Equity and Trusts

In 2003 Edith placed some assets on trust with the intention of providing long-term financial
security for members of her family. She transferred 100,000 and the legal title to an
unoccupied derelict house to Damien and Francis as trustees. Damien and Francis both
work at Ediths local pub and do not have trustee experience. They are instructed to hold the
assets on trust for Ediths daughter Margaret for life, with the remainder to go to Margarets
two adult children, Bernadette and Rory.
The sum of 100,000 was immediately invested by the trustees. Francis asked the advice of
an old university friend who has a degree in business studies. The friend advised them to
invest in Disastek, a new consumer electronics manufacturer. They used the entire 100,000
to buy shares in this company. Since the global economic downturn in 2008, Disasteks
shares have lost 10% of their value. However, Damien and Francis think the investment will
improve as the economy recovers, and feel that there is no need to scrutinise it too harshly
yet.
Bernadette volunteers at a local nursing home for the elderly. She strongly desires to make a
significant donation to the nursing home to help them renovate their premises. She asks the
trustees if they will grant her 20,000 from her interest in the trust for this purpose. Rory is a
keen snowboarder, and wants to pursue a career as a snowboarding instructor. He wants
10,000 from the trust so he can practice his skills in various overseas resorts and pay for
his instructor qualifications. The trustees agree that the requests are both made in pursuit of
worthy causes, and the payments are made to Bernadette and Rory (by selling some of the
Disastek shares first).
Meanwhile, the trustees tried repeatedly to sell the derelict house so they can reinvest the
proceeds in something more profitable, but did not find a buyer. They recently sold the
house to Damiens wife, Erika, for 200,000, which was slightly more than its estimated
market value. Damien and Erika are now renovating the house.
The trust recently received a dividend of 1,000 from the Disastek shareholding. The
trustees split it equally between themselves, writing in the trust accounts that it was paid out
to them as remuneration for their trustee services.

Have the trustees acted within their powers and duties?

- Money invested in the shares

According to s3(1) Trustee Act 20001 trustees possess a general power of investment,
allowing them to make any kind of investment that he could make if he were absolutely
entitled to the assets of the trust.
However, one of the essential criteria is the need for diversification of investments of the
trust (s4(3)). Investing the whole 100.000 in the same type of shares was risky and not a
good idea. They should have split the money and put some in different shares, to be sure that
the price of at least some of it went up.
Following s5(1) TA 2000, trustees need to get proper advice (s5(4) the advice of a person
who is reasonably believed by the trustee to be qualified to give it by his ability in and
practical experience of financial and other matters relating to the proposed investment.)
before exercising any power of investment. Damien and Francis both working in Ediths pub
and having no experience at trustees, they asked Francis friend for help. Since the friend has
a degree in business studies, the trustees felt safe in asking him for help: he should know
what to do. Here, clearly the friend did not give them sound advice: he should have told them
so split the investments and to collect some of the interest.
Furthermore, according to s4(2) TA 2000, trustees must from time to time review the
investments of the trust and consider whether, having regard to the standard investment
criteria, they should be varied.. Here the shares lost 10% of their value since the global
economic downturn of 2008. As fort he investments, the trustees are supposed to take advice
if they need it (s5(2) TA 2000). However they feel that there is no need to scrutinise their
shareholding too harshly yet (s5(3) TA 2000).
Here there are clearly in the wrong: they should have reviewed the shares more often. Even
taking into account that the global economic crisis was a surprise for everybody, the crisis
was five years ago and the shares have been losing value ever since. It has been five years,
and the trustees really ought to have checked the shares and sold them to invest in safe
placements so as not to throw away the trust money.
It is up to the beneficiaries to show that the trustees made decisions that a reasonable prudent
trustee would not have made, according to Nestle v National Westminster Bank [1993]2 :
although the defendant had failed to appreciate the scope of its powers of investment, and had
failed to conduct a periodic review of the investments, it was not enough.

- Payments made to Bernadette and Rory

One of the powers of trustees is the discretionary power of advancement, which allows them
to make early payments of capital to beneficiaries with interest in the capital, according to
s32 TA 1925. However there are a number of restrictions: the money has to be for the
beneficiarys advancement or benefit. A beneficiary can only ask for half of his presumptive
share, not all of the capital. And consent from prior interest holder is required.
Here the trustees did not seem to ask Ediths daughter consent although she is the beneficiary
for life. There are in breach of their power.
As far as Bernadette is concerned, the power of advancement means the advancement or
benefit of the beneficiary herself, not even of her family.3 However it was considered in Re

1

Trustee Act 2000.

