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EQUITY AND TRUSTS

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EQUITY AND TRUSTS TRUSTEES 1 Trustees and their role in administration of the trust First we will consider some general principles and then: Appointment and ... – PowerPoint PPT presentation

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Title: EQUITY AND TRUSTS


1
EQUITY AND TRUSTS
  • TRUSTEES 1

2
Trustees and their role in administration of the
trust
  • First we will consider some general principles
    and then
  • Appointment and retirement of trustees
  • Powers
  • Breach
  • Remedies

3
General Principles
  • Is trusteeship a privilege?
  • Trustees subject to many duties and powers
  • Personal liability
  • Majority paid professionals provision for payment
    usually made in the trust instrument

4
Duties and Powers
  • A duty is an obligation and must be carried out /
    powers are discretionary - confer an element of
    choice upon the trustee as to whether to exercise
    it or not.
  • Duties and powers of trustees are implied into
    trusts by the rules of law (statutory and
    equitable).

5
Effect of trust deed
  • Scope of the duties and powers outlined in the
    trust instrument trust instrument is first
    place to see if it has varied implied rules.
  • Normally are varied particularly where trustee is
    professional providing for remuneration,
    trustees liability increase trustees powers.
  • Implied powers before the Trustee Act 2000 (TA
    2000), were quite narrow did not allow trustees
    modern investment opportunities. Most express
    trusts vary statutory and common law rules will
    probably continue to do so.

6
Old and new rules will need consideration
  • Next few lectures will concern general law i.e.
    the default position, in particular the TA 2000.
  • TA 2000 does not codify the law, certain areas
    still governed by the old rules.
  • Will examine both old and the new rules and
    identify which rules apply in any given
    situation.
  • NB it is important to familiarise yourself with
    the general statutory and case law provisions AND
    the common ways they are altered by express
    terms.

7
The standard of care
  • S1 TA 2000 provides general standard of care.
    See Schedule1 investment, acquisition of land,
    appointment of agents.
  • When standard does not apply e.g. when
    exercising duties on being appointed, exercising
    powers under the TA 1925 or TLATA 1996, then
    general equitable duty of care applies see
    Speight v Gaunt (1883) 9 App. Cas. 1. The trustee
    should have taken all those precautions which an
    ordinary prudent man of business would have taken
    in managing similar affairs of his own.
  • NB duty of care can be expressly excluded (Sch1,
    para7) if or in so far as it appears from the
    trust instrument that the duty was not meant to
    apply 
  • Professionally drafted trust instruments usually
    include express exemption clause excluding the
    statutory duty of care (will also exclude the
    general equitable duty of care).

8
Commencement and termination of trusteeship
9
Appointment of trustees
  • Anyone with necessary capacity to manage own
    affairs children not under s20 LPA 1925 (can be
    trustees of resulting trust see e.g. Vinogradoff
    1935 Wn 68).
  • Corporations must satisfy trust corporation
    status definition (a) public trustee, trustee
    in bankruptcy, treasury solicitor (b) court
    appointee, (c) list in s3(4) Public Trustee Act
    1906.
  • Most private trusts trust corporations are banks.

10
Appointment of trustees
  • S14(2) Trustee Act 1925 sole trustee cannot give
    valid receipt
  • S34 TA 1925 land 4 trustees maximum. Does not
    apply to personalty but generally adhered too
  • S36(6) TA 1925 appointment of additional
    trustees.

11
Appointment of trustees
  • Appointment of the first trustees made by
    settlor. Can appoint self or anyone with
    necessary capacity and who agrees.
  • Can give power in trust to others to appoint.
  • If there are no trustees willing and able to act
    when the trust first takes effect court will not
    allow trust to fail for want of trustees and will
    make an appointment.




12
Appointment of subsequent trustees
  • Trust is independent of settlor once commenced
    so no power of appointment
  • Can retain this power by including it in the
    instrument
  • Subsequent trustees who else can appoint?
  • S.36 TA 1925 deals with appointment of additional
    / substitution trustees.
  • Additional ts act together with existing
    trustees when numbers drop / expertise needed
    (must have ref to restrictions e.g. S34 TA 1925).
  • Substitutions replace one or more existing
    trustees.

