Equity and Trust Law - Essay Example

Equity and Trust Law Introduction “He is the beneficiary of a generous trust set up by his father” his condition or obligation of one to whom anything is confided; responsible charge or office.” We can summarize the term trust in this manner. The trust property is something held by one party for the benefit of another and the first party is called as the trustee and second party is the beneficiary. There will be an agreement, under which a person can transfer title of the specific property to another who agrees to hold or manage it for the benefit of a third person. The main intention behind the creation of trust is that the devisee or grantee shall convey it, or dispose of the profits, at the will, or for the benefit, of another; an estate held for the use of another; a confidence respecting property reposed in one person, who is termed the trustee, for the benefit of another, who is called the cestui que trust. Generally the beneficiary gets interest and dividends on the trust assets for a set number of years. Law of equity and trust confers the provision regarding the trust. It laid down several duties and responsibilities for the trustees. Trust can be raised from either trust deed/covenant as said before or by the Will, i.e. a testamentary trust is a trust created by a Will or a codicil to a Will. A testament is a Will. Here the trust instrument is the Will/Codicil. A testamentary trust can not be by inter vivos i.e it can not be exist between living persons. Generally there can be two types of disputes raised from this type of the trust established by the law. a) Dispute concerning property left in Wills which are over the capacity of a testator b) dispute regarding whether the testator made the Will under undue influence. Here there is a rule that he/she must dispose of that property personally and may not delegate that power of disposition to another. Tatham v Huxtable(1950) 81 CLR 639 where the Court insisted to keep up the rule “Will directed the executor to distribute the residuary property “to others not otherwise provided for who, , have rendered service 2 meriting consideration by the testator.”( Kitto J,1950).(1) In our case, Brain has appointed Tony and Nathan as executors and trustees under his Will (testament) over the trust deed which he (the testator) had made earlier where his children Pat and Richard are the trustees. Before we render the service of tackled conclusions to Tony and Nathan, it is inevitable to have a look upon the rules, provisions, scope of trustees of trust deed and trustees of testamentary trust. The testamentary trust property and trust property There will always be some testators who draft their own will trusts, there will always be those who die intestate so that their property passes on statutory trusts, and there will always be legally qualified draftsmen who will not draft trusts as ably as other draftsmen. A Will can also include provision for establishing a Testamentary Trust, which can be a tax effective tool for distributing your estate. How much fairer, simpler and cheaper if all settlers are treated equally and all trust instruments are significantly shortened by virtue of a wide range of statutory default powers conferred upon trustees, except to the extent extended, excluded or modified by the trust instrument. Moreover, there seems no reason why these powers should not be made applicable to existing trusts as opposed to new trusts so that, from the commencement of the proposed Act, the trustees will be able to cope with fundamental changes in the way in which investment business is carried on without the time, trouble and cost of applying to the courts for new powers. All deceased estates are for a time at least, “testamentary trusts”. On death, the assets of the deceased vest in the executor. A trust left in a Will may be a discretionary trust - which allows the trustee the discretion to distribute income or capital to the beneficiaries. It may be a fixed trust where the income distribution is fixed for a period – ----------------------------------------------------------------------------------------------------------- 1.Kitto J (1950) 81 CLR 639. 3 usually for the income beneficiary’s life .It may also be fixed in the sense that a particular person has right to occupy a house for life or until marriage or entry into a nursing home or whatever. (eJTR 2006Testamentary Trusts: Not Just “Another” Trust Arlene Macdonald) (2) Discretionary trust under testamentary trust The expression "discretion" denotes an authority vested in trustees, either expressly by the terms of the trust instrument or by the general law, to dispose at their discretion of the trust fund, whether capital or income, in favor of some or all of the beneficiaries. It therefore includes the authority to apply trust property under a discretionary trust, powers of appointment conferred on trustees and dispositive powers such as those conferred by sections 31 and 32 of the Trustee Act 1925 in respect of maintenance and advancement. Where a dispositive discretion is expressly conferred upon a trustee a preliminary consideration in determining the extent to which the exercise of that discretion will be subject to review, is whether there is any qualification imposed upon it. In