The facts of the problem are: Dora, the testator of the trust, is dead now. In her valid will, she appointed her husband Edwin and Fiona as trustees. She gave all of her estate (which worth £600,000) to them to be held in trust for her husband Edwin for his lifetime and then for her children Alice, Boris and Cassandra, who reach 21. The will contained no other provisions. Alice is now 23, Boris is 18, and Cassandra is 15. There are two-fold problems that arose from the following facts.
Firstly, Fiona asked for suggestions from her friend Gerald who has made some suitable investments. He recommended that the trustees invest £150,000 of trust money in an investment portfolio, which subsequently increases in value to £300,000 and another £150,000 in shares in Sound Plc. The rest of the trust money is deposited in a bank account. Sound Plc, the company where they invested, goes into insolvent liquidation a few months later. Therefore, those shares became worthless. Now the investment in sound plc seems to be a wrong decision on Fiona’s part. Thus, the question arises as to whether her decision to make such investments has been lawfully made and what will be the consequences if not.
Secondly, Alice, Boris and Cassandra are Dora’s children but not by Edwin, but by an earlier marriage. So, it is expected that Edwin may not like them. In practice, he does not have a good relationship with them. However, Alice asked the trustees for £40,000 from the trust fund for business purposes. Boris also asked for money from the trust fund as he started to go to university, and he has some issues with his living expenses. Now the question arises, are Alice and Boris entitled to get financial help from the trust fund as they had requested? Another point that can subsequently occur is what would happen if Edwin died. (because he had a life interest over the property).
Trust is an equitable obligation. It is an English concept, governed by common law and equity principles. In a trust there are three parties involved, the testator, the trustee/s and the beneficiaries. Normally, a settler is a single person, but there can be several trustees and beneficiaries. In a general sense, trust means the situation where the ownership of a property is enjoyed by several persons. It is a relationship governed by equity where the owner of the property becomes the testator of the property who trusts such property to the trustee/s to hold the property for the beneficiary. The trust instrument contains the rights and duties of both the trustees and beneficiaries. And such rights and duties are governed by the law. The trustee under a trust agreement, is bestowed with the duty to manage the trust. For example, Boris trusts his property, making Ron and Maxwell trustees of the trust agreement and his sons Martin and Robin as beneficiaries. Now the trustees will have to hold the trust property for the beneficiaries. In the aforementioned facts, Dora is the testator of the trust, who made Edwin and Fiona as trustees. So, both of them have to hold the trust property for the beneficiaries. (her children) It’s likely to be irrelevant here but in most of the cases, the primary objective of a trust is to provide a source of income for a person who is incapable of managing his resources.
According to the trust law, investment means “…which produces income”. Although, no definition of “Investment” has been given in the Act 2000. It is one of the duties of the trustees to make investments of the trust properties. At the same time, they do not hold a duty to give reasons for their decisions. But according to “The Trustee Act 2000” the trustees ought to have care and skill as is reasonable, regarding any knowledge or experience that he already has. Thus, it is hard to make the trustees liable for any loss arising out of their investment decisions if the power given to him has been duly exercised with care and skill.
In the case Bartlett v Barclays Bank where a claim was made against the trustee for compensation for losses incurred during his administration. The definition of standard of duty and care has been tried to be given. In the case of selecting investment decisions the duty of care is different. Generally, in business a prudent man invests at his own risk and for his own benefit. Whereas, in case of a trustee, the trustee has to act with the prudence of an ordinary man of business who invests for the benefits of the beneficiaries. The trustee may have the power to make investment of the trust property in two ways; by the trust instrument and the Act 2000. The trust instrument may give a trustee express or implied authority to make investments, and this may even include purchasing non-income producing assets. In case of statutory investment power, i.e., power to make investments has been given u/s 3-10 of the Trustee Act 2000, subject to the express power given under the instrument. Generally speaking, the sections only apply where express authority to invest has been given in the instrument. A general power of investment that they have to make investments has been given under section 3 of the Act 2000. Such investments shall be deemed as if the trustee/s are absolutely entitled to the fund. The trustees are required to have proper advice before investing. They also must review their investments. Now in the given fact Sound Plc, where one of the trustees made investments with the consultancy of her friend, went into insolvent liquidation. Thus, the shares in that company became worthless. The issue here is: can Fiona be liable for such loss due to the bad investment decision? To address this issue we must consider whether Fiona has such power to invest and if so, then whether she takes such a decision with due care. These issues are dependent on some facts. As per we know that her friend Gerald, who has made some good investment decisions in his business, recommended the investment she cannot be held liable for such bad investments. Thus, we can say that the trustees have lawfully made those investment decisions.
Alice asked the trustees for £40,000 from the trust for some business purposes. Boris started his university, and he also asked the trustees for money from the trust fund to meet his living expenses issues. But the problem is, both of them are contingent remainder beneficiaries. i.e., a beneficiary with a future right to a trust estate provided they survive the current beneficiary. According to the will, Edwin is the trustee and a beneficiary of the trust, as the choice says, “for Edwin during his lifetime… Now the issue here is whether Alice and Boris can receive help from the trust where Edwin is the current beneficiary and still alive.
