STEP

Title Research

A simple job?

  • Author : Natalie Johnson
  • Date : March 2011
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.


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