Week 4- Administration of trusts, powers and duties Flashcards
Facts and significance of Vatcher v Paull 1915 regarding the validity of exercises of power (privy council of jersey)?
Facts- Under a marriage settlement, husband and intended second wife had joint power of appointment over settled fund for husband’s children (husband was settlor and trustee, wife was trustee, both held the joint power of appointment to decide who the object of the trust was), whether by his first or second marriage. Upon moving to Jersey, the husband acquired real estate, and under a joint deed with his second wife, they settled the fund in favour of their own family (second marriage at the expense of the first marriage), with a clause that if the issue of the first marriage should abandon their rights in the appointor’s real estate the appointment would be void. The law in Jersey was such that anyone dying before 1891 had no power to alter the disposition of their real estate, but the husband had died in 1886.
Significance- the appointment was a valid exercise of the power.
Lord Parker- “In the present case, by the very terms of the settlement creating the power, the donee is entitled to appoint to one or more of the objects of the power exclusively of the others or other of them. He is also entitled to appoint upon condition. The mere fact, therefore, that he intended to benefit the issue of the second to the exclusion of the issue of the first marriage cannot be alleged against the validity of the execution of the power, nor is it any objection to the validity of such execution that the appointment is subject to a condition subsequent with a defeasance in case the condition be not performed. If, therefore, the appointment is open to any objection it must be by reason of the nature of the condition imposed. It should be noticed that in the present case the condition is *379 not one to be performed by the appointees; it is to be performed if at all by third parties over whose actions the appointees have no control.”
McPhail v Doulton 1971 AC 424 facts and significance regarding dispositive powers and duties?
Facts- Bertram Baden executed a deed settling a non-charitable trust for the benefit of the staff of Matthew Hall & Co Ltd and their relatives and dependents. The objects clause provided that:
The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit.
Significance regarding dispositive powers of trustees in a discretionary trust: The significance of the test set out in Re Gulbenkian for discretionary trusts (in or out tests) is that, if the trustees choose to exercise their power of appointment, they must be able to say with certainty whether an object is or is not within the range of people which the power permits the trustees to appoint property to. Lord Wilberforce at 456: “The reference to 'defeating the intention of donors completely' shows that what he is concerned with is to point to the contrast between powers and trusts which lies in the facultative nature of the one and the mandatory nature of the other, the conclusion being the rejection of the 'broader' proposition as to powers accepted by two members of the Court of Appeal. With this in mind it becomes clear that the sentence so much relied on by the appellants will not sustain the weight they put on it. This is: 'The trustees have a duty to select the donees of the donor's bounty from among the class designated by the donor; he has not entrusted them with any power to select the donees merely from among known claimants who are within the class, for that is constituting a narrower class and the donor has given them no power to do this' ( [1970] A.C. 508 , 524). What this does say, and I respectfully agree, is that, in the case of a trust, the trustees must select from the class. What it does not say, as I read it, or imply, is that in order to carry out their duty of selection they must have before them, or be able to get, a complete list of all possible objects.” (Re-affirming the test in Re Gulbenkian and rejecting the approach in IRC v Broadway cottages).
Re Manisty’s settlement facts and significance regarding broad powers and validity?
Facts- “A settlor may validly empower his trustees to add to a class of beneficiaries of the settlement. A power is not void for uncertainty merely because wide in ambit. By a settlement made in 1971, M gave the trustees discretion to pay, apply, appoint or settle the trust funds for the benefit of any of the beneficiaries within 79 years of the date of the settlement. He also gave them power by any deed or deeds revocable or irrevocable to declare that any persons, corporations or charities should be included in the class of beneficiaries. In 1972 the trustees by deed purported to exercise the power by adding to the class the settlor’s mother and any person who should for the time being be his widow. Doubts having arisen as to the validity of the power they took out an originating summons to determine its validity.