Nestle v National Westminster Bank [1993] 1 WLR 1260
3
Re Paulings Settlement [1964]
2

Clores Settlement Trust [1966] whether it could mean something wider than material benefit.
The court agreed that giving money to a charity would be advancement because benefit is a
wider concept than material gain; if a person feels they are under a moral obligation to give to
a charity, allowing them to do so alleviates the feeling of having to perform your duty; there
is amongst wealthy people a general philanthropic duty; and of course if also minimises tax
burden.
Here it can be argued that as Bernadette volunteers at the nursing home, she fells that she is
under a moral obligation to help them financially. However half of her presumptive share
amounts to 25.000 (and half of the house the trustees had not sold yet), so giving her
20.000 to give away to a charity (especially as it is not for her own advancement) may be
considered to be too much.
Furthermore, the payments were made by selling some of the invested shares that had lost
some of their value, essentially throwing away 10% of their value.
As far as Rory is concerned, the case to consider is Taylor v Taylor (1875)4 where a number
of expenses were claimed by the beneficiary as part of his advancement. Payment of the
admission fee to one of the Inns of Court in the case of a child intended for the Bar and the
price of a commission and outfit of a child entering the army were considered an
advancement in his life. However, price of outfit and passage money of an officer in the
army and his wife on going out to India with his regiment was not.
Here, arguably paying for Rorys snowboard instructor qualifications is similar to the
admission fees and price of commission; the trustees were right in deciding it was part of the
power of advancement. Contrarily, Rorys going to various overseas resorts to practice his
skills seems similar to the passage money that was not held to be an advancement. The
trustees should not have given Rory that much money.
- The house
Trustees have a duty to consult the beneficiaries when dealing with land, according to s.11
TLATA 1996. However, according to s6(1) TLATA 19965, trustees have powers over
property as absolute owner. (To sell the house, the trustees need to satisfy the rules of
overreaching (s27(2) LPA 1925): the money must be given to 2 or more trustees. Here there
are two trustees, so the rule is satisfied.) As the Ediths house is derelict, there are no chattels
to take into consideration.
The trustees have a duty to obtain the best price possible, according to Buttle v Saunders
[1950]. The house should not be sold under market value. Here the trustees tried repeatedly to
sell the house, and finally sold it to one of the trustees wife. The house was sold for slightly
more than its estimated market value, so the duty was fulfilled.
However, according to the rule of self-dealing, trustees cannot sell trust property to
themselves. According to Re Thompsons Settlement [1986]6 a man must not put himself
in a position where duty and [personal] interest conflict or where his duty to one conflicts
with his duty to another unless expressly authorised. Here the house was not sold to a trustee
himself but to his wife. Courts tend to vigilan[tly] scrutinise proxy purchases (as in Burrell
v Burrells Trustees (1915)7. If Damien and Erika intend to live in the house, they can show

4

Taylor v Taylor (1875) L.R. 20 Eq. 155

Trusts of Land and Appointment of Trustees Act 1996
6
Re Thompsons Settlement [1986] Ch 99
7
Burrell v Burrells Trustees 1915 SC 333
5

that the transaction has been fair and honest and the trustee has made no profit out of it.8 If
the couple plan on reselling the house they are now renovating for a huge profit, the
transaction will be in breach of fair-dealing. A constructive trust on the unauthorised gains
will arise automatically by law9 to keep the money linked to the trust.
- Remuneration
Trustees hold a fiduciary position, and according to Bray v Ford [1896]10, it is an inflexible
rule of a Court of Equity that a person in a fiduciary position .... is not, unless expressly
provided, entitled to make a profit.11
They are only allowed to get remuneration under certain circumstances: if it was intended by
the trust (per s.28 TA 2000); if there is a contractual agreement with the beneficiaries; under
s. 29 TA 2000 (if the trustees are a trust corporation; or act in a professional capacity); if the
trustee is a professional solicitor (as per the rule in Craddock v Piper (1850)12).
However Damien and Francis do not fit in any of those categories: they are not a trust
corporation nor a solicitor, and there does not seem to exist any specific clause in the trust nor
a contractual agreement with Margaret, Bernadette and Rory. Although they acted in good
faith, their writing in the trust accounts that the money was paid out in remuneration for their
trustee services does not change anything.

Per Megarry VC in Tito v Waddell (No 2) [1977] Ch 106

Westdeutsche Landesbank Giro v Islington LBC [1996] UKHL 12
10
Bray v Ford [1896] A.C. 44.
11
Lord Herschell in Bray v Ford [1896] A.C. 44.
12
Craddock v Piper (1850) 1 Mac & G 664
9