13
S.36 TA 1925
  • Additional trustees can be appointed where a sole
    trustee (other than a t. corporation was
    appointed) or no more than 3 trustees.
  • Appointee (by order of priority)
  • (a) person named in trust instrument
  • (b) surviving / continuing trustees
  • If no appointment then can request court under
    s41 TA 1925.
  • S36 says may appoint another person i.e. not
    himself.

14
Appointment by substitution
  • Necessarily involves retirement / death /
    removal of trustee
  • Appointer can appoint self unlike s36(6)
  • Who can appoint? Anyone named for this purpose
    in trust instrument (in order of priority)
  • Surviving or continuing trustees
  • Personal reps of last trustees
  • The court should not be used where others can
    appoint even when bens ask for referral.

15
S.36(1) TA 1925
  • Sets out circumstances for appointment
  • (1) Trustee dead
  • (2) Trustee remains outside of UK for gt12
    months
  • (3) Trustee unfit or refuses to act
  • (4) Trustee is infant
  • (5) Trustee asks to be discharged
  • Bens have no influence (other than in ts of
    land or where provided for in t instrument)
    there is no stat duty to take account of their
    views. Bens can influence when all of
    age/competent/represent whole beneficial
    entitlement see Saunders v Vautier (1841) 4
    Beav.115.

16
S11 TLATA 1996
  • Position modified in respect of ts of land
  • S11 obligation to consult with bens who are
    entitled to interest in possession to give
    effect to majority wishes (n.b. can be excluded
    in instrument)
  •  
  • S19 where no person to appoint new ts and bens
    are of full age / capacity and are entitled to
    entirety of t property can direct one or more
    ts to retire / appoint new trustees
  • S20 bens have similar right where trustee is
    mentally unable and there is no one under s36 TA
    25 to appoint.

17
Retirement of trustees
  • Retirement s.36(1) TA 1925
  • Outgoing trustee retires on appointment of new
    trustee
  • Can be used to bring about forced retirement
    (but restricted to sits set out above).

18
Retirement
  • S39 TA 1925 retirement without substitution
    permitted if
  • two trustees or corporation remain
  • deed is completed
  • consent of co-trustees and anyone with power of
    appointment obtained (by deed)

19
Ss 19 20 TLTA 1996
  • Contain provisions that may be used by bens to
    obtain trustee retirement.

20
Removal of trustees
  • Can be done by other trustees (e.g. by refusal
    to take part in appointment of new trustee but
    only where Act or trust instrument provides)
  • Where trustee agrees retirement.

21
Removal under s41 TA 1935
  • Court has power to appoint new trustee as
    substitute or in addition.

22
Courts inherent powers
  • Court has inherent power to remove trustees
    even where fit provided this is for benefit of
    trust.

23
Disclaimer
  • Appointment as trustee can be disclaimed
  • Provided must not have done any act to indicate
    acceptance
  • Disclaimer can be oral / written implied by
    conduct (e.g. inactivity)
  • Evidence needed to avoid future liability.

24
Vesting of trust property
  • T property must be vested in trustees
  • Settlor must do this or cause it to be done by
    method appropriate to type of property
  • Can self-declare as trustee
  • If property is not transferred to trustees then
    it will be incompletely constituted.

25
Vesting
  • Existing trusts normally contain vesting
    declaration see s40 TA 1925
  • S40 if appointment made by deed and it contains
    vesting declaration property becomes vested in
    trustees.

26
Trustees duties and powers
  • In this section we will consider the following
  • 1. The actions trustees MUST take in the
    administration of the trust (DUTIES).
  • 2. The matters about which they have a CHOICE
    (powers).
  • 3. The standard of care in relation to duties
    and powers.  

27
Initial duties
  • Upon appointment trustees under duty to to
    familiarise themselves with the details of the
    trusts, the trust property and the terms of the
    trust instrument
  • To collect in and safeguard the trust assets.
    The trustees must make sure that the trust
    property is in a state of security and under the
    joint control of all the trustees. NB the extent
    of this duty Re Brogden (1888) 38 Ch. D 546
    Buttle v Saunders 1950 2 AER 193. Must ensure
    no breach by previous trustees
  •   Trustees have a continuing duty to safeguard
    the assets and the documents giving title.
    Continuing duty also to ensure that the assets
    remain vested in the joint names of all the
    trustees.

28
Duty to invest
  • Trustees have a duty to invest but a power over
    what to invest in
  • Such investments are governed by statutory
    default provisions (previously Trustee Investment
    Act 1961 (TIA 1961) now TA 2000 or by express
    power in trust instrument).

