Professional Development

Institute and Faculty of Actuaries

A practical guide to trusts
Workbook

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1. Introduction to trusts

Trusts are used by individuals as a sensible means of holding, preserving and generating
fortunes. They also have a wide variety of applications in a commercial context. For example:
 Commercial investors often come across trustee shareholders holding significant blocks
of shares in both private and public companies.
 When more than one bank (called a syndicate) lend money to a borrower it is
impractical for them all to take security over the borrower’s assets individually. To solve
this the banks appoint a security trustee who holds the security on trust for the banks.
 Where a company takes money in advance for goods or services and is close to
insolvency the directors sometimes create a trust so that the company holds advance
payments on trust for customers. This way, if the company goes into liquidation the
money does not go to meet the claims of creditors of the company but is ringfenced for
customers. Directors do this to stave off potential wrongful trading claims (see the
company law guide)

Courts may also impose a trust in commercial transactions as a means of preventing one party
unjustly enriching itself at the expense of another.

Trusts exist in all common law jurisdictions such as India, the US and Canada. In civil law
systems which are usually based on French or German law it is not conceptually possible to
split property rights the way a trust does. If any form of trust exists in civil law systems it does
so under legislation.

2. What is a trust?

A trust is not a legal person; it is a name given to a collection of rights, obligations and assets.
A trust has been described as "an equitable obligation binding a person (who is called a
trustee) to deal with property over which he has control (which is called trust property) for the
benefit of persons (who are called beneficiaries) of whom he may himself be one and any one
of whom may enforce the obligation" (Underhill & Hayton Law of Trusts and Trustees ). This
definition was approved by the court in Re Marshall's Will Trusts ([1945] Ch 217).

3. How are trusts created?

Trusts may be created:

 By statute (statutory trusts).

 Intentionally by an act of the settlor (express trusts). The person who sets up the trust is
called the settlor.

 Implicitly from the intention of the settlor (implied or resulting trusts).

 By operation of law (constructive trusts).

Express trusts are the type most commonly encountered in commercial transactions and this
note focuses on this type of trust (see Types of trust below).

The key characteristic of a trust is that it permits the separation of legal ownership and
beneficial interest: the trustees become the owners of the trust property as far as third parties
are concerned; the persons with a beneficial interest in the trust property are entitled to expect

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(and can require) that the trustees will manage the trust property for their benefit and,
depending on the terms of the trust and the exercise of the trustees' powers, will or may benefit
from the trust property or its income in due course but they do not own that property.

This means that the trust has a wide variety of applications and uses including the following:

4. Types of trust

There are a number of different types of trusts:

4.1 Implied or resulting trusts.

An implied trust may be either presumed or automatic. A presumed trust arises where a person
is presumed to have the intention to create a trust in respect of property he holds. Such a trust
may be inferred when someone provides the purchase price for property to be legally held by
another. For example Alice and Bob are in a relationship. They both contribute to the deposit
for a house but Bob says that only he can be on the ownership register at the Land Registry. A
court may hold that Bob holds the property on resulting trust for himself and Alice. Whether
there is in fact such a legal presumption will depend upon the relationship between donor and
donee and the other circumstances prevailing at the time. There will, for example, be no such
presumption if a gift is from husband to wife. Evidence of intention will usually be sufficient to
override this presumption.

An implied trust may arise automatically where the settlor fails to dispose of the whole
beneficial interest in the property which returns to or "results" to the settlor.

4.2 Constructive trusts

Constructive trusts arise through operation of law, regardless of the intentions of the parties.
Equity will often find such a trust to exist to prevent unjust enrichment, or where it would be
unconscionable to allow a legal owner to retain beneficial ownership of property. For example,
an actuary who improperly profits from his position will be a constructive trustee until he
accounts for his profits. In recent years, the courts have shown themselves increasingly willing
to find constructive trusts in the commercial context, for example, where a bank wrongly made
a payment twice to another, the second bank was held to be a constructive trustee. This can
cause the obvious difficulty that constructive trustees may be unaware of their potential
trusteeship.

