. Whereas prior to the 2000 Act such wide investment powers would only be available if the settlor or the court had made express provision for them, since the 2000 Act very wide investment powers are available to trustees generally. However, settlors (before the commencement of the trust) and the courts are able to restrict or exclude those very wide powers. In theory a settlor could use a special clause to remove investment powers entirely, but in such a case it is probable that the court would vary the trust under s57 Trustee Act 1925 were the absence of the power to impede the good administration of the trust (see modes of variation).

However, despite the very wide investment powers which are now generally available, trustees are generally under no duty to alter the original composition of the trust fund as chosen by the settlor, but may of course be liable for inadequate supervision of those investments.

The trustees' powers of investment must be exercised with prudence and fairness. You should recall the requisite standard of prudence from the trusteeship workbook. In this workbook we will be considering one or two aspects of prudence in special detail as they relate to trustee investment. It is, for instance, prudent to diversify investments, to appoint expert agents and to take appropriate advice. The Trustee Act 2000 preserves the requirement of prudence. (See section one of the Trustee Act 2000.)

There is, however, another important aspect of trustee investment which should not be overlooked - ethics! We will see that a trustee must usually seek nothing but the best financial return on an investment, but that occasionally the best interests of the trust or the trust beneficiaries demand a more selective approach to investment along ethical lines.

In this workbook we will be examining investment powers under the general law, the duties of prudent and fair investment and the relevance of ethics to trustee investment. We will see that we are at a time of great change in the law of trustee investment, the Trustee Act 2000 having recently transformed the law with the aim of giving investment powers to trustees which will allow them to use the full range of options available in the modern investment market.


AN ILLUSTRATIVE EXAMINATION-TYPE QUESTION

Here we have reproduced a typical examination question on investment which raises many of the issues considered in this workbook. We will try to answer this question as we work our way through the book. For a full answer click here.


In his will Terence left his property to trustees to be held on trust for his wife, Wilma, for life, remainder to his three children in equal shares. He appointed as trustees his solicitor, Steven, and his brother, Ben. The only mention of investment in the will was an authorisation to invest up to one quarter of the fund in shares in private companies.

The trustees took the following steps in relation to investment:

(i) They lent £50,000 on the security of freehold property. The building has now been demolished by the local authority as part of a slum clearance programme. the mortgagor is bankrupt and the site is valued at £20,000.

(ii) Terence's estate included 10,000 shares in Alpha Ltd, worth £20,000 and 15,000 shares in Delta Ltd, worth £40,000. Steven advised that the shares should be retained. Alpha Ltd has now been taken over and the trust has received £50,000 for its shareholding. Delta Ltd has been wound up and the shares are worth nothing.

(iii) Timothy's estate also included 5,000 shares in Sticky Like plc, a quoted tobacco company. Ben, an ardent non-smoker, insisted that they be sold. Wilma strongly supported this action as Terence had died from lung cancer caused by smoking. The shares were sold for £25,000 and the proceeds invested in Government bonds. The securities are now worth £27,000; the shares, if retained, would have been worth £40,000.

Wilma and her children have brought an action against the trustees for breach of their trust.

Advise Steven and Ben as to their liability.


9.2.2. Investment Powers

In this part of the workbook we will be considering trustees' powers of investment, paying particular attention to the way in which the Trustee Act 2000 has radically reformed this area of the law.

You should already be familiar with certain aspects of the Trustee Act from the Trusteeship Workbook. There we saw how the 2000 Act has introduced fundamental reforms of the law relating to the delegation of trustees' functions. It is essential to remind ourselves that the MAIN REASON WHY the trustees' duty of care was placed on a statutory footing, and the law of trustees' delegation so radically reformed, was to enable trustees to appoint appropriate experts to invest the trust fund more creatively. We will see in this workbook that the trustees' investment powers have been widened so as to enable even the amateur trustee to invest in sophisticated and complicated forms of investment. We will also see that the scheme of the Trustee Act 2000 also encourages trustees to utilise a prudently chosen portfolio of investments. The choice and management of diverse portfolio of suitable investments is a task an amateur trustee will only be able to discharge with expert help.

The purpose of this page of the workbook is to set out the main provisions of the Trustee Act 2000 relating to investment. The aim is that you will see how investment fits into the overall scheme for the reform of trustees' powers and duties. Note how the first major part of the Act is devoted to investment, with provisions as to delegation and remuneration following on behind. This is no accident. As was pointed out above, the principal design of the Act was to liberalise trustee investments. The provisions as to delegation, remuneration and insurance are essentially there to supplement the investment aims.

The relationship between delegation and investment is, in other words, a very close one. You should recall, for instance, that trustees are not permitted to authorise an agent to exercise asset management functions except by an agreement evidenced in writing in which the agent agrees to comply with a 'policy statement' which the trustees are obliged to provide as a guide to the exercise of asset management functions in the best interests of the trust (s.15(1) Trustee Act 2000). The agent must agree to be bound by any revisions of the policy statement made under section 22 of the Act (s.15(2)(b)(ii)). The policy statement (and presumably any revisions of it) must be in writing or evidenced in writing (s.15(4)).

According to subsection 15(5) 'asset management functions' include functions which relate to the investment of assets subject to the trust (s.15(5)(a) and the acquisition of property which is to be subject to the trust (s.15(5)(b)), as well as the management of property subject to the trust (s.15(5)(c)).

Click the "Copy to scrapbook" button on the toolbar and the key provisions of the Trustee Act 2000 will be copied to your scrapbook. Your task is to create your own useful summary of the investment provisions contained within the Trustee Act 2000 by editing your scrapbook (ie. cutting out the text of the Act to leave only the key parts of the key provisions relating to investment). Don't forget to look at the schedules to the Act!

If you print off the final product you will have a useful summary of the Trustee Act to have beside you as you work through the remainder of the workbook.

Which of the following 'investments' is valid exercise of the general investment power provided by section 3 of the Trustee Act 2000?

(Consider how the reasoning in Re Peczenik's settlement (for the full report of this case click here) might be relevant to your choices.)


1. an unsecured loan to a friend who promises to repay with interest

2. purchase of a freehold for the life beneficiary to live in

3. purchase of an antique painting

4. purchase of a lottery ticket

5. purchase of shares in a private company


Answer: 2, 3, & 5

Let us consider each in turn:

i. personal loan

A personal loan is a loan for which the only security is the borrower's personal promise to repay. The fact that a trustee is authorised by section 3 of the 2000 Act to invest 'as if they were an absolute beneficial owner of the fund' may be insufficient to authorise an investment of this type, because the law does not regard personal loans to be any investment at all (due to the fact that they are inherently risky and those risks cannot generally be off-set by making other investments of a different type - see the case of Keong v Neoh [1934] AC 529). Having said that, if the trust instrument in express terms authorises investment "upon such personal credit without security as the trustees think fit", or words to that effect, this type of investment will be permitted (see Re Laing's Settlement [1899] 1 Ch 593). Effect should be given to trust instruments according to the plain construction of their express terms (see Re Harari's Settlement Trusts [1949] WN 79)


ii. freehold

Where the trust property originally consisted of or included land there will be a ‘trust of land’ within the Trusts of Land and Appointment of Trustees Act 1996, which came into force on 1st January 1997. The trustees of such a trust have in relation to the land subject to the trust all the powers of an absolute owner, including the power to purchase a legal estate in any land in England or Wales by way of investment, for occupation by any beneficiary, or for any other reason. (Subsections 1(1) and (6)).

Where the trust is not a trust of land within the TLATA 1996, investment in freehold land is now authorised by the Trustee Act 2000. Section 8 provides that a trustee may acquire 'freehold or leasehold land in the United Kingdom'…'as an investment'…'for occupation by a beneficiary' or 'for any other reason'.

All trustees (apart from in cases of settled land and university land) now have the power to invest in freehold land, although the trust instrument can exclude or restrict that power (s.9 Trustee Act 2000).


iii. paintings

This type of investment does not produce an income, and for that reason would not qualify as an investment at all under the traditional view. However, we have noted that the Trustee Act 2000 contains a statutory endorsement of modern portfolio theory. According to that theory individual investments are not to be judged in isolation, but to be judged according to their suitability to the wider portfolio of which they form a part. Because the Act authorises trustees to invest in any kind of investment "as if they were absolute owners of the fund", the fact that a particular investment is not income producing will not invalidate that investment. So long as an ordinary prudent person might describe the painting as an investment (whether good, bad, high risk or low risk) the trustee will probably be justified in making an investment of that type. Whether the particular painting was an appropriate investment of that type may, however, be harder for the trustee to establish. A trustee who purchased a child's naive scrawl in the speculative hope that the child would one day grow up to be a highly sought-after artist would surely be considered to have breached their duty to exercise prudence in the choice of suitable investments.

iv. lottery ticket

No prudent trustee would regard the purchase of a lottery ticket to be a sound investment. It cannot be a valid trust investment because it is always speculative. Nor can one imagine a portfolio to which a lottery ticket would be suitable. It would take very clear and specific express authorisation in the trust instrument to authorise investment of this type eg "my trustees shall be authorised to apply the trust fund by gambling the same upon a lottery or any similar game of chance". Not very likely, is it? Having said that, many ordinary prudent investors would consider investment in premium bonds to be a perfectly valid investment and for that reason there is no reason to believe that they could not also be suitable to a trust portfolio. The crucial distinctions between a lottery ticket and a premium bond are, of course, that the nominal capital value of the premium bond is maintained and the potential (risk) of income returns are far greater in the case of premium bonds than in the case of the typical lottery.

v. private company shares

It may be hard to believe, but prior to the Trustee Act 2000 shares in private companies were not an authorised investment under the general law of trusts. They are now authorised under the general power of investment (Trustee Act s.3).

As a result of s.3 of the Trustee Act 2000, all trustees have the same wide powers of investment which previously were only granted by the court (in the absence of the express provision of such powers in the trust instrument) when the nature of the fund and the trustees suggested that wide powers of investment would be appropriate. It is arguable that the liberal scheme introduced by the Trustee Act 2000, which grants wide default powers of investment regardless of the type of fund and trustees, exposes many trust funds to undesirable risk.

Which factors influenced the judge's decision to grant wide investment powers in Steel v Wellcome Custodian Trustees [1988] 1 WLR 167?

