This problem question relates to issues surrounding the powers of trustees

Advice the trustees as to whether they will be able to help Tom and Sally?

The general law of trusts, as supplemented by the terms of the trust, imposes on the trustees a wide range of duties, which govern their administration of the trust. Duties of the trustees relate to how the trustees deal with the trust property and others will cover their responsibilities towards the beneficiaries. As far as duties are concerned, they must be discharged

Powers on the other hand, are usually concerned with how the trustees’ treat the beneficiaries and some powers relate to how the trustees deal with the trust property. The trustees’ powers are not mandatory they merely provide a facility for the trustees. They are not under an obligation to use a power, and if they do decide to use one of their powers, the manner in which they exercise it is entirely a matter for them. The powers of trustees are fiduciary powers and as such the trustees are under a duty to decide whether to exercise them or not, but having so considered there is no obligation to exercise. The court will only interfere with a decision taken in bad faith.

In assessing the extent of help that can be provided by Fred and Wilma in the separate cases of Tom and Sally, the relevant power will be the power of advancement. It follows that the ability for the trustees to allow payment or use of part of the trust capital for the benefit of the beneficiaries before his/her entitlement is due, concerns a power rather than a duty. The duty in this case is the purpose of the trusts, which is that Tom and Sally should be made entitled to all Edna’s property. Although Edna has expressly provided for the method of disbursement, this by itself can be read as a power, which in turn allows for flexibility. However in order for any act to be effective, the trustees must act unanimously. This means that whatever decisions that Fred and Wilma might think appropriate must be the decision of two of them.

As Edna has transferred all her property to Fred and Wilma on trusts for Tom and Sally on reaching the age of 30 years of age, a power of advancement would allow the trustees to sanction the payment of part of the capital trust fund to or for the benefit of the beneficiaries before they have attained the age of thirty. It is not clear what the value of Wilma’s property is and therefore unclear what portion of trust property is required.

The power of advancement relates to the possibility of the trustees deciding to allow part of the trust capital to be paid to or used for the benefit of a beneficiary before his entitlement has become vested. If the trustees agree to Tom’s request of a £20, 000 to pay his tuition and accommodation, and/or Sally’s request for capital, this would be an example of an advancement. The word ‘advancement’ means to establish someone in life or to make a permanent of long-term provision for them. However the situation with the medical bills for Sally’s sick son is another matter. The power of the trustees to advance money is restricted strictly for the benefit of those mentioned as beneficiaries, i.e Tom and Sally. This will be considered separately below.

Additionally, any advancement must be set against the eventual entitlement of a beneficiary. The Law Reform Committee recommended that the duty to bring advancements into account should be modified to make allowances for the effects of inflation. The Present rule is that the property advanced is valued as at the date of the advancement. The Law Reform Committee recommended that Trustees should calculate the fraction of the fund, which was being advanced and that the beneficiary would be regarded as receiving a fractional share of his/her eventual entitlement. Thus, advancements are thought of in fractional rather than cash terms.

It is noted that Edna has not given any express power of advancement. The power of advancement potentially exercisable by Fred and Wilma will be governed by statute. The Trustee Act 1925 s 32, created a statutory power of advancement, which is automatically exercisable under any trust, unless there is a contrary intention, express, or implied. There is nothing that seems to feature in Edna’s case to suggest that she would have anything against an advancement. Fred and Wilma should consider exercising their powers that they are entitled under statutory law. The power of advancement is a fiduciary power which Fred and Wilma could only properly exercise after due consideration and weight is given to all relevant circumstances

If the trustees exercise the power of advancement, section 32 gives the trustees the power ‘to pay or apply’ the money for advancement or benefit of a beneficiary so they are free to become involved and to pay the money, not to the beneficiary, but to others in order to advance or benefit. So, in Tom’s case direct to the relevant school. It is also open to the trustees to pay money to the beneficiary so that he will have control of the money. It was held in Re Pauling’s Settlement Trusts [1963] 3 All ER 1, that the trustees have a responsibility to inquire as to the application of the money. If the money was advanced for a particular purpose the beneficiary is under a duty to use it for that purpose

However, it may become relevant to know that there is a statutory limit on the proportion of a beneficiaries’ share in the trust property that can be advanced. There is a proviso to s 32(1) that imposes limits on the power. For example not more than one-half of a beneficiaries’ vested share may be advanced. Therefore, any advancement must be set against the eventual entitlement of a beneficiary. However the case of D (a minor) v. O [2004] 3 All ER 780 (H.C), addressed this situation.