Liability depends on knowledge of the existence of the trust, and either dealing with (knowing
receipt) or assisting someone else to deal with (knowing assistance) trust property in a manner
inconsistent with it being trust property. Receiving trust property without knowledge does not
give rise to liability; liability arises when the recipient continues to deal with it after discovering
that it is so. In this case knowledge can be imputed to someone who does not make enquiries
or wilfully shuts his eyes to the obvious. The true distinction when considering liability for
knowing assistance is between honesty and dishonesty and it is unlikely that a merely
negligent person would fall into this category.
.

4.3 Bare trusts.

Under a bare trust, a trustee holds property for a beneficiary with no specific trust provisions.
The trustee (or nominee) deals with the property in accordance with the beneficiary's
directions. In this case the beneficiary is the beneficial owner of the property. A bare trust can
be express or implied.

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4.4 Private trusts.

The term private trust can be used to describe trusts set up by individuals. There are five basic
types:

 A life interest trust where the life beneficiary is entitled to receive for life or a fixed
period all or a fixed share of the income generated by the trust fund. On his death, the
right to trust income will pass to another or the trust may come to an end because the
trust capital will be distributed to the capital beneficiaries.

 A discretionary trust where the trustees have the power to appoint the income and
capital of the trust fund as they see fit among a class of beneficiaries. Income that is not
applied can be accumulated during the permitted accumulation period.

 An accumulation and maintenance trust established under section 71 of the Inheritance

Tax Act 1984 has certain tax advantages where there are young children. The
beneficiaries must generally attain an interest in the income or capital of the trust fund
by the time they reach 25, but until they reach 18 the trustees can choose whether trust
income should be applied for the benefit of the beneficiaries or accumulated for later
distribution. They are similar to discretionary trusts except that the beneficiary must
obtain an interest in the trust income or capital no later than his attaining age 25.

 A protective trust enables the settlor to provide protection for an immature or reckless
beneficiary by transferring assets to trustees to hold on protective trusts for that
beneficiary. A beneficiary initially gets a life interest in the trust fund which is protected
in that it automatically comes to an end if, for example, he is declared bankrupt or
attempts to assign his interest to his creditors. The fund will then be held on
discretionary trusts for the benefit of a wider class of beneficiaries which will include the
beneficiary and his family.

 A charitable trust where the trustees may only use income or capital to benefit charities
or charitable purposes.

5. Sources of law

There are two sources from which a trustee derives his powers: the general law and the trust
instrument.

Trusts have been part of English law for centuries. In addition to case law, the law affecting
trusts and trustees is contained mainly in:

 The Trustee Act 1925 (TA 1925).

 The Law of Property Act 1925 (LPA 1925).

 The Settled Land Act 1925 (SLA 1925).

 The Variation of Trusts Act 1958 (VTA 1958).

 The Perpetuities and Accumulations Act 1964 (PAA 1964).

 The Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996).

 The Trustee Delegation Act 1999 (TDA 1999).

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 The Trustee Act 2000 (TA 2000).

The trust instrument (also called the trust deed or settlement deed) is the document that sets
up the express trust and governs the trust's operation. Its provisions usually take precedence
over the general law and usually extend rather than restrict trustee powers (see Content
below). There are exceptions to this; not all sections of the relevant legislation can be excluded
so that, for example, a trust instrument cannot exclude the trustees' power under TLATA 1996
to postpone the sale of land. Another example is the obligation on a trustee to consider
standard investment criteria when exercising a power of investment (Section 4 TA 2000).

6. Elements of a trust

The basic elements of a trust are the parties, formalities, content, trustees and their duties and
powers.

6.1 Parties

There are normally two parties to a trust instrument, the settlor and the trustees (see Trustees
below). The settlor is the person who sets up the trust and settles or transfers the trust property
on or to the trustees for the benefit of the beneficiaries. Such a trust is completely constituted
by an effective transfer of the trust property to trustees (Milroy v Lord [1862] 4 De G.F & J.
264).

