Trustees — Appointment, Powers and Duties — SQE1 FLK2 Trusts Law

A man dies leaving his farm on trust for his grandchildren. His will names six friends as trustees, in a stated order. All six are willing. All six are able. Only four of them are trustees of the farm. Not because anybody chose, not because anybody objected, and there is nothing for a court to decide. A statute did it, automatically, the moment he died.

That is this topic in one example. Trusteeship runs on default rules that operate whether or not anyone notices them. Who can hold the office. How you get into it and out of it. What care you owe. What you may do with the money. Most of the answers sit in two statutes, and knowing which one you are in is half the battle. Keep those six friends in mind.

Here is the route. Who can be a trustee, and how many. Then getting into the office and out of it, by appointment, removal and retirement. Then the duty of care, and the investment rules that hang off it. Then the two great powers over the fund, maintenance and advancement. And last, delegation, and what trustees may never hand to somebody else.

Who can be a trustee? Anyone over 18 years of age and of sound mind. The appointment of a minor is void, under section 20 of the Law of Property Act 1925. A minor cannot hold a legal estate in land in any event. And nobody can be compelled. Trusteeship is a voluntary office, and a person named as trustee may simply decline.

How many? One is enough to run a trust. But two numbers matter for land. A maximum of four, under section 34(2) of the Law of Property Act 1925. Where more than four are named, it is the four first named who are willing and able to act. And a practical minimum of two, because a sole individual trustee of land cannot give a valid receipt for capital money.

Which is why our six friends are only four. The statute cuts the number down whatever the will says. No disclaimer, no court. And notice the limit is about land. The same will leaves a share portfolio on the same trusts, and all six can be trustees of that. Four for the farm, six for the shares, from one document.

There is one exception to that minimum of two. A trust corporation. The category takes in the Public Trustee, the Official Solicitor, and corporations authorised to act as trustees, such as banks. Three advantages. Perpetual existence, so they do not die or lose capacity. Professional expertise. And uniquely, the ability to act as sole trustee of land and still give a valid receipt.

Disqualification is narrower than people expect. Bankruptcy does not end a trusteeship. Try it. A trustee is made bankrupt, has done nothing wrong, and her co-trustee decides she is out of office and starts dealing with the investments alone. Is she out?

No. She remains a trustee with full authority. The co-trustee is doubly wrong, because trustees of a private trust must act unanimously. What bankruptcy does is expose her to replacement. It is a ground for appointing someone in her place under section 36(1), and section 41 names a bankrupt trustee expressly as a case for the court.

Appointment. Five routes worth knowing. The settlor, in the trust instrument, which is much the commonest. A person nominated in the instrument with power to appoint replacements. The continuing trustees, under section 36 of the Trustee Act 1925. The court, under section 41, where it is expedient. And the beneficiaries.

The beneficiaries' route is where two rules get confused. Separate them now. The rule in Saunders v Vautier lets beneficiaries end a trust early and call for the property. They must all be of full age and capacity and, taken together, absolutely entitled. That is a power to terminate. It gives no right at all to install new trustees and keep the trust running.

The power to change trustees is section 19 of the Trusts of Land and Appointment of Trustees Act 1996. It applies where the instrument nominates nobody with power to appoint. The same beneficiaries may then direct the trustees in writing to retire and to appoint the people they name. No court, and no end to the trust. Neither right works while any beneficiary is a minor or unascertained.

Removal by the court. Section 41 of the Trustee Act 1925 is really a power to appoint, which removes a trustee by appointing someone in substitution. The general test is expediency. The section then names particular cases. A trustee who lacks capacity, who is bankrupt, or a corporation in liquidation. Notice what is not on that list. Breach of trust.

Behind the statute sits the court's inherent jurisdiction, which is wider. It can be used where no breach has occurred at all. Letterstedt v Broers is the case. Two trustees fall out over something private and stop speaking. No investment decision is taken for two years. No breach, no bad faith, and the court will still remove one of them. Its guiding principle is the welfare of the beneficiaries.

Retirement, and there are two routes out. Under section 36 a trustee who wants to be discharged is replaced. The continuing trustees and anyone with power to appoint consent, and a new trustee is appointed in her place. In practice by deed, so that section 40 vests the trust property in the new and continuing trustees without a separate transfer.