[In that case the Wellcome Custodian Trustees, who were the trustees of a very large charitable trust (the fund was worth approximately £3,200 million), applied to court for an extension to their investment powers. They wished to be permitted to invest as if they were beneficial owners of the property, although subject to the requirement that investments should be made upon expert advice and subject to certain guidelines as to suitable investments. It was held that the extension of investment powers should be approved as requested: the trustees would be permitted to invest in any kind of assets whatsoever.]


(a) 90% of the fund, even with extended investment powers, was likely to remain invested in Wellcome plc

(b) expert advice was available to the trustees

(c) the large size of the fund

(d) general changes in investment practice since 1961


Answer: All Four

(a) was a factor. The judge was keen, therefore, to grant the trustees as much flexibility as possible as regards investments of the remaining 10%.

(b) This was a factor. In the present case the expert advice came in the form of four professional fund managers whose performance was monitored at all times by a specialist firm appointed for that purpose.

(c) This was a factor. The fund in this case was massive, and therefore in greater need of diversification, and better able to bear the risk of loss that accompanies wide investment powers.

(d) This was a factor. Amongst the changes which influenced the decision the judge noted, in particular, that inflation had encouraged movement towards shorter term investments such as shares.

TEST: LOANS SECURED ON LAND (MORTGAGES)

Read sections 8 and 9 of the Trustee Act 1925.

According to those sections what would be the extent of the trustees' liability for advancing a £200,000 loan on the security of freehold land worth £270,000 without having taken expert advice? (NOTE: these sections of the Trustee Act 1925 only apply to trusts which were created before the Trustee Act 2000 came into force on 1st February 2001).

(a) £20,000

(b) £70,000

(c) £90,000

(d) £nil
Answer: (a)

According to section 8, the trustee is liable for a breach of trust for failing to take expert advice as to the value of the land which is to be security for the loan. However, according to s.9, a loan of £180,000 would be treated as a proper investment (being two-thirds of £270,000), and the trustee will therefore be liable to make good only the £20,000 difference between the proper loan and the improper loan, plus interest.

Note, however, that for an expert's report to fall within s.8 it should be a report which focusses exclusively upon the particular property on which the monies are to be advanced. A more general report, covering a number of properties, will not qualify the trustees for relief under the section. (Shaw v Cates [1909] 1 Ch 389 per Parker J). See, further, Palmer v Emerson [1911] 1 Ch 758, which is another case in which inappropriate use was made of an expert report (the report being too old).



9.2.3. Investment Duties

Having considered the general investment powers which are granted to trustees by the Trustee Act 2000, we are now going to consider the trustee's duty to invest prudently and fairly.

Prudence

The motto of an ordinary prudent person of business, who is driven by the need to make profit, might be that one must "speculate to accumulate". The motto of a trustee, who is driven by the overriding duty to safeguard the trust fund, is quite different. It could be said to be that the trustee must "select to protect". The key to proper trust investment is to protect the fund. This does not mean, however, that the trustee should be content to aim merely at maintaining the nominal value of the fund. That modest aim could be achieved by simply burying the fund in a hole in the ground (or placing it in a current account with a high street bank - which, due to very low rates of interest, would amount to pretty much the same thing as burying it in the ground). The prudent trustee aims to protect the real value of the fund, to ensure, that is, (as far as reasonably possible) that the fund has the same purchasing power when it is eventually passed to the beneficiaries as it had when the settlor passed it to the trustees. (Taking both capital and income values into account.) However, as we shall shortly discover, where proper caution ends and over-cautious neglect begins is not easy to determine.

Two aspects of the trustees' duty to "select to protect" ie. the duty to invest prudently, are crucial. First, the need to take expert advice as to the selection of appropriate investments. Although, professional advice need not be sought if the trustee reasonably concludes that to seek such advice would be unnecessary or undesirable. So, for instance, if the fund is very small the cost of instructing an expert might be greater than any loss that could sensibly be imagined to flow from making the investment without expert advice. Second, the need to judge the suitability of investments in the light of the whole portfolio, and not to judge each investment in isolation. In short, investments must be suitably diversified. Of course, if the fund is on the small side, the administrative and other transaction costs of investment in a wide range of investments will be prohibitive. As a general rule, the smaller the fund the less it makes sense to diversify. To paraphrase one commentator: "with small funds the safest course may be to put all ones eggs in the same basket, but to watch the basket closely".


Fairness

Where there are different beneficiaries or classes of beneficiary with different, to some extent competing, interests in a trust fund, as will be the case in the simple traditional settlement trust "To A for life, to B in remainder", the trustees must not bias the exercise of their investment powers in favour of one type of beneficiary over another. Hence, in a trust of the traditional sort, a trustee would be in breach of trust if they chose a portfolio geared almost exclusively to the production of income at the expense of capital, and vice-versa. The trustee's duty is to act fairly between all the beneficiaries. However, we will see later that fairly does not necessarily mean equally in all respects!

THE DUTY TO INVEST WITH PRUDENCE

Remind yourself of the general standard of prudence that is expected of trustees in relation to investment, which you should already have considered in the TRUSTEESHIP workbook. The relevant standard is laid down in the case of Speight v Gaunt (1883) 9 App Cas 1 as interpreted in Re Whiteley (1886) 33 Ch D 347. Also, look up ss 4 and 5 of the Trustee Act 2000, which enshrine certain aspects of the general duty of prudence in statutory form.

Now attempt the following exercise. Your task is to read the brief facts of the three cases outlined below, and to decide whether the trustee's behaviour in each case was in your opinion prudent or not.

(a) Case 1

The trustee is a successful business woman and is confident that she knows a good investment when she sees one. She therefore decides to invest a small part of the fund in shares in a football club that has just been floated on the stockmarket.

(b) Case 2

The same trustee decides to invest all of the fund in shares in a football club that has just been floated on the stockmarket.

(c) Case 3

The same trustee, having taken expert advice, decides to invest all of the fund in shares in a football club that has just been floated on the stockmarket.

Answer:

In all three cases, the trustee is authorised to invest as if she were an absolute owner of the property (section 3 of the Trustee Act 2000). This means that she had been authorised to invest in any type of investment recognised by law. However, this does not relieve her from the overriding duty to invest the trust fund with the standard of prudence required by the general law. This duty is described in Speight v Gaunt as the duty to conduct the business of the trust as an ordinary prudent prudent person of business would conduct their own. In Re Whiteley the business of the trust was said to be "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 obliged to provide".

One important feature of prudent investment is diversification. It will generally be imprudent to invest 'all your eggs in one basket' (although, it has been suggested that, if the fund is small the transaction costs involved in spreading the investments across a wide portfolio might mean that the most prudent course is to invest 'all the eggs in one basket' and to watch the basket carefully!). For diversification, see the next page.

Another important feature of prudence is knowing when to take advice from appropriate experts. Section 5(1) of the 2000 Act provides that "[b]efore exercising any power of investment, whether arising under this Part or otherwise, a trustee must (unless [he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so]) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised". Combined with the general standard of prudence which exists at common law, this would appear to raise a duty to take expert advice where the trustee is not sufficiently expert to judge the prudence or otherwise of a particular course of investment.

Applying these observations to the present facts, the following conclusions emerge:

Case 1

By restricting the investment to a small part of the fund, the trustee appears to have acted prudently, the implication being that the rest of the fund has been invested elsewhere, thus achieving a degree of diversification of the fund. However, the prudence or otherwise of the investment can only really be judged in the light of the whole portfolio of investments. The fact that the trustee made the investment on her own advice might suggest imprudence if a proper judgment of the appropriateness of the shares lay beyond her expertise. All in all, this appears to have been a fairly prudent course of investment to take.

Case 2

Not only has the trustee not taken expert advice as to the suitability of the investment (which may or may not have been imprudent), she has invested all of the fund in these shares. Unless the fund is very small, this lack of diversification would appear to be highly imprudent.

Case 3

This time the trustee has taken proper advice, which in itself is prudent. However, the same doubts apply here as were expressed above in relation to the lack of diversification. This looks like an imprudent course of investment.


MODERN PORTFOLIO THEORY

According to Hoffmann J in Nestle v National Westminster Bank plc (1988) (reported in (1996) 10 TLI 112):

“Modern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment in isolation”.

Viewed in isolation any investment in shares in a private company will look prohibitively risky. Investment in any particular share will expose the fund to specific risks, such as the failure of the company in question and the collapse of the share price. The major insight offered by Modern Portfolio Theory is that such specific risks can be eliminated through diversification. Crudely, the investor is able to off-set the risk that stock in X Co will decrease, against the chance that stock in Y Co will increase. Whilst to be sure of eliminating such specific risk entirely the investor would need to invest in every available equity, holding the shares of just a few different companies will off-set the greater part of the risk.

Nevertheless, there remains the risk that the market in shares as a whole might suffer a loss, perhaps in the form of a "stock-market crash". This ‘systemic’ or ‘non-diversifiable’ risk remains a real one. On the other hand, indices such as those referred to in Nestle, show that (notwithstanding blips such as the "crashes" in 1929 and 1986) shares remain a very safe long-term investment. This makes them an especially good investment for trustees, given that in the normal run of things, the trust is likely to endure for a number of decades.

There now follows a list of obstacles which lie in the path to investment according to modern portfolio theory. Each obstacle was a feature of English law before the Trustee Act 2000 came into force. Study the 2000 Act (especially parts I and II) and try to identify which of the obstacles remain after the 2000 Act, which are reduced in significance by the Act and which have been removed by the Act.


o gains made through one breach of trust could not be off-set against gains made in another breach of trust ? Remains ü Reduced Removed

Answer: Reduced

It is true to say that the anti-netting rule remains, but it is clear that its influence in the context of trustee investments has been reduced.

The traditional rule that insists that trustees may not set-off gains made in one breach of trust (eg investment in an investment which appears to be speculative if viewed in isolation) against losses made in another breach of trust was laid down in Dimes v Scott (1828) 4 Russ 195. Sometimes referred to as the ‘anti-netting’ rule, the rule is traditionally a strict one in English law, although Brightman J in Bartlett v Barclays Bank Trust Co Ltd suggested that where two transactions can be regarded as being in fact two parts of single larger transaction, some element of set-off between the two transactions might be justified: "I think it would be unjust to deprive the bank of this element of salvage in the course of assessing the cost of the shipwreck".

The fact that one or more transactions might have appeared speculative (and therefore to have been made in breach of trust) if viewed in isolation should be irrelevant when modern portfolio theory is applied. According to that theory, whether or not there has been a breach of trust will depend upon whether or not the portfolio as a whole was prudently chosen. Thus, to take a crude but clear example, investment in the ice-cream industry might appear to be speculative (depending as it does on hot weather), but it does not appear to be so speculative if other parts of the portfolio are invested in umbrella manufacturers and manufacturers of woollen garments!