The application in the above case was intended to secure the whole of the capital as opposed to the proviso in which section 32 restricts the amount of funds available. The court found that it was satisfied that it was for the claimants’ benefit that the limit imposed by section 32 of the Trustee Act 1925 ought to be lifted. The court allowed the application by assuming jurisdiction on two grounds.

The first ground acknowledged the court’s jurisdiction to vary the terms of the trust. The court held that there was an inherent power to approve a ‘compromise’ agreement on behalf of interested parties. As part of its role in supervising trusts, the court claimed a number of inherent powers to permit trustees to do acts not permitted by the terms of their trust. If those beneficiaries who are of full age agreed to the trustees acting beyond their powers the court could step in and agree (or, if appropriate, refuse to agree) to proposals on behalf of any beneficiary who lacked the legal capacity to participate in the agreement.

The second ground identified in the above judgement involved The Variation of Trusts Act 1958. The Act introduced sweeping changes in the law, and it extended the court’s jurisdiction in order to approve the variation of the trusts concerning administrative and beneficial interests on behalf of the beneficiaries. The court is entitled to sanction “any agreement varying or revoking all or any trusts or enlarging the powers of the trustees of managing or administrating any of the property subject to the trusts ”. There are several conditions to be met in order for the Act to be applicable, all of which are satisfied in the present case concerning the trust created by Edna. These include that property be held on trust where the trust was created by will, the agreement is based on a benefit of those that are subject of the application for variation.

The general effect of the Variation of Trust Act 1958, is to give to the court the power to approve of ‘arrangements’ varying or revoking all or any of the trusts, or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts on behalf of specified categories of people. However, in most situations the court can only give its approval if the arrangement would be for the benefit of those on whose behalf approval is being sought. Under the Act beneficial interests may be varied and alterations may be made in the powers of management or administration.

As far as Sally is concerned, the Variation of Trusts Act cannot give effect to a variation that seeks to benefit her son, as he is not mentioned as a beneficiary. However, an application for variation under the Act can be considered in relation to her need for advancement for capital to use to float the internet company only. Similarly, the Act can be used as a tool to give effect to Tom’s desire for £20,000 for his education. In both cases, an application to the court under The Variation of Trusts Act would have to be considered if the proviso imposed by section 32 of the Trustees Act 1925 would restrict the amount of money that can be advanced according to their respective needs. As mentioned above the Variation of trustees Act will allow the court the discretion to allow advancement of the whole property as opposed to half . The Variation of Trustees Act is designed to deal with situations where the original dispositions was intended to endure according to its terms but which in light of changed attitudes and circumstances it is fair and reasonable to vary.

In most cases, the application will be made by the beneficiaries in this case Tom and Sally. Fred and Wilma may apply if they are satisfied that the proposals are beneficial to the persons interested and have a good chance of being approved by the courts: in Re Druce’s Settlement Trusts [1962] 1 All ER 563 . The powers of the court are very wide and approval may be given to an arrangement which results in trustees’ powers of management or administration being enlarged.

As far as the situation with Sally’s sick son is concerned, an application to the court will be the only option. This is because the power of advancement under section 32 of the Trustees Act 1925, can only benefit persons who are entitled or contingently entitled to capital. The court’s inherent jurisdiction to consider a wide variety of circumstances was highlighted in the case  above. Whether the court will choose to exercise its discretion to allow advancement to Sally that will benefit her sick son is a matter left entirely to their discretion.

Finally, the contingency required by Edna was that both Tom and Sally should attain the age of thirty. Edna also highlighted that where the trust to fail on either of them, the interest should go to her sister Betty. Therefore, what would be the position if a beneficiary was entitled to a contingency interest and the trustees advanced a sum of money to him but the contingency was never satisfied and the interest never becomes vested? This would happen say if either or both of Tom and Sally do not live to the age of thirty. Would the advancement have to be repaid to Betty? The answer is no, the sum may be kept to the obvious prejudice of the trust fund and the other beneficiaries.

BIBLIOGRAPHY

  • Bryant J, ‘A Modern Problem of Trustees’; 155 NLJ 1074
  • Edwards R, Stockwell B, Trusts & Equity; 4th Edition: Financial Times Pitman Publishing 1999
  • Megarry and Wade, Modern Law of Trusts; Sweet and Maxwell 2004
  • Ramjon M, ‘Unlocking Trusts’; Textbook Series 2005
  • D M W Waters, ‘The “New” Power of Advancement’;  (1958) Conv 413
  • D M W Waters, ‘The Creation of Sub-Trusts Under a Power of Advancement’; (1959) 23 Conv 27
  • Word Count including bibliography, footnotes, articles and journals: 1, 995

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