It is also possible for a settlor simply to declare a trust over property which he owns, and to
become the trustee of that property. It is not necessary for a settlor to state formally that he is a
trustee but it is necessary to clearly express an intention to create a trust. Where a settlor
makes an oral statement regarding the application of his property, the distinction between a
successful declaration of trust and a failed one can be fine and the court will take into account
the surrounding circumstances as well as the stated intention (Jones v Lock [1865] 1 Ch App
25 and Paul v Constance [1977] 1 WLR 527).

The settlor has two principal functions. He transfers the trust property to the trustees and is
primarily responsible for the provisions of the trust instrument. Unless he has reserved powers
to himself in the trust instrument or is a trustee or beneficiary, the settlor has no further role to
play in law. Whilst trustees will seek to abide by the settlor's wishes when administering the
trust, their duty is to manage the trust property for the benefit of the beneficiaries in accordance
with the terms of the trust instrument and applicable trust law.

Beneficiaries, whilst mentioned in the trust instrument are not a party to it (unless one of them
is the settlor and/or a trustee). There is no prohibition on a beneficiary being the settlor and/or
a trustee. Although the beneficiaries are not signatories to it, the terms on which they may
benefit from the trust property will be set out in the instrument. Except in the case of charitable
trusts, it is the beneficiaries, not the settlor, which have the right to enforce the terms of the
trust against the trustees. The rights of beneficiaries under charitable trusts are enforced by the
Charity Commissioners or the Attorney General.

6.2 Formalities

Few formalities are required for the creation of a trust. The settlor must have the capacity to
create a trust. In general, if a person has the power to dispose of property he can create a trust
over it. Therefore, unless suffering from mental incapacity, anyone over the age of 18 can
create an express trust of property which is capable of disposition (section 1(1), Family Law
Reform Act 1969).

In order to create a valid express trust there must be three certainties:

 Certainty of words. This means that the words creating the trust must be imperative.

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 Certainty of subject matter. This means that the trust property must be clearly defined
or capable of ascertainment.

 Certainty of objects (i.e. beneficiaries). The objects must be certain or capable of being
rendered certain (Knight v Knight [1840] 3 Beav 148).

An oral declaration by a settlor capable of making a trust, which discharges these three
requirements, can be sufficient to create a trust. However, an express trust is usually in writing
and certain statutory powers governing the creation of trusts sometimes require writing. For
example, any declaration of trust over land or any interest therein must be evidenced by writing
However this does not apply to the creation or operation of resulting, implied or constructive
trusts.

All types of property can be subject to a trust. Common examples are land, trading company
shares, an investment portfolio, cash, debt, a business, works of art, intellectual property rights
and so on. There are no particular restrictions although, in practice, persons will be reluctant to
become trustees of assets which carry risk of personal liability simply because of their
ownership. An example of this would be ownership in trust of a shipping line through holding
companies where there is a risk of liability for an environmental disaster piercing the corporate
veil and ending up with the trustees.

6.3 Content

Trust instruments, although varying in form, contain a number of established elements. They
usually set out the:

 Parties (the settlor and the trustees).

 Initial trust fund. The initial fund is normally stated to be a minimum sum of cash with
the addition of further assets being noted by memorandum, so that the fund size is not
apparent on the face of the deed.

 Length of time that the trust is to last. The length of time a non-charitable trust may run
(its so-called perpetuity period) is normally restricted to a maximum of 125 years..

 Beneficial (dispositive) powers and duties. The dispositive powers describe the terms
on which the beneficiaries will or may benefit from the income and capital of the trust.

 Powers and duties relating to management and administration. The administrative

powers confer powers and duties on the trustees regarding the management and
investment of the trust property pending distribution to the beneficiaries. Where the trust
document is silent, general trust law will often fill the gap.

6.4 Trustees

Once property has been transferred to the trustees by the settlor, the trustees become the
legal owners of the trust property. Thus trustees, unlike directors of a company, deal with the
property themselves not on behalf of or authorised by the trust.

