ENGLAND & WALES

3. Trusts

A. Introduction

A trust is a legal relationship created by a person, called the settlor, after assets have been placed under the control of one or more persons, called trustees, for the benefit of one or more persons, called beneficiaries. Trustees control title to assets but for the benefit of others, and the assets are not part of the trustees' own estates. A settlor may also be a trustee and a beneficiary.

B. Most Frequently Used Trusts

Common arrangements in England and Wales include:

  • interest in possession (IIP) trusts, including protective trusts, often with powers for advancement or appointment in favour of one or more objects
  • discretionary income and capital trusts, which are often coupled with a duty or power to accumulate any income not paid or applied
  • trusts for public, or charitable, and private purposes, and
  • nominee or bare trusts.

In England and Wales, private purpose trusts are generally not valid.

C. Governing Law

The provisions of the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985, apply in England and Wales. The settlor may choose the governing law of the trust. If the settlor does not choose one, or if the chosen law does not recognise trusts, the governing law will be the law with which the trust has the closest connection, having regard to the place in which it is to be administered, the situs of the trust assets, the situations of the trustees and the objects of the trust. If, according to the governing law, the trust has been properly created, it will be recognised in England and Wales; the governing law also applies to the construction and administration of the trust. The trust instrument can provide for the administration to be governed by a law different from the trust itself.

D. Creation Of A Trust

This summary addresses voluntary trusts, rather than constructive, implied orresulting trusts.

I. Valid Constitution

A voluntary trust is created where:

  • the settlor intends to create a trust, orally, by conduct or by writing (no special words are necessary), and the trust property and the beneficiaries are identifiable
  • some person is able to benefit under the trust and enforce it, and
  • it is completely constituted, through declaration of trust of property by the settlor or by proper transfer of property to the trustees with declaration of the applicable trusts.

A trust may be set aside by the court if the trust instrument was executed under duress, under a mistake or procured by fraud, misrepresentation or undue influence.

Ii. Duration And Termination

The duration of a trust is restricted by perpetuity rules; for any trust created since 6 April 2010 interests must vest within 125 years. Subject to that, a trust terminates when:

  • the trusts are carried out
  • there is no longer any property subject to the trusts
  • any power of revocation is exercised, or
  • if all beneficiaries of full age and capacity direct a transfer of the property by the trustee.

In relation to any trust created after 6 April 2010, accumulations of income are unrestricted.

Iii. Beneficiaries

During administration of the trust, beneficiaries have the rights given to them under its terms. A beneficiary of an IIP trust is entitled to net income of the trust fund and may be entitled to occupy trust land. An object of a discretionary trust has a right to be considered as a potential recipient of benefit by the trustees and a right to have their interest protected by a court of equity. At the end of the trust, beneficiaries interested in the capital are entitled to call for a transfer of the assets.

Iv. Trustees

The settlor appoints the initial trustees, who assume office on acceptance, either express or implied. No more than four persons may be appointed as trustees of land. Fewer than two trustees of land cannot give a valid receipt for capital money arising on a disposition of land, except in the case of a trust corporation.

1) Appointment and discharge

New or additional trustees may be appointed under an express provision in the trust instrument, under power conferred by statute, or by the court. Where no person is nominated by the trust instrument to appoint new trustees, if all the beneficiaries are of full age and capacity and are entitled together to the trust property, they may direct the retirement and appointment of trustees.

A trustee may retire and be discharged if:

  • a new trustee is appointed in place of the old trustee
  • the co-trustees and any person nominated by the trust instrument to appoint new trustees consent and not fewer than two trustees (or a trust corporation) will continue to act, or the trustee is discharged by the court.

2) Duties

Trustees on appointment must acquaint themselves with the trust and all documents relating to it that come under their control. They must identify trust property and take necessary steps for its protection and proper investment. They must:

  • strictly comply with the trust
  • not put themselves into a position that is inconsistent with their duty as trustees, and
  • execute the trust with reasonable diligence, conducting its affairs as would ordinary prudent businesspersons in conducting their own affairs, a higher standard usually being expected of a professional trustee.

Trustees should be aware of the money laundering provisions under the Proceeds of Crime Act 2002 and associated statutes and regulations.

3) Powers

Unless otherwise provided, trustees must act unanimously in the exercise of their powers and are not permitted to delegate the exercise of their powers. Trustees are authorised by statute to delegate any function other than one relating to the distribution of assets, a power to appoint trustees and certain others. An individual trustee may delegate functions for up to 12 months by power of attorney.