The explanatory notes which accompany the 2000 Act expressly state that the 'standard investment criteria' (suitability and diversity) are intended to accord with modern portfolio theory (note 25). It follows that, even if the anti-netting rule hasn't been removed by the 2000 Act, it is implicit that parliament intended that the promotion, by the 2000 Act, of modern portfolio investment should not be hampered by the anti-netting rule.


THE DUTY TO INVEST WITH FAIRNESS

Having reflected upon the duty and the standard of prudence, it is necessary now to consider another traditional duty of trustee investment. Namely, the duty to invest the trust fund fairly as between different classes of beneficiary. (For an explanation of the historical background to the duty click here.)The different classes are usually life and remainder beneficiaries (see the case of Nestle for an example).

[Note, however, that in certain trusts, such as discretionary trusts, it makes no sense to insist upon 'fairness' between the beneficiaries in this sense - see Edge v Pensions Ombudsman]

To begin, we need to consider briefly what 'fairness' between the life-tenant and the remainderman amounts to in this context.

It is apparent from the cases that the requirement for such fairness is largely a consequence of the presumed intentions of the settlor in establishing a trust in the first place. The question is: how did the latter intend that the trustees should balance the interests of temporally disjunctive beneficiaries? Clearly he wished that the fund should inure to the benefit of the remainderman (otherwise the property would have been given absolutely to the life-tenant alone). On the other hand, the fact that it was the latter who was likely to be better known to the settlor might suggest that the trustees should be very reluctant to sacrifice the interests of the life tenant to those of the remainderman.

Suppose that C has created a trust by his will in favour of A for life and B in remainder. A is C's surviving spouse and B is the class of C's nephews. The trustees have decided to sell and re-invest the whole fund in one of the following ways. Which of the options would in your view be the fairest way to proceed?


(a) to have the whole fund valued and to divide it equally between all eligible beneficiaries ie. the surviving spouse and the individual nephews

(b) to have the whole fund valued and to divide it equally between the two classes of beneficiary ie. equal division between the surviving spouse and the nephews as a class.

(c) to bias the investments in favour of income production at the expense of capital growth/maintenance of nominal capital value

(d) to bias the investments in favour of capital growth at the expense of income


Answer: C

This is probably the fairest course.

Recently the courts have been mindful of the need for a certain flexibility to inform the investment process, especially in relation to the interests of the life-tenant: In Nestle, Hoffman J suggested as much when he said:

"the trustee must act fairly in making investment decisions which may have different consequences for different classes of beneficiaries....I prefer this formulation to the traditional image of holding the scales equally between tenant for life and remainderman...[which] suggests a more mechanistic process that I believe the law requires. The trustees have in my judgment a wide discretion. They are for example entitled to take into account the income needs of the tenant for life or the fact that the tenant for life was a person known to the settlor and a primary object of the trust whereas the remainderman is a remoter relative or a stranger. Of course these cannot be allowed to become the overriding considerations but the concept of fairness between classes of beneficiaries does not require them to be excluded. It would be an inhuman law which required trustees to adhere to some mechanical rule for preserving the real value of the capital when the tenant for life was the the testator's widow who had fallen upon hard times and the remainderman was young and well off".



9.2.4. Investment Ethics

ETHICAL AND POLITICAL INVESTMENT POLICY

Consider the case of Cowan v Scargill [1985] 1 Ch 270 and the case of Harries v Church Commissioners for England [1992] 1 WLR 1241.

According to those cases which of the following factors should a trustee take into account when choosing investments and a court take into account when considering whether or not to approve an application to restrict trustee investments along ethical or political lines?


1. The trustees' own political or ethical views

2. The unanimous wishes of the beneficiaries

3. The likely effect of the chosen investments on future donations to the trust

4. The effect of the ethical/political course of investment upon the diversity of the fund

5. The terms of the trust instrument

6. That the burden on the trustee to justify an ethical restriction on investment options is a heavy one

Answer: 2, 3, 4, 5, & 6

The trustees' own political or ethical views

In Cowan v Scargill, Sir Robert Megarry VC held that 'In considering what investments to make trustees must put on one side their own personal interests and views'.

The unanimous wishes of the beneficiaries

Again, in Cowan v Scargill, the Vice-Chancellor acknowledged that 'benefit is a word with a very wide meaning, and there are circumstances in which arrangements which work to the financial disadvantage of the beneficiary may yet be for his 'benefit''. However, he emphasised that such cases would be very rare and that the onus would rest heavily upon the trustee to show that non-financial benefits were a valid investment criterion in the particular case. The Vice-Chancellor gave as examples of the sort of cases in which non-financial considerations might be taken into account: trusts where "the only actual or potential beneficiaries of a trust are all adults with very strict views on moral and social matters, condemning all forms of alcohol, tobacco and popular entertainment, as well as armaments". In such cases, investment in alcohol, tobacco etc would probably be inappropriate despite the larger financial benefits such investments might yield.

The likely effect of the chosen investments on future donations to the trust

In Harries v Church Commissioners, The Bishop of Oxford, Richard Harries, argued that the state of the Church Commissioner's investment policy might discourage potential donors to the charity from making donations. The court accepted that where there is a real risk of financial detriment due to reduced donations this is a factor which should be taken into account in deciding whether or not to approve an application to exclude certain ethically 'unsound' investment options from the trusts investment policy. However, this was held not to be a decisive factor in the instant case.

The effect of the ethical/political course of investment upon the diversity of the fund

In Harries v Church Commissioners, the court noted that the Commissioners' existing investment policy already had the effect of excluding 13% by value of the major UK listed companies, and noted with concern that the Bishop's proposals would, if accepted, have excluded a further 24% of that important investment market.
The terms of the trust instrument

The general bias of the law in favour of financial benefits over ethical/political benefits may be excluded or modified by the express terms of the trust instrument. As Sir Donald Nicholls VC acknowledged in Harries: 'trustees would be entitled, or even required, to take into account non-financial criteria...where the trust deed so provides".

That the burden on the trustee to justify an ethical restriction on investment options is a heavy one

Where two investments are of equal financial merit, a trustee will, in practice, be permitted to choose the most ethically sound option. However, if asked to justify his choice a trustee would be wise to state merely that the investments options were of equal financial viability. He should be wary of actively justifying his choice on ethical grounds, in case it should appear that he allowed his personal opinions to influence his choice.

Where a trustee chooses a financially less viable option over a financially more viable option, the burden on the trustee to justify his choice is a heavy one to discharge. The trustee will have to justify his decision according to one of the factors listed above (the terms of the trust instrument, the unanimous views of the beneficiaries etc.).


9.3. Maintenance/ Advancement

9.3.1. Introduction

Suppose that a testator created a trust by his will "for the benefit of A for life and B in remainder". We know that in such a case, the testator intended that A and B should have vested interests from the moment of his death. A's interest is said to be vested in possession, B's interest is said to be vested in interest. B's interest will vest in possession upon A's death.

Suppose now that A is an infant and is therefore not yet entitled absolutely to the income of the trust, but is in urgent need of financial provision. Can the trustees apply trust income in favour of the infant?. Or suppose that B desperately requires capital during A's lifetime. Can the trustees apply trust capital in favour of the infant?

It has long been the practice of trusts draftsmen to insert clauses to deal with these sorts of situation, and in recognition of this widespread practice, parliament made statutory provision for such eventualities. These provisions can now be found in the Trustee Act 1925 ss31 and 32. The Act implies into every trust a power in the hands of the trustees to make payments out of the trust income for the maintenance of infant beneficiaries (s.31) and a power to make payments out of trust capital for the advancement and benefit of infant and/or adult beneficiaries (s.32). However, it is important to note that these provisions can be excluded or modified by the express terms of the trust instrument (s.69).

AN ILLUSTRATIVE EXAMINATION-TYPE QUESTION

Here we have reproduced a typical examination question on maintenance and advancement which raises many of the issues considered in this section of the workbook. We will try to answer this question as we work our way through the section.


Tina and Tania are trustees of a £900,000 cash fund which was left in Donald’s will, to his grandchildren in equal shares should they attain the age of 21. there are two grandchildren at present: Billy, aged 18 and Sarah, aged 12.

Tina and Tania consult you for advice concerning the following proposals:

(i) They wish to make a payment of £40,000 out of income for Sarah’s education at a private school.

(ii) They wish to resettle half of the capital into a new trust whereby the children would take if they attained the age of 35 rather than 21; they wish to do this because, in the opinion of the trustees, it would be better for the grandchildren to receive capital at a more mature age;

Advise the trustees.

COMPARING THE STATUTORY INGREDIENTS OF MAINTENANCE AND ADVANCEMENT

Before we proceed to consider the powers of maintenance and advancement individually in detail, let us first try to categorise the following aspects of the statutory power under the correct heading.

You will have to examine closely the wording of sections 31 and 32 of the Trustee Act 1925 before attempting this exercise.

The clues were in the question!

Maintenance has an "i" in it, so it is easy to remember that it applies to INCOME and INFANTS.

Advancement, on the other hand, has a "c" in it, so it is easy to remember that it applies to CAPITAL. Advancement is not restricted to infants.

You were right to suppose that both maintenance and advancement are powers rather than duties.


9.3.2. Maintenance

The trustees' power to maintain beneficiaries out of income can be expressly incorporated into trust instruments. In the absence of an express power, and provided that the trust instrument does not exclude it, the trustees' power of maintenance under s31 Trustee Act will apply. (In fact, the court itself has a power to maintain infant beneficiaries under its inherent jurisdiction (see Re Jones) and under Trustee Act 1925 s53.)

Having acquainted yourself with the detail of s.31, you will know that the power of maintenance is exercisable in the trustee's discretion. However, there are numerous factors which the trustee must take into account, which of the following factors are among them?


1. The fact that someone other than the beneficiary seeking maintenance has a prior entitlement to the fund

2. The fact that income should not be paid to the infant directly

3. The fact that the trustee should be aware of other income that is available for the same purposes

4. The fact that the trustees should bear in mind that income that is not applied for maintenance this year will not be available next year

5. The fact that the trustees should only use their power if to do so will be for the maintenance, education AND benefit of the infant

6. The fact that the trustees should consider the age of the infant and his or her requirements

Answer: 1, 2, 3, & 6

Trustees should consider the fact that:


Someone other than the beneficiary seeking maintenance may have a prior entitlement to the fund

The trustees' power to maintain an infant beneficiary is subject to the rights of persons with prior interests. So, if the trust provides for A for life and for B in remainder, the income should not be applied to maintain B, because A is absolutely entitled to all the income of the fund.


