Advise to Beneficiaries

Alex died two years ago. His validly executed will left his collection of paintings and £300,000 to Paul and Irvin to hold on trust for “such of my grandsons, Harry, Richard and Steven, as they reach 21, and if more than one, in equal shares”. The will contained no express administrative provisions.

Harry is now 22, Richard is 19 and Steven is 17. Harry was given his share of the fund when he attained 21. Nothing else has been paid to any beneficiary out of the fund.

Three months ago, Steven asked for £20,000 to fund a series of proposed art trips to European cities. At the same time, Richard asked for money from the trust to pay for university tuition fees and living expenses. Both requests were refused. Steven and Richard are annoyed about this.

Recently, Paul purchased a painting from the trust at auction He paid £12,000 (which was a high price) because he was keen to acquire the painting to add to his collection of art by the same artist.

The beneficiaries have consulted you about the extent to which they can challenge the trustees decisions. Also, they feel it would be easier to work with different trustees and wonder if they can end the trust. They want to recover the painting which Paul bought at auction, because they strongly believe that it should be kept in the family.

Advise the beneficiaries:

• (a) Whether Paul and Irvin could have helped Steven and Richard when they requested funds and on what basis, if any, Steven and Richard can challenge the trustees refusal of their requests.
• (b) Whether the beneficiaries can replace the trustees or bring the trust to an end; and
• (c) Whether and on what basis the beneficiaries can recover the painting.

A

Although the trust states that the beneficiaries should not receive the contents of the trust until they reach the age of 21, there are several statutory exceptions. The trustees can make an advancement if it is for the beneficiaries ‘advancement or benefit’. In Pilkington v IRC, the court held that ‘advancement or benefit’ should be interpreted as ‘any use which will improve the material situation of the beneficiary’. No more than half the beneficiary’s share in the capital can be provided, and any advancement made must be deducted from their final entitlement.

Steven has requested his advancement to fund a series of art trips. If these are for educational purposes, it could be argued that the money will improve his material situation as it will help his career. In Roper-Curzon v Roper-Curzon, it was held that helping a beneficiary advance their career is a valid reason for an advancement under s32.

Richard has requested the advancement for his university fees and living expenses, which will arguably improve his material situation as it will allow him to attend university, obtain qualifications and advance his career.

Alternatively, Steven and Richard may wish to use the income from the trust instead. As Richard is aged 19, he is automatically entitled to receive any income from the trust (e.g. interest) that has generated since he turned 18 years old and, depending on the amount, could use this to pay his university fees and living expenses. Steven is under 18 years old and is therefore not automatically entitled to the income, however the trustees have the discretion to apply all or part of the income for the ‘maintenance, education or benefit’ as is reasonable in the circumstances.

However these statutes only provide discretion to the trustees rather than an obligation, therefore Paul and Irwin only need to demonstrate that they have considered using the powers and have used their discretion in good faith after taking into account all the relevant circumstances. It was held in Stephenson v Barclays Bank that beneficiaries cannot control the way the trustees exercise their discretion unless there are overriding clauses in the trust instrument.

Courts are normally reluctant to interfere in such cases. In Tempest v Lord Camoys, the court stated they would not interfere with a trustee’s decision unless their powers had been exercised incorrectly and in Re Manisty’s Settlement, the court held they would not override such a decision unless the exercise of the powers was ‘irrational, perverse or irrelevant to any sensible explanation’.

Beneficiaries can experience difficulty when attempting to have the decision reviewed by a court as there is no obligation on trustees to provide beneficiaries with their reasons, and the beneficiaries therefore cannot know whether there are valid reasons for refusal. However it was held in Schmidt v Rosewood Trust Ltd that the courts have an inherent jurisdiction to supervise in the administration of trusts and that the documents recording trustee’s decisions should be released to the courts unless there is a valid reason not to do so.

Richard should request his share of the income from the trust generated since he was 18 as he is entitled to it. If this is not enough to cover his university fees and living expenses, he may choose to pursue an advancement of the trust capital. Steven needs either maintenance from the income or an advancement and should make an application to the courts to release the documents relating to the trustee’s decisions. If the courts agree the documents should be released and it emerges that the decisions are irrational or the trustee’s powers have been used incorrectly, Steven and Richard may then choose to apply to the courts to overrule the decision.

B

The authority to replace a trustee can be derived from three sources; an express power, statutory power or the court. It was held in Re Higginbottom that the hierarchical order of these sources must be followed and only if one source cannot be used can beneficiaries consider using the next source.

As there are no express administrative provisions in the trust instrument, the beneficiaries can consider using a statutory power. There are several statues dealing with the removal and replacement of trustees.