In general, any individual, company or other corporation may be appointed as a trustee. The
choice of trustee is a matter of prime importance as they control the trust assets. The settlor
will usually appoint the first trustee himself. As soon as the trust comes into existence he loses
his right as settlor to appoint the trustees. He may reserve the power to appoint trustees in the
future, however if he makes an appointment it will be because he is the person named in the
trust instrument not because he is the settlor.

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Other types of trustees include:

 A Judicial Trustee: a person or corporation appointed by the court to act as trustee

where the trust is to be supervised by the court.

 The Public Trustee: a corporation established by the Public Trustee Act 1906 principally
to administer small private trusts.

 A trust corporation: a corporation which undertakes the business of administering trusts

which satisfies a number of conditions, in particular, those which would enable it to act
as a custodian trustee (section 68, TA 1925). These conditions include requirements
that it must be constituted in the UK or EU, have a place of business in the UK and
have a minimum paid up share capital of £250,000 of which at least £100,000 is paid
up in cash.

The general principle is that any number of persons may be trustees. Normally there will be
more than one trustee to ensure continuity, but there should not be too many to make
administration impractical. There are a few restrictions on the minimum number of trustees. In
particular, whilst one trustee can hold land, a sole trustee who is not a trust corporation cannot
give a valid receipt for the proceeds of sale of land and there are restrictions that may apply on
a change of trustee.

At the other end of the scale there is no general limit on the maximum number of trustees but
where the trust holds land, the maximum number is four, and if more than four are named, only
the first four trustees named in the trust instrument and able and willing to act will be the
trustees.

A settlor usually considers carefully who is to have the power of appointment of new or
additional trustees, and will normally make express provision for this in the trust deed. If he
fails to do so, the power rests with the trustees for the time being (section 36, TA 1925 (as
amended by TLATA and TDA).

The trust instrument will often contain express provisions regarding the resignation or removal
of a trustee. Removal of a trustee is possible under statute only in limited circumstances, for
example, if he is out of the UK for more than 12 months, if he refuses to act, is unfit to act or
incapable of acting (section 36, TA 1925 (as amended)). It is also possible to apply to court to
remove a trustee either under the court's inherent jurisdiction over trustees or in exercise of its
statutory power to appoint new trustees (section 41, TA 1925). Also under section 19 TLATA
beneficiaries may have the power to remove a trustee.

6.5 Trustees' duties

6.5.1 Statutory duty of care

All trustees have a duty to ensure that they manage and protect the assets of the trust
diligently and prudently. The TA 2000 imposes a statutory duty of care on trustees when
carrying out certain functions either under the TA 2000, or under equivalent provisions in the
trust instrument (section 1, TA 2000). The duty of care can be restricted by express provisions
in the trust deed.

In general terms this duty applies to any exercise by a trustee of a power to invest trust
property; to acquire land; to appoint agents, nominees and custodians; or to insure trust
property (Schedule 1, TA 2000).

The duty is a default provision, which may be excluded or modified by the terms of the trust.
The duty requires trustees to act with such care and skill as is reasonable in all circumstances.
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Particular regard will be given to any special knowledge or experience held by the trustee, and
also whether he/she is acting in a professional capacity (section 1(1), TA 2000). The statutory
duty of care takes effect in addition to existing fundamental duties of trustees in equity and at
common law.

6.5.2 Non statutory fiduciary duties

In addition to the statutory duty of care, a trustee's principal duty as a fiduciary is to act in
accordance with the directions of the settlement in the best interests of its beneficiaries.
Trustees may not:

 Put themselves in a position where their fiduciary duties and their personal interests
may conflict (see Conflicts of interest below).

 Make a personal profit from their trusteeship unless authorised (see Trustee
remuneration below).

 Fetter their discretion to act in the future (see Fettering trustees' discretions below).

 Delegate their powers unless authorised (see Power to delegate below).