Income should not be paid to the infant directly

Payment should be made to the infant's parent or guardian or paid directly to address the particular financial need. So, for example, if the payment of income is intended to pay for the infant's school fees, the trustees should make the payment to the child's guardian or to the school direct.


Other income may be available for the same purposes

Section 31(1)(i)(a) provides that the trustee may exercise the power of maintenance whether or not there exists another fund for the purpose of the maintenance, education or benefit of the infant. However, if the trustees have notice that another fund is available the trustees should not decide to meet the entire need entirely out of the income from their trust. A proportionate part only of the income of each of the available funds should be paid or applied. Thus, if another available fund is twice as large as the trust fund, the trustees should pay out only half as much as that fund towards the infant beneficiary's needs. However, if it is not practicable to make a proportional contribution, the trustees may meet the school fees entirely out of their trust income. This might be necessary where, for example, the other available funds have already been totally used up or allocated to other purposes.


Income that is not applied for maintenance this year will not be available next year

This is not true! Any income that is not used to maintain the beneficiary in any given year must be accumulated (added as an accretion to the capital), but the trustees may at any time during the infancy of the beneficiary apply those accumulations as if they were income arising in the then current year.


Trustees should only use their power if to do so will be for the maintenance, education AND benefit of the infant

This is not true either. The power must only be exercised if to do so would be for the maintenance, benefit OR education of the infant.


They must consider the age of the infant and his or her requirements

This is true. According to s31(1)(ii) any maintenance payment must be reasonable in all the circumstances. In determining what is reasonable, the trustees must have regard to the "age of the infant and his requirements and generally to the circumstances of the case, and in particular to what other income, if any, is applicable for the same purposes".


GIFTS CARRYING THE INTERMEDIATE INCOME

Section 31(3) states that the power of maintenance contained within s.31 will not apply to every interest under a trust:

"This section applies in the case of a contingent interest only if the limitation or trust carries the intermediate income of the property, but it applies to a future or contingent legacy by the parent of, or person standing in loco parentis to, the legatee".

"Intermediate income" is income arising on property during the intermediate period between the date when a contingent gift becomes effective (eg the date of the testator's death in the case of a will trust) and the date when the gift ultimately vests (ie. the date when the contingency is met).

Whether or not a testamentary gift carries the intermediate income is explained by s175 of the Law of Property Act 1925. Before studying that section do take note of the following definitions:

Testamentary: made by will or codicil or other testamentary paper

Devise: testamentary gift of realty (ie land, apart from leases)

Bequest: testamentary gift of personalty (ie property other than land. But note that 'personalty' includes leases)

Legacy: testamentary gift of cash

Contingent gift: a gift that may or may not vest in possession, usually because the gift is subject to a condition that may or may not be met. A gift to A if A qualifies as a barrister is contingent. A gift to B when A dies is not. A's death is not a contingency because it will happen!

Future gift: this is the same thing as a deferred gift. It is a gift which will vest, but the testator has deliberately put back the date of vesting. A gift to B when A dies is a deferred gift. A gift to B in the year 2010 is also deferred.

Now study s.175 carefully. Can you say which of the following testamentary gifts to B will carry the intermediate income?


(a) £1,000 to A, Whiteacre (leasehold) to B at 25, residue to C

(b) £10,000 to B if B qualifies as a barrister

(c) Greenacre (freehold) to B on the 1st of January 2010

(d) Greenacre (freehold) to A, the rest of my freehold property to B upon his attaining the age of 21 or graduating from university, whichever is the earlier

(e) To B, whatever remains of my personalty, upon her attaining 21 or earlier marriage.

(f) My car to A and the residue of my personal estate to B upon A's death or on the 1st January 2010, which ever is the later.

Answer: A, C, D, & E

(a) is a contingent specific bequest of personalty. According to s.175 it does carry the intermediate income, as indeed would a contingent specific devise of realty.

(c) This is a deferred ("future") specific devise of realty. According to s.175 it carries the intermediate income. A deferred ("future") specific bequest of personalty also carries the intermediate income.

(d) This is a contingent residuary devise of freehold land. according to s.175 it carries the intermediate income.

(e) This is a contingent residuary bequest of personalty. Section 175 makes no reference to such a gift, therefore it might be assumed that the gift does not carry the intermediate income. In fact, although the beneficiary of such a gift would not be entitled to claim the interest as income earned on the capital to which they are entitled, the unclaimed income would necessarily fall into the residue of the personalty, and the beneficiaries would therefore acquire it indirectly. (Re Adams [1893] 1 Ch 329.)

ACCUMULATION OF SURPLUS INCOME

We have seen that if a gift carries the intermediate income, the trustees have the power to maintain the beneficiary out of that income in certain circumstances. However, what happens if the trustees decide not to maintain the beneficiary? Read section 31(2) Trustee Act 1925 for an answer.

You should have discovered that according to s31(2) any surplus income should be accumulated annually "in the way of compound interest" (ie. unused income of this year is added to the capital, and income for the next year is calculated on the combined sum of capital and accumulated income, and so on with yearly rests). However, accumulated income can be used in future years in order to maintain the infant beneficiary as if it were income of the then current year!

The next question is, what would happen to the accumulations on a beneficiary's share if the beneficiary died during infancy?

Let us take the case where a large fund of personalty is left to three sisters in equal shares, the vesting of each sister's share being contingent upon her qualifying as a vet. Suppose that the eldest sister is the victim of a tragic and untimely death at the age of 14.

The income arising from her share of the fund had been accumulated from her birth until her death. What do you think will happen to the accumulations of her income?

We have frozen the account just before the death of the eldest sister. The capital entitlement of the deceased beneficiary is shown as a yellow block, and the capital entitlement of the other beneficiaries as a blue block. The accumulations on the deceased beneficiary's share are represented as a green block, and accumulations on the other beneficiaries' shares as a red block.

Your task is to represent the state of the account immediately after her death.

If a beneficiary dies during infancy the accumulations on that beneficiary's share are added to the capital of the trust as a whole, and not just to that beneficiary's share. the accumulations will not, therefore, devolve on the estate of the deceased infant. this is so even if the infant had a vested interest in the income during their life (Re Delamere's ST [1984] 1 WLR 813).

Following on from the last exercise, the next question is, what would happen if the sister didn't die at the age of 14 but happily reached the age of 18, or married under that age?

The income arising from her share of the fund had been accumulated from her birth until her reaching the age of 18. What do you think will happen to the accumulations of her income? Don't forget that the vesting of her interest is contingent upon her qualifying as a vet.

We have frozen the account just before the eldest sister turned 18 years old. The contingent capital entitlement of the eldest sister is shown as a yellow block, and the contingent capital entitlement of the other beneficiaries as a blue block. The accumulations on the share of the eldest sister are represented as a green block, accumulations on the other beneficiaries shares are represented as a red block.

Your task is to represent the proper state of the account immediately upon her turning 18.

To compare your drawing to the author's drawing click here.

When an infant beneficiary attains majority (reaches the age of 18), or marries under that age, the trustees must add the accumulations to the capital from which the accumulated income arose. This has been represented diagrammatically by turning the green accumulations into yellow capital.

However, there are two exceptions to this rule. When either of the exceptions applies, the trustees will not add the accumulations to the capital, but will hold them on trust for the beneficiary absolutely, so that the accumulations may be paid to the beneficiary and the beneficiary's signed receipt will discharge the trustee.

Can you identify the two exceptions from a reading of s31(2) Trustee Act 1925?

They are:

1) where the beneficiary already had a vested interest in the income before they attained majority (or earlier marriage).

2) where the beneficiary's contingent interest in the income vests at the date that they attain majority (or earlier marriage). For this exception to operate it is crucial that the beneficiary's interest had been a contingent interest in realty or personalty which has now vested absolutely (s31(2)(i)(b)).

Suppose Benny has just reached the age of 18. According to the terms of a late friend's will, he will be entitled to "Whiteacre", a freehold property, upon his attaining the age of 21. He was not maintained from the income during his infancy. Is Benny entitled to the accumulations now?

No, he is not. Benny does not fall within either of the exceptions. therefore, the accumulations will be added to his capital entitlement to "Whiteacre". He will be able to claim the capital and the accumulations when he reaches the age of 21.

In the meantime he will be absolutely entitled to the income which is currently earned on the combined fund of capital and accumulations (s31(1)(ii)).


9.3.3. Advancement

THE POWER OF ADVANCEMENT

The power to apply capital for the advancement of a beneficiary may be granted by the express terms of the trust instrument and may replace or modify the statutory power of advancement. If there is no express power the statutory power will apply, provided that there is no express intention to the contrary (s.69(2)Trustee Act 1925). The statutory power of advancement is found in s32 Trustee Act 1925.

Although s32 states that maintenance may be made out of capital money, it has been held that the trustees may apply capital assets for the advancement of the beneficiary (Re Collard's WT). R E Megarry described this as the 'healthy realism' of equity (1961) 77 LQR 161 at 163.

As we progress through this section it is important to be aware of the meaning of the word 'advancement'. Read the speech of Viscount Radcliffe in Pilkington v IRC [1964] AC 612. How did his Lordship define 'advancement' and what examples does he give of payments which would be for the advancement of the beneficiary? Click here for a solution.

Beware! It is a common (and understandable) semantic error to think of advancements as payments 'in advance', in the sense of 'early' payment. It is true that payments of capital under s32 are often made earlier than would have been the case in the absence of an exercise of the power, but the technical meaning of 'advancement' in this context is 'to put the beneficiary on in life', 'to put them forward'. Literally, an ADVANcement is something that gives the beneficiary an ADVANtage.

Section 32 of the Trustee Act 1925 provides that:

"Trustees may at any time...apply any capital money subject to a trust, for the advancement or benefit, in such manner as they may, in their absolute discretion, think fit..".

In Re Moxon's WT [1958] 1 All ER 386, Dankwerts J stated that "Benefit...is the widest possible word one could have...and it must include a payment direct to the beneficiary; but that does not absolve the trustees from making up their minds whether the payment in the particular manner which they contemplate is for the benefit of the beneficiary".

Which of the following transactions do you think would be for the benefit of the primary beneficiary?


