3. Trusts

a. Introduction

For practical purposes, ‘trust’ may be defined as a legal relationship in which legal title to property is transferred to a person (the trustee) who does not acquire an unlimited right to the property, but who holds it subject to an obligation to apply it in accordance with the directions, express or implied, of the person who constituted the trust (the truster or settlor) for the benefit of certain persons (the beneficiaries).

b. Most frequently used trusts

Scottish trusts fall into certain broad categories. First, there are trusts used in commercial arrangements, such as unit trusts, investment trusts, pension fund trusts, employee trusts and so on.

Next there are what are termed public trusts, which are for the benefit of the public, or a section of the public. Charitable bodies are the most common public trusts.

Finally, there are private trusts, established by individuals, normally for the benefit of their family or close friends. The class of private trusts covers a wide-range of different types of trusts. Within this class, it is important to notice a distinction between what might be called a ‘real trust’ and a ‘bare trust’. In a bare trust, if property is held by one person, say T, for the benefit of another, say B, who is entitled to the property outright, B can require T to make the property over to B or into B’s name at any time. In these circumstances, there are no conditions or trust provisions that must be satisfied before T must make over the property. In this case, T is known as a bare trustee or nominee.

Although trusts are often used for tax planning, the desire to protect assets from third-party claims is also often the driving force for creating a trust. Once a trust has been properly created and the assets transferred to the trustees, those assets should be safe from third-party claims.

c. Governing law

The provisions of the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985 apply in Scotland. 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. The governing law also applies to 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

i. Constitution

The trust relationship may be established either voluntarily when the owner of the property transfers legal ownership of it to trustees to hold it for defined purposes on behalf of the beneficiaries, or involuntarily by operation of law. The constitution of a trust set up during the transferor’s lifetime is completed by delivery of the trust property or trust deed to the trustee or a third party. A testamentary trust is established by the death of the truster. A secret trust is not competent in Scots law.

No particular form of words is needed to create a trust, so long as it can be established that the grantor had sufficient intention to create the trust; that is a matter of interpretation.

Trust purposes are the essence of a trust. Without purposes there is no trust and an individual takes property transferred to them absolutely. The trust purposes must be certain; if not, the trust may be void from uncertainty. The purposes must also not be too wide, since a truster may not delegate to trustees complete discretion to choose the trust purposes. The trust purposes cannot be immoral or contrary to public policy.

ii. Duration

In principle, a trust can last indefinitely under Scottish trust law. This is subject to some limitations, including rules preventing indefinite accumulations of income and, for liferent trusts, rules restricting successive liferents (Law Reform (Miscellaneous Provisions Scotland) Act 1968). This Act stipulates that if a trust deed executed after 25 November 1968 provides a liferent to a beneficiary who was neither alive nor in utero at the time the deed was signed, the liferent will not last beyond that beneficiary’s 18th birthday, but rather that the beneficiary will become entitled to the property absolutely at that time.

Scots law does not allow indefinite accumulation of income. Instead, there are permitted periods that include, among others: the lifetime of the granter; 21 years from the date the trust deed is signed; and, the respective minorities of the beneficiaries. A Scottish trust can have only one accumulation period, the period of which is either specified in the deed or determined by applicable case law. Unlike in England, one cannot have a period attributed to a trust on a ‘wait and see’ basis.

iii. Beneficiaries

The classification of the trustee’s and beneficiary’s rights is probably the greatest single difference between trust law in Scotland and England. The orthodox view in Scotland is that a trustee has the right ‘in rem’ (or ownership of the trust property) and the beneficiary’s rights are personal, ‘in persona’, against the trustees. Notwithstanding the ‘mere’ personal nature of the beneficiary’s right, however, it is quite extensive: this interest is not defeated by the alienation of trust property in breach of trust. If the trustee becomes insolvent, the beneficiaries prevail over the trustee’s creditors. The right of a trustee does not transmit on death to their successors. Nevertheless, beneficiaries cannot vindicate trust property for themselves against anyone other than the trustees. Instead, wronged beneficiaries have a range of possible remedies against the trustees, including the right to interdict them from committing a breach of trust, a declarator of count reckoning and payment, and even a personal action of damages for a breach of trust.

iv. Trustees

1) Appointment

The original trustees are chosen by the truster. Given the onerous nature of the trustee relationship, it is essential that the trustees accept office; acceptance may either be implied or, preferably, explicit. Usually, the first nomination of trustees is set out in the trust deed or declaration, but that is not essential. Notwithstanding the fundamental concept of delectus personae (i.e. a trustee is chosen for specific personal qualities) a nomination can be ex officio (i.e. arising from a particular office rather than personal characteristics).

If a trustee dies or resigns while in office, title to the trust property automatically vests in the surviving trustees.

New trustees may either be appointed by the truster (who may reserve this power in the trust deed either for themselves or to any named individual) or by a quorum of existing trustees exercising the power to assume new trustees pursuant to the 1921 Act. Although at common law the Court of Session can appoint new trustees, this is rare as the 1921 Act contains a statutory power under which the court may appoint a trustee or trustees in certain circumstances (e.g. if trustees cannot be assumed; if a sole trustee becomes insane or incapable; or if a sole trustee is absent continuously or has disappeared from the UK for a period of at least six months).