A beneficiary can be eligible for serving as the trustee of an estate. When a testator is comfortable trusting the trust property to a person they are close to, it can benefit the exact property. But the complications start when the time comes to carry out the duties as a trustee. The trustee holds the fiduciary responsibility for the trust property. That means a trustee must consider the interest of the beneficiary above all. But in cases where a beneficiary is also a trustee at the same time, this can happen that such a person can use his trustee power to serve his own benefit and in such cases other beneficiaries are likely to doubt the object of such trustee who also plays the role of beneficiary. Thus, scope of possible disputes is always open in such situations. There are two types of beneficiaries; primary and contingent. Primary beneficiaries are those who are entitled to the trust property directly. Whereas, a contingent beneficiary is those who become entitled to the trust property after some events. Thus, the right of contingent beneficiaries over the trust property is subject to some future events. However, contingent beneficiaries do have the right to petition the court to have a trustee removed, which can happen if the contingent beneficiary feels that the trustee has not been properly managing the assets of the trust. The contingent beneficiaries may not have a direct right to receive any sum from the trustee, unless the trust provides otherwise. However, they still have some rights e.g., right to information about the trust’s assets, liabilities, receipts (income) and disbursements (expenses) and the administration of the trust. Here in the given case, it is difficult to provide Alice and Boris the money they requested.
However, the above complication shall not exist if Edwin has died. As we have already discussed that Edwin is the surviving beneficiary. He has the life interest over the trust property. That means the remaining beneficiaries are not directly entitled to the property over Edwin’s life interest. But as Both the beneficiaries (Alice and Boris) have attained the age of 23 and 18 respectively, they are entitled to the trust property directly, if Edwin no longer exists.
The final issue is, can the trust be ended and if so, then how it can be ended. To address this issue, let’s focus on the structure of the trust again. Dora was the author (testator) of the trust. Edwin and Fiona are the trustees, where Edwin also has a life interest as a beneficiary over the trust property. Dora’s children Alice, Boris and Cassandra are the remaining contingent beneficiaries. The will contained no other provisions. Alice, Boris and Cassandra all have attained the age of majority. The trust fund was worth £600,000 when Dora died. The investment issues with Fiona have been discussed above. As Sound Plc, where they invested, went into insolvent liquidation, the shares became worthless. Thus, the trust will continue with the remaining account.
The contingent beneficiaries, Alice and Boris, asked the trustees for money from the trust to help them with their business and living expenses. But as their right over the trust property is subjected to the death of Edwin, they cannot get such a sum of money. But if we assume that Edwin ceased to exist, then all the remaining beneficiaries will be entitled to the trust property. And as all of them attained the age of majority, it is clear how the trust should be executed as the will contained “…in equal shares”, therefore the trust will be ended by dividing the remaining sum (after the investment) of the trust property according to the equal proportion of the beneficiaries.
There have been three significant issues in this above-discussed fact. We have discussed and tried to reach a position to solve these issues. Firstly, the investment issues. Whether the trustees were entitled to such investments, we have seen that the trustees have the right to invest the trust property complying with the trust instrument and statutory obligation. There has been no expressed or implied bar on investment in the trust instrument. Secondly, we discussed the request for money by two of the contingent beneficiaries. Where we have seen that such beneficiaries are not entitled to any sum of money since the existence of the beneficiary with a life interest. But the situation is different when the current beneficiary ceases to exist. The remaining beneficiaries directly get access to the property.
- Garry Watt, Trusts and Equity, Sixth Edition, p-16
- Browne C. Lewis, The Law of Trusts, 2013 p-2
- Martin, JE, Hanbury and Martin Modern Equity, p-45
- Restatement of Trusts: Prudent Investor Rule, (1992) p- 171
- Re Wragg  2 Ch 58
- Re Londonderry’s Settlement  Ch 918
- Section 1, of the Act 2000
- Schedule 1 of the Act 2000
 Ch 515
- John H. Langbein, The Contractarian Basis of the Law of Trusts, Vol. 105: 625, p-655
- s5 of the Act 2000
- DENNIS A. FORDHAM ‘RIGHTS OF TRUST CONTINGENT REMAINDER BENEFICIARIES’, dennisfordhamlaw.com/rights-of-trust-contingent-remainder-beneficiaries, accessed 8th October, 2019
- Robert H. Sitkoff, TRUST LAW AS FIDUCIARY GOVERNANCE PLUS ASSET PARTITIONING, 2011 p-3
- Mayfield v. Peek, 446 S.W.3d 253
Garry Watt, Trusts and Equity, Sixth Edition, p-16
Browne C. Lewis, The Law of Trusts, 2013 p-2
Martin, JE, Hanbury and Martin Modern Equity, p-45
Robert H. Sitkoff, TRUST LAW AS FIDUCIARY GOVERNANCE PLUS ASSET PARTITIONING, 2011 p-3
Restatement of Trusts: Prudent Investor Rule, (1992) p- 171
John H. Langbein, The Contractarian Basis of the Law of Trusts, Vol. 105: 625, p-655
 Ch 918
 2 Ch 58
 Ch 515
446 S.W.3d 253
s1, of the Trust Act 2000
Schedule 1 of the Act 2000
s5 of the Act 2000
DENNIS A. FORDHAM ‘RIGHTS OF TRUST CONTINGENT REMAINDER BENEFICIARIES’, dennisfordhamlaw.com/rights-of-trust-contingent-remainder-beneficiaries, accessed 8th October, 2019