Conflicts of interest. Trustees must ensure that there is no conflict between their personal
interests and their duties as trustees, although they may be granted the power by the trust
instrument to deal with trust property in ways which might otherwise be considered to be in
breach of trust. Therefore trustees must not sell or lease trust property to one of their number.
Such a transaction is voidable at the instance of a beneficiary, however fair the transaction
might be.

Therefore a purchase can be set aside by a successful application by a beneficiary within a

reasonable time even if there was no fraud on the part of the trustee or the trustee had paid
above market value for the property (Re Thomson's Settlement [1986] Ch 99). It may fall within
a limited range of exceptions, for example, it is expressly or impliedly authorised in the trust
instrument (Sargeant v National Westminster Bank plc [1991] P & CR 518) or by the court.

Similarly a trustee must not use knowledge obtained as a trustee to obtain a personal
advantage. A trustee will be held to be a constructive trustee for any profit extracted by use of
his knowledge even if the trust is no poorer. For example, the Court of Appeal has held that a
solicitor, acting as agent of a trustee, who succeeded in obtaining control of a private company
by acquiring all the shares other than those held by the trust was liable to account to the trust
for profits subsequently made, even though much of those profits had accrued by virtue of
efforts that he made after gaining control (Boardman v Phipps [1967] 2 AC 46). As the
knowledge that he had acquired as the trust's solicitor enabled him to gain control of the
company, his profit belonged to the trust. He was, however, entitled to substantial
remuneration for the skill that he had employed on the trust's behalf because of his openness
and honesty.

The general rule of common law is that trustees are not permitted to charge for their trustee
services (Robinson v Pett [1734] 3 P Wms 249). This rule is subject to exceptions, the most
important of which is where the trustee is specifically authorised to charge in the trust
instrument, where payment is authorised by statute or where the court orders payment under
its inherent jurisdiction to secure the good administration of trusts.

If all the beneficiaries are adult beneficiaries and between them are absolutely entitled to the
trust property, they may authorise payment of trustee fees (Re Sherwood [1840] 3 Beav 388).

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Generally, if there is no charging clause, the court has power to authorise payment where the
work has been exceptionally onerous or has required exceptional skills (Re Worthington [1954]
1 ALL ER 677). The courts exercise this power sparingly. The court can also authorise
remuneration for the services of a trustee that it appoints as it thinks fit (section 42, TA 1925).

Professional trustees can charge for services performed since 1st February, 2001 without the
need for an express professional charging clause in the trust deed (section 29, TA 2000). This
is of use to old trusts and informally created trusts which may not include a charging clause.
Under this provision, a professional trustee of a non-charitable trust is entitled to receive
reasonable remuneration out of the trust fund for any services that he provides to or on behalf
of the trust. Normally professional trustees will ensure that there is a comprehensive fee
charging clause in the trust instrument before accepting office as trustee.

In the past charging clauses were strictly construed against professional trustees. The TA 2000
now provides rules for construction of express professional charging clauses. These rules
apply to services provided under a trust from 1 February 2001, regardless of when the trust
was created, provided that the rules are not inconsistent with the terms of the trust instrument.
The rules on construction provide that a trustee is still entitled under the trust instrument to
receive payment for his services even if those services are capable of being provided by a lay
trustee (section 28(2), TA 2000).

Provision is also made for the reimbursement of a trustee’s proper expenses (section 31, TA
2000).

Fettering trustees' discretions. Any undertakings given by trustees may constitute a

restriction of their powers. The rule of equity is that a fiduciary cannot bind himself as to the
manner in which he will exercise a discretion in the future, although many modern trusts will
expressly allow the trustees to restrict their powers. Even without such a power, a trustee's
discretion is not necessarily fettered just because he undertakes to do something in the future.
The law recognises that there are instances when a trustee has to take a decision now, which
will only become operable in the future.

A number of cases relating to company directors confirm that fiduciaries may bind themselves
as to the future exercise of their powers in certain circumstances. In the Fulham V Cabra
Estates case the Court of Appeal held that when a contract is negotiated on behalf of a
company and the directors bona fide think that it is in the interests of the company as a whole
that the contract should be entered into, they may bind themselves by the contract.

