Trusts - Powers and Control of Trustees

Question 1

Powers of Maintenance and Advancement

Answer 1

• Allow trustees to make earlier use of trust capital / income in certain situations
• E.g. beneficiary with contingent interest can receive money
• Derive from statute but can be extended or restricted by trust document
• Discretionary powers: trustees under no obligation to use them
• Advance does not mean a loan - simply an early release of trust income / capital

Question 2

Income

Answer 2

Money generated by trust property

E.g. interest from money in a bank account or dividends from shares

Question 3

Capital

Answer 3

Assets forming trust property

Question 4

Power of maintenance

Answer 4

Applies to trust income

Beneficiary under 18 has no right to this income:

• Income can be accumulated until beneficiary reaches 18; or
• Given to beneficiary under power of maintenance

Applies when child beneficiary has interest in income

Income can be used for maintenance, education or benefit as trustees see fit and any unused income accumulates (must be applied directly to that purpose or to a parent / guardian and not paid directly to minor)

Previous income accumulated can be used for maintenance, education or benefit

Settlor may vary power of maintenance

Question 5

When beneficiary turns 18

Answer 5

Power of maintenance ends

Beneficiary can claim income as of right but will depend on nature of their interest

Vested interest in income: entitled to claim interest arising after 18th birthday and income accumulated during minority

Vested interest in income and capital: trust ends on beneficiary’s 18th birthday and trust property must be transferred to beneficiary, including any accumulated income

Contingent interest in capital: if beneficiary has an interest in capital contingent on them attaining an age greater than 18 they are entitled to claim all the income arising after their 18th birthday and any remaining income accumulated during their minority accrues to capital

Question 6

How much income can be paid out for maintenance?

Answer 6

• Pre-October 2014: only a reasonable amount
• Post-October 2014: no requirement of reasonableness

Trust in a will takes effect on the date of death

Question 7

Power of advancement

Answer 7

Applies to trust capital

Trustees can use this power only if beneficiary has interest in trust capital

Power will not apply to a beneficiary only with a life interest - this applies only to income and not capital

Trustees have wide discretion

Trustees may pay or apply capital sums (i.e. either directly to beneficiary or apply it to the purpose)

Rules for power of advancement:

• Amount must not exceed vested or presumptive entitlement (e.g. a trust fund currently at £300,000 to be shared equally amongst 3 beneficiaries)
• Any advances must be factored into final distribution
• If an advance will prejudice any beneficiary entitled to a prior interest the written consent of that person (provided they are 18 and have capacity) is required

Power applies to beneficiaries of all ages (although still relevant because a person under 18 cannot give a valid receipt)

Pre-October 2014: advances limited to no more than half of a beneficiary’s share
Post-October 2014: no limit

Trust in a will takes effect on the date of death

Question 8

Control of Trustees by Beneficiaries

Answer 8

• General rule: trustees not subject to control of beneficaries and no requirement to consult

Exceptions to general rule:

• Beneficiaries may compel trustees to fulfil duties
• Beneficiaries cannot challenge trustees’ excercise discretion unless irrational or capricious (trustees not required to provide reasons as to how they have exercised discretion)
• Where trustees have given beneficiaries a legitimate expectation that their discretion will be exercised in a particular, if they wish to change their policy they should warn the beneficiaries in advance
• Beneficiary’s right to inspect trust documents: includes trust document, accounts and minutes of trustees’ meetings except where documents include information about exercise of discretion

Two special powers:

If beneficiaries are over the 18, have capacity and between them they are absolutely entitled to the entire equitable interest and agree unanimously they may:

• Require the trustees to retire and appoint new ones of their choosing; and
• Bring the trust to an end and require trustees to transfer trust funds in shares they agree