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Lecture 2 notes...

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Lecture 2: Trusts 1. Sources of Trusts Law in Scotland 2. Defining a trust 3. Why a trust? 4. Types of trust 5. Creation of a Trust 6. Trustees Duties 7. Trustees powers 8. Variation of trust purposes 9. Termination of a trust 10.Rights and Liabilities of Trustees 11.Right of Third Parties

Sources of Trust Law     

Common law judgments Institutional writers of C17th-19th Trusts (Scotland) Act 1921 The Trusts (Scotland) Act 1961 Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 (the 1990 Act)

Trust Definition A trust is created when one person (truster) transfers title in his/her property to a second person (trustee), who is then under an obligation to apply the property for the benefit of a third person (beneficiary). Parties in a Trust Truster a. Specifies: The purpose The property The trustee The beneficiary b. Transfers the property to trustee

Trustee: a. Holds Legal Title (good against the whole world) b. Two Patrimonies Separate legal bodies of property Protection from trustees creditors Beneficiary: Enjoyment of the benefit Money Maintenance Living in property Charitable help 3. Why create a Trust? • • • • • • • •

Postpone decision on who benefits An expert to manage the trust Protection from insolvency Tax efficiency Split right to benefit between 2+ individuals Place restrictions on the right to benefit Collective investment Create public benefit

4. Types of Trust Inter Vivos Private Morta causa C Private Inter Vivos Public Morta causa Public “A private trust is a trust designed to benefit a specified individual or a specified group of individuals... a public trust on the other hand is one that is set up for the benefit of the public in general, or of a specified class of the public in general.” Norrie and Scobbie Trusts (1991) pp17-18

5. Creation of Trust • • • •

Capacity (16 in Scotland)* Declaration of the Trust Transfer of property Must have a valid purpose

5.a. Declaration of trust •

Must announce: Creation and specify the purpose, beneficiaries and trustees.

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No “special or technical form of words is needed” • MacPherson v MacPherson’s curator bonis (1894) 21 R 386 per Lord McLaren at p. 387 • Style Financial Services Ltd v Bank of Scotland (no2) 1998 S.L.T 851 Does not need to be in writing except as dictated by the Requirements of Writing (Scotland) Act 1995 s1.

1. Every declaration of trust must: make it clear that it intends to create a trust, it specifies the purpose of that trust, who the beneficiaries are and who the trustees are to be 2. There are no special or technical words needed, (as per the case of MacPherson v MacPherson) indeed you don’t need to actually use the word trust. What the courts do is ask the questions, “Is it clear that the truster intended to bind the trustee to carry out the specified purposes?” The use of the words ‘in trust’ or ‘on behalf of’ will usually be enough to create a trust but it depends on the circumstances and context of the case - See Style Financial Services Ltd v Bank of Scotland (No2) 1998 S.L.T 851 3. A declaration can be verbal and can be proved by any legal means. So to be clear the declaration does not need to be in writing but it is prudent to reduce the declaration to writing. There are some exceptions. There are three types of instances when the declaration MUST be in writing: • If you are establishing yourself as a trustee of your own property - RW(Sc)Act 1995 s.1(2)(a) • If you are establishing a trust in an interest in land - RW(Sc) Act 1995 s.1(2)(b) • If you are establishing a Mortis causa trust - RW(Sc) Act 1995 s.1(2)(c) 5.b. Transfer • • •

Property must vest in the trust If you are declaring yourself as your own trustee, there is no need to transfer Mortis causa comes into being on death of truster

Permitted time/periods before transfer • •

S 5 Trusts (Scotland) Act 1961 (4); The Law Reform (Miscellaneous Provisions) (Scotland) Act 1966 (2 further periods) Only one period of the six below can apply under a trust: 1) The life of the truster 2) 21 years from the death of truster 3) 21 years from the date of creation of trust 4) Minority (0-21) for person living or in utero at death of granter 5) Minority (0-21) for person who if of full age would get income 6) Minority (0-21) for person living or in utero at date of creation of trust.