Under the common law, the court also has power to remove a trustee from office, but the court is most reluctant to exercise this power unless the trustee has been shown to be unfit or guilty of abuse of office. If there has merely been disagreement between the trustees, then the court will not remove a trustee.

There is no general requirement for any set number of trustees, although it is sensible to have more than one.

2) Powers

Trustees’ powers are obtained mainly from statute or powers expressed in, or implied in, the trust deed. Modern trust deeds generally contain comprehensive powers although older trusts may have to rely on those given by statute. Broadly speaking, these powers may be found in the 1921 Act andthe 2005 Act. These statutory powers can be exercised only if they are not at variance with the terms or purposes of the trust.

3) Duties

While the English Trustee Act 2000 establishes a definitive standard of care for trustees of trusts that are subject to English law, the position in Scotland is a little less clear. The principal duties of trustees may be summarised as follows.

  • Duty of care: trustees are under a general duty of care to act with the same care and diligence that persons of ordinary prudence may be expected to use in their own concerns.
  • Duty to carry out the terms of the trust: the trustees must administer the trust in accordance with its terms.
  • Duty to control the trust property: the trustees must take steps to ascertain and ingather the trust property and keep it under their control.
  • Duty to keep accounts: the trustees have a general duty to keep records and accounts of the trust property.
  • Duty to devote time to trust affairs: the trustees must meet together as often as is necessary and give such time to the trust’s affairs as is required for the proper administration of the trust.
  • Duty to invest: the trustees have a general duty to invest the trust property and are personally liable if they fail to do so. Trustees’ powers to invest are derived from the trust deed and the 2005 Act.
  • This Act sweeps aside the previous rigid approach to investment and generally allows trustees to hold most types of investments, to delegate investment management on a discretionary basis and to register trust assets in a nominee name.
  • Duty not to delegate: the trustees may not delegate any of their powers as trustees, unless the trust deed permits them to do so. They may appoint agents to carry out certain tasks on their behalf but may not delegate their primary role of overall responsibility for the administration of the trust.
  • Conflicts of interest: the trustees should not act in a way that causes them to have a conflict of interest with the trust. This means that the trustees must not derive any personal profit from the trust (and this has implications for the remuneration of the trustees); nor must a trustee as an individual enter into any transaction with the trust.
  • Duty to take advice: the trustees should take advice from a properly qualified person in matters on which they are not themselves competent to advise.

4) Trustees’ liabilities

To the beneficiaries: trustees must pay beneficiaries their due and carry out the purposes of the trust in the manner of a careful and prudent trustee. Failure to do so results in a breach of trust and a trustee is liable for any loss caused by such a breach. The remedies open to a beneficiary are personal in nature and include:

  • interdict – a one-off remedy to prevent an action happening
  • damages – for loss to the trust estate only, and
  • a declarator or an action of accounting against the trustees to compel them to administer the trust according to its terms.

Most modern deeds contain clauses that seek to limit a trustee’s liability to the beneficiaries for breach of trust. These are strictly construed. The 1921 Act provides some statutory relief for trustees who commit a breach of trust at the instigation of a beneficiary, and for those who have acted honestly and reasonably and are fairly to be excused personal liability for any breach.

To third parties: it is a rebuttable presumption that trustees are personally liable in their dealings with third parties; thankfully, this can be overturned where it is established that the third party knew the trustees’ intention was to bind only the trust estate and that the third party accepted the relationship on that basis.

Ultra vires transactions: if the trustees carry out some act or omission that is not authorised by common law, statute or trust deed, they are in breach of trust and liable to the beneficiaries. The 1961 Act gives some protection to third parties transacting with the trustees in these circumstances.

5) Decision making

While English trustees must act unanimously, the position is quite different in Scotland. If trustees meet to discuss trust business and make decisions they require a quorum to attend the meeting before it is effective. Unless the trust deed specifies otherwise, a quorum is normally a majority of the accepting and surviving trustees. However, to make an effective decision, a majority of the overall number of trustees (not just the number of trustees in attendance at any meeting) must support that decision. That said, no act of administration can be carried out without all trustees having been consulted, and if such an action is carried out without full consultation, it will normally be void. Parties dealing with the trust may be concerned that there is a risk that not all trustees have been consulted, with the result that any contractual obligation might later be declared void. Some protection is afforded, however, where a deed is granted by a quorum of the trustees, and the party dealing with the trust acts in good faith for value. Very occasionally, trustees are appointed on a joint basis and all must be involved in making any decisions. Scots trust law also permits the appointment of trustees without whom no act of administration will be effectual.

The Scottish Law Commission is currently undertaking a comprehensive review of Scottish trust law. Much of the current law is based on the 1921Act and on 19th-century case law, both developed at a time when the social and business background to the use of trusts was very different to today. A number of Discussion Papers have been published since 2003 covering topics that include beach of trust, liability of trustees to third parties and the variation and termination of trusts. Some of the Law Commission’s recommendations to modernise trust law may become law in the next few years.

© 2012 Society of Trust & Estate Practitioners