29
TIA 1961
  • Applied in so far as not expressly excluded by
    trust
  • TIA listed authorised investments in Schedule 1
    (narrower low risk and wider range higher
    risk investments). Trustees permitted risky
    investments in equities for first time.
  • Wider range investments governed by certain
    criteria quoted companies / shares fully paid up
    / company with capital of 1m dividends paid
    for previous five years.

30
TIA 1961
  • Imposed duties
  • 6(1) required regard for diversification
    suitability of investment
  • 6(2) certain investments required advice to be
    sought by trustee
  • 6(3) requirement to determine when to seek
    advice about retained investments.

31
TIA 1961
  • Considered restrictive land / private company
    shares not permitted
  • Splitting fund a crude form of risk management
    potentially lowering returns
  • Requirements of wider range investments actually
    made them low risk
  • Requirement for advice burdensome
  • Act normally excluded therefore.

32
Express clauses
  • Express clauses used to allow for wider
    investment. Re Harari 1949 1 AER 430 such
    clauses should be given plain / literal meaning
  • Example of a simple express clause
  • To invest as freely as if they were absolutely
    beneficially entitled.
  • Trustees thereby permitted to invest as if
    absolute owners.

33
Trustee Act 2000
  • Trustee Act 2000 now governs trustees powers of
    investment where no express provision made (i.e..
    they are default powers).
  • Applies to all trusts whether created before or
    after it comes into force.
  • Existing trusts now have the new investment
    powers.

34
General power of Investment
  • S.3 TA 2000 general power of investment
  • a trustee may make any kind of investment that
    he could make if he were absolutely entitled to
    the assets of the trust
  • Note that the general power of investment does
    not authorise the purchase of land (governed by
    S.8).

35
Meaning of invest?
  • What does invest mean? See Re Wragge 1919 2
    Ch 58
  • to apply money in the purchase of some property
    from which interest or profit is expected and
    which property is purchased in order to be held
    for the sake of the income which it will yield

36
When is an investment an investment?
  • Whether the power to invest derives from s3 or
    an express clause we need to know what counts as
    an investment?
  • Re Power 1947 Ch 572 house for occupation by
    a beneficiary producing no income not an
    investment.
  • Modern judicial attitudes investments that
    accrue in value considered legitimate see for
    e.g. Cowan v Scargill 1985 Ch 270, per Megarry
    VC the prospects of the yield of income and of
    capital appreciation both have to be considered
    in judging the return from the investment.

37
Principles governing investment
  • Harries v Church Commissioners per Nicholls VC
    trustees should seek the maximum return, whether
    by way of income or capital growth Known as
    concept of maximum or total return.
  • EN 22 (explanatory note) the trustees can
    invest in a way which which is expected to
    produce an income or capital return.
  • No definition of investment in TA 2000. ENs are
    not part of the Act is it income producing
    (traditional approach) or can investment include
    income or capital appreciation in accord with
    modern judicial view?

38
Investments in land
  • S.8 TA 2000 special rules re land investments
    in freehold or leasehold land. Under TIA 1961
    investments in land not permitted except by
    express clause (but note effects of Re Wragge and
    Re Power). Authorised in UK if the land is
  • (a)    as an investment
  • (b)   for occupation by a beneficiary
  • (c)    for any other reason

39
Protection for beneficiaries
  • Trustees not absolute owners of assets.
    Beneficiaries may feel inclined to invest
    speculatively. Law Commission considered that
    beneficiaries need protection against investment
    risks. Legislation to set out specified trustee
    duties when making investment. Hence
  • S4 Standard Investment Criteria
  • 4(3)
  • - (a) suitability
  • - (b) diversification

40
Investment criteria
  • EN 23 investments must be suitable.
    Suitability relates both to the kind of
    investment proposed and to the particular
    investment as an investment of that kind
  • Includes considerations such as the size and risk
    of the investment, appropriate balance between
    income/ capital growth (life tenants income and
    capital for remainder man)
  • Includes any relevant ethical considerations
  • But compare Cowan/Harries re ethical
    considerations.