Gisborne v. Gisborne,(3) (Underhill & Hayton,1984) established that a trustee who has an "absolute" or "uncontrollable" discretion will not be subject to challenge in the courts provided that the discretion is exercised bona fide. In Learoyd v. Whiteley (1887) 12 App.Case 727 it was held that the exercise of trustee management or administrative discretions, for example the power of investment, reasonableness is an issue, but in the notion of the duty of care imposed upon trustees to exercise the care and skill of the ordinary prudent man of business. ------------------------------------------------------------------------------------------------------------ 2. eJTR ( 2006) Testamentary Trusts: Not Just “Another” Trust Arlene Macdonald 3. Gisborne v. Gisborne,(3) Underhill & Hayton, Law Relating to Trusts and Trustees (14th ed., 1987), p. 586 Pettit, Equity and The Law of Trusts (5th ed., 1984), p. 331. Snells Principles of Equity (28th ed., 1982), p. 234.) 4 All the trustees under the Will should remember and follow some obligations as the executors/administrators of the trust property. Obligations of trustees under the Will An Executor is obligated to execute the terms of a Will in strict accordance with the “the testators" instructions, subject to the rule that a trust under the Will only arises if expressly declared by the testator. They must completely manage and administer the trust fund. Trustees must be acquainted with the terms of the trust and all associated documentation. The trustees would be injudicious to invest all the estate funds in high income, low capital growth investments. And lastly, trustees must keep proper accounts and full records of all their decisions. Trustees are bound by powers given to the trustees under the Trustee Act 1956 with any specific powers mentioned in the will Fiduciary Duties The trustees /executors must never put themselves in a position of conflict between their duty as trustees and their personal interest. They cannot profit from their role as trustees. So for example, without specific authorization or the consent of all beneficiaries, it would be unreasonable for trustees to buy property from or sell property to the estate I.e. the Trustees always for their work. The trustees have a duty to act in good faith and in the interests of the beneficiaries. Thirdly, trustees cannot delegate their powers and must act personally. The trustees should be consulted about matters and agree before taking action. So it should be always remembered that there are sufficient safeguards in the equitable duties imposed upon trustees and in regulatory regimes designed to protect the public to justify following the practice of draftsmen in conferring the widest possible administrative powers upon trustees in a Schedule A to a Trustee Powers Act. However, 5 to avoid such complexities we provisionally consider that while trustees of both old and new trusts should have the new powers, no trustee of an old trust should be liable for breach of trust for only using the powers available to him before commencement of the new Act. Old trustees and new trustees We thus believe that there are sufficient safeguards in the equitable duties imposed upon trustees’ the widest possible administrative powers upon trustees in a Schedule A to a Trustee Powers Act. Section 3 insists that that Trustees have in relation to the Trust Property all the powers of an absolute beneficial owner including particularly, power to make an investment ,whether or not income-producing of any kind anywhere in the world but excluding any power to trade subject to some exceptions. Regarding the trust by Will, there always arise question related the distributions to beneficiaries. A beneficiary entitled to an undivided share in a trust fund and receiving, for example, a cash sum by way of advance or appropriation of part of his share must bring into account when the final division takes place the value of the cash sum at the time of its advancement and not the value of the sum at the time of the division. In inflationary times, the bringing into hotchpot of the value at the time of its advancement will mean that the beneficiary who received part of his share in advance will receive a larger proportion of the whole fund than would be expected given the value of his initial undivided share. Such a problem will not arise if the beneficiary is given the whole of his share in advance. An “Interested Trustee” who also has an interest in the Trust Property by virtue of being a beneficiary of the trust, may enter into a transaction with the Trustees acting either in their own names or on behalf of any company acquired, purchased or promoted. The Interested Trustee first discloses to the Trustees the nature and extent of any material interest conflicting with his fiduciary duties. 6 But here the testamentary trustees has got an exclusive powers of appropriation of trust property without the consent of person by virtue of limitation laid down in section11 of trusts of Land and Appointment of Trustees Act 1996. In the actual condition or state of investment of the same at the time of appropriation in or towards the satisfaction of the share or interest of any person or persons in the Trust Property.