Powers are either dispositive or administrative. Any power conferred on trustees is fiduciary, and trustees must:

  • consider exercising it from time to time and decide whether or not to do so
  • inform themselves of all relevant matters including advice thought necessary
  • act for the purposes for which the power was given, not unreasonably, capriciously or corruptly, and
  • not prefer any beneficiary unless authorised to discriminate, or it is a consequence of properly exercising the power for the benefit of the trust as a whole.

Trustees must not fetter the future exercise of their powers, nor exercise a dispositive power in their own favour unless expressly or impliedly authorised. Statutory powers include powers of maintenance, advancement, investment, acquisition and sale of land, employment of agents, nominees and custodians, compromise, and power to restrict occupation of land by beneficiaries. Common additional powers included in trust instruments are powers of appointment, resettlement, advancement, accumulation, appropriation, investment, and change of the proper law and country of administration of the trust.

4) Liabilities and indemnities

Trustees act as principals in all they do in the course of administering trusts; they are not agents of the trust. Any contractual or other liability falls on them personally and is not limited to the amount of the trust fund. Trustees have a statutory right of indemnity for expenses properly incurred by them when acting on behalf of the trust.

5) Remuneration

Unless there is express provision to the contrary, trustees are accountable for any profit that they make out of the trust. They are entitled to recover remuneration for their services if there is an appropriate charging provision in the trust instrument. A professional trustee who is not a sole trustee may, by statute, be entitled to remuneration even for services that could have been provided by a lay trustee.

V. Protectors

Protectors are not commonly used. Where provision is made for such an office, the trust instrument defines the powers and duties.

Vi. Role Of Public Trustee Or Guardian

The public trustee may act as an ordinary trustee, a judicial trustee or a custodian trustee, either alone or jointly with others, but not of certain trusts, including those that are for charitable purposes or involve the carrying on of business. A judicial trustee may be appointed by, and under the control of, the court, when administration of the trust has broken down. A custodian trustee, which must be a trust corporation, holds trusts assets and documents while others carry out the administration of the trust.


E. Trust Administration

I. General Management

Unless otherwise authorised, trustees invest all capital trust money coming into their hands. In addition to any express powers and subject to any express restrictions, trustees invest trust assets as if absolutely entitled to them, having regard to suitability of investment and need to diversify investments. Trustees must obtain and consider proper advice, act for the benefit of the beneficiaries, and, unless otherwise authorised, act impartially as between beneficiaries with different interests. The duty of care is specified in the TA 2000.

Ii. Distributions From Trust

Trustees determine who is entitled to distributions, whether under the trust or pursuant to the exercise of a power. If they have advertised for claims, they are protected against distributions made without regard to claims of which they received no notice. Minors cannot give a good receipt although trustees may distribute to such a minor if authorised to do so by the trust instrument. Trustees must comply with an order of the Court of Protection regarding distributions to a person lacking mental capacity, unless there is a person authorised to receive it under a Lasting Power of Attorney (LPA).

Iii. Passing Of Accounts

Trustees must keep an accurate statement concerning trust property and on demand must furnish a beneficiary with it. They may have the accounts audited from time to time, but generally not more than once every three years.

Iv. Variation Of A Trust

Trustees may safely depart from the terms of the trust:

  • with consent of beneficiaries of capacity who are affected
  • pursuant to an order of the court to authorise transactions:
  • under its inherent jurisdiction in the case of emergency
  • under s57 of the TA 1925 where it is expedient, or
  • pursuant to an order under s1 of the VTA, under which the court has jurisdiction to approve an arrangement amounting to a variation or revocation on behalf of various classes of beneficiary in various circumstances.

F. Confidentiality And Disclosure

Trustees must inform adult beneficiaries of the existence of the trust and of the nature of their interest, except in the case of objects of mere fiduciary powers. They should generally disclose the trust instrument and accounts to the principal beneficiaries with vested interests. Beneficiaries, including objects of a fiduciary power, may apply to the court to require trustees to provide accurate information as to the state of the trust and documents relating to its affairs. The court will balance the competing interests of all involved in the determination of the application. Generally, the trustees do not need to provide disclosure of documents relating to the process of the exercise of discretionary dispositive powers. Disclosure might be ordered subject to limits and safeguards.


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