Should sections 31 & 32 Trustee Act 1925 be changed?

 In Trusts

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The Law Commission has issued a supplemental consultation to its Intestacy and Family Provisions Claims on Death consultation paper 191. It invites comment on its review of sections 31 & 32 Trustee Act 1925 by 21 July 2011. http://bit.ly/lTk441

The review focuses on those two well-known and important sections of the Trustee Act 1925 which deal with the administration of income and the advancement of capital.

Introduction

Sections 31 & 32 apply as default provisions and are essential because of the statutory trusts which can arise on intestacy i.e. where there is no express trust deed to cover how income and capital is to be managed. Apparently they reflected common practice in the drafting of trusts at the time.

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Section 32

In various responses to the original consultation document commentators were keen to encourage that the proposed change to s.32 for intestacy cases should apply in all cases to avoid confusion and avoid traps for the unwary. This supplemental consultation in taking these comments on board therefore proposes that the power contained in s.32 to pay or apply capital to or for the benefit of a trust beneficiary should be extended, for the purposes of all trusts however established, to the whole, rather than one-half, of the beneficiary’s share in the trust fund.

This proposal is to be welcomed because the question of how much can be advanced in a particular trust is often a practical problem where the value of the fund has increased between making an advance totalling one half of the share at a particular time and then being asked to advance more at a later date, which is not possible. In small trusts, without any express extension to the existing s.32 power, the restriction to one half of the fund prevents the trust being wound up by advancing the whole of the fund to the beneficiary which often makes sense to save unnecessary administrative costs.

Although there is always the risk that one or two rogue trustees may act dishonestly or not in a prudent fashion in making cavalier advances of the whole fund; on balance this risk is small and there are plenty of duties placed on trustees in general not to be reckless, but to act in the best interests of all the beneficiaries and make decisions on full and proper consideration.

Given that pretty much all professionally drafted trusts and Will trusts will automatically extend the power of advancement in s.32 to the whole fund it makes sense to have a standard default provision for all trusts however arising which is in this form.

Section 31

This section is more complex. It relates to the income of the trust fund and amongst other things its enables trustees to make payments from the income for the maintenance, education or benefit of certain beneficiaries. Subsection 1 says:

“(1) Where any property is held by trustees in trust for any person for any interest whatsoever, whether vested or contingent, then, subject to any prior interests or charges affecting that property—

(i) during the infancy of any such person, if his interest so long continues, the trustees may, at their sole discretion, pay to his parent or guardian, if any, or otherwise apply for or towards his maintenance, education, or benefit, the whole or such part, if any, of the income of that property as may, in all the circumstances, be reasonable, whether or not there is—

(a) any other fund applicable to the same purpose; or

(b) any person bound by law to provide for his maintenance or education; and

(ii) if such person on attaining the age of [eighteen years] has not a vested interest in such income, the trustees shall thenceforth pay the income of that property and of any accretion thereto under subsection (2) of this section to him, until he either attains a vested interest therein or dies, or until failure of his interest:

Provided that, in deciding whether the whole or any part of the income of the property is during a minority to be paid or applied for the purposes aforesaid, the trustees shall have regard to the age of the infant and his requirements and generally to the circumstances of the case, and in particular to what other income, if any, is applicable for the same purposes; and where trustees have notice that the income of more than one fund is applicable for those purposes, then, so far as practicable, unless the entire income of the funds is paid or applied as aforesaid or the court otherwise directs, a proportionate part only of the income of each fund shall be so paid or applied.”

It is frequently the case that proviso mentioned above, which places the onus on the trustees to take into account the position of the infant and whether or not there is any other income available from other sources to meet their needs, is expressly excluded in trust deeds and Will trusts. Some other precedents also alter the wording of s.31(1)(i) from the question of the trustees deciding what is reasonable payment or use of the income for the infant in question substituting instead full discretion for the trustees.