Significance- Held, (1) that the settlor was not precluded by the doctrine of non-delegation from conferring an intermediate power on his trustees; (2) the power in question was not invalid for uncertainty since (a) a special power in favour of a class was valid if it could be said with certainty whether a given person was a member of the class, and an intermediate power was likewise valid; (b) the mere width of the power did not render it uncertain; and (c) the settlor was entitled to confer absolute discretion on his trustees and was not obliged to provide guidance on how it was to be exercised; so that (3) as there was no logical objection to intermediate powers and no authority to the contrary, the power was valid” The breadth of the power alone cannot be sufficient grounds to render it invalid, so long as it is exercised in line with the intention of the settlor, and the rule in Re Gulbenkian requires that the power conferred can be exercised by ascertaining with certainty whether a person is or isn’t a member of the class of potential beneficiaries.
What do Re Hay’s Settlement and Re Manisty’s settlement say about dispositive powers?
That both hybrid powers and special powers are not void merely because they are wide in ambit
What obligation does Turner v Turner illustrate as falling upon trustees in a discretionary trust, of which failure to exercise results in breach of a trust?
Facts- “Trustees who exercise a power of appointment, under a discretionary trust, without exercising their discretion because they did not realise that it existed, are in breach of their duty to consider the appropriateness of the appointment, and the appointment will be invalid. S, the settlor, set up a trust for the benefit of his wife, children, remoter issue and the spouses of such issue. He appointed trustees who knew nothing about trusts. The trustees were given discretionary power to appoint capital and income to any or all beneficiaries. There followed a series of appointments which were carried out by the trustees solely at the behest of the settlor, and without understanding that they had any discretion in the matter.
Held, that when exercising a discretionary power of appointment, the trustees were under a duty to consider the appropriateness of the appointment. They had not exercised their discretion and were in breach of that duty. Accordingly, the purported appointments would be set aside” for breach of trust.
Mervyn Davies J: “Accordingly, the trustees exercising a power come under a duty to consider. It is plain on the evidence that here the trustees did not in any way “consider” in the course of signing the three deeds in question. They did not know they had any discretion during the settlor’s lifetime, they did not read or understand the effect of the documents they were signing and what they were doing was not preceded by any decision. They merely signed when requested. The trustees therefore made the appointments in breach of their duty in that it was their duty to “consider” before appointing and this they did not do.”
What is the standard investment criteria for the purposes of the Trustee act 2000 s4
S4) (1) In exercising any power of investment, whether arising under this Part or otherwise, a trustee must have regard to the standard investment criteria.
(2) A trustee must from time to time review the investments of the trust and consider whether, having regard to the standard investment criteria, they should be varied.
(3) The standard investment criteria, in relation to a trust, are—
(a) the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and
(b) the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.
what is proper advice for the purposes of s5 of the Trustee act 2000?
S5) Advice.
(1) Before exercising any power of investment, whether arising under this Part or otherwise, a trustee must (unless the exception applies) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised.
(2) When reviewing the investments of the trust, a trustee must (unless the exception applies) obtain and consider proper advice about whether, having regard to the standard investment criteria, the investments should be varied.
(3) The exception is that a trustee need not obtain such advice if he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so.
(4) Proper advice is the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment.
What is the general power of investment under s3 of the trustee act 2000?
S3) A trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust (The general power of investment s3(2))
S3(3)- The GOP does not permit a trustee to make investments in land other than in loans secured on land
What is the reason for the trustee act 2000 and how does it allow more flexibility to the investment portfolio of the trustee, especially compared to the 1961 act?
The effect of the act is to seemingly increase the burden on the trustee to seek advice and invest trust property in a reasonably prudent manner; the previous legislation governing the investment duties of the trustees, The trustee investment act 1961, provided a list of investments which were said to be safe and provide a reasonable return. So long as the trustee invested in one of these named investments, they could not be in breach of their duty of investment. The shift in the law means that the trustees have much greater discretionary powers of investment, but this is curtailed by a duty of care to ensure the power is used in a prudent manner, as the above sections illustrate. The duty of care is set out below in s1-2, and the situations where the duty is to be complied with is set out in schedule 1 of the act.
What is the duty of care under the trustee act 2000 s1 and what is the standard of care for cases that fall outside of those listed in schedule 1 of the same act?
S1) The duty of care*
(1) Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular—
(a) to any special knowledge or experience that he has or holds himself out as having, and
(b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
(2) In this Act the duty under subsection (1) is called “the duty of care”
Outside the cases in schedule 1 eg investment or acquisition of land, the duty of care is that under the case law, as in the prudent businessman.
