Trust Reform (2): A Wishlist for Trust Law Reform
This article is intended as a “taster” rather than a list of all those issues the Law Commission of England & Wales might be encouraged to consider in its ”Modernising Trust Law for a Global Britain”.
In Part 1, I looked at the Big Picture (well, aspects of it). This Part 2 delves more into the detail, considering some of the issues that would: support the particular wishes of intending settlors; and provide further protection to trustees and beneficiaries.
Since 1925, the courts of England & Wales have considered many aspects of trust law and, in some instances, handed down conflicting decisions on cases with strikingly similar facts. Whilst it would be wonderful if the outcome of the Law Commission‘s review would be to resolve all such anomalies, the legislation would outstrip the page count of Tolley’s Yellow Tax Book, and it would not stop new issues arising from developments elsewhere in the law.
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Several jurisdictions have set out in legislation the powers a settlor may retain over a trust without the trust being void or voidable. In some instances, the provisions are included within the general trust legislation (e.g. Jersey), whereas in others they are the subject of specific laws (e.g. STAR trusts in Cayman). Some trust laws specify the powers a settlor can validly retain; others, the powers that cannot be retained.
A revised trust law could include a list of powers that might validly be retained by the settlor and specify that, on its own, the reservation of any such power does not give the settlor any beneficial interest in the trust property (hopefully to avoid HMRC deciding that any such trust is settlor interested for tax purposes). Any such law might also specify that s.1 Trustee Act 2000 applies to the exercise of any such power.
Within the trust world there is a tension between an increased engagement with professional trustees due to, for example, the increasingly onerous burden of regulations imposed on trusts/trustees; and the wider use of “private” trustees in view of the perceived cost of employing professionals (encouraged by the self-help industry suggesting that the cost of a professional trustee is disproportionate to any benefits they might bring to the administration of the trust). Non-professional trustees are also seen as being more sympathetic to a settlor’s wishes (regardless of the law or the particular terms of the trust).
The defining of powers that a settlor can validly retain (or delegate to others), whilst not affecting the cost of professional services, will allow a settlor to more confidently appoint professional trustees in the knowledge that they (the settlor) can retain an intimate involvement with the trust, subject of course to the actual nature of the powers they retain. This might enable the settlor, say, to appoint an asset manager to the trust – an issue that can often lead to disagreement between settlor and trustees as the trustees have a duty to ensure any such manager meets certain criteria.
It is trite law that where a beneficiary is appointed trustee when the trust is created, they can exercise the trust powers to benefit themselves (unless the trust instrument directs otherwise).
If a beneficiary is subsequently appointed trustee, they cannot exercise trust powers which would benefit themselves unless specifically provided for within the trust instrument (or sanctioned by the court). Frequently family members are appointed trustee to fill a vacancy or to replace an “expensive” professional trustee, despite the fact that they are a beneficiary or a potential object of the trustees’ discretion. This may effectively freeze them out of any future benefit.
Whilst the STEP Standard Provisions (both the 1st and 2nd Editions) include a mechanism enabling beneficiary trustees validly to benefit, these provisions rely upon there being another trustee, independent of the beneficiary trustee. Where trustees are all close family members, this provision does not assist them.
A reform of trust law could moderate the situation by excluding a beneficiary trustee from joining in the exercise of powers that would benefit them, whilst still requiring unanimity of the other trustees (who might be at least 2 in number or an independent (professional?) trustee – perhaps borrowing the definition from the STEP Standard Provisions?). However, if the trustees intended to enter into a series of transactions, resulting in more than one beneficiary trustee benefitting, at the very least an independent/professional trustee should be involved or the sanction of the court required.
Removal of trustees
At present, the power to remove trustees is limited and, unless a trustee is removed by an order of the court, the remaining trustees often face difficulties in removing the name of the former trustee from the title to trust assets.
The main powers to remove trustees (Trustee Act 1925, Part III) deal with a number of potential scenarios, some of which no longer seem appropriate (e.g. a trustee remaining outside of the jurisdiction for more than 12 months) and fail to include others which are becoming more prevalent (e.g. an “untraceable” trustee).
s.19 Trusts of Land and Appointment of Trustees Act 1996 (TLATA) provides another route – where there is no person nominated to appoint new trustees, the beneficiaries, as a body, may direct trustees to retire provided that “reasonable arrangements have been made for the protection of any rights of (the outgoing trustee(s)) in connection with the trust”. The negotiation of such arrangements can be lengthy and compromise the on-going administration of the trust. The trustee(s) to be removed often continue as trustees until such time as a deed of (appointment and) retirement incorporating the “reasonable arrangements” is executed.