It is an administrative burden to have to investigate the existence or otherwise of sources of income available to a beneficiary before deciding what proportion of a particular trust fund should be used to provide income for their maintenance, education or benefit. In intestacy cases there is no option but that the trustees of the statutory trusts must apply this default rule.

The Law Commission propose that the second part of the proviso to s.31(1) (the requirement that trustees should only pay a proportionate part of the income where they have notice that the income of another fund is applicable for the same purposes) should be removed. Largely its reasoning is that a settlor would probably if asked not expect any sums payable to be at the joint discretion of two sets of trustees.

This amendment would be sensible but it does not go far enough. The other usual alteration to s.31(1)(i) should be undertaken as well to emphasis the decision is totally at the discretion of the trustees since any exercise of discretion must be reasonable.

The Law Commission does ask consultees whether further changes should be made to the power to pay or apply income for a beneficiary’s maintenance, education or benefit contained in s.31(1) of the Trustee Act 1925, and in particular whether it would be beneficial to make one or both of the following amendments:

(1) Delete the first part of the proviso to s.31(1)

(2) Redraft s.31(1)(i) so as to remove the words “as may, in all the circumstances, be reasonable” and substitute an unfettered discretion.

To bring s.31 up to date with modern drafting it would make sense to remove the proviso in its entirety and to alter paragraph (i) so that s.31 (1) would read:

“(1) Where any property is held by trustees in trust for any person for any interest whatsoever, whether vested or contingent, then, subject to any prior interests or charges affecting that property—

(i) during the infancy of any such person, if his interest so long continues, the trustees may, at their sole discretion, pay to his parent or guardian, if any, or otherwise apply for or towards his maintenance, education, or benefit, the whole or such part, if any, of the income of that property as they see fit, whether or not there is—

(a) any other fund applicable to the same purpose; or

(b) any person bound by law to provide for his maintenance or education; and

(ii) if such person on attaining the age of [eighteen years] has not a vested interest in such income, the trustees shall thenceforth pay the income of that property and of any accretion thereto under subsection (2) of this section to him, until he either attains a vested interest therein or dies, or until failure of his interest.”

The Law Commission recognize that there are other regular amendments made to s.31 in the precedent books but do not feel it is appropriate to further change this default provisions, preferring instead to leave this to a discussion on a case by case basis between the settlor and his adviser.

Conclusion

The Commission does not suggest that any changes proposed should apply to existing trusts mostly because increasing the amount of the trust fund which could be advanced worked to the detriment of the default beneficiaries and therefore would be in breach of the Human Rights Act 1998 which prevents deprivation of property.

Instead, it is suggested that any changes would apply to trusts created on or after the commencement date, other than trusts which are created by trustees using their power under an existing trust. However, whilst this would be straightforward for inter vivos trusts and the trusts arising on intestacy with Wills there is a choice to make between applying the new rules to Will trusts where the Will is executed after commencement or to all Will trusts for deaths on or after commencement. The recommendation is the latter and that would be sensible since it is a flexibility which would probably be drafted into most professional Wills and if it was a homemade Will it is unlikely in the extreme that the testator put his mind to this issue. To apply the changes to Wills for deaths on or after commencement would improve the simplicity and administration by default and this would be preferable.

Although acknowledging that there is an important technical difference between special powers of appointment and powers of advancement the Law Commission does not think that in considering whether any changes to ss. 31 & 32 as they affect new trusts created by exercise of powers of appointment and powers of advancement under trusts in existence at the time of commencement, requires a different approach to the coming into effect of the changes.

It therefore proposes that the reforms of ss.31 & 32 of the Trustee Act 1925 should apply (subject to s.69(2) Trustee Act 1925) in relation to interests arising under instruments which take effect after the commencement of the implementing legislation. This includes:

  1.  Interests arising under Wills that take effect on the death of the testator after commencement; and
  2. Interests arising by the exercise, after commencement, of general powers of appointment, special powers of appointment and powers of advancement contained in instruments which had already taken effect before commencement.

The proposals are welcome and it would be an improvement to adopt them all.

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