What are the facts and significance of Nestle v National Westminster Bank 1988, especially with regards to Hoffmann J’s reference to the modern portfolio theory?
Facts- NW, a bank, acted as sole trustee of the will of N, who died in 1922. It managed the investments firstly for N’s widow and two sons to provide annuities as expressly required by the will and then for the two sons. From time to time the investment strategy was changed to provide the sons with more income to meet their particular tax requirements, by investing in funds which were tax exempt for foreign residents, with the sons residing abroad. In 1986 G, the granddaughter of N and the sole remaining beneficiary, became absolutely entitled. At that time the fund was worth GBP 269,203. If it had kept pace with the ordinary share index since 1922 it would have been worth GBP 1,800,000. G issued proceedings for negligence against NW.
Held, giving judgment for NW, that NW had not been negligent. It had adhered to the standards of prudent investment management and was entitled to be judged by the prevailing investment orthodoxies of the time”
Lord Hoffmann: “The classic statement is that of Lindley LJ (Re Whiteley (1886) 33 Ch D 347, 355):
“The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider, the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.”
This is an extremely flexible standard capable of adaptation to current economic conditions and contemporary understanding of markets and investments. For example, investments which were imprudent in the days of the gold standard may be sound and sensible in times of high inflation. Modern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation. (This is not to say that losses on investments made in breach of trust can be set off against gains in the rest of the portfolio but only that an investment which in isolation is too risky and therefore in breach of trust may be justified when held in conjunction with other investments.”
Also must be recognised that, whilst the bank had misunderstood the scope of its investment clause, they could still justify their decision if they had understood the clause, and their investment of the funds had not actually caused a loss; the plaintiffs were only claiming for a lost economic opportunity.
How does the standard of care expected of a paid trustee differ to that of a volunteer?
“A paid trustee is expected to exercise a higher standard of diligence and knowledge than an unpaid trustee, and that a bank which advertises itself largely in the public press as taking charge of administrations is under a special duty”
Facts and significance of Speight v Gaunt regarding the standard of care expected of trustees?
Is it true that all losses to the value of the trust property resulting from mismanagement from the trustee mean that they have breached their duty of care?
Facts- Trustee (Gaunt, employed by the settlor) paid £15,000 to a broker on the strength of a ‘written bought note’, suggesting the broker had bought securities in that amount, although in reality they had never bought the securities, and this was not discovered until he had become bankrupt, by which time all of the money had been lost.
Significance- Both the CA and the HL agreed that the trustee had acted in the ordinary course of business, as it was standard practice to provide an advanced payment for the purchase of securities.
Jessel MR in the CA said: “the trustee is not bound because he is a trustee to conduct in other than the ordinary and usual way in which similar business is conducted by mankind in transactions of their own. It could never be reasonable to make a trustee adopt further and better precautions than an ordinary prudent man of business would adopt, or to conduct the business in any other way.”
“If it were otherwise, no one would be a trustee at all. He is not paid for it. He says, “I take all reasonable precautions and all the precautions which are deemed reasonable by prudent men of business, and beyond that I am not required to go.” Now what are the usual precautions taken by men of business when they make an investment? If the investment is an investment made on the Stock Exchange through a stockbroker, the ordinary course of business is for the investor to select a stockbroker in good credit and in a good position, having regard to the sum to be invested, and to direct him to make the investment—that is, to purchase on the Stock Exchange of a jobber or another broker the investment required. In the ordinary course, all that the broker can do is to enter into a contract—usually it is for the next account-day
Facts and significance of Learoyd v Whiteley 1887 regarding the duties of the trustee and how the standard of care compares to the freedoms of a property owner investing his own property?