This is an important issue for trustees to bear in mind if they are requested, for example, to
sign irrevocable undertakings to sell prior to a takeover bid being announced. There is always
a danger that, having given an irrevocable undertaking, a higher bid is made by a competing
offeror. The trustee has already bound himself contractually, but remains subject to his
overriding duty to act in the best interests of the beneficiaries. Where a trustee is unsure about
what he should do he can seek the approval of the court to a proposed course of action.

Trustees may also be required to retain or restrict dealings with trust assets for a period during
which warranty or indemnity claims may be made as part of the terms of a sale of the business.
The trustees need to conclude that the proposed course of action, including the fetter, is in the
best interests of the beneficiaries.

Power to delegate. There is a general equitable maxim which demands that a trustee shall not
delegate his powers under a trust unless authorised by the trust instrument or a specific
statutory provision. In today's investment climate delegation is normally desirable as no trustee
may reasonably be expected to possess all the skills required in the management of a diverse
trust fund.

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Before the introduction of TA 2000 it was not possible for trustees, as a collective body to
delegate their discretions without express authority in the trust instrument. Trustees now have
wide-ranging powers to delegate many of their functions in the absence of an express power in
the trust instrument or where an express power does not provide to the contrary (sections 11 to
15, TA 2000).

Delegation to a beneficiary is not permitted under TA 2000 (but see below for powers to
appoint beneficiaries under other statutes). The nature of the functions which may be
delegated are in part governed by whether the trust is charitable or not. Special restrictions
apply to the delegation of asset management functions (section 15, TA 2000).

The statutory duty of care applies to the exercise of the powers of delegation and appointment,
such that trustees must exercise reasonable care when appointing and reviewing agents
(section 1 and Schedule 1, TA 2000). It is not sufficient to simply act in good faith. Trustees are
obliged to review the terms of appointments and the performance of the appointees. In the
case of investment management functions, where trustees have to issue an investment policy
statement the statement must be reviewed regularly, and consideration must be given to
whether agents are complying with it.

If trustees use the power in the Trustee Act 2000 to delegate their investment functions to
investment managers they are prohibited from entering into agreements which permit the
investment manager to appoint a substitute, limit the investment manager’s liability in any way
or allow the investment manager to act in circumstances capable of giving rise to a conflict of
interest. However, this prohibition can be lifted where trustees can show that it was reasonably
necessary to agree to such terms. Reasonable necessity can usually be shown because
trustees would find it hard to employ investment managers on any other terms. A trustee who
satisfies the statutory duty of care in relation to the appointment and review of appointment of
an agent, nominee or custodian will not be liable for the acts and defaults of the appointee
(section 23, TA 2000).

The powers of delegation and appointment in TA 2000 take effect as a default provision and
apply to all trusts except pension trusts, authorised unit trusts or certain funds established
under schemes made under the Charities Act 1993.

6.6 Trustees' powers

Trustees have a number of administrative and managerial powers granted by statute and
under the trust instrument. Modern trust instruments extend the powers granted to trustees by
statute to administer the trust and to confer benefits on the beneficiaries. Where powers are
insufficient, particularly in the case of an older trust instrument drafted in a different investment
climate, trustees may apply to the court for authority to deal with the trust property (section 57,
TA 1925). It is also possible to apply to court to vary the trust (section 1, VTA 1958). However,
following the wide statutory powers contained in Trustee Act 2000, the need to have recourse
to the court will be reduced.

6.6.1 Investment powers.

Most trust instruments grant trustees investment powers, however, a default power of
investment exists for trustees where the trust deed or statute does not provide specific powers
(section 3, TA 2000). This power enables trustees to invest in the same range of investments
as if they were absolute owners of the assets. Previous restrictions covered by relevant
sections of the Trustee Investments Act 1961 have ceased to apply and trustees can now
invest in any investment that is expected to produce an income or capital return. This power
enables trustees to hold investments jointly or in common with other persons.