1) giving capital to enable the beneficiary to make a charitable donation

2) resettling capital on new trusts for the benefit of the beneficiary's children

3) resettling capital on new trusts under which the beneficiary's possession of the capital will be postponed

Answer: No answer

In Re Clore's ST [1966] 1 WLR 955, the father of a trust beneficiary had established a charitable foundation to which the beneficiary felt morally obliged to contribute. It would have been more tax efficient for the donation to have been made through an exercise of a power of advancement in favour of the beneficiary, than for it to have been made out of the beneficiary's private funds. The trustees sought the court's approval to make a capital payment to the beneficiary for this purpose. It was held that the payment would be a proper exercise of the power of advancement. The beneficiary was morally bound to make the donation. He would benefit financially from making the donation out of the trust fund rather than out of his private monies.

Viscount Radcliffe stated in Pilkington v IRC that "It is no objection to the exercise of the power that other persons benefit incidentally from the exercise of the power". In that case Miss Pilkington was the object of the power of advancement. The trustees had proposed to advance her by re-settling capital monies for her benefit. Her children would have received nothing under the original trust, but under the resettlement they would benefit if she died under the age of 30 leaving surviving issue.

The case we are presented with is rather more dramatic, because the primary beneficiary receives no financial benefit from the transaction. It is closer to the case of Re Earl of Buckinghamshire ST, The Times March 1977, where the court considered an express power of advancement in a trust instrument.

The question there was whether the trustees could provide for the benefit of the primary beneficiary by resettling the trust property on his children. Walton J held that if the 'primary beneficiary' had no resources, it would not be for his benefit to provide his children with £500,000. But, because the primary beneficiary was wealthy, that made all the difference. Therefore, whether the power is being exercised for the benefit of the primary beneficiary will fall to be determined on the particular facts of each case.

If a beneficiary is a bit of a spendthrift (reckless with money) or in some other way immature or irresponsible, it might be for their benefit to wait a little longer before receiving their capital entitlement under the trust.

Similar considerations have been held to justify the variation of a trust so as to postpone the date at which a beneficiary's interest vested in possession (see Re T's Settlement Trusts [1963] 3 All ER 759).


CONDITIONS RELATING TO THE EXERCISE OF THE POWER

Look again at s32 of the Trustee Act 1925. You will see that the section contains a number of provisos to the exercise of the power of advancement. These are:

a) that the capital applied shall not exceed altogether in amount one half of the presumptive or vested share or interest of that person in the trust property; [Note: this 50% rule can be relaxed by express provision in the trust instrument!]

(b) if that person is or becomes absolutely and indefeasibly entitled to a share in the trust property the money so paid out or applied shall be brought into account as part of such share; (the so-called 'hotch-pot' rule)

(c) no such payment or application shall be made so as to prejudice any person entitled to any prior life or other interest, whether vested or contingent, in the money paid or applied unless such person is in existence and of full age and consents in writing to such payment or application.



Suppose that a gift has been made in trust for A and B in equal shares upon their graduating from university. One day, when the trust fund was valued at £100,000, the trustees decided to exercise their statutory power of advancement in favour of A to the full extent permitted by the general law (the trust contained no express power of advancement). Subsequent to the exercise of this power the remaining portion of the trust fund increased in value and is today worth £300,000. B now requests a payment of £100,000 by way of advancement, and A requests a further £25,000. Consider the case of Re Marquess of Abergavenny [1981] 2 All ER 643 and tick whichever one of the following choices represents the maximum extent to which the trustees can today exercise their power of advancement in favour of the beneficiaries.


(a) As to A: nil As to B: £150,000

(b) As to A: nil As to B: £81,250

(c) As to A: £50,000 As to B: £162, 500

(d) As to A: £62,500 As to B: £87,500

(e) As to A: £125,000 As to B: £150,000

(f) As to A: £nil As to B: £87,500


Answer: (a) & (b)

Your answer in relation to A was correct, well done.

When the trustees exercised the power in the past in favour of A to the maximum extent permitted by law, they would have given A £25,000. This represents half of A's presumptive share (A's presumptive share being the £50,000 share that he is presumed to get, according to the present value of the fund, upon satisfying the contingency attaching to the gift).

The good news for A is that the £25,000 will not have to be repaid even if, in the event, the contingency is not satisfied!

Turning now to the requests that have been made today, the trustees should be advised that they will not be able to advance A in the sum of £25,000. On the contrary, it is clear from the case of Re Marquess of Abergavenny [1981] 2 All ER 643 that a beneficiary, such as A, will be unable to claim further payments by way of advancement if the trustees have already used the power to the full with respect to that beneficiary. In the light of the decision in that case, trustees should generally be advised not to utilise a beneficiary's 'entitlement'' (not forgetting that the exercise of the power is actually in the trustees' discretion) to advancement in full at any one time unless it is absolutely necessary to do so - due to the risk that emergencies might arise in the future!

In relation to B your calculations appear to have missed the mark somewhat. The fund is currently valued at £300,000. You appear to have presumed B's share in that fund to be £150,000. This isn't quite correct, and even if it were, the figure would have to be halved to ascertain the maximum amount that could be paid by way of advancement. Have another try.

When the trustees exercised the power in the past in favour of A to the maximum extent permitted by law, they would have given A £25,000. This represents half of A's presumptive share (A's presumptive share being the £50,000 share that he is presumed to get, according to the value of the fund at that time, upon satisfying the contingency attaching to the gift) (s32(1)(a)).

The good news for A is that the £25,000 will not have to be repaid even if, in the event, the contingency is not satisfied!

Turning now to the requests that have been made today, the trustees should be advised that they will not be able to advance A in the sum of £25,000. On the contrary, it is clear from the case of Re Marquess of Abergavenny [1981] 2 All ER 643 that a beneficiary, such as A, will be unable to claim further payments by way of advancement if the trustees have already used the power to the full with respect to that beneficiary. In the light of the decision in that case, trustees should generally be advised not to utilise a beneficiary's 'entitlement'' (not forgetting that the exercise of the power is actually in the trustees' discretion) to advancement in full at any one time unless it is absolutely necessary to do so - due to the risk that emergencies might arise in the future!

The trustees should be further advised that they will not be able to advance B in the sum of £100,000. B's presumptive share is half of the sum of [£300,000 and £25,000] (see s32(1)(b)) ie £162,500. It follows that the trustees may only apply up to half of this amount for B's advancement ie. a maximum of £81,250.

Does this appear to you to create an unfair result? Suppose that A and B both become absolutely entitled to the capital today. A will receive £137,500 and B will receive £162,500. However, A will no doubt have put the £25,000 he has already received to profitable use. That £25,000, if it has done as well as the rest of the fund (ie. increased three-fold since the date the power of advancement was exercised), will today be worth £75,000. In real terms it may be that A will receive a total benefit of £212,500, compared to B’s £162,000. The Law Commission has expressed some concern in relation to this possibility, and has recommended that when the beneficiaries become absolutely entitled to the capital, any beneficiary who received capital early by way of advancement should account for its value as a proportion of the fund at the date of the advancement, rather than merely its cash value. (See Law Commission 23rd Report paras 4.43 - 4.47.)

Finally, note that s32(1)(c) has no application to this case, because there is nobody with an interest in the fund which takes priority to that of A and B. It would be different if the trust had been for C for life and for A and B in remainder in equal shares absolutely. Although C is entitled only to income, that income is earned on the capital of the fund, and therefore C's consent will be required before the power of advancement is exercised in favour of A and B. Note, also, that this written consent is required even where a clause in the trust instrument purports to dispense with the requirement (Henley v Wardell, The Times, 29 January 1988).

A FIDUCIARY POWER

What does it mean to say that the power of advancement is a fiduciary power? Consider Re Pauling's ST [1963] 3 All ER 1 (look at the full report, but a summary is available). There are a number of consequences of the fiduciary nature of the power:

1.The fiduciary nature of the power requires the trustees to weigh, against the benefit to the advancee, the interests of other persons entitled under the trust.

2. The trustees cannot "prescribe a particular purpose, and then raise and pay the money over to the advancee leaving him or her entirely free, legally and morally, to apply it for that purpose or to spend it in any way he or she chooses, without any responsibility on the trustees even to inquire as to its application" (Re Pauling's).

The trustee (a bank) in Re Pauling's had been advised by counsel that they could pay trust monies over to the adult advancees, and what they did with them thereafter was not the concern of the trustees. The Court of Appeal came to a different view, holding that if the monies are not used for the prescribed purpose, and the trustees have notice of that fact, they will be under a duty to make no further payments without first satisfying themselves that the money will be properly applied.

3.It will be an invalid exercise of the power to pay monies to the beneficiary with the knowledge that the sums will be used by the beneficiary's spouse to repay a debt due to one of the trustees (see Molyneux v Fletcher [1898] 1 QBD 648).

ADVANCEMENT BY RESETTLEMENT

The power of advancement may be exercised by settling capital monies on new trusts. One such case in which this occurred was Pilkington v IRC [1964] AC 612. Read the speech of Viscount Radcliffe in that case, and then try to identify which of the following factors might render an advancement by resettlement invalid.


(a) breach of one of the rules against perpetuity

(b) breach of the rule against delegation of basic discretions

(c) breach of the requirement that the power of advancement must only be exercised in a manner beneficial to the beneficiaries

Answer: All Correct

(a) A gift or trust will be void for perpetuity if it has the effect of rendering capital inalienable, ie. unusable, for a period longer than the perpetuity period. The perpetuity period here is the same as the common law period used in the rule against remoteness of vesting.

The common law rule against remoteness of vesting provides that where an interest is disposed of in favour of X subject to a ‘contingency’ (a requirement which may or may not be met) it will be void for perpetuity from the date of the disposition unless the contingency will certainly be met (thus vesting the interest in the grantee) - if it is met at all - within the ‘perpetuity period’.

• “perpetuity period” for the purpose of this rule is the period ending 21 years after the death of all "lives in being".

• "lives in being" are persons alive at the “effective date” of the grant, or persons in their mother's womb who are later born. Although there is some academic debate as to which persons might fall within this description, for most practical purposes it is sufficient to take ‘relevant’ lives in being to be those persons who are expressly or impliedly referred to in the instrument by which the disposition is effected. Thus the lives in being at the date of execution of an inter vivos gift to “such of my grandchildren as qualify as lawyers” include not only the grandchildren, but also the settlor and any of his children who are then alive. The grandchildren were expressly referred to, the reference to the settlor and his children is implicit. You are unlikely to meet any other examples of implied lives in being.