The main statutory power to replace trustees is details in s.36 of the Trustee Act 1925; however the replacement would need to be justified by one of the reasons listed by statue. These reasons include death, retirement, incapable of acting, trustees outside the UK for over 12 months, trustees refuses to act or is unfit to act, or the trustee is an infant. It appears that none of these reasons apply in this case unless the beneficiaries can convince the trustees to retire voluntarily; Steven and Richard merely wish to replace the trustees because they disagree with the way that the trust is being handled. The statue lists, in chronological order, the persons who will be entitled to choose the replacement trustees in the event of a trustee being removed; as there is nobody specifically nominated in the trust instrument to appoint new trustees, the surviving or continuing trustee holds the power. This enables a ‘retiring’ trustee to appoint a replacement for himself before leaving the trust.  Steven and Richard therefore would not have the power to choose their own trustees and would need to ensure that the current trustees are fully co-operative to complete the replacement.

There are also statutory provisions allowing beneficiaries to write to a trustee appointing a new trustee and directing the existing trustee to retire, however each beneficiary must be of full age and capacity and be collectively absolutely entitled to the trust property. As Steven is under 18 years old, he is not of full age and therefore this statutory does not apply. If Steven is nearly 18, the beneficiaries may wish to wait until his birthday. The beneficiaries must ensure that they replace the trustees because there must be at least two remaining trustees in place.

If Irwin and Paul will not voluntarily co-operate with a statutory replacement, the beneficiaries can apply to the court to use their inherent jurisdiction to do so instead. In Letterstedt v Broers, the court stated the main consideration of the court is the welfare of the beneficiaries and, although there was no evidence that the trustee in question had committed any fault, they removed a trustee as it was believed the friction between the beneficiary and the trustee would impede the administration of the trust. More recently, the courts confirmed in Alkin v Raymondthat friction and hostility between a beneficiary and a trustee are relevant factors to determine whether the trustee will act properly and give full consideration to the merits of the beneficiary. If the courts believe that the hostility between Steven and Richard and their trustees will affect the trustee’s ability to properly exercise their powers under the trust, the court may agree to replace them.

Steve and Richard may chose instead to end the trust. In Saunders v Vautier, the court held that beneficiaries are able to end a trust early and divide the funds between themselves so long as all beneficiaries are in existence and identified, are sui juris (18 or over and of sound mind) and are in agreement.

As Steven is under 18, Richard would need to apply to the court to provide consent on his behalf. The court would only provide such consent if it deemed that ending the trust will be beneficial to Steven. The intention of the settlor, Alex, is considered irrelevant during the courts deliberations. It was also held in Re Cohen’s WT that the court must be satisfied they are making ‘a reasonable bargain that an adult would be prepared to make’, understanding that there is not necessarily a guarantee that the beneficiary will be better off.

The court may consider that ending the trust early will be detrimental to Steven as he is only 17, and it may be more beneficial to wait until Steven is old and more responsible before being given a large amount of money. However the court will also consider what Steven may spend the money on; if the art trips are for his education, it will be more beneficial for Steven to have access to the trust money now. Furthermore, under the current trust terms, if Steven doesn’t live until the age of 21 he will receive nothing; by ending the trust early, there is a guarantee that he will receive the money.

If the court does provide consent on behalf of Steven, the beneficiaries can then end the trust and divide the assets among them immediately.

C

In Bristol and West Building Society v Mothew, it was held that trustees hold a fiduciary duty to act in trust, confidence and loyalty. In addition, trustees have a statutory duty to exercise all duties with such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience he holds.

Trustees are not allowed to make a profit from a trust as he must use trust property solely for the benefit of the beneficiaries. In Bristol and West Building Society v Mothew, the court stated the primary duty of a trustee is to act in the best interests of the beneficiaries and not to allow his interest to conflict with any of his duties.

When dealing with trust property, such as the paintings left by Alex, trustees have an overriding duty to ensure that they obtain the best price. As the £12,000 paid by Paul is a high price, it cannot be argued that Paul has failed in this duty, however the purchase may still be deemed void under the ‘self-dealing rule’, which applies when a trustee purchases trust property for their own benefit. The rule is in place because there is a clear breach of conflict between a trustee’s obligation to get the best price for the trust and their personal interest in paying the lowest price possible. The rule is normally strictly enforced by the courts and in Ex Parte James it was held that it does not matter if the property is purchased in good faith. Tito v Waddell held that even if a transaction is open and fair and the trustee has paid equal to or over the market value of the property, the transaction is still voidable. In Holder v Holder, an exception was made when the court allowed a trustee to purchase some property that had been placed on sale by the other trustees, however in Re Thompsons Settlement, the court distinguished Holder by stating it was an exceptional case because the trustee who purchased the property had never actually acted as a personal representative.