(para 8 sch A). Powers of beneficiary Trustees The beneficiaries could be the Trustee of their own individual trust which would allow them to control the distribution of capital and income to themselves, or amongst a range of secondary beneficiaries eg the primary beneficiarys spouse and children. The distribution resolution can be decided on an annual basis in consideration of each beneficiarys personal income and taxation circumstances as well as family circumstances like assets held within a Testamentary Trust may provide some protection in the event of family breakdown or bankruptcy.( 2004 UHY Haines Norton) Wealth Creation And Estate Planning) (4) It is not true that the testamentary trustees enjoy the complete freedom by possessing the trust property by Will. There are provisions in trust law to safeguard the interests of the beneficiary trustees. It is true that the executor has duties of a trustee to administer the estate ie to pay all debts including tax bills, funeral expenses and to distribute the bequests. It is only when administration is complete i.e. all debts paid or assets have been set aside by the executor to pay them that the beneficiaries become absolutely entitled to any assets or their share of cash ,if there are no further trusts created and the assets and/or cash are distributed to the beneficiaries. ------------------------------------------------------------------------------------------------------------ 4. UHY Haines Norton (2004) Wealth Creation and Estate Planning 7 This is the “estate during administration” and is as much a trust as any other. The beneficiaries at this stage have no right to anything except proper administration. It is during this period that unhappy or omitted beneficiaries should make any relevant application for variation of the Will under the Family Provision legislation of the particular State or territory. There is a very limited time allowed for an aggrieved beneficiary to make an application for obvious reasons although the Court may extend the time if it considers it appropriate. But testamentary trustees should remember that by virtue of provisions given in Sections 12 and 13, a beneficiary has the right to occupy trust property. In Pearson v IRC [1981] AC 753 this provision of “interest in possession has clearly given. Testamentary trust related to land In relation to land, by virtue of the Trusts of Land and Appointment of Trustees Act 1996, trustees of land has all the powers of an absolute owner which will include a power to use the land as security. The ability of trustees to sell trust property and to invest the proceeds in other property is limited by the rule that they cannot lawfully invest trust funds other than as authorized by the terms of the trust instrument or by statute or, in rarer cases, by the court. Statutory powers of investment are currently contained in the Trustee Act 1925 and in the Trustee Investments Act 1961. Consultation with beneficiaries Section 11 of the Trusts of Land and Appointment of Trustees Act 1996 imposes duties of consultation of the beneficiaries unless excluded by the trust instrument. The intention behind this section is to extend the provisions of Section 26(3) of the Law of Property Act 1925 (which is repealed by this Act). The trustees must consult with the beneficiaries "in the exercise of any function relating to the land subject to the trust". This 8 presumably means, for example, that the trustees must consult the beneficiaries concerned before taking any decision whatsoever relating to the land. The trustees do not, however, have to consult all the beneficiaries of the settlement, but only those of full age and entitled to a beneficial interest in possession in the land (Section 9(1)). Subsection (2)(a) provides that if the trust is created by "a disposition" made after the commencement of the Act there is no such need to consult in so far as provision to that effect is made by the disposition. Such provisions will no doubt become standard in most express trusts.In Grey v Inland Revenue Commissioners it was held that expression disposition is capable of including an oral declaration of trust. It is also provided that the trustees need not consult under this section in relation to a trust which is created or arises under a Will made before the commencement of the Act (whether the testator died before or after such commencement). If the trust was created inter vivos before such commencement then there is no need to consult under the Section unless the settler, or surviving settlers executes a deed declaring that they must do so -- sub-section (3) -- and the same rule applies if the trust was made after the commencement of the Act "by reference" to a trust made before such commencement: this might, for example, happen if a settlor conveyed further land to trustees to hold by reference to the trusts of an earlier settlement made by him. The revised STEP Standard Provisions expressly exclude the application of section 11 as inappropriate to ordinary trusts where the settler does not seek to favour particular beneficiaries but expects the trustees to manage things themselves. Trustees of land have the benefit of a general power to manage the trust property as if they were the beneficial owners thereof.