Trustees: appointment, duties, powers, and liabilities - Tru...

Learning Outcomes

This article outlines trustees’ appointment, duties, powers, and liabilities, with a focus on the statutory power of advancement, including:

• Appointment, retirement, and removal of trustees; authority to appoint; statutory grounds for replacement
• Minimum and maximum numbers of trustees; when a trust corporation can act; vesting of trust property; right of survivorship
• Trustees’ core fiduciary duties; statutory duty of care; impartiality between beneficiaries; standard investment criteria
• Distinction between income maintenance (s.31 TA 1925) and capital advancement (s.32 TA 1925); appropriate application of each
• Application of s.32 Trustee Act 1925: eligible recipients, permissible amounts, meaning of “advancement or benefit,” and prior consent requirements
• Changes introduced by the Inheritance and Trustees’ Powers Act 2014 (effective 1 October 2014), including ability to advance the whole presumptive share
• Trustee decision‑making processes, documentation, and risk management when exercising advancement; bringing advances into account; effects if contingencies fail
• Trustee liabilities for misapplication of capital and available protections (including s.61 and s.62 Trustee Act 1925); common pitfalls and safe practices

SQE1 Syllabus

For SQE1, you are required to understand trustees’ appointment, duties, powers, and liabilities (including the statutory powers of maintenance and advancement), with a focus on the following syllabus points:

• Appointment, retirement, and removal of trustees under Trustee Act 1925 and TLATA 1996
• Trustees’ fiduciary duties, statutory duty of care, and investment powers under Trustee Act 2000
• Trustees’ statutory powers of maintenance (s.31 TA 1925) and advancement (s.32 TA 1925), as amended by ITPA 2014
• Trustee liabilities for breach of trust, court relief under s.61 TA 1925, and impounding under s.62 TA 1925

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which statutory provision gives trustees the power to advance capital to a beneficiary before their interest vests?
   1. s.31 Trustee Act 1925
   2. s.32 Trustee Act 1925
   3. s.1 Trustee Act 2000
   4. s.19 Trusts of Land and Appointment of Trustees Act 1996

2. True or false? Trustees can advance the whole of a beneficiary’s presumptive share of capital under a trust created after 1 October 2014, unless the trust instrument restricts this.

3. What must trustees obtain before advancing capital to a beneficiary if another person has a prior interest in the trust fund?

4. Which of the following is NOT a core duty of a trustee?
   1. Duty to act impartially between beneficiaries
   2. Duty to invest trust assets
   3. Duty to act in the best interests of the settlor
   4. Duty to exercise reasonable care and skill

Introduction

When managing a trust, trustees must follow strict legal rules on their appointment, duties, powers, and liabilities. A key statutory power is the ability to advance trust capital to a beneficiary before their interest becomes absolute. This is known as the statutory power of advancement, found in s.32 Trustee Act 1925. Understanding how and when this power can be used is essential for SQE1.

Appointment, Retirement, and Removal of Trustees

Trustees are usually appointed by the trust instrument (the document creating the trust). If a trustee retires, dies, or is unfit or incapable, a replacement can be appointed by the person nominated in the trust instrument, or otherwise by the continuing trustees or the court.

Key Term: trustee
A person or company who holds legal title to trust property and manages it for the benefit of the beneficiaries.

Key Term: beneficiary
A person entitled to benefit from the trust property, holding an equitable interest.

Key Term: trust instrument
The document (such as a will or deed) that creates the trust and sets out its terms.

Key Term: trust corporation
A professional trustee entity authorised to act as trustee. A sole trust corporation can satisfy statutory requirements that would otherwise require two individual trustees for certain functions (e.g., giving valid receipts on a sale of land).

Key Term: right of survivorship
The rule that co‑trustees hold the legal estate as joint tenants at law; on a trustee’s death, legal title automatically vests in the surviving trustees.