• the “effective date” of a disposition varies according to whether the disposition was made inter vivos or by will. An inter vivos deed of gift or trust is effective at the date of its execution. A testamentary gift or trust is effective, not at the date of execution of the will, but at the date of the testator's/testatrix's death.

If there are no lives in being at the effective date of the disposition the perpetuity period will be a straightforward 21 years commencing at that effective date of the disposition.

(b) In Pilkington v IRC, Viscount Radcliffe stated that "the law is not that a trustee may not delegate; it is that they may not delegate without authority". In a similar vein Upjohn J in Re Wills [1959] Ch 1, stated that "unless on its proper construction, the power of advancement permits delegation of powers and discretion, a settlement created in exercise of the power of advancement cannot in general delegate any powers or discretion, at any rate in relation to beneficial interests".

(c) This requirement must always be satisfied when exercising the power of advancement (s32 Trustee Act 1925).


9.3.4. Express Provision in the Trust

The statutory powers of maintenance and advancement apply only in so far as a contrary intention is not expressed in the trust instrument (s69(2)Trustee Act 1925).

This means that the trusts may be created in which the trustees have no such power of maintenance and advancement at all, or a limited version of them. It also means that trusts can be created in which the trustees have wider powers than those provided for by the statute.

One trust of the former variety was considered in IRC v Bernstein [1961] 1 Ch 399. There the settlor had directed that the income on his trusts should be accumulated during his lifetime and this was held to be evidence of an intention to exclude the statutory power of advancement. Such a direction to accumulate would, of course, be evidence of an intention to exclude the power of maintenance also.

As to trusts of the latter variety, it should be noted that the settlor can expressly provide that the power of advancement should not be limited to only one-half of the beneficiaries' presumptive shares. A settlor could, if he so wished, give his trustees the power to advance the beneficiary to whatever extent they think fit. By this means it is conceivable that a beneficiary with a contingent interest in capital (subject, perhaps to her becoming a qualified barrister) might receive her capital entitlement in full without ever having satisfied the contingency.



9.4. Variation of Trust

9.4.1. Introduction

"The general rule..is that the court will give effect, as it requires the trustees themselves to do, to the intentions of a settlor as expressed in the trust instrument, and has not arrogated to itself any overriding power to disregard or rewrite the trusts"
- per Sir Raymond Evershed MR in Re Downshire's SE (1953)

As a consequence of this general rule, in the usual course of events a trust will continue to be administered according to the powers and duties laid down by the settlor, and in favour of the beneficiaries prescribed by the settlor.

However, the economic and other circumstances which were prevailing when the settlor drew up the terms of the trust are bound to change. Perhaps the most universal change is that which occurs, at least annually, in the United Kingdom's fiscal regime (tax laws) as a result of budgets presented from time to time by the Chancellor of the Exchequer. If the terms and circumstances of trusts were fixed once and for all in the manner prescribed by the settlor, trusts would become 'sitting ducks' for the guns of the Inland Revenue. The court's power to vary trusts is a valuable means of dodging the shot!

It follows that although the variation of a trust will usually defeat the settlor's expressed intentions, there is a strong case for suggesting that variation actually fulfils the settlor's implicit intention, inter alia, to maximise the financial benefit to the beneficiaries.

Trusts may be varied in a number of ways, and not all of them necessarily involve the involvement of the courts. We shall shortly consider the modes of variation in detail. For now it will be sufficient to note that some of these modes are only utilised to effect a variation of the trustees administrative/management powers and duties, whereas other modes are employed principally to vary the beneficial interests under the trusts.

As we progress through this section we will see that there are even circumstances in which trusts may be revoked entirely, and circumstances where the original trusts have been so varied that they hardly resemble the form of the original trusts at all.

ILLUSTRATIVE EXAMINATION-TYPE QUESTION

By the end of this section of the workbook you should be able to answer the following question. It is typical of the sort of problem-type question that you might be asked to attempt in your trust law examination. Already you should recognise that the question raises issues in relation to the variation of the administration of trusts, and in relation to the variation of the beneficial interests under the trusts.

Imagine that you are judge sitting in chambers hearing the following applications to vary trusts. What orders would you make, and by what authority?

(a) Wendy is the beneficiary of a trust under which she has a power to appoint her own children to be beneficiaries. In default of any such appointment, the fund will pass to her next of kin. Wendy has one child, William, but instead of making an appointment in his favour, she has come to court to seek a variation of the trust which would grant her a life interest, and William an interest in remainder. Wendy’s only other living relative, Rosamund, has come to court to resist the application for a variation.

(b) Virginia is the principal beneficiary of a protective trust established to prevent the fund from falling into the hands of her domineering brother, Victor. She now applies to court to have the protection of the trust removed.

(c) Xavier, a trustee of land, has applied to court to remove a clause preventing him from selling the land or using it to raise security. He argues that the infant beneficiaries of the trust need the funds now.


9.4.2. Modes of Varying Trusts

According to the Saunders v Vautier a beneficiary who is sui juris (legally capable ie. adult, of sound mind etc) and solely entitled to the trust property may direct his trustee to convey the trust property to him. In Saunders v Vautier (1841) 10 LJ Ch 354, the testator left property on trust for Vautier subject to a direction to the trustee to accumulate the income until Vautier's 25th birthday. When Vautier reached the age of majority (which was then 21) he successfully claimed the whole of the fund.

The rule has since been extended to trusts where there are several beneficiaries. If they are all sui juris and between them absolutely entitled to the trust property, they may agree to terminate the trust and have have the trust property transferred to them. By this means a trust can be revoked, but the beneficiaries might decide to re-settle the fund on new trusts. If the new trusts are substantially the same as the original trusts it would not be artificial to suggest that the rule in Saunders v Vautier had been employed to effect a variation of the original trust!

There are, however, some limitations on the application of the rule designed to protect trustee discretions. The rule was considered in detail in Stephenson (Inspector of Taxes) v Barclays Bank Trust Co Ltd [1975] 1 All ER 625. There Walton J stated some "elementary principles" of the application of the Rule: (1) where persons, being sui juris, between them hold the entirety of the beneficial interest under a trust they can direct the trustees as to how to deal with the trust property; (2) but they cannot thereby override the existing trusts and at the same time keep them in existence; (3) so, for instance, they cannot require the current trustees to make particular investments; (4) nor can they deny the trustees' basic right to be indemnified out of the trust fund for any expenses incurred by them in carrying out the trust.

However, since the first of January 1997 if all the beneficiaries of a trust are sui juris they can remove the existing trustees and appoint new trustees in their place. As a practical matter this might have the effect of making the trustees more compliant to the wishes of the beneficiaries in relation to matters such as investment etc.

The principle of unanimous consent which underlies the rule in Saunders v Vautier is also the guiding principle behind the Variation of Trusts Act 1958. An important limitation on the rule in Saunders v Vautier is, as we have seen, that the beneficiaries must be adult in order to take advantage of it. The 1958 Act allows the court to consent to a variation on behalf of infants and unborn beneficiaries, and other beneficiaries who lack the capacity to consent. It also allows the court to give consent to a variation on behalf of classes of beneficiary (eg "the next-of-kin of a living beneficiary") who cannot be ascertained at this point in time. See The Variation of Trusts Act 1958, for more detail. Note that where a variation is sought under the 1958 Act, the court, if it approves the proposed variation, will also approve any incidental alterations of the trust administration. Before the 1958 Act the court had no jurisdiction to vary the beneficial interests under trusts. In order to achieve a variation, interested parties would pretend to dispute the meaning of the trust, and having come to a 'compromise' (ie a variation of the true meaning of the trust) would apply to the court to approve the compromise by court order. This artificial practice was brought to an end by the House of Lords in 1954 in the case of Chapman v Chapman. The Variation of Trusts Act was enacted to fill the resulting lacuna in the court's jurisdiction.

Further assistance for infant beneficiaries is provided by Trustee Act 1925 s.53. Under this section, the trust may be varied for the maintenance, education or benefit of an infant beneficiary. The variation is effected by empowering the trustees to make a conveyance on sale of the beneficiary's interest. The capital proceeds of the sale and income made thereon are then 'applied' for the maintenance of the infant. The power is most useful where the beneficiary has an interest only in capital under the trust, and in other situations where the trustees will not have the usual power to maintain the beneficiary (see maintenance). See Re Meux's WT [1957] 2 All ER 630.

Although incidental variation of administrative powers and duties can be authorised by the Variation of Trusts Act 1958, where a variation of the administrative scheme is all that is being sought, the trustees should apply for a variation under Trustee Act 1925 s.57. This section allows the court to authorise the trustees to carry out any transaction 'in the management or administration' of the trust property where such transaction is 'expedient'. (See, further, Anker-Petersen v Anker - Petersen (1991) 16 LS Gaz 32x.)

Section 57 largely supersedes the court's inherent jurisdiction to vary trusts in cases where the variation is required to deal with an emergency which is threatening the integrity of the trust fund in a manner that the settlor had not foreseen and has made no provision for. See Re New [1901] 2 Ch 534. The court's inherent jurisdiction also covers cases of 'salvage'. These cases almost exclusively involve infants. In such cases the administration of the trust may be varied in the interests of the infant beneficiaries in situations of absolute necessity. An example would be where one part of the property is mortgaged to raise monies to prevent another part of the property from becoming valueless - as where Greenacre is mortgaged to prevent Green Mansion from falling down (see Re Jackson).


9.4.3. Variation of Trust Act 1958

As we observed when we considered the various modes of varying trusts, the principle of unanimous consent which underlies the rule in Saunders v Vautier is also the guiding principle behind the Variation of Trusts Act 1958. As Lord Reid stated in IRC v Holmden [1968] AC 685: "The court does not itself amend or vary the trusts of the original settlement. The beneficiaries are not bound because a court has made the variation. Each beneficiary is bound because he has consented to the variation".
An important limitation on the rule in Saunders v Vautier is, as we have seen, that the beneficiaries must be adult in order to take advantage of it. The 1958 Act allows the court to consent to a variation on behalf of infants and unborn beneficiaries, and other beneficiaries who lack the capacity to consent. It also allows the court to give consent to a variation on behalf of classes of beneficiary (eg "the next-of-kin of a living beneficiary") who cannot be ascertained at the date of the court hearing to determine whether or not to approve the variation that has been requested.