Under section 39 she retires with no replacement at all. Three conditions. The retirement is declared by deed. The co-trustees and anyone with power to appoint consent by deed. And at least two trustees, or a trust corporation, must remain afterwards. So section 36 is out with a replacement, and section 39 is out without one.

Retirement ends the office. It does not end liability. The outgoing trustee stays personally liable for her own breaches committed before she left. She is not liable for what the continuing trustees do afterwards, unless she retired to facilitate that very breach. Head v Gould. So £50,000 put into a company shortly before she retired is hers to answer for. An investment made a year later is not.

Now duties. The statutory duty of care is section 1 of the Trustee Act 2000. A trustee must exercise such care and skill as is reasonable in the circumstances. The old formulation is the prudent man of business. But it is modified twice, and the modifications are where the marks are.

Regard is had to any special knowledge or experience the trustee has, or holds himself out as having. And to what is reasonable to expect of someone acting in the course of that kind of business or profession. So a solicitor trustee is judged as a reasonably competent solicitor. The duty covers any function of trusteeship, not just investment.

Investment. Section 3 of the Trustee Act 2000 gives trustees a very wide power. They may make any kind of investment they could make if they were absolutely entitled to the assets. That replaced the restrictive lists under the Trustee Investments Act 1961. But the width is controlled by two sections you must know.

Section 4 requires trustees to have regard to the standard investment criteria. Two of them. Suitability, meaning the suitability to this trust of investments of that kind. And the need for diversification, so far as appropriate. A high-risk holding may be unsuitable for a trust providing steady income to a vulnerable beneficiary. Everything in one asset class may breach the duty.

Section 5 adds review and advice. Trustees must review the investments from time to time, and must obtain and consider proper advice about how the assets should be invested. Proper advice means advice from someone they reasonably believe qualified by ability and practical experience. They are not bound to follow it. They are bound to consider it.

Now the two powers over the fund itself. Maintenance and advancement. Easy to keep apart once you have the pairing. Maintenance is income, for minors. Advancement is capital, for anybody.

Section 31 of the Trustee Act 1925 lets trustees apply trust income for the maintenance, education or benefit of a minor beneficiary entitled to that income. Maintenance is read broadly. Food, clothing, housing, school fees. For trusts arising on or after 1 October 2014 the discretion is unfettered. The Inheritance and Trustees' Powers Act 2014 replaced the old requirement to act reasonably with whatever the trustees think fit.

Section 32 lets trustees apply capital for the advancement or benefit of a beneficiary, at any age. And here is the number that decides questions. For trusts created on or after 1 October 2014 the ceiling is the whole of the beneficiary's presumptive share. That is what they would take if the trust were wound up today. For trusts created before that date it was one-half.

Benefit is construed very widely. But wide is not unlimited. Where trustees advance capital for a stated purpose, they must apply it for that purpose, or satisfy themselves that it is so applied. Re Pauling's Settlement Trusts is the warning. Hand a large sum to a young beneficiary heavily influenced by her parents, suspecting it will pay the parents' debts, and you have committed a breach of trust.

Delegation last, and start with a misconception. It is tempting to say trustees may delegate carrying out decisions but never making them. That is wrong. Under section 11 of the Trustee Act 2000 the trustees of a non-charitable trust may authorise an agent to exercise any delegable function. Delegable means anything not on a short list. Try it. Deciding investment policy. Deciding how much each beneficiary gets. Appointing a new trustee. Which can be delegated?

Only the first. The list in section 11(2) has four items. Decisions about whether or in what way trust assets should be distributed. Whether payments out of the fund come from income or capital. The power to appoint a trustee. And the powers to delegate or to appoint a nominee or custodian. Investment policy is not on it, so it can go to a fund manager.

But delegating asset management functions triggers section 15. The agreement must be in writing or evidenced in writing. The trustees must prepare a policy statement, also written, guiding how the functions are to be exercised in the best interests of the trust. And the agreement must require the agent to comply with it. An oral instruction and a glance at performance once a year will not do.

Two more. Section 16 lets trustees appoint a nominee, in whose name investments are held. Section 17 lets them appoint a custodian, who holds assets but cannot manage them. And section 23 matters. A trustee who met the duty of care in selecting and reviewing the agent is not liable for the agent's defaults.