Who can appoint and how:

• If a person is nominated in the trust instrument to appoint new trustees, they have priority.
• If none is nominated or willing and able to act, the continuing trustees (including a retiring trustee who joins in the appointment) or the personal representatives of the last surviving trustee may appoint under s.36(1) Trustee Act 1925. Appointment must be in writing; using a deed is advantageous because of automatic vesting (see below).
• The court may appoint under s.41 Trustee Act 1925 where expedient and otherwise impracticable or difficult; it will consider the settlor’s wishes, even‑handedness among beneficiaries, and effective administration.

Grounds for replacement include death, remaining outside the UK for more than 12 months, desire to be discharged, refusal to act (disclaimer), being unfit (e.g., undischarged bankrupt, dishonesty), being incapable (e.g., loss of capacity), or minority (s.36(1) TA 1925).

Beneficiary appointment rights (trusts of land):

• Under s.19 TLATA 1996, adult, capacitated beneficiaries who are, taken together, absolutely entitled may direct a trustee to retire and direct the appointment of a specified replacement, subject to there being either a trust corporation or at least two trustees remaining and reasonable arrangements protecting the outgoing trustee’s rights.
• Under s.20 TLATA 1996, beneficiaries may direct appointment where a trustee lacks capacity and there is no one else entitled and willing to appoint under s.36(1) TA 1925.

Retirement and vesting:

• A trustee may retire by deed if at least two trustees (or a trust corporation) remain and the continuing trustees consent (s.39 TA 1925).
• On appointment by deed, most trust property vests automatically in the new and continuing trustees (s.40(1) TA 1925), except for assets that require specific transfer formalities (e.g., company shares), which must still be completed.
• At law, trustees hold as joint tenants; on a trustee’s death, title vests in the survivors by right of survivorship.

Number of trustees:

• For pure personalty, at least one trustee is permitted, though best practice is two or more.
• For land, a maximum of four trustees may hold legal title; at least two individual trustees or a trust corporation are needed to give valid receipts on sale to overreach equitable interests.

Core Duties of Trustees

Trustees owe strict duties to the beneficiaries. These include:

• Acting in good faith and for the benefit of the beneficiaries.
• Exercising reasonable care and skill (the standard is higher for professional trustees).
• Acting impartially between all beneficiaries.
• Obeying the terms of the trust and relevant statutes.
• Keeping trust property secure and properly invested.
• Not profiting from their position or allowing conflicts of interest.

Key Term: fiduciary duty
The obligation to act loyally and solely in the interests of the beneficiaries, avoiding conflicts and unauthorised profits.

Key Term: duty of care
The obligation to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or experience.

Additional practical duties include:

• Acting jointly and unanimously unless the trust instrument permits majority decision‑making; trustees must each remain active.
• Taking possession and control of all trust property and ensuring proper title and registrations.
• Keeping accurate accounts and records, and disclosing core trust documents (trust deed, accounts, investment schedules) on request, subject to confidentiality and the court’s supervisory discretion.
• Investing in line with the Trustee Act 2000: consider suitability and diversification (s.4), obtain and consider proper advice unless inappropriate (s.5), and periodically review investments. Trustees may delegate asset management subject to statutory safeguards but may not delegate dispositive discretions unless expressly permitted.

Trustee Powers

Trustees derive their powers from the trust instrument and statute. Key statutory powers include:

• The general power of investment (Trustee Act 2000, s.3), with land purchase enabled by s.8.
• The power to delegate certain functions (Trustee Act 2000, s.11), including appointment of agents subject to a written policy statement and ongoing supervision.
• The power to apply income for maintenance of minors (Trustee Act 1925, s.31).
• The power to advance capital for the benefit of beneficiaries (Trustee Act 1925, s.32).

Key Term: power of appointment
An express power (often in the trust instrument) allowing trustees to distribute capital (or income) to specified persons or within a defined class. Distinct from the statutory power of advancement; a mere discretionary object of a trust is not “entitled to capital” under s.32 unless the instrument separately confers an appointment.

Trustees must always exercise their powers in accordance with their duties and in the best interests of the beneficiaries.

The Statutory Power of Advancement

The statutory power of advancement allows trustees to pay or apply capital for the advancement or benefit of a beneficiary before their interest becomes absolute.

