Trustees are given two specific categories that they can operate in. The first one is the power to act with regards to the trust and the trust property. This power is discretionary and need only be used when the trustee feels that it is in the best interest of the trust. Using this power is not compulsory and all trustees must agree on the exercise of it. The second capacity is a duty to act. A trustee has certain duties that are obligatory. Failure to carry out these duties will result in the trustee breaching the trust. When it comes to carrying out a duty, unanimous agreement of all trustees is not needed.
Unlike a power, a majority vote on the course of action to take will suffice. When the majority is attained, the duty can be carried out. A duty is something that must be done for the trust, while a power is in place to help you carry out that duty. For example, a trustee has a duty to safeguard the trust property1. Anything done that conflicts with this duty will be a breach of the duty and therefore, a breach of trust. Trustees only have the power to take out insurance for the trust property, it is not obligatory. However, if they do not insure the trust, they are most likely failing in their duty to safeguard the trust property.
In looking at the scenario, Peter has different powers and duties. The way he exercises them will determine whether he is in breach of trust or not. The issues that Peter would have to consider when it comes to James, Sally and Chris are the subjects of maintenance and advancement. Maintenance, referred to in S 31 (1) (i) of the Trustee Act 1925, states in general terms, that trustees have a discretionary power to give money for the maintenance or education of a beneficiary, before they are officially entitled to receive all of the money.
This is a power that trustees have but they have no duty or any obligation to carry it out. It is completely discretionary. The money given to the beneficiary for maintenance must be from the income of the trust property, which means that the trust must be making profit in some way. Maintenance cannot be paid if there is no income. Advancement is similar to maintenance as it is paid to a beneficiary before they are officially entitled to receive it. However, it is a capital sum paid to the beneficiary for some reason, for example, to start a business. It must be for the beneficiary’s advancement or benefit.
Advancement is not paid out of the income as maintenance is, but is paid out of the capital sum. In the case study, advancement would be taken out of the £250,000. When advancement is paid, only up to 50% of the beneficiary’s share can be given. The remaining half must be held by the trustee until the beneficiary becomes eligible for it. It is also important to note that in circumstances where there is a life tenant receiving the benefit of the trust, if a beneficiary with a future interest requires an advancement, the life tenant must give his or her permission in writing.
If permission is obtained, then an advancement of a future interest would be possible, this being an interest that will become available to the beneficiary at some point in the future. In the case study, it seems James would require an advancement. Sally would either be seeking maintenance or an advancement. She may wish for an advance payment to cover her university fees and living costs or she may want her father to continue to help her while she receives the income of the trust as maintenance to help her through university.
This would seem to be acceptable under the rule of maintenance as it can be used for her maintenance or education. It is important to note that James and Sally may not be eligible for either maintenance or advancement. It would be Peter’s responsibility to decide whether they were eligible according to the facts and the power that he has as trustee. The way the scenario stands at the moment, at the time the gift is given, Chris is the only one entitled to it. He has the life interest. James and Sally would either have a vested interest or a contingent interest. A vested interest is certain.
The beneficiary will certainly get the benefit of the trust at some stage. For example, if the gift was a vested interest, it is certain that the beneficiary will be entitled to it at some point. A contingent interest is conditional, it is based on a condition. With a contingent interest, it cannot be said for certain that the beneficiary will ever receive it. It is dependant on them (the beneficiary) fulfilling the criteria or meeting certain conditions. James and Sally both have contingent interests due to the fact that their getting the gift is dependant on them reaching 25.
If they died before they reached 25, the money would revert back to Chris’s estate. If the gift was a vested gift and the beneficiaries died before they received it, it would become a part of their estate. If James and Sally where able to acquire the money automatically on Chris’s death, then they would have a vested interest in the property. However, as there is also the condition that they reach 25, it means it is a contingent interest. As well as a contingent interest, they also have a future interest, which means it is not coming into force now but at some point in the future.
As Chris has the life interest in the trust and James and Sally only have a future contingent interest, James and Sally cannot acquire the money from the trust until Chris has died and they have turned 25. It also means that they are not entitled to any of the present income. It all belongs to their father. The only time they may become entitled to maintenance is if Chris dies and they have not yet reached the age of 25. The money would then be available to them. If either of them wanted maintenance while Chris was still alive, Peter cannot give them anything. The only way they may get some money is if they asked Chris for some.
If there was no life tenant, it is likely that they would be entitled to maintenance providing that the option had not been excluded by the trust document. Peter may be able to give James an advancement, as with advancement it does not matter if there is a life tenant. As long as the life tenant agrees in writing to the advancement, it may be possible for James to get it. Peter may provide money to James, as long as Chris has agreed in writing. It must be for James’ advancement or benefit and it is likely that his business venture would fall into that category.
If Peter thought that the money was not going to be used for what James originally said, then he has a responsibility to the trust to protect it and withhold funding from James. Peter must use his discretion. If Brian, the testator, gave any impression in the trust that advancement was contrary to his intentions, then James would not be entitled to an advancement. This was the point raised in Re Evans Settlement 2 where the testator made provisions for the beneficiaries to receive a certain amount from the trust before they became eligible.