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The power of investment applies to all trusts, irrespective of the date of their creation, but the
trust instrument can restrict the power. Since TA 2000 trustees must, in all cases, whether
using the power of investment contained in the Act or an express power of investment
contained in the trust deed, consider the suitability of investments and also the need for
diversification of the trust assets; these factors are defined as the standard investment criteria
(section 4, TA 2000). Trustees must also keep the investments under review and are generally
required to seek proper advice (section 5, TA 2000).

This power is subject to trustees’ fiduciary duties and the statutory duty of care (Part I, TA 2000
(see above)). The statutory duty of care can be excluded by the trust deed.
The power of investment under TA 2000 does not apply to pension trusts, authorised unit trusts
or funds established under schemes made under sections 24 or 25 of the Charities Act 1993.

6.6.2 Power to insure.

Trustees have the power to insure any trust property (land or personal property) against such
risks and in such sums as they see fit (section 19, TA 1925 as substituted by section 34, TA
2000). The premiums may be paid out of the income or capital of the trust funds.

Trustees are subject to the statutory duty of care in exercising the power to insure (section 1
and Schedule 1, TA 2000) (unless this has been excluded in the trust deed).

6.6.3 Power to acquire land.

Trustees have the power to acquire and deal with freehold or leasehold land on behalf of the
trust (sections 8 to 10, TA 2000). This is not restricted to the acquisition of property as an
investment. However, the power in TA 2000 is restricted to land in the UK. Many modern trust
instruments will give trustees power to invest in land outside the UK.

The power to acquire land is a default provision and is subject to any restrictions or exclusions
in the trust instrument or legislation (section 9, TA 2000).

This power does not apply to occupational pension schemes, authorised unit trusts and certain
schemes under the Charities Act 1993.

6.6.4 Borrowing and lending.

Trustees' powers to borrow under the general law are limited. They have no general power to
borrow money in order to invest, but they may borrow in order to apply capital moneys subject
to the trust (section 16, TA 1925).
.

6.7 Trustee liabilities

The office of trustee carries onerous responsibilities and trustees are liable to beneficiaries if
they act in breach of trust, that is, in breach of their fiduciary obligations to the beneficiaries.
This can happen if the trustees have acted other than in accordance with the provisions of the
trust deed and have failed to live up to the standard that is expected of them. Beneficiaries will
have a personal claim against the trustees and if a trustee is found liable he will be required to
make good any consequent loss to the trust funds.

Courts have discretion to absolve a trustee from making good a consequent loss even if he has
acted in breach of trust. The court needs to be satisfied that the trustee acted honestly and
reasonably and ought fairly to be excused from the breach and from omitting to apply to court
for directions before committing the breach (section 61, TA 1925). Similarly if the beneficiary
requested or consented to the particular course of action resulting in breach of trust the trustee

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will not be held liable to account to that beneficiary. This is on the basis that the beneficiary
was an adult capable of managing his own affairs at the time of the breach, that he had full
knowledge and knew what he was doing and that no undue influence was brought to bear
upon him (Re Pauling's Settlement Trusts [1964] Ch 303).

The liability of trustees in relation to the delegation of their functions is considered above (see
Power to delegate above).

Exemption clauses. Because of the adverse financial consequences of a successful action by

beneficiaries against trustees for intentional or inadvertent breaches of trust, it is unlikely that a
trustee would accept the responsibility of office without the exclusion or exoneration clauses
contained in most trust instruments, exempting trustees from liability in defined circumstances.

Note that the statutory duty of care under TA 2000 may be excluded by the trust instrument
(paragraph 7, Schedule 1, TA 2000).