As to the question whether it is the order of the court or the arrangement which effects the variation, the answer seems to be 'both'. In Re Holt's Settlement [1968] 1 All ER 470, Megarry J approved of the argument put to him that, "when the adults by their counsel assented to the arrangement and the court on behalf of the infants by order approved the arrangement then there was an arrangement which varied the trusts". In the same case his Lordship held that:

"Any variation owes its authority not to anything in the initial settlement but to the statute and the consent of the adults coming, as it were, ab extra. This certainly seems to be so in any case not within the Act where a variation or settlement is made under the doctrine of Saunders v Vautier...by all the adults joining together, and I cannot see any real difference in principle in a case where the court exercises its jurisdiction on behalf of the infants under the Act of 1958".

Section 1 of the Variation of Trusts Act 1958 states that the court may approve an arrangement "by whomsoever proposed" varying or revoking all or any of the trusts. In fact, applications should be made jointly by all competent adult beneficiaries of the trust. The trustees should generally not apply for a variation unless they believe that the variation would be for the benefit of all the beneficiaries AND there is no adult beneficiary willing to apply (Re Druce's ST [1962] 1 WLR 363). The form of the application is an originating summons exhibiting a draft scheme of arrangement.

Which of the following people do you think should be joined as defendants to the application to vary the trust?


(a) the trustees.

(b) adult beneficiaries who do not consent to the application.

(c) the settlor.

(d) beneficiaries described in the trust as "next of kin of the principal beneficiary"

Answer: ALL Correct

(a) The trustees should certainly be joined as defendants to any application made by the beneficiaries. The trustees have a fiduciary duty to protect the interest of all the beneficiaries under the trust and they ought to object if the proposed variation appears to benefit some but not all of the beneficiaries.


(b) The court has no authority under the 1958 Act to approve an arrangement on behalf of adult beneficiaries who have the capacity to give their own consent. If any of those adults do not approve the variation in the form that has been proposed they should in theory be joined as defendants to the application. However, without the prior support of those persons an application would be a futile exercise.

(c) The settlor should be joined as a defendant to the application were the trust is an inter vivos trust and the settlor is still alive.

(d) According to section 1(1)(b) of the 1958 Act, the court can consent to an arrangement on behalf of the next-of-kin of the principal beneficiary (or any other class of beneficiary who may be entitled upon the happening of a future event, eg. the death of the principal beneficiary). The fact that the court can consent to an arrangement on behalf of such persons means that they need not be joined as defendants to the application.

However, to continue with the next-of-kin example, the court has no authority to consent on behalf of persons who would qualify as "next-of-kin" if the death of the principal beneficiary (or other event) were to occur on the date of the application to court. It is impossible to identify a person's next-of-kin until that person dies, and so it is impossible to get their consent to any variation. However, the court is required by s.1(1)(b) to imagine that the death has occurred on the date of the court hearing. This process allows the court to identify potential members of the "next-of-kin" class of beneficiaries, and once identified those persons must give their own consent to the arrangement before it can be approved by court order.

THE BENEFIT REQUIREMENT

According to s.1 of the Variation of Trusts Act 1958, the court has no authority to approve an arrangement varying a trust unless the arrangement will be for the benefit of persons within paragraphs 1(1)(a), 1(1)(b) and 1(1)(c). But which of the following forms of benefit will qualify as a benefit for the purposes of the 1958 Act?


Financial benefit ü Benefit No Benefit

Social and moral benefit ü Benefit No Benefit

Benefit from deferring the beneficiaries' entitlement ü Benefit No Benefit

Benefit of family harmony ? Benefit ? No Benefit


Answer: A, B, C.

(a) In the majority of cases a variation under the 1958 Act is sought in order to procure a financial advantage, often in the form of a reduced tax burden. If this type of advantage will be achieved by means of a proposed arrangement to vary trusts under the Act, the variation is presumed to be for the benefit of the beneficiaries, and the courts will generally consent to the proposed variation.

The financial benefits yielded by a variation can sometimes be very significant. Thus, in Re Duke of Norfolk's WT, The Times, 23 March 1966, the trust estate was worth approximately £3M. The beneficiaries saved £50,000 as a result of the variation.

In Re Weston's Settlements [1968] 3 All ER 338, a case where parents sought a variation of a trust in favour of their children, to enable the trust to be exported to Jersey, Lord Denning MR accepted that tax savings are prima facie a legitimate reason for exercising the 1958 Act jurisdiction to vary trusts:

"The exodus of this family to Jersey is done to avoid British taxation. Having made great wealth here, they want to quit without paying the taxes and duties which are imposed on those who stay. So be it. If it really be for the benefit of the children, let it be done".

Charitable status also brings with it fiscal benefits, but before charitable status is granted a public benefit must nearly always be shown. It might be asked, therefore, whether there is a sufficient benefit to the public in the jurisdiction to vary trusts under the 1958 Act!

(b) The courts are not concerned merely with financial benefits. As Megarry J stated in Re Holt's Settlement [1969] 1 Ch 100, benefit is "not confined to financial benefit, but may extend to social or moral benefit".

In Re Weston's Settlement [1968] 3 All ER 338 Mr Stanley Weston had settled two trusts in favour of his children, but they were subject to certain tax disadvantages. The settlor applied for an order approving an arrangement under which his trust would be exported to Jersey from England. Because of Jersey's status as a 'tax-haven', the trust stood to save £163,000 in capital gains tax if the trust could be exported. However, the family had been resident in Jersey for only three months and it was highly likely that they would not stay there after the exportation of the trust.

Held the application would not be allowed. Lord Denning MR stated held that the court should not consider merely the financial benefit to the infants or unborn children, but also their educational and social benefit. His Lordship observed that "There are many things in life more worthwhile than money. One of these things is to be brought up in this our England, which is still "the envy of less happier lands"...The avoidance of tax may be lawful, but it is not yet a virtue...if it really be for the benefit of the children, let it be done. Let them go, taking their money with them, but, if it be not truly for their benefit, the court should not countenance it".

He went on: "Are they to be wanderers over the face of the earth, moving from this country to that, according to where they can best avoid tax? I cannot believe that to be right. Children are like trees: they grow stronger with firm roots".

Leaving aside his Lordship's decidedly unempirical assumption that Jersey is less happy a land than "this our England", it is clear that his Lordship was prepared to let moral and social benefits outweigh financial benefits in the appropriate case. He dismissed the application in this case.

Contrast the decision in this case with the outcome of the applications in Re Seale's Marriage Settlement [1961] 3 WLR 262 and Re Windeatt's WT [1969] 2 All ER 324. Can you see why the result in those cases differed from that in Re Weston's?
(c) In Re T's Settlement Trusts [1963] 3 All ER 759, it was seen to be a benefit to the beneficiary to defer the vesting of a gift until she was more mature and responsible, thereby protecting her from creditors, exploitation and her own folly.

In Re Holt's Settlement [1968] 1 All ER 470, it was seen to be a benefit to the beneficiaries to defer the vesting of the gift until they were reasonably advanced in a career and settled in life. This involved a deferral of the contingent age from 21 to 30. Megarry J stated that he did not require evidence of special immaturity or irresponsibility in order to hold that the deferral of the gift would be for the benefit of the beneficiaries.

Risks of Detriment?

What if the arrangement which has been put forward for approval under the 1958 Act would, in the normal course of events, be for the benefit of all the beneficiaries, but carries a risk that certain potential beneficiaries might in certain possible circumstances suffer a detriment rather than a benefit? How much weight should be attached to the potential that such a beneficiary might someday suffer the detriment?

The question is of particular relevance when the court comes to consider whether the arrangement would be for the benefit of unborn beneficiaries under paragraph 1(1)(c). In Re Cohen's WT [1959] 1 WLR 865 Dankwerts J held that in exercising the jurisdiction under the Act the court must, on behalf of those persons for who it was approving the arrangement, take the sort of risk which an adult would be prepared to take on their own behalf. In Re Cohen's Settlement Trusts [1965] 3 All ER 139 approval for the arrangement was refused because the prospects of the unborn person under the arrangement would have been hopeless whatever events might actually happen to pass.

Do you think that the court approved the arrangements in the following cases?

In Re Holt's [1965] 3 All ER 139 there was a risk that one of the unborn beneficiaries would receive no interest under the trust if their mother died during or shortly after childbirth. However, this risk had to be balanced against the possibility that the mother might survive for a reasonable, or indeed substantial, period after the birth, whereupon the infant would undoubtedly receive a benefit under the new arrangement.

In Re CL [1968] 1 All ER 1104 where the beneficiary was mentally incapacitated, an arrangement was propose which would result in the removal of the beneficiary's interest under the trust. There was no financial benefit to the beneficiary in that case, but there would be a benefit to her family members.


NOTE:

There is authority to show, however, that if the proposed arrangement involves risks as to whether or not a financial benefit would accrue to a beneficiary, the court will require that the trustees take out insurance against that risk, even at the expense of that beneficiary's income: Re Robinson's ST [1976] 3 All ER 61. Obviously, if the insurance premiums would involve an excessive drain on the income, insurance would not be required. The arrangement must, after all, be for the benefit of the beneficiary on balance.


(a) Re Holt's [1965] 3 All ER 139 ü Yes No

(b) Re CL [1968] 1 All ER 1104 ü Yes No

Answer: Both YES


Resettlement or Variation?

As we have seen, the 1958 Act permits the court to approve any arrangement "varying or revoking all or any of the trusts.." However, does there come a point at which a trust has been so varied that it cannot be said to be a variant of the original trust at all, but is in truth a wholly different settlement? Does the Act permit resettlements or must arrangements be genuine variations?

In Re Ball's Settlement Trusts 2 All ER 438 Megarry J laid down a test for distinguishing resettlements, which would be void, from variations which would be valid. His test has been referred to as the "substratum test". As he said: "if an arrangement, while leaving the substratum, effectuates the purpose of the original trust by other means, it may still be possible to regard the arrangement as merely varying the original trusts, even though the means employed are wholly different and even though the form is completely changed".

Applying this test, which of the following arrangements do you think were approved by the court?

In Re T's Settlement [1963] 3 All ER 759 a mother who wished to prevent her immature and irresponsible daughter from becoming entitled to the capital at the age of 21 applied for an order approving an arrangement under which her daughter's share would be transferred to a new trust under which the fund would be held on a protective trust for the daughter for her life, with remainder to her issue.

In Re Ball's Settlement Trusts 2 All ER 438 an application was made to vary the terms of a settlement. Under the original terms the settlor had a life interest in the income of the fund, with the power to appoint his two sons (or their families) as beneficiaries in remainder. Neither family was to take more than half of the value of the fund under the power of appointment. Under the terms of the proposed new arrangement the two sons would be given life interests in half of the fund each, then their children would take in equal shares.