5.c. Valid Purpose The declaration of trust must also specify the purposes of the trust in order for it be effective. The purpose must not be void from uncertainty: Language must not be vague (Sutherland’s trust v Sutherland’s trust (1893)) Allan and Others (Shaw’s Trs ) (1893) 1SLT 308, “in such a way as my trustees shall deem best”

Salveson’s Trustees v Wye 1954 S.C. 440, “only to the trustees to select from among those who form that class ” Ineffective by reason of being overly wide Reasonable person must be able to determine whether or not any given individual is within or outside the trust 1. The declaration of trust must also specify the purposes of the trust in order for it be effective. Valid purposes include: Protection of the vulnerable For the benefit of the public Collective investment purposes Minimising tax liability Administering a deceased person’s estate 2. The purpose must not be vague: You need to instruct the trustees how you want them to distribute the trust or at the very least grant them clear criteria upon which to make the decision. In Trustees Allan and Others (Shaw’s Trs ) (1893) 1SLT 308 the truster left the trustee a wide discretion on how to dispose of property “ in such a way or ways as my trustees shall deem best.” This was held to be void in too vague In Salveson’s Trustees v Wye 1954 S.C. 440 the declaration of trust stated that the deceased was “leaving it [the property] only to the trustees to select from among those who form that class the particular recipients of his bounty” Illegal purposes • • • • •

The following are types of purposes that are void: Criminal purposes – Bowman v Secular Society Ltd [1917] A.C. 406 Directly prohibited purposes – Excessive accumulation of income Contrary to public policy – Aitken’s Trs v Aitken 1927 S.C. 374 Contra bonos mores – Bowman v Secular Society Ltd [1917] A.C. 406

Contra Bonos Mores: Three main categories • Conditions relating to living arrangements. Fraser v Rose (1849) 11 D. 1466 • Conditions relating to marriage. Aird’s Exrs v Aird 1949 S.C. 154 • Conditions relating to religion - A truster may provide that a person may benefit only if he adheres to or refrains from adhering to a particular religion Blathwayt v Baron Cawley [1976] A.C. 397. However a condition that the beneficiary must promise to maintain a particular faith for the rest of his life before taking a benefit would probably be invalid as being contra bonos mores, Innes’ Trs v Innes 1963 SLT 353. 6. Trustees Duties: Decision making •

Must be a majority decision: – s 3 1961 Act.

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A 50% split is not enough (McCulloch v Wallace (1846) 9D 32) Failure to consult may make the decision invalid (Wyse v Abbot (1881) 8R 983)

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Two exceptions to the general rule: – Unanimous decision – Presence of a sine qua non trustee.

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Trustees’ have discretion in their actions and decisions

1. What the truster writes into the deed is the key in determining precisely how decision will be validly taken in the administration of the trust. Usually the decision must be by a quorum or a majority – if there are only 2 trustess that has to be both of them. This established in s3 1961 Act •

It is worth noting that this quorum means a majority of all trustees, not a majority who happened to be at the meeting. So if there are 5 trustees: only 3 turn up at the meeting and only 2 of that 3 agree then this is not a satisfactory majority. (However, there is still collective liability for the decision, even for those in the dissenting minority).

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When it comes to making a decision ALL trustees have a right to be consulted. Failure to do so may make a decision by the remaining trustees invalid Wyse v Abbot (1881) 8R 983 There are some exceptional circumstances where a decision has to be quickly and then not consulting all trusting can be excused if a trustee is unavailable to participate.

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Oddly there is not an obligation on every trustee to participate in the decision 2. There are 2 general exceptions to this: 1. If the trust deed specifies that it must be a unanimous decision. 2. The trust deed nominates one or two trustees to be sine qua non – (a special type of trustee who must agree to any act of trust administration for it to be valid). This is in effect a veto but this provision is very rare. Decision making by trustees: •

“If it can be shown that the trustees considered the wrong question or that, although they purported to consider the right question, they did not really apply their minds to it or perversely shut their eyes to the facts or that they did not act honestly or in good faith, then there is no true decision and the court will intervene” – Board of Management for Dundee General Hospital v Bell’s Trs 1952(S.C. (HL) 78 cited by Chalmers 11.36.