This was held to exclude statutory provisions including the advancement rule. However, it seems that there is no evidence that advancement was contrary to Brian’s wishes so James would be likely to get an advancement if Chris agrees in writing. If there is a contingent interest and an advancement is given through the discretion of the trustee, should the beneficiary die without fulfilling the contingency, the trustee will not be held liable even though the condition has not been met. Providing sufficient discretion was used, the advancement would be held to be acceptable.
If James received an advancement, then died before reaching the age of 25, Peter would not be penalised. The remainder of the capital sum would just revert back to Chris’ estate. If Sally asked for maintenance and not advancement, she may have a problem receiving it as there is a life tenant. One of the reasons maintenance is in place is to help with education, so if Sally was entitled to it, she would be able to receive it as her need is educational. The money however, can only be paid if it is available for the beneficiary and in this case, it is not. Chris has the sole benefit of the trust.
Sally would not be able to get any and Peter has no discretion in the matter. If there was no life tenant, Sally would be able to receive maintenance (providing there is income). If she was under the age of 18, she would only be able to receive it if she asked for it and genuinely needed it. If she was over the age of 18, she would automatically receive it. Then, when she reached 25, she would get the capital sum and any income that was accumulated before she reached 18 that she did not ask for. Section 31 of the Trustees Act makes provision for maintenance.
It is possible for Section 31 to be excluded in the trust document. In this case, the testator would most likely object to income being automatically given to the beneficiary at the age of 18. In this situation, the beneficiary would have to apply for maintenance. Unfortunately, however, maintenance would not benefit Sally as there is a life tenant. Sally would benefit most from applying for advancement. Providing her father gave his permission in writing, Peter would be able to give her a part of her inheritance. Where Tabitha is concerned, the point of law applicable is variation of the trust.
Jennifer would like the trust to be changed so that Tabitha cannot receive her money for another ten years. The general rule laid down in Re New 3 was that a trustee must carry out the trust according to its terms and must not deviate from the terms of the trust. There are however, a few exceptions to the rule. Variations are allowed if beneficiaries consent or if the courts have the authority to change them through their inherent jurisdiction. Exceptions also include any provisions made by statutes and in addition, the Variation of Trusts Act 1958.
Chapman v Chapman 4 also set out four exceptions to the general rule. For a variation of trust to be valid, it is the general belief that the trust must only be altered to achieve beneficial purpose. This would be the reasoning that the courts would find most acceptable. However, the trustee cannot act independently, all beneficiaries who are suis juris (of legal age) may deal with their beneficial interests in any way they see fit. They are also required to consent to any changes. Peter could not delay Tabitha receiving her inheritance without her permission, otherwise he would be in breach of trust.
The change must also be beneficial to Tabitha and I think that although withholding her money may seem to make sense, it is unlikely that this would benefit her. I doubt the courts would agree that it was a benefit to her. The variation is not, for example, a tax or financial benefit, so it is unlikely that the courts would allow the variation. There is very little that Peter can do to vary the trust without Tabitha’s consent as she is of legal age. The courts have the power to make certain provisions, but only when it is most needed. There are no statutory provisions that would give Peter the power to change the terms of this trust.
The Variation of Trusts Act 1958 can only apply when beneficiaries are under age or not of sound mind, this means any person that cannot consent for themselves. There seems to be no reason why Tabitha cannot decide what she wants to happen with the trust. It is unlikely that Peter can do anything to honour Jennifer’s request. I find this a little peculiar as it is Peter’s responsibility to protect the trust and if there is evidence that the trust may be destroyed, Peter should be given the power to protect it. This seems to be a flaw in trust law. However, Tabitha’s spending may just be conjecture by Jennifer.
Tabitha may be nothing like that, but that is what Jennifer thinks of her. Also, if Tabitha is a spendthrift, then who is to say that she will have changed by the time she is 35. If the trust keeps being postponed, then Tabitha may die never getting her inheritance. The courts always endeavour to uphold the testator’s wishes and it was not his wish that Tabitha never receive her inheritance. The purchase of Molineux Cottage by Peter may constitute a conflict of interest. In law, if a conflict of interest arises, then it is most likely going to be a breach of trust, even if the conflict benefits the trust.
Even though Peter bought the cottage for £20,000 over market value, the courts are still likely to find that a breach has occurred. A trustee can use his knowledge of the trust and the trust property to give him an advantage over other buyers, therefore a conflict of interest is said to arise and it is likely that a breach of trust is present. Peter is a classic example of this and it is likely that the courts will say he is in breach. When trustees do enter into a sale, if a beneficiary wishes, he/she can avoid the sale.
So, if Tabitha disagreed with Peter purchasing the cottage, she could ask the courts to set the contract aside. One way Peter may escape liability is if Tabitha received independent advice and still proceeded with the sale. If she did receive independent help, the sale may still stand. If she did not, it is likely that it could be set aside. The courts must decide. However, Peter would have still broken the general rule by buying the cottage and a conflict of interest would be present. It would be advisable to Peter not to make this purchase as the general rule is trustees should not purchase trust property.