(5) ------------------------------------------------------------------------------------------------------------ 5. The Trusts of Land and Appointment of Trustees Act 1996, s6 (1) 9 The testamentary trust ends like other trusts. If a life interest, it ends when the person whose life is to be counted, dies or when the person with the interest assigns or surrenders it. If a discretionary trust, it ends when the trust deed says so, when the trust vests by one of the actions provided for in the Will, such as distribution of the property to the various beneficiaries or by declaration by the trustee that the trust has vested or the Court makes an order vesting the trust. It can also end by accident if there is no trust property. Breach of trust As said before, the trust duties are obligations contained in the trust instrument or imposed by law, which must be carried out by the trustees. The trustees’ failure to carry out their duties is a breach of trust and the trust beneficiaries may take action to recover any loss caused to the trust by the trustees’ failure. If a trustee commits a breach of trust, the beneficiaries may either affirm the transaction or, if a loss has occurred, hold the trustee liable for the amount necessary to compensate fully for the consequences of the breach. This may include recovery of lost income, capital gain, or appreciation that would have resulted from proper administration. (6) A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of: (1) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (2) the profit the trustee made by reason of the breach. Exemption A trustee may be exempted from this in the following case. No Trustee shall be liable for any loss or damage which may happen to the Trust Fund at any time or from ------------------------------------------------------------------------------------------------------------ 6. Restatement (Third) of Trusts: Prudent Investor Rule § 205 (1992), Subsection (a) 10 any cause whatsoever unless such loss or damage shall be caused by his own actual fraud. In 1998 in Armitage v Nurse the court exclude liability for ordinary or even gross negligence. The court held that a clause could exclude the trustee from liability for loss or damage to the trust property “no matter how indolent, imprudent, lacking in diligence, negligent or willful he may have been, so long as he has not acted dishonestly”. It is now settled law in England and Wales that trustee exemption clauses can validly exempt trustees from liability for breaches of trust except fraud. These are the provisions under the various Acts related to the Equity and Trust law which must be followed by parties Tony and Nathan. Now we shall tackle the problem of the parties to the given case. Since Brian appointed Tony and Nathan as the executors and trustees under the Will, it is their duty to administer the trust property .The property will go to Pat and Richard as per Brian’s wish by virtue of the rule” the assets are legally owned by the Trustee of the Trust and therefore are not able to be dealt with through a person’s Will”. It doesn’t matter that Pat married George instead of Jonathan; Brian wished that once pat get married the Black acre would go to Pat. To whom she going to marry is not a matter here. Richard also entitled to get the house. Since the agriculture land is acquired by Brian from his deceased father, Nathan will get it as per the existing trust. Tony is entitled to get 3000 shares in the company out of 5000 as 2000 shares were already disposed by Brian by virtue of the rule “only the deceased’s shares in the company may be dealt with through their Will.” It is to be remembered here that all the property will take effect only on the discretion of the executors unless and until the Will demands. Conclusion This case examines the use of testamentary trusts and it looks at the advantages and disadvantages of creating a testamentary trust in the Will as distinct from leaving property to existing inter vivos trusts .From the discussion given above it can be seen that testamentary trust is not just another trust but is associated with many aspects peculiar to testamentary trusts that do not apply to trusts inter vivos. ************************************ Bibliography Books and Authors 1. Anguilla ,D, John ( 2007 ) Trusts & Trustee Volume 13, Number 8 Pp. 276-281 Published by Oxford University Press 2. Goldworth,J The Law of Trusts and Equitable Obligations 4th edn Oxford University Press, Oxford. ISBN-10: 0-19-928535-7; ISBN-13: 978-0-19-928535-8 PP 3. Underhill & Hayton, Law Relating to Trusts and Trustees (14th ed., 1987), p. 586 Pettit, Equity and The Law of Trusts (5th ed., 1984), p. 331. Snells Principles of Equity (28th ed., 1982), p. 234.) Statutes 4. Trustee Act 1925 5. Trustee Act 1956 6. Trustee Act 2000 7. Trustee Investments Act 1961. 8. Trusts of Land and Appointment of Trustees Act 1996 9. Restatement (Third) of Trusts: Prudent Investor Rule § 205 (1992), Journals and publications 10. Bray,J Key ,Cases: Equity & Trusts ISBN-10: 0340926805 Published: 25/08/2006 11. Horne,R, The New Land Law A Commentary on the Trusts of Land and Appointment of Trustees Act 1996 12. Macdonald, A eJTR (2006)Testamentary Trusts: Not Just “Another” Trust 13. Harvard Law Review, Rights and Liabilities of Executors , Vol. 18, No. 3 (Jan., 1905), pp. 224-225 doi:10.2307/1323250 Read More