Where the truster has given discretion to the trustees, the court will not control the way the trustess uses that discretion, unless there is a breach of trust or acting in a clearly unreasonable manner. However, nor can the trustee refuse to exercise that discretion – they cannot refuse to make a decision. The trustees must be reasonable in the exercise of their discretion – good faith, carefully, impartially and to the best of their abilities. Genearlly, the courts are reluctant to intervene in a trustees exercise of their discretion – but [go onto quote]

6. Trustees’ Duties • • • •

General duty of care – Raes v Meek (1889) 16R (HL) 31 Duty not to delegate – Scot v Occidental Petroleum (Caledonia ) Ltd 1990 S.L.T. 882 Duty to secure trust property Duty to take advice – Martin v Edinburgh District Council 1988 S.L.T. 329

Duty of care – The central duty of a trustees is to carry out the trust purposes – under a general duty of care. They must act in good faith in the best interest of the beneficiaries. The standard applied is that ‘a person of ordinary prudence would be expected to use in the management of their own affairs.’ – this is an objective test. They must do what an ordinary person of prudence would do to conserve and protect the trust property. Not to Delegate It is important to note that some tasks can be delegated – such as the appointment of agents or professional specialists to carry out specific tasks. However, trustees cannot instruct those agents to exercise the discretionary power which they have been given under the trust. They can delegate administrative functions. This distinction is not always easy to apply in practise. Secure trust property They must take possession of the trust property – they must take the legal title and retain control over that property. If cash in a bank they must have it in a separate trust account. Duty to take advice – The more specialised the area in which they must exercise their discretion the important it is to seek advice if they do not possess that information themselves. 6. Trustees’ Duties contd. •

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Duty to keep account – Ross v Ross (1896) 23R (HL) 67 – Duties regarding existing debts and obligations inter vivos vs mortis causa – (S.5 Bankruptcy (Scotland) Act 2016) – Duties regarding new debts and obligations Duty to pay the correct beneficiaries

Keep account – Trustees must keep proper accounts of the trust property, income and expenditure. How much was spent, to whom and why. Invoices, receipts etc should be retained. Bens have the right to inspect these accounts. Keeping accounts also protects the trustee. Existing Debts – must be paid always with mortis causa trusts rarely with inter vivos New debts – if take on a new debt contract, the trustee must contract in their personal capacity, but have the right to be reimbursed by the trust. Pay the correct Bens – This seems obvious but can be tricky particularly where you have a class of beneficiaries – hence the need for clarity in the declaration of trust. 6.a. Duty to invest trust property

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Trustees must exercise due care in the choice of investment and must not take excessive risks Losses caused may have to be met by trustees personally Trustees must act in best interests of beneficiaries Problem of ethical investments – Cowan v Scargill [1985] Ch 270 & Harris v Church Commissioners for England [1992] 1 W.L.r 1241

If the trust deed specifies or excludes type of investment this must be adhered to. If there is nothing mentioned in the trust deed then s4 Trusts Act 1921 allows trustees to “make any kind of investment” The actual meaning is more limited than it might seem – they can make any type of investment but can’t invest in just anything: not every investment is one that the trustee should make. Trustees should not take great risks with trust funds unless the trust deed give them clear instructions to do so. They need to balance risk against the need to protect the value of the fund against inflation and overtime too many very low risk investments tend to fall behind inflation, and therefore actually devalue the trust property in real terms. The law seeks to protect the interests of the beneficiaries by imposing general duties on trustees investment powers. Before investing, trustees should seek and consider any appropriate advice from someone reasonably expected to give good advice due to their qualifications and professional experience for the investment being considered; e.g. stock broker for shares. This is more stringent than the general standard of ordinary person of prudence because they may not be expected to seek advice. When considering the advice the trustees under s4 1921 Act must think about: (1) The suitability of the investment for the trust (2) And the need for diversification (as appropriate in that trusts situation) Diversification underlies the point that trustees must not take excessive risks. This leads us nicely into the question of ethical investments – not all investments are ethically appropriate for the purposes of the trust. However, generally, ethical considerations cannot guide the investment decision. If however, two investments are equally appropriate, then ethical considerations can then be considered (Harris v Church of England Commissioners) Once the investments have been made there is an on-going duty to review them periodically – the more risky the investment the more often it needs to be checked.