There are exceptions to the self-dealing rule if the beneficiaries, each over the age of 18 and possessing full mental capacity, consent to the purchase, the trust instrument contain a clause authorising the sale or the trustee has obtained the courts consent. The beneficiaries do not consent to the sale as they believe the painting should remain in the family, and in addition Steven is under the aged of 18 so is unable to provide consent. Further, there are no clauses in the trust instrument providing any authorisation, and Paul does not appear to have obtained the courts consent prior to the purchase. The sale of the painting is not necessarily void from the outset; it is valid if, and until, the beneficiaries set it aside. The beneficiaries must decide to void the sale within a reasonable time, but as Paul has only ‘recently’ made the purchase the beneficiaries still have sufficient time. Once the sale is declared void, the painting must be returned to the trust and the purchase money should be refunded to Paul.

Bibliography

Books:

Ramjohn M, Unlocking Equity and Trusts (5th Edition, Routledge 2015)

Watt G, Trusts & Equity (6th Edition, Oxford 2014)

Cases:

Alkin v Raymond (2010) All ER (D) 48

Bristol and West Building Society v Mothew[1996] 4 All ER 698

Bryant v Hickley (1894) 1 Ch 324

Buttle v Saunders [1950] 2 All ER 193

Ex Parte James(1803) 8 Ves 337

Ex Parte Lacey (1802) 6 Ves 625

Goulding v James [1997] 2 All ER 239

Holder v Holder[1968] Ch 353

Keech v Sandford (1726) 2 Eq Cas Abr 7419

Letterstedt v Broers1884) 9 App Cas 371

Pilkington v IRC [1964] AC 612

Re Beloved Wilkes Charity (1851) 3 Mac & G 44

Re Cohen’s WT [1965] 1 WLR 1229

Re Higginbottom [1892] 3 Ch 132

Re Manisty’s Settlement[1974] Ch 17

Re Thompsons Settlement[1986]Ch 99

Roper-Curzon v Roper-Curzon(1871) LR 11

Saunders v Vautier(1841) 4 Beav 115

Schmidt v Rosewood Trust Ltd [2003] 2 AC 707

Stephenson v Barclays Bank[1975] 1 WLR 882

Tempest v Lord Camoys(1882) 21 Ch D 571

Tito v Waddell (No2) [1977] Ch 106

Legislation:

Trustee Act 1925

Trustee Act 2000

Trusts of Land and Appointment of Trustee’s Act 1996

Variation of Trusts Act 1958

Footnotes

S.31 & S.32 Trustee Act 1925

S.32 Trustee Act 1925

[1964] AC 612

S32(1)(a) Trustee Act 1925

S.32(1)(b) Trustee Act 1925

(1871) LR 11

S.31(1)(ii) Trustee Act 1925

S31(1)(i) Trustee Act 1925

Bryant v Hickley (1894) 1 Ch 324

[1975] 1 WLR 882

Gary Watt, Trusts & Equity (6th Edition, Oxford 2014)

(1882) 21 Ch D 571

[1974] Ch 17

Re Beloved Wilkes Charity (1851) 3 Mac & G 44

[2003] 2 AC 707

S.31(1)(ii) Trustee Act 1925

Tempest v Lord Camoys(1882) 21 Ch D 57, Re Manisty’s Settlement [1974] Ch 17

Mohamed Ramjohn, Unlocking Equity and Trusts (5th Edition, Routledge 2015)

[1892] 3 Ch 132

S.36(1) Trustee Act 1925

Ibid

S.36(8) Trustee Act 1925

S.19(2)(a) Trusts of Land and Appointment of Trustee’s Act 1996

S.19(3) Trusts of Land and Appointment of Trustee’s Act 1996

S.41 Trustee Act 1925

(1884) 9 App Cas 371

(2010) All ER (D) 48

(1841) 4 Beav 115

S.1(1)(a) Variation of Trusts Act 1958

Goulding v James [1997] 2 All ER 239

[1965] 1 WLR 1229

Saunders v Vautier (1841) 4 Beav 115

[1996] 4 All ER 698

S.1 Trustee Act 2000

Mohamed Ramjohn, Unlocking Equity and Trusts (5th Edition, Routledge 2015)

[1996] 4 All ER 698

Buttle v Saunders [1950] 2 All ER 193

Keech v Sandford (1726) 2 Eq Cas Abr 7419

Mohamed Ramjohn, Unlocking Equity and Trusts (5th Edition, Routledge 2015)

Ex Parte Lacey (1802) 6 Ves 625

(1803) 8 Ves 337

(No2) [1977] Ch 106

[1968] Ch 353

[1986]Ch 99

Mohamed Ramjohn, Unlocking Equity and Trusts (5th Edition, Routledge 2015)

Ex Parte Lacey (1802) 6 Ves 625

Ex Parte James (1803) 8 Ves 337

Mohamed Ramjohn, Unlocking Equity and Trusts (5th Edition, Routledge 2015)