Where a trustee is “untraceable” this effectively freezes the administration of the trust and can imperil both the trust property and a beneficiary’s financial position (especially if they rely upon the trust fund for their income, etc.). Accordingly, an updated trust law should include a provision for the removal of an “untraceable” trustee by the other trustees, or by the adult beneficiaries.
s.19 TLATA, might also be extended to enable trustees to be removed by the adult beneficiaries (specifically exercising a fiduciary power in such circumstances), so as to remove the barrier that exists where, say, there are also minor or unborn beneficiaries. The opportunity may also be taken for the removal to be effective after a specified time from the date formal notice is given, so as to avoid potential for the outgoing trustee effectively to blackmail the beneficiaries into granting outlandishly generous terms to facilitate the trustee’s retirement.
Information, etc. to beneficiaries
The provision of information to the beneficiaries of an English Law trust is governed by case law. The primary cases are Re Londonderry’s Settlement and Schmidt v. Rosewood Trust Limited. These help define what are “trust documents”, and their release to beneficiaries. In both cases, the judgments took into account the need for trustees to have access to information to enable them to exercise their powers under the trust, and to do so without the fear of coercion or, when making any decisions, being subjected to inappropriate or undue influence.
However, these carefully considered judgments are being undermined by data protection regulations which enable individuals to obtain details held on them by others via a “subject access request” (SAR). Trustees may be required to provide the individual submitting a SAR with all information that pertains to that individual, even though it would not be disclosable under the rules set down in the above cases. The courts have upheld a trustee’s obligation to release such information under a valid SAR.
Having obtained information under a SAR, a disgruntled beneficiary may use that to challenge the exercise by a trustee of any of its powers, including the exercise of a discretion, notwithstanding that a trustee could otherwise refuse disclosure under either Re Londonderry or Schmidt v. Rosewood.
In the circumstances, I suggest disclosure under the data protection regulations needs to be limited by reference to the cases such as Re Londonderry and Schmidt v. Rosewood. Despite Common Law having controlled the disclosure of trust information for centuries, the time has now come for statutory codification, if only to undo the mischief created by the use of SARs to obtain information to which a beneficiary would not otherwise be entitled.
Notification of a beneficiary’s interest
The above assumes that the beneficiaries are aware that they have an interest in the trust, which raises the question as to whether trustees have any obligation to inform a beneficiary of their (potential) interest. Case law does not necessarily provide guidance, as the general rule appears to be that trustees have no obligation to inform a beneficiary.
However, there is an increasing requirement for trustees to disclose to taxing authorities the identity of beneficiaries (e.g. the UK Trust Register and CRS/FATCA). A growing number of jurisdictions require beneficiaries themselves to disclose any trust interests (with penalties imposed for any omission, no matter how innocent). Can trustees continue to withhold from potential beneficiaries, let alone the intended beneficiaries of a trust, information about the trust and their interest therein. It may be that a statement of good practice would suffice, short of legislation.
Limitation of trustee liability
As we have recently been reminded by the Court of Appeal (First Tower Trustees v. CDS (Superstores International) Ltd  EWCA Civ 1396) a trust governed by the law of England & Wales has no legal personality: trustees of such trusts are personally liable and, to the extent that any liabilities are properly attributable to the trust, are entitled to be indemnified out of the trust fund. In the judgment, their Lordships reminded practitioners that trustees can limit their contractual liability by expressly contracting “as trustees (and not otherwise)”. Whilst stated to be a well-established principle, it is not widely adopted. Where a trustee’s contractual liability is intended to be limited to the extent of the available trust fund such contracts normally include a specific provision to that effect. The other contracting parties are not always willing to adopt such a provision.
A number of other leading jurisdictions include within their trust law provisions limiting a trustee’s contractual liability to the trust fund, where they contract as trustee. These include not only the likes of Jersey and Guernsey, but also the United States of America, where the Uniform Trust Code (UTC) has been adopted by the majority of states. In its recent report on trust law (Scottish Law Commission Paper No. 239 – the “Report”), the Scottish Law Commission recommended that Scottish trust law adopt such a provision, to encompass not only a trustee’s contractual liability but also statutory liabilities (e.g. under environmental protection legislation), which largely reflects section 1010 of the UTC. The aim is to enable trustees of Scots Law trusts to compete with trustees in other jurisdictions on a more level playing field.
It may be time for England & Wales to follow suit and legislate to limit a trustee’s liability to enable trustees within this jurisdiction to compete internationally on a more level playing field? In June 1999 the Trust Law Committee published a report: “Rights of Creditors Against Trustees and Trust Funds” in which it recommended that a trustee’s contractual liability should be limited to the value of the trust fund, provided that the contract was not entered into in breach of the trustee’s equitable duties. It is understood that most professional bodies supported the recommendation.
With the growing number of jurisdictions that have enacted a statutory limitation of a trustee’s liability, the recommendations of the Trust Law Committee should be revisited and, in the light of both the UTC (section 1010) and the Scottish Law Commission’s Report, extended to include statutory liabilities.
As stated above, this article is intended as a “taster” to air some of the aspects the Law Commission might consider. I am sure other practitioners will identify many more.
Paul Saunders © 12.12.2018
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