6.b.Rule against Auctor in Rem Suam “actor in his own cause” - Prohibits conflict of interests Transaction is voidable even if the trustee was acting in good faith - Aberdeen Railway Co v Blaikie Bros (1854) Macq 461 • Trustee must hand over profits to the trust. • Beneficiary can challenge any transaction with a conflict of interest • Exceptions: • Expressly agreed with the truster (remuneration) All beneficiaries give fully informed consent • •

1. Auctor in rem suam means “actors in his own cause”. There is a requirement that the trustees separates her own interests from that of the trust – they must not place themselves in a conflict of interest.

2. This rule is applied very strictly and it is irrelevant whether or not the transaction is a good one and fair. Transaction is voidable even if the trustee was acting in good faith - Aberdeen Railway Co v Blaikie Bros (1854) Macq 461 If there is a potential conflict of interest the transaction is voidable. So even if the trustee was acting in good faith, and the trust made a healthy profit or gained a benefit that transaction can still be set aside by the court. 3. To reiterate: Any profit must be returned to the estate, even if the trust did not make a loss. • What does this mean in practice? • A trustee must not buy trust property or sell their own property to the trust ! This is a very important rule. • Any beneficiary may challenge a transaction that has occurred with a conflict of interest or by a co-trustee. HOWEVER, there is an important exemption:A trustee may act, even if there is a conflict of interest where; (a) this is expressly agreed by the truster who has foreseen the conflict (e.g trust deed allows for remuneration for trustees) (b) All the beneficiaries or potential beneficiaries give fully informed consent. •

7. Powers of Trustees • •

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Three broad categories of powers: Powers granted in the trust deed – “[the deed] is the foundation and the measure of the powers of the trustees” Goodsir v Carruthers (1858) 20D 11412. Powers conferred by s 4 of the Trusts (Sc) Act 1921 Common law powers may be granted upon application to the court in exceptional circumstances if it is expedient for the trust –

Three broad categories of powers: 1. Powers grantedin the trust deed: • Trustees originally derived all their powers under the trusts deed but this is now rare • Lord Ardmillan stated in Goodsir v Carruthers (1858) 20D 1141 that the trust deed “is the foundation and the measure of the powers of the trustees” • The trust deed may confer powers expressly or implicitly. 2. Trusts Scotland 1921 Act created implied powers for trustees unless they are excluded or incompatible with the express terms of the trust. There are 17 general powers are implied in all trust deeds. They will only come into the trust by default so if you wish to exclude some or all of them must must ensure that the trust deed reflects this. 3. There are also common law powers which my be granted upon application being made to the court. In exceptional circumstances where it would otherwise be impossible to fulfil the trust purposes without additional powers, the court may be able to intervene as in the case of Andersons Trs 1921 S.C. 315. The court must be happy that this power is expedient for the execution of the trust. The test of expediency is the test that the courts apply and it is very easy to meet. Powers conferred by statutory provisions •

To sell the trust estate

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To grant leases of the trust estate To acquire any interest in residential accommodation reasonably required To appoint factors and law agents and pay them To discharge deal with debts due to the trust estate To grant all deeds necessary for carrying into effect the powers vested in the trustees; and To pay trust debts S5 1921 Act permits the court to grant the trustees authority to exercise any of the general powers listed in s4,

These powers are taken to be powers which all trustees have unless, exercising such as power would be “at variance with the terms or the purposes of the trust”. • To sell the trust estate or any part of it • To grant leases of the trust estate or any part of it and to remove tenants • To borrow money on the security of the trust property - in residential accommodation “reasonably required to enable the trustees to provide a suitable residence for occupation by any of the beneficiaries” • To make any kind of investment • To buy property • To appoint factors and law agents and pay them suitable remuneration • To uplift, discharge or assign debts due to the trust estate • To grant all deeds necessary for exercising their powers • To pay trust debts • S5 1921 Act permits the court to grant the trustees authority to exercise any of the general powers listed in s4, even it is at variance with the terms or purposes of the trust. 8. Variation of Trust purposes 1. Private Trust – Beneficiary’s fully informed consent must have capacity • Note status of 16 & 17 yr olds – Sec 1 Trusts (Sc) Act 1961 court can consent to a variation on behalf of beneficiaries as long that there is not prejudice to any of the beneficiaries it must consider • Person unable to consent • Potential future beneficiaries • Any unborn per...