Trusts Operating in a Socially Beneficial Manner - Coursework Example

Trustees Introduction: The trust is a legal instrument which serves to ensure that the proceeds of an e business are fairly and equitably administered. The equitable maxim that exists is that a trust will not fail for want of a trustee – a person/s who holds the legal rights to trust property or assets which he/she is bound to exercise on behalf of others who have been identified as beneficiaries with equitable rights to the trust property or assets. But in the administration of trusts, trustees do not have any written ethical social policy, primarily due to the perception that profitability and socially beneficial expenses do not work well together.1a With the passage of the Trustee Act of 20001 which includes expansion of the function of the trustee and enhanced provision for judicial review of cases involving properties administered by a trust, there is increased scope for fairness and equitable treatment for all parties concerned. The new guidelines spelt out by the Charities Act of 1993 require a charitable trust to be duly registered and provide annual accounts, with the provision for the Charity Commission to strip it of its charitable status in the event that it fails to fulfill its charitable purpose,2 thereby placing an added burden upon the trustees of charitable institutions to invest and operate the trusts in a socially beneficial manner. Moreover, in the case of land trusts, the principles of strict settlement have been modified and beneficiaries have increased powers to show adequate cause for removal of a trustee.3 Therefore, there is now no valid legal or economic reason for trustees to exercise their responsibilities in a fraudulent manner that could be detrimental to the beneficiaries and they are required to uphold the interests of the trust at all times. The concept of trusts: Moffett lays out the basis for the foundation of a trust as the measure of “confