Equity and Trusts In 2003 Edith placed some assets on trust with the intention of providing long-term financial securityformembersofherfamily.Shetransferred100,000andthelegaltitletoan unoccupiedderelicthousetoDamienandFrancisastrustees.DamienandFrancisboth work at Ediths local pub and do not have trustee experience. They are instructed to hold the assets on trust for Ediths daughter Margaret for life, with the remainder to go to Margarets two adult children, Bernadette and Rory. The sum of 100,000 was immediately invested by the trustees. Francis asked the advice of anolduniversityfriendwhohasadegreeinbusinessstudies.Thefriendadvisedthemto invest in Disastek, a new consumer electronics manufacturer. They used the entire 100,000 tobuysharesinthiscompany.Sincetheglobaleconomicdownturnin2008,Disasteks shares have lost 10% of their value. However, Damien and Francis think the investment will improve as the economy recovers, and feel that there is no need to scrutinise it too harshly yet. Bernadette volunteers at a local nursing home for the elderly. She strongly desires to make a significant donation to the nursing home to help them renovate their premises. She asks the trustees if they will grant her 20,000 from her interest in the trust for this purpose. Rory is a keensnowboarder,andwantstopursueacareerasasnowboardinginstructor.Hewants 10,000fromthetrustsohecanpracticehisskillsinvariousoverseasresortsandpayfor his instructor qualifications. The trustees agree that the requests are both made in pursuit of worthy causes, and the payments are made to Bernadette and Rory (by selling some of the Disastek shares first). Meanwhile,thetrusteestriedrepeatedlytosellthederelicthousesotheycanreinvestthe proceedsinsomethingmoreprofitable,butdidnotfindabuyer.Theyrecentlysoldthe housetoDamienswife,Erika,for200,000,whichwasslightlymorethanitsestimated market value. Damien and Erika are now renovating the house. Thetrustrecentlyreceivedadividendof1,000fromtheDisastekshareholding.The trustees split it equally between themselves, writing in the trust accounts that it was paid out to them as remuneration for their trustee services. Have the trustees acted within their powers and duties? - Money invested in the shares Accordingtos3(1)TrusteeAct20001trusteespossessageneralpowerofinvestment, allowingthemtomakeanykindofinvestmentthathecouldmakeifhewereabsolutely entitled to the assets of the trust. However,oneoftheessentialcriteriaistheneedfordiversificationofinvestmentsofthe trust(s4(3)).Investingthewhole100.000inthesametypeofshareswasriskyandnota good idea. They should have split the money and put some in different shares, to be sure that the price of at least some of it went up. Followings5(1)TA2000,trusteesneedtogetproperadvice(s5(4)theadviceofaperson whoisreasonablybelievedbythetrusteetobequalifiedtogiveitbyhisabilityinand practicalexperienceoffinancialandothermattersrelatingtotheproposedinvestment.) before exercising any power of investment. Damien and Francis both working in Ediths pub and having no experience at trustees, they asked Francis friend for help. Since the friend has adegreeinbusinessstudies,thetrusteesfeltsafeinaskinghimforhelp:heshouldknow what to do. Here, clearly the friend did not give them sound advice: he should have told them so split the investments and to collect some of the interest. Furthermore,accordingtos4(2)TA2000,trusteesmustfromtimetotimereviewthe investmentsofthetrustandconsiderwhether,havingregardtothestandardinvestment criteria,theyshouldbevaried..Heretheshareslost10%oftheirvaluesincetheglobal economic downturn of 2008. As fort he investments, the trustees are supposed to take advice iftheyneedit(s5(2)TA2000).Howevertheyfeelthatthereisnoneedtoscrutinisetheir shareholding too harshly yet (s5(3) TA 2000). Here there are clearly in the wrong: they should have reviewed the shares more often. Even takingintoaccountthattheglobaleconomiccrisiswasasurpriseforeverybody,thecrisis wasfiveyearsagoandtheshareshavebeenlosingvalueeversince.Ithasbeenfiveyears, andthetrusteesreallyoughttohavecheckedthesharesandsoldthemtoinvestinsafe placements so as not to throw away the trust money. It is up to the beneficiaries to show that the trustees made decisions that a reasonable prudent trusteewouldnothavemade,accordingtoNestlevNationalWestminsterBank[1993]2 : although the defendant had failed to appreciate the scope of its powers of investment, and had failed to conduct a periodic review of the investments, it was not enough. - Payments made to Bernadette and Rory One of the powers of trustees is the discretionary power of advancement, which allows them tomakeearlypaymentsofcapitaltobeneficiarieswithinterestinthecapital,accordingto s32TA1925.Howeverthereareanumberofrestrictions:themoneyhastobeforthe beneficiarys advancement or benefit. A beneficiary can only ask for half of his presumptive share, not all of the capital. And consent from prior interest holder is required.Here the trustees did not seem to ask Ediths daughter consent although she is the beneficiary for life. There are in breach of their power. AsfarasBernadetteisconcerned,thepowerofadvancementmeanstheadvancementor benefitofthebeneficiaryherself,notevenofherfamily.3HoweveritwasconsideredinRe 1 Trustee Act 2000. 