Two smaller powers to finish. Insurance sits in section 19 of the Trustee Act 1925, as substituted by section 34 of the Trustee Act 2000. Trustees may insure trust property against any risk and pay premiums from income or capital. Section 8 of the Trustee Act 2000 lets them acquire freehold or leasehold land in the United Kingdom.

Three permitted purposes. As an investment, for occupation by a beneficiary, or for any other reason. Occupation is a purpose in its own right, so trustees buying a flat for a beneficiary to live in need not justify it as an investment. But what the beneficiary may then do comes from the 1996 Act, not the Trustee Act. Section 12 gives a right to occupy. Section 13 gives the trustees the machinery to restrict it.

A word on how SQE1 tests this. You will not be asked to recite section numbers or case names. You get a scenario, five answers, and one instruction. Pick the best. But this is a statutory topic, so knowing which Act a rule lives in is genuinely worth marks, because the wrong Act is how the distractors are built.

If you keep only three things, keep these. The division of labour between the two Acts. The 1925 Act for appointment, retirement, maintenance and advancement. The 2000 Act for the duty of care, investment and delegation. Saunders v Vautier, which ends a trust and does not appoint anybody. And Head v Gould, for the trustee who retires and finds she has taken her past with her.

Four traps. One. There is no single standard of care. A solicitor trustee is judged as a reasonably competent solicitor. A lay trustee who holds himself out as having financial expertise is judged by the expertise he claimed. The duty raises the bar for the people who invited it.

Two. Do not use Saunders v Vautier to change trustees. It terminates the trust and hands the property over. The power to direct a retirement and an appointment, with the trust continuing, is section 19 of the 1996 Act. Same beneficiaries, same conditions, completely different outcome.

Three. Beneficiary occupation of trust land is not a Trustee Act 2000 question. Section 8 lets the trustees buy land for a beneficiary to occupy. What the beneficiary may then do comes from sections 12 and 13 of the 1996 Act.

Four. An advancement is an advance. It is brought into account against that beneficiary's share when the fund is finally divided. And where somebody holds a prior interest, a life tenant for instance, they must consent in writing before capital moves.

Quick check. A settlement created by deed in 2019 holds a fund of £300,000 for the settlor's three children in equal shares. They are now 25, 22 and 19, and nobody holds a prior interest. The trust instrument neither extends nor restricts the statutory power of advancement. The eldest asks the trustees to advance capital to help her buy a flat. If the trust were wound up today, each child would take £100,000.

What is the largest sum the trustees may advance to her? Three candidate answers. One. £50,000, being one-half of her presumptive share. Two. £100,000, being the whole of her presumptive share. Three. Any sum the trustees think fit, there being no statutory limit. Pause here if you want a moment.

The answer is two. £100,000. Section 32 of the Trustee Act 1925 lets trustees apply capital for the advancement or benefit of a beneficiary interested in capital. For trusts created on or after 1 October 2014 the Inheritance and Trustees' Powers Act 2014 raised the ceiling from one-half to the whole presumptive share. This settlement was made in 2019, and the instrument does not restrict the power.

Why the others fail. Option one is the pre-2014 answer, and it is the single most common mistake on this section. One-half was the ceiling only for trusts created before 1 October 2014. Option three forgets that there is a ceiling at all. The power is capped at the presumptive share, and no prior interest exists here, so nobody's consent is needed.

Five things to take away. One. Over 18, sound mind, willing. Four trustees maximum for land, two minimum for a valid receipt. Two. Getting out. Section 36 replaces you. Section 39 lets you go with nobody in your place, provided two trustees or a trust corporation remain. Neither ends liability for what you did.

Three. The duty of care in section 1 of the Trustee Act 2000, higher for professionals and for claimed expertise. Investment is wide under section 3, controlled by section 4 and section 5. Four. Maintenance is income for minors under section 31. Advancement is capital for anybody under section 32, up to the whole presumptive share for modern trusts.

Five. Trustees can delegate everything except distribution decisions, income against capital, appointing a trustee, and the delegation powers themselves. And back to our six friends. Two of them were never trustees of the farm and never will be, though all six hold the shares. Next time, Trustees' Liability and Protection.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.