STEP provisions – 2nd Edition
The STEP provisions 1st Edition were in need of updating to reflect both changes in the law and practical problems in administration. It seems hard to think that since the 1st Edition was published we have had the Trusts of Land & Appointment of Trustees Act 1996, the Trustee Act 2000 and the FA 2006.
The main change proposed is to introduce the concept of narrower and wider powers. The proposal is to have two wide powers which can be selected to apply but if no selection is made then by default the narrower powers apply. The wider form powers are:
- Powers relating to income and capital
- Power to appropriate at value at the time of death
In each case by adopting the wider powers the settlor is relying on the trustees appointed to act reasonably and fairly as the exercise of each could be open to abuse. For example, the powers relating to income and capital state that ‘the Trustees are under no duty to hold a balance between conflicting interests of Persons interested in Trust Property’ which overrides the general law which requires a balance to be struck between the needs of any life tenant and the interests of the remaindermen.
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In effect, the clause provides the trustees with the power to ignore the remaindermen entirely and invest only to produce income for the life tenant and equally would permit the trustees to avoid investing for income (perhaps because the life tenant has extensive personal funds or has no need of income because she is being cared for at state expense) and go exclusively for capital growth.
The clause is similar to clause 3(4) of the 1st Edition but by putting it in the wider powers section it will not apply unless the settlor has instructed that it be included.
For both the powers relating to income and capital and the power to appropriate the only protection from abuse is to be found in the provisions preventing conflicts of interest in clause 8 which would prevent a trustee who was also a beneficiary from taking decisions for his own benefit without the existence and consent of an Independent Trustee.
Updating to accommodate changes in the law
Most of the changes compared to the 1st Edition are to provide a wider clause then those permitted under the general law, for example, the Trustee Act 2000 now permits trustees to invest Trust Property in any manner as if they were beneficial owners apart from property which has to be a legal estate in the UK. Clause 3(1)(a) of the draft 2nd Edition widens this to ‘land in any part of the world’.
Some changes are a direct result of legislation rendering them obsolete such as the removal of what was clause 5, the holding of land on trust for sale (abolished by the Trusts of Land & Appointment of Trustees Act 1996) and the removal of the power to insure (covered now by s.19 Trustee Act 1925 as amended by s.34 Trustee Act 2000).
Practical changes to aid administration
Other clauses have been completely re-worked such as clause 3(4) which says: “Income may be set aside and invested to answer any liabilities which in the opinion of the Trustees ought to be borne out of income or to meet depreciation of the capital value of any Trust Property. In particular, income may be applied for a leasehold sinking fund policy.” This clause is attempting to deal with the tricky problem of demergers in companies when special dividends are issued as a way of returning capital which diminishes the capital value of the holding and therefore the capital of the trust. It permits the special dividend to be retained as capital even though the payment would otherwise be strictly classified as income.
One interesting tweak is the addition to the power to apply or pay income for the benefit of a minor to their parent or guardian or the young person (if 16 years old) of the power to apply capital in similar fashion. This could be helpful for dealing with small sums of capital which are better paid out than held in trust. Obviously it is discretionary and not compulsory so the trustees would have to use their judgment in any particular case.
The changes to Trustee Remuneration clause may well prove contentious in a variety of ways:
- The entitlement to reasonable remuneration has been restricted to trustees acting in a professional capacity instead of anyone ‘who is engaged in a business’ being able to charge for work done. Where a lay PR, for example, may be a self-employed person who has to give up paid for time to sort out the estate this will now need a specific clause to widen the STEP provisions.
- The appointment of a Trust Corporation to act as Trustee will be on the basis of its standard terms as published at the date of the appointment or as published from time to time. This will mean the drafter will have to ascertain what the Trust Corporation’s standard terms are as some include protection from liability for negligence. A member of STEP or a solicitor is duty bound under the membership rules or Code of Conduct respectively to advise a client of any limitation on liability which may be included in what has been drafted and although indirect this would constitute such an indemnity clause.
Liability of trustees
The clause dealing with the liability of trustees has also been reworked and now protects both lay and professional trustees from strict liability unless negligent and continues to protect the lay trustee (but not the professional trustee) from negligence. The clause has been enhanced by the inclusion of protection for the trustees from claims from unknown beneficiaries of which the trustees were not aware at the time of making a distribution.
A new innovation is to allow trustees to adopt if required any subsequent edition of the STEP provisions. This gets over the problem that a document cannot incorporate by reference another document which does not exist at the time of its inception.
All in all the draft proposals present a useful update to the 1st Edition – we shall have to wait and see the outcome of the consultation on the draft before we can adopt the use of the 2nd Edition.
© Gill Steel, LawSkills Ltd. 2009
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