In Goulding v James [1997] 2 All ER 239 the testatrix made a will in 1992 whereby she directed that her estate was to be divided into two parts to be given to her daughter June and June’s husband, Kenneth. She further provided that their interest was to pass to their son, Marcus, contingent upon his attaining the age of 40 if either June or Kenneth predeceased the testatrix. This will was revoked in 1994 and replaced with a new will which created a trust under which June had a life interest in possession of the residuary estate subject to which Marcus was to take absolutely provided he reached the age of 40. The new will further provided that if Marcus failed to attain the age of 40 or died before June, then Marcus’ children would take the estate absolutely. After the death of the testatrix, June and Marcus applied to court for a variation of the trust contained in the will under s1(1)(c) of the Variation of Trusts Act 1958. The variation sought was for 45% of the estate to be held for June, 45% for Marcus and the remaining 10% for Marcus’ children.


(a) Re T's Settlement û Approved ü Declined

(b) Re Ball's Settlement Trusts ü Approved û Declined

(c) Goulding v James ü Approved Declined

Answer (a) Decline

Approval for the arrangement was refused. Wilberforce J held that what was being proposed was a resettlement, and stated that where the arrangement "is in truth a complete new settlement" it will not be approved.

This case was decided before Re Ball's, and in the light of Re Ball's and more recent cases it is far from clear that the case would have been decided the same way today.

Answer (b) Approved

In Re Ball's the settlor's life interest was removed, and so the form of the trust had undoubtedly changed but the remaining trusts were held to be "still in essence trusts of half of the fund for each of the two named sons and their families". However, it must be queried whether the removal of a life interest is merely a change of form. It does appear to be fairly substantial. Indeed, the whole distinction between extensive variation and total resettlements looks like a rather artificial one after Re Ball's. The author of Parker & Mellows', "The Modern Law of Trusts", suggests that "a pedantic distinction has grown up between "variation" and "resettlement" for which there appears to be no sanction in the words of the Act, nor any practical justification".

Answer (c) Approved

The Court of Appeal approved the arrangement, even though it represented a quite radical departure from the form of trusts laid down by the settlor. This case provides further support to the view that the distinction between variation and resettlement is an artificial one. (See, further, the settlor's intentions).


The Settlor's Intentions

Many variations approved by the court under the 1958 Act would accord with the implicit intention of settlors that their trusts should adapt to emergencies, to changes in the tax laws and to the needs of beneficiaries which might arise. Nevertheless, whenever a trust is varied there will necessarily be some departure from the expressed intentions of the settlor as set out in the original trust. In some instances the departure is dramatic, such as where the beneficiaries decide to bring the trust to an end under the rule in Saunders v Vautier. We have seen that the courts have no jurisdiction to re-write trusts, but variations under the 1958 Act are in a sense written by the beneficiaries. The court is asked merely to approve the arrangements. When considering such an application, how important a consideration are the settlor's intentions in your opinion?

In the case of Re Remnant's ST the court approved a variation under which undesirable forfeiture clauses were removed. In that case the judge held that the fact that the testator's intention would be defeated was a "serious but by no means conclusive consideration".

However, in some exceptional cases, fidelity to the settlor's intentions has been more marked, and almost appears to have been the "conclusive consideration". Such a case is Re Steed's WT [1960] 1 Ch 407, where Lord Evershed observed that the testator had been anxious that the beneficiary "should be well provided for and not exposed to the temptation, which he thought was real, of being, to use a common phrase, sponged upon by one of her brothers". For this reason the settlor had placed her interest under a protective trust. She now sought an order approving an arrangement under which that protection would be removed. Lord Evershed held that "the court must...regard the proposal in the light of the purpose of the trust as shown by the evidence of the will or settlement". He came to the conclusion, influenced by the testator's intentions, the trustees' representations, the conclusions of the judge at first instance, and general evidence to suggest that the beneficiary's brother might still try to 'sponge' off her, that approval for the arrangement should be refused. According to his Lordship, the arrangement was one which would have "cut at the root of the testator's wishes and intentions".

However, the most recent case, Goulding v James [1997], leaves us doubting that any significance should be attached to the settlor's residual intentions at all. According to that case, the overriding consideration should be whether or not the variation would be for the benefit of the beneficiaries. It would, in fact, be quite logical to ignore the settlor's intentions. After all, the jurisdiction to vary trusts under the 1958 Act has its roots in the rule in Saunders v Vautier, a rule which allows the beneficiaries to defeat the settlor's intentions absolutely.


9.4.4. Variation Conclusion

In this section we have considered the broad jurisdiction of courts to vary trusts. It is a jurisdiction which raises dilemmas for the courts. One is the difficulty in weighing the settlor's intentions against the interests of the persons currently entitled to the fund. We have resolved this dilemma fairly squarely in favour of the beneficiaries. Other dilemmas, to which you must come to your own conclusion, include:

1) the need to balance, against the provision of a tax-avoidance facility for beneficiaries, the interests of the average taxpayer.

2) the need to balance the settlor's freedom of disposition of his private property against the public interest in removing unfair discrimination. (See, eg. Re Remnant's).

This conflict of public and private concerns has made its home in our courts, which is appropriate to the extent that their constitution reflects the dilemma. (The court is itself a public body which has traditionally had the role of regulating private rights to property). However, perhaps some of these issues are in need of greater governmental scrutiny and would be more at home in Parliament. Indeed, with the forthcoming enactment into English law of the European Convention on Human Rights, some of these issues may be resolved even as you study this subject!


9.5. Miscellaneous – Accounting & Informing

Trustees have to keep a diary-like record of the administration of the trust for production to new trustees (Tiger v Barclays Bank Ltd [1951] 2 KB 556, Court of Appeal). Further, if a trustee deals with trust property it is generally true that every beneficiary has a right to see documents relating to that dealing. This is because trust documents are, in a sense, the property of the beneficiaries.

However, this general rule will occasionally conflict with the trustees' professional duty of confidence, and with the rule that trustees need not disclose reasons for their decisions (see Wilson v Law Debenture Co.). Do you think that these conflicts are resolved in favour of disclosure or against disclosure?


1) case of conflict with professional privilege ? In Favour ? Against

2) case of conflict with the principle that trustees need not give reasons for their decisions ? In Favour ? Against

Answer: Depends

A professional trustee may in certain circumstances raise professional privilege as a defence to a summons for disclosure of trust documents. In order to displace the privilege the beneficiaries must make out a prima facie case of fraud (O'Rourke v Darbishire [1920] AC 581, House of Lords).

In Re Londonderry's Settlement [1964] 3 All ER 855, Harman LJ decided that 'if necessary' the principle that trustees are not required to disclose reasons for their decisions should override the ordinary rule that beneficiaries are entitled to inspect trust documents. His Lordship acknowledged that it is very difficult to resolve the dilemma in a way "which will not cut down the rights of the beneficiaries too much".

In the same case, Salmon LJ came to the same conclusion by a slightly different route. He concluded, albeit tentatively, that if any part of a document contains information which the beneficiaries are not entitled to know, such a document should not be regarded as being a trust document.


9.6. Conclusion

In this workbook, we have examined a number of aspects of trust administration in detail. In particular we have focused upon the trustees' powers to invest the trust fund with a view to producing income and capital gains, and the trustees' powers in relation to dealings with the income and capital of the trust (powers of maintenance and advancement). We have also observed that proper records must be kept of these dealings, and an account produced to the beneficiaries if requested.

We have also considered in detail the various modes by which a trust might be varied so as to grant the trustees greater and more flexible administrative powers. As part of our study of the variation of trusts we noted that some variations alter not only the administration of the trusts, but the nature of the beneficial interests thereunder. We considered the role of trustees in applications to vary the trusts in this way.

A theme which unites our many areas of study in this workbook is that trusts must always be administered in a manner beneficial to the beneficiaries. Investments must be chosen so as to yield a benefit, the powers of maintenance and advancement should only be exercised if the exercise thereof will benefit the principal beneficiaries, and trusts should only be varied where the variation would be for the benefit of the beneficiaries. Normally benefit is taken to mean financial benefit, but to some extent benefits of a non-financial nature are also considered to be a worthy object of the good administration of the trust, and where appropriate this broadening of the concept of benefit is surely to be welcomed.

In the context of investment, ethical benefits have been admitted in small part, and there is undoubtedly scope for even greater liberalisation of the concept of benefit beyond the merely financial in that context. It is notable, however, that the concept of benefit in the almost entirely administrative context of investment is very narrow compared to the breadth of the concept in contexts (such as those of maintenance, advancement and variation) which touch more directly upon the beneficial entitlement of individual beneficiaries.

We have seen that in relation to the exercise of powers of maintenance and advancement the notion of benefit has been extended to include the moral benefit to one beneficiary of being able to donate to his father's charity. And in relation to variation, the courts have more than anywhere else been prepared to place social and moral benefits above the merely financial when considering whether or not to approve a variation of the beneficial interests under the Variation of Trusts Act 1958.

A move to greater acceptance of non-financial benefits in trustee investment would be difficult to regulate through the courts, and terribly complex to enact through the legislature. Acknowledging these difficulties Lord Nicholls of Birkenhead has recently offered the following words of comfort to the constrained trustee:

"The range of sound investments available to trustees is so extensive that very frequently there is scope for trustees to give effect to moral considerations, either by positively preferring certain investments or negatively avoiding others, without thereby prejudicing beneficiaries' financial interests. In practice, the inclusion or exclusion of particular investments or types of investment will often be possible without incurring the risk of a lower rate of return"

(Trustees and their broader community: where duty, morality and ethics converge, Trust Law International Vol 9(3) 1995))

In a similar vein, it is encouraging that the explanatory notes accompanying the Trustee Act 2000 indicate that 'ethical considerations' will henceforth be relevant when assessing the suitability of the trustees' chosen portfolio (note 23). Although, unfortunately, no such suggestion appears in the Act itself. Hopefully future legislation will make express allowance for ethical investment. Nevertheless, until that event, the trustee who wishes to invest ethically (in the reasonable belief that ethical investment would be in the best interests of the beneficiaries) can take comfort from the words of Lord Nicholls, and from the explanatory notes which accompany the Trustee Act 2000 and from the fact that (as the case of Nestle shows) it will be difficult for a claimant to prove that another trustee investing the same fund, but without regard to ethical concerns, would have achieved better financial returns.