41
Investment criteria
  • In Cowan trustees must put aside their own
    personal interests and views
  • In Harries investments to be made solely on the
    basis of investment criteria
  • Trustees can only make a financially
    disadvantageous investment decision for ethical
    reasons in extremely limited circumstances e.g.
    where aims conflict with aims of charity (e.g.
    tobacco/cancer)

42
Standard investment criteria
  • Under criteria there is need for diversification
  • Modern portfolio theory
  • See Hoffmann J. in Nestle v National Westminster
    Bank PLC (1st instance, 29th June 1988 unreported
    affd 1994 1 All ER 118 CA)
  • Trustees judged by the standards of current
    portfolio theory risk level of entire portfolio
    rather than the risk attaching to each investment
    taken in isolation.

43
Trustees subject to duty of care
  • Duty of care contained in s1 TA 2000.
  • EN 25 as the exercise of the power of
    investment is subject to the duty of care in S1,
    trustees may need to have regard to other matters
    in addition to the SIC. However, the SIC will be
    of central importance in every case.

44
Advice
  • TIA 1961 required advice to be sought and
    considered for anything other than
  • low risk investments. (See LC Report 260) Under
    TA 2000
  • S. 5 before investing trustees must have obtain
    and consider proper advice with regard to SIC
  • Unless 5(3) T reasonably concludes it unnecessary
    or inappropriate
  • EN 26 example of where investment small cost
    of advice is disproportionate
  • Trustees possess the skills
  • Ss(4) proper advice advice of person
    reasonably believed by T to be able to give it
  • Ss (2) advice when reviewing about varying
    investments.

45
Other safeguards
  • NB stat duty of care set out in S1 TA 2000
    applies when exercising the power of investment,
    when carrying out the section 4 and 5 duties and
    exercising the power under section 8 to buy land

46
General investment duties
  • Cowan v Scargill 1985, per Megarry VC
  • Duty of trustees to exercise their powers in the
    best interests of the present and future
    beneficiaries of the trust, holding the scales
    impartially between the different classes
  • This is a paramount duty.

47
Two points to note
  • Best interests financial interests (but caveat
    below) power of investment must be exercised to
    yield the best return, judged in relation to the
    risks of the investment in question income yield
    capital appreciation both to be considered
  • Ts must act fairly between the beneficiaries.

48
Also
  • Ts must put aside own interests and views
  • Ts may need to act dishonourably if required (see
    Buttle v Saunders 1950 2 All ER 193)
  • Caveat benefit does not inevitably and solely
    mean bens financial benefit. If only bens are
    all adults with strict moral views might not be
    to their benefit to make investments to which
    they morally object. In v. rare cases Ts can
    take into a/c non-financial considerations
    leading to actual financial disadvantage.

49
Standard of care
  • Ts under duty to meet standard of care in Learoyd
    v Whiteley (1887) the duty including the duty to
    seek advice on matters T does not understand and
    on receipt acting with same degree of prudence.
  • Under Learoyd standard for investment is such
    care is as an ordinary prudent man would take if
    he were minded to make investment on behalf of
    others for whom he felt morally bound to provide.
    NB Replaced by S1 TA 2000.

50
Cowan v Scargill
  • Facts mineworkers pension fund. V wide
    investment powers. Ten trustees aided by experts.
    Five from NUM refused investment plan unless
    overseas investments withdrawn and no energy
    industries in competition with coal.
  • Court held Ts in breach unless adopt
    investment strategy had to act in best
    interests of bens and put aside personal views.

51
Review of investments
  • Review requirements under section 4(2) trustee
    must from time to time review the trust
    investments and consider whether they should be
    varied
  • EN 24 S4(2) codifies the common law position,
    under which a trustee with a power of investment
    must undertake periodic reviews of the
    investments Nestle v National Westminster Bank
    (supra)
  • Must obtain and consider proper advice when
    reviewing see S.5(2).

52
When will these powers apply?
  • Power of investment under s3 applies to all
    trusts
  • TA Ss 6 power is additional to any powers
    conferred on trustees subject to any restriction
  • Ss 9 10 contain similar provisions regarding
    land under s8.
  • NB power of trustee to apply to court under
    Variation of Trusts Act 1958 or s57 TA 1925 to
    widen investment powers. Rare since TIA 1961
    because difficult to extend beyond modern powers
    in statute. Re Kolb principle Re Kolbs WT
    1962 Ch. 531, compare with Trustees of the
    British Museum v AG 1984 1 WLR 418).
  • Investment powers now extended under TA 2000.
  • Further duties and powers will be considered in
    the next lecture.
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