2 Nestle v National Westminster Bank [1993] 1 WLR 1260 3 Re Paulings Settlement [1964] Clores Settlement Trust [1966] whether it could mean something wider than material benefit. The court agreed that giving money to a charity would be advancement because benefit is a wider concept than material gain; if a person feels they are under a moral obligation to give to a charity, allowing them to do so alleviates the feeling of having to perform your duty; there is amongst wealthy people a general philanthropic duty; and of course if also minimises tax burden.Here it can be argued that as Bernadette volunteers at the nursing home, she fells that she is underamoralobligationtohelpthemfinancially.Howeverhalfofherpresumptiveshare amountsto25.000(andhalfofthehousethetrusteeshadnotsoldyet),sogivingher 20.000togiveawaytoacharity(especiallyasitisnotforherownadvancement)maybe considered to be too much.Furthermore,thepaymentsweremadebysellingsomeoftheinvestedsharesthathadlost some of their value, essentially throwing away 10% of their value. As far as Rory is concerned, the case to consider is Taylor v Taylor (1875)4 where a number ofexpenseswereclaimedbythebeneficiaryaspartofhisadvancement.Paymentofthe admission fee to one of the Inns of Court in the case of a child intended for the Bar and the priceofacommissionandoutfitofachildenteringthearmywereconsideredan advancementinhislife.However,priceofoutfitandpassagemoneyofanofficerinthe army and his wife on going out to India with his regiment was not. Here,arguablypayingforRoryssnowboardinstructorqualificationsissimilartothe admission fees and price of commission; the trustees were right in deciding it was part of the powerofadvancement.Contrarily,Rorysgoingtovariousoverseasresortstopracticehis skillsseemssimilartothepassagemoneythatwasnotheldtobeanadvancement.The trustees should not have given Rory that much money. - The house Trusteeshaveadutytoconsultthebeneficiarieswhendealingwithland,accordingtos.11 TLATA1996.However,accordingtos6(1)TLATA19965,trusteeshavepowersover propertyasabsoluteowner.(Tosellthehouse,thetrusteesneedtosatisfytherulesof overreaching (s27(2) LPA 1925): the money must be given to 2 or more trustees. Here there are two trustees, so the rule is satisfied.) As the Ediths house is derelict, there are no chattels to take into consideration. Thetrusteeshaveadutytoobtainthebestpricepossible,accordingtoButtlevSaunders [1950]. The house should not be sold under market value. Here the trustees tried repeatedly to sell the house, and finally sold it to one of the trustees wife. The house was sold for slightly more than its estimated market value, so the duty was fulfilled. However,accordingtotheruleofself-dealing,trusteescannotselltrustpropertyto themselves. According to Re Thompsons Settlement [1986]6 a man must not put himself inapositionwheredutyand[personal]interestconflictorwherehisdutytooneconflicts with his duty to another unless expressly authorised. Here the house was not sold to a trustee himself but to his wife. Courts tend to vigilan[tly] scrutinise proxy purchases (as in Burrell v Burrells Trustees (1915)7. If Damien and Erika intend to live in the house, they can show 4 Taylor v Taylor (1875) L.R. 20 Eq. 155 5 Trusts of Land and Appointment of Trustees Act 1996 6 Re Thompsons Settlement [1986] Ch 99 7 Burrell v Burrells Trustees 1915 SC 333 thatthetransactionhasbeenfairandhonestandthetrusteehasmadenoprofitoutofit.8If thecoupleplanonresellingthehousetheyarenowrenovatingforahugeprofit,the transactionwillbeinbreachoffair-dealing.Aconstructivetrustontheunauthorisedgains will arise automatically by law9 to keep the money linked to the trust. - Remuneration Trustees hold a fiduciary position, and according to Bray v Ford [1896]10, it is an inflexible ruleofaCourtofEquitythatapersoninafiduciaryposition....isnot,unlessexpressly provided, entitled to make a profit.11 They are only allowed to get remuneration under certain circumstances: if it was intended by the trust (per s.28 TA 2000); if there is a contractual agreement with the beneficiaries; under s. 29 TA 2000 (if the trustees are a trust corporation; or act in a professional capacity); if the trustee is a professional solicitor (as per the rule in Craddock v Piper (1850)12). HoweverDamienandFrancisdonotfitinanyofthosecategories:theyarenotatrust corporation nor a solicitor, and there does not seem to exist any specific clause in the trust nor acontractualagreementwithMargaret,BernadetteandRory.Althoughtheyactedingood faith, their writing in the trust accounts that the money was paid out in remuneration for their trustee services does not change anything. 8 Per Megarry VC in Tito v Waddell (No 2) [1977] Ch 106 9 Westdeutsche Landesbank Giro v Islington LBC [1996] UKHL 12 10 Bray v Ford [1896] A.C. 44. 11 Lord Herschell in Bray v Ford [1896] A.C. 44. 12 Craddock v Piper (1850) 1 Mac & G 664