Key Term: advancement
The application of trust capital for the benefit of a beneficiary before their interest vests absolutely.

Key Term: presumptive share
The share of trust capital a beneficiary would be entitled to if they became absolutely entitled at the time of advancement.

Key Term: prior interest
An interest in the trust fund that takes priority over the interest of the beneficiary seeking advancement (e.g., a life tenant’s right to income).

Scope and Conditions

• The power is found in s.32 Trustee Act 1925.
• For trusts created on or after 1 October 2014 (when the Inheritance and Trustees’ Powers Act 2014 came into force), trustees may advance up to the whole of a beneficiary’s presumptive share, unless the trust instrument restricts this.
• For older trusts, the pre‑2014 default limit is one‑half of the presumptive share (unless the trust instrument varies this).
• The advancement must be for the beneficiary’s “advancement or benefit”, a broad concept encompassing education or training, starting or expanding a business, acquiring a home, professional development, and other materially beneficial purposes. However, trustees must consider the propriety of the purpose and avoid indirectly benefitting third parties inappropriately.
• If another person has a prior interest (such as a life tenant), their written consent is required before advancement can be made out of the capital subject to their interest. The prior interest cannot be prejudiced without such consent.
• Any advance is brought into account when the beneficiary later becomes absolutely entitled, so that overall shares remain fair. If a beneficiary’s contingent interest later fails, sums already advanced are not recoverable, provided the advance was properly made.

Important limits and distinctions:

• Eligibility: s.32 applies to “any person entitled to the capital of the trust property or to any share thereof”. This includes vested remaindermen and persons contingently entitled to capital. By contrast, a person who is merely a discretionary object with no fixed or contingent entitlement to capital cannot be advanced under s.32 unless an express power (e.g., a power of appointment) permits payment.
• Documentation and process: trustees should minute their decision, set out the proposed purpose, consider alternative means (e.g., income under s.31), confirm the beneficiary’s eligibility and presumptive share, obtain required consents, and ensure proportionality to the share and fairness between beneficiaries.
• Resettlement and delegation: using s.32 to resettle capital into a new trust that delegates dispositive powers is generally outside the basic statutory power unless expressly permitted by the trust instrument. Trustees must avoid creating structures that fetter future discretions or prejudice others.

Worked Example 1.1

A trust is set up for three siblings, each to receive a share of the capital at age 25. One sibling, aged 21, asks for funds to start a business. The trust was created in 2018. Can the trustees advance the full presumptive share?

Answer:
Yes. For trusts created after 1 October 2014, trustees may advance up to the whole of the beneficiary’s presumptive share, unless the trust instrument says otherwise. The trustees must consider the benefit to the beneficiary and obtain written consent from any person with a prior interest.

Worked Example 1.2

A trust created in 2010 provides for two children to receive capital at age 30. One child, aged 24, requests £40,000 of their presumptive share (half the trust fund) to pay for a postgraduate degree. Can the trustees advance this amount?

Answer:
For trusts created before 1 October 2014, the maximum advancement is one-half of the presumptive share. The trustees may advance up to this limit if it is for the beneficiary’s benefit and subject to any required consents.

Worked Example 1.3

Under a will trust: “To my wife for life; remainder to my son absolutely.” The son, aged 22, seeks £50,000 to buy a home. The trust began in 2022. Can the trustees advance this sum?

Answer:
The son is contingently entitled to capital (a vested remainder subject to the prior life interest), so s.32 applies. The trustees can advance up to the whole of his presumptive share, but must obtain the life tenant’s written consent because the advancement would come from capital subject to her prior income interest and cannot prejudice it without consent.

Worked Example 1.4

A discretionary trust created in 2019 for “such of my nieces and nephews as my trustees think fit” with no fixed capital entitlements. One niece asks for £20,000 to start a business. Does s.32 apply?

Answer:
No. A mere discretionary object is not “entitled to capital” within s.32. Unless the trust instrument confers a separate power of appointment or advancement to discretionary objects, s.32 cannot be used. The trustees may consider using an express dispositive power (if available) or decline.

Worked Example 1.5

A trust created in 2008 provides: “To my grandchildren who pass the bar exam before age 30, equally.” A grandchild aged 23 requests £15,000 to fund bar training. If she later fails the exam, will the trustees recover the advance?

Answer:
She is contingently entitled to capital and eligible for s.32; the default limit is one‑half of her presumptive share. An advance properly made is brought into account if she later becomes absolutely entitled. If her contingency ultimately fails, the amount advanced is not recoverable, provided the trustees acted properly when advancing.

Exam Warning

Trustees must check the date the trust was created and the terms of the trust instrument. If the trust instrument restricts or excludes the statutory power of advancement, trustees cannot override this. Always confirm the trust’s terms before advising on advancement.

Further pitfalls and cautions:

• Do not confuse income maintenance (s.31) with capital advancement (s.32). If the request can be met by income and the beneficiary is entitled to income, consider s.31 first.
• Avoid advancing capital to clear a parent’s personal debts without the actual beneficiary’s informed consent. Courts have criticised such use as contrary to proper advancement.
• Record the reasoned decision and obtain all required consents before payment. If the trust has successive interests, ensure the life tenant’s income is not prejudiced without consent.

Revision Tip

When answering SQE1 questions on advancement, always identify:

• The date the trust was created.
• The terms of the trust instrument.
• Whether there is a prior interest requiring consent.
• The purpose of the advancement and whether it benefits the beneficiary.
• Whether the recipient is “entitled to capital” (vested or contingent) or merely a discretionary object.

Trustee Liability and Protection

Trustees are personally liable for losses caused by breach of trust, such as advancing capital without authority or required consent. However, the court may relieve a trustee from liability if they acted honestly and reasonably (Trustee Act 1925, s.61). Trust instruments may include exclusion clauses, but these cannot exclude liability for fraud or dishonesty.

Key Term: breach of trust
A failure by a trustee to comply with their duties or the terms of the trust, resulting in loss or unauthorised gain.

Further protections and practical points:

• Beneficiary consent: Where a beneficiary instigates or consents in writing to a transaction that constitutes a breach, the court may impound the beneficiary’s interest to indemnify the trustee (s.62 TA 1925). This is rarely a substitute for proper authority but may mitigate exposure in exceptional cases.
• Documentation and advice: Minute decisions, take appropriate advice (especially where the proposed advance is substantial or complex), and retain consents and receipts. Where the proposed transaction tests the boundaries of s.32 or may prejudice other interests, consider seeking court directions.
• Maintenance vs advancement records: Keep clear separation between income applied under s.31 and capital advanced under s.32, and ensure advances are brought into account fairly when later calculating shares.
• Limitation: Claims against trustees for breach of trust are subject to limitation rules under the Limitation Act 1980 (with exceptions for fraud and actions to recover trust property), but trustees should not rely on limitation as a risk management tool when exercising s.32.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Who appoints, retires, and removes trustees; statutory grounds and processes, including TLATA 1996 provisions.
• Minimum/maximum number of trustees, use of trust corporations, vesting on appointment (s.40 TA 1925), and right of survivorship.
• Trustees’ fiduciary duties, statutory duty of care, and the standard investment criteria.
• The statutory power of advancement (s.32 TA 1925), including the 2014 change that allows full presumptive share for post‑2014 trusts.
• Distinguishing s.32 advancement (capital) from s.31 maintenance (income), and recognising who is “entitled to capital”.
• The need to obtain written consent from holders of prior interests before advancing capital from funds subject to their rights.
• Bringing advances into account when absolute entitlement arises, and the effect if contingencies later fail.
• Trustee liability for misapplication and potential court relief under s.61, and impounding a consenting beneficiary’s interest under s.62.

Key Terms and Concepts

• trustee
• beneficiary
• trust instrument
• trust corporation
• right of survivorship
• fiduciary duty
• duty of care
• power of appointment
• advancement
• presumptive share
• prior interest
• breach of trust