Facts- Trustees invested trust money on the security of a 5 per cent. mortgage of a freehold brickfield, with buildings, machinery and plant affixed to the soil, being advised by competent valuers that the property was a good security for the amount invested. The valuers’ report was in fact based upon a valuation of more than double the amount invested and upon the supposition that the concern was going, but the report did not state this, nor distinguish between the value of the land and that of the buildings, machinery, &c. The trustees acted bonâ fide but acted upon the report without making any further inquiries. The security having failed:
Held, affirming the decision of the Court of Appeal (33 Ch. D. 347), that the trustees had not acted with ordinary prudence, and were liable to make good the money with interest at 4 per cent. from the date of the last *728 payment; and that the tenant for life was not liable to return to the trustees 1 per cent., which was claimed on the ground that the higher interest was due to its being a hazardous security
Significance- Lord Watson- “As a general rule the law requires of a trustee no higher degree of diligence in the execution of his office than a man of ordinary prudence would exercise in the management of his own private affairs. Yet he is not allowed the same discretion in investing the moneys of the trust as if he were a person sui juris dealing with his own estate. Business men of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended with hazard. So, so long as he acts in the honest observance of these limitations, the general rule already stated will apply.”
Buttle v Saunders facts and significance regarding the importance of acting in the best financial interests of the beneficiary?
Facts- The defendant trustee agreed to sell Mrs Simpson land for £6142, before a beneficiary offered £6500 for the same land. In order to uphold good commercial practice, the defendant honoured the lower offer, before the plaintiff beneficiary rejected an injunction on the sale to Mrs Simpson, alleging that the trustee’s duty was to obtain the highest price, part of the duty in acting in the best financial interests of the beneficiary.
Significance- Injunction granted- Wynn-Parry J granted the injunction saying,
“The only consideration which was present to their minds was that they had gone so far in the negotiations with Mrs Simpson that they could not properly, from the point of view of commercial morality, resile from those negotiations.”
There was no formally agreed sale to Simpson, just the beginning of a sale, and therefore there was an obligation on the trustee to “gazump” the original offer.
Facts and significance of Cowan v Scargill and the potential for other criteria by which to judge the duty of care of the trustees and the relevant interests of the beneficiaries?
Facts- Trustees appointed by the national coal board wished to approve an investment plan that included investment in overseas securities and oil and gas industries. The trustees appointed by the national union of mineworkers refused to consent to a plan including overseas investments because they were at direct competition with the domestic miners, and would reduce the value of their pension funds etc.
Significance- it was held that the NUM trustee’s refusal to approve was in breach of trust- they argued that it was inconsistent with the policies of the union, and the pension fund from which retired miners were to recover pensions should have been maximised, as they were the clear beneficiaries of the fund.
McKendrick on Cowan v Scargill: Megarry VC “When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.
10.24 The fact that the NUM strategy might benefit present miners by perhaps assisting the health of the coal industry, which was by no means certain, would be of no benefit at all to retired miners who depended upon the financial performance of the investment to fund their current pensions, so the NUM strategy might also be regarded as not even-handed.
Megarry VC continued:
“In considering what investments to make trustees must put to one side their own personal interests and views. Trustees may have strongly held social or political views. They may be firmly opposed to any investment in South Africa or other countries, or they may object to any form of investment in companies concerned with alcohol, tobacco, armaments or many other things. In the conduct of their own affairs, of course, they are free to abstain from making any such investments. Yet under a trust, if investments of this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by reasons of the views that they hold.”
However, Megarry VC also said: This is the caveat of trust investment and the benefit of beneficiaries. Even if it would cause financial growth maximisation, it is not ALWAYS SO THAT THE BEST INTERESTS OF THE BENEFICIARIES ARE THE BEST FINANCIAL INTERESTS [I]f the only actual beneficiaries or potential beneficiaries of a trust are all adults with very strict views on moral and social matters, condemning all forms of alcohol, tobacco and popular entertainment, as well as armaments, I can well understand that it might not be for the ‘benefit’ of such beneficiaries to know that they are obtaining rather larger financial returns under the trust by reason of investments in those activities … To the extent this last passage is taken to suggest that a trustee might make ‘ethical’ investment decisions in such circumstances, Megarry VC’s words should be disregarded. If all the actual and potential beneficiaries are adults, then a trustee intending such a policy should present it to them in advance and get their consent, in which case the investment will not be in breach of trust. Otherwise it is a breach of trust, since trustees should not have the power to determine by their own lights what constitutes an ‘ethical’ or ‘moral’ benefit to their beneficiaries as a whole- they may be a breach of trust depending on the class of beneficiaries and their relationship with the trustee, whereby the trustee has additional expectations to gain the permission of the beneficiaries in making potentially ethically-adverse investments.
