ABOUT THE AUTHOR: Natalie Johnson is a Solicitor
at Wrigleys Solicitors LLP
D rafting a deed of appointment and/or retirement of trustees
sounds like a simple job. They are, generally speaking, short
documents, the risks are regarded as low, and one is unlikely to
recover one’s time costs in full. The job is therefore often given
to whichever trainee happens to be in the department at the
time.
There are, however, pitfalls with deeds of appointment and/or
retirement, of which your average trainee may not be aware. Take,
for example, the typical trust where the statutory power of
appointment under section 36 Trustee Act 1925 is stated to
apply to the appointment of new trustees.
Section 36(1) provides a power to appoint a replacement trustee
where an existing trustee is dead, remains out of the United
Kingdom for more than 12 months, desires to be discharged, refuses
to act or is unfit to act or incapable of acting as a trustee. This
power must be exercised in writing and can be exercised by either
the appointor nominated in the trust deed or, if there is no such
person, by the surviving or continuing trustees (or, if none, by
the personal representative of the last surviving or continuing
trustee). It is subject to the restrictions on the number of
trustees imposed by section 34 Trustee Act 1925 (i.e. no
more than four trustees of a settlement of land or holding land on
trust for sale). This restriction on the number of trustees does
not apply in the case of land vested in trustees for charitable,
ecclesiastical or public purposes.
Section 36(1) is of no assistance where the trustees seek to
appoint an additional trustee (rather than to replace an existing
one). Where the appointor or trustees wish to rely on the
Trustee Act 1925 to appoint an additional trustee, section
36(6) provides that such appointment must be in writing, and can be
exercised by either the appointor (if there is one) or by the
trustee or trustees for the time being (if there is no appointor).
The disadvantages of relying on section 36(6) are that it can only
be used to bring the total number of trustees up to a maximum of
four, and that the appointor cannot use it to appoint
himself/herself as a trustee.
The problem arises where there are already four trustees and,
either there is no simultaneous retirement, or the trust is a
settlement of land, or the trustees hold land for sale. This means
that neither the power given by section 36(1) nor the power given
by section 36(6) applies, and any appointments would be invalidly
made if you sought to rely on either of those powers. If a trustee
is retiring at the same time, you would be able to rely on the
power in section 36(1), so long as the restriction in section 34(1)
does not apply.
The misplaced reliance on section 36 is not the only problem
that can arise. Chains of indemnity are a frequent problem, if they
are not followed through (i.e. if trustees who have given an
indemnity are not, in turn, released from that indemnity when they
retire), and trustees who think that they have been discharged from
liability may have an unpleasant surprise when they realise that
they have continuing liability under these continuing
indemnities.
There are, however, pitfalls with deeds of appointment
and/or retirement, of which your average trainee may not be
aware
This situation, where someone who thinks that they have retired
as a trustee may have continuing liabilities, can also occur where
a trustee is retiring without replacement from a trust with an
appointor. Under section 39(1) Trustee Act 1925, the
appointor must be a party to the deed of retirement, in order for
the retiring trustee to be discharged from the trust. Where the
appointor is not a party to the deed, the retirement will be
invalid; this means not only continuing liability for the trustee
in question, but also has knock on effects for the validity of
decisions made by the remaining trustees.
How can these problems be avoided?
First, when drafting the declaration of trust, ensure that the
trustees do not have to rely on the statutory power of appointment.
Depending on the client, this may mean giving the settlor a power
to appoint during their lifetime and then power to the trustees, or
it may mean giving power to appoint new trustees to the trustees
for the time being.
Second, when drafting a deed of appointment and/or retirement of
trustees, it is important to check the trust deed and any
subsequent deeds/resolutions, not only to see that there is the
power to appoint, but also to ascertain whether any indemnity
chains have been started. Where relying on the statutory power, it
is worth going back to the Trustee Act 1925 to check its
provisions, as relying on the most recent deed of appointment can
cause problems where it was not properly drafted. It may be
appropriate to flag for clients when sending out a deed of
appointment and/or retirement of trustees that the deeds may not be
suitable in all circumstances and that it should not be copied for
future appointments/retirements.
Third, by asking the trustees to return the signed deed to you,
you can ensure that it has been properly executed.
Where an existing trust deed only provides the statutory power
of appointment, and this is insufficient for your purposes, you may
wish to consider whether the trustees, beneficiaries, court or
Charity Commission (as appropriate) have the power to amend the
trust deed, so as to give the necessary powers to appoint
trustees.
Where relying on the statutory power, it is worth going
back to the Trustee Act 1925 to check its provisions
For appointments of charity trustees made after 6 April 2010,
you may also wish to flag the HMRC Fit and Proper Persons Test, and
the recommendation made by HMRC that new trustees sign a
declaration that they are a ‘fit and proper person’ to be a charity
trustee.
The implications of getting a deed of appointment and/or
retirement wrong can mean that decisions made or powers exercised
by the trustees (e.g. the decision to appoint capital or to add
beneficiaries) are invalid; this can have serious tax implications
in family trusts. Even in charitable trusts it can delay
transactions, such as property purchases, if the problem has to be
resolved.
The job, while well within the capabilities of your average
trainee, should be checked carefully to ensure that the appointment
and/or retirements are effective.