Court decisions have indicated that even trustees who charge for their services may be able to
rely on a trustee exemption clause excluding liability even for gross negligence if it is drafted
sufficiently widely (Armitage v Nurse [1997] 2 All ER 705). The exculpatory clause in this case
exempted the trustee from liability for loss or damage to the trust property as a result of being
imprudent, or lacking in diligence, or from negligence or wilful default, so long as he has not
acted dishonestly. The Court of Appeal considered that a trustee exemption clause which
purports to exclude all liability except for actual fraud is not void, whether for repugnancy or
because it is contrary to public policy. Although the court conceived of a core of obligations
owed by trustees to beneficiaries, this did not include the duties of skill and care, prudence and
diligence. The duty of trustees to perform trusts honestly and in good faith for the benefit of
beneficiaries is the minimum necessary to give substance to the trusts and is sufficient. This
view has been confirmed by the Court of Appeal in the Bogg case where a professional
trustee, who was also a director of a private company whose shares were held by the trust,
was able to rely on a wide trustee exoneration clause when, over a two year period during
which he was both director and trustee, the trust's holding in the company became virtually
worthless (Bogg v Raper, 22nd April, 1998, TLR).

Professional trustees may, however, rely on a wide exoneration clause only to the extent that it
clearly protects them. In the event of uncertainty or inconsistency, the clause will be
restrictively interpreted.

For example, in the Wight case, a solicitor trustee of a trust was also solicitor to a company,
some of whose shares formed part of the trust property (Wight & Another v Olswang & Another
(No 1), (1998-1999) 1 ITELR 783). The solicitor mistakenly believed that he was debarred by
insider dealing legislation from giving instructions to sell the shares at a time when he had price
sensitive information relating to them, with the result that a lesser price was obtained when
they were sold. The beneficiaries alleged that the solicitor trustee was in breach of his duty to
obtain the best possible price when selling trust assets. The court held that where there is
inconsistency between two exoneration clauses, the court would not permit them to rely on the
clause which clearly only accommodated the lay trustee.

© The University of Law Limited 2019 12 Ifoa__DP

Professional Development

QUESTIONS

1. Alice and Bob are trustees of the Big trust fund. They have decided to sell some trust
assets. Who in law will be the seller?
2. Unit trusts are trusts. They have the option to convert to OIECS (a collective investment
scheme structured as a company). Why might a unit trust want to convert to an OEIC?
3. In a pension scenario who is the settlor, the trustee and the beneficiaries of a pension
trust fund
4. An actuary uses confidential client information to make a profit for himself. How will the
law treat that profit?
5. A company close to insolvency intends to set up a trust fund to ringfence funds for
important suppliers. It puts the money in a segregated account at the bank and calls the
trust the Urgent Supplier Trust fund. Has the trust complied with the three certainties?
6. Can a trustee charge for his or her services?
7. Is there anything wrong with trustees selling trust fund property to a trustee?
8. Nina transfers property worth £1m to X Ltd for £1. Is there an argument the property is
held on trust?
9. Can professional trustees exclude liability for their own negligence?
10. Who enforces the rights of beneficiaries in a charitable trust?

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ANSWERS

1. Alice and Bob are sellers as trustees. A trust is not a separate entity like a company is.
2. It may be beneficial to convert to a OEIC because much of the world does not
recognise the trust as a legal structure. All legal jurisdictions recognise companies.
3. The settlor is the employer. The trustees are whoever the employer appoints and the
beneficiaries are employees.
4. It is likely the actuary is in breach of a duty to avoid a conflict of interest. Any profit he
makes will be held on constructive trust for the client.
5. There is certainty of subject matter (the money) and intention (the word trust has been
used and the money is in a segregated account). However the beneficiaries cannot be
identified as it is impossible to say who is an urgent supplier without further definition.
This trust would fail.
6. Under general law no. However, a trust deed will allow trustees to charge for services
and professional trustees can now charge even if the trust deed does not provide for
charging.
7. Yes. There is a clear conflict of interest here. Beneficiaries could apply to set the sale
aside
8. Yes. There is an argument the property is held by X Ltd on resulting trust as it may be
the only explanation as to why Nina transferred assets worth £1m for £1.
9. Yes. The case of Armitage v Nurse makes clear trustees can exempt themselves from
liability for their own negligence.
10. The attorney General.
:

© The University of Law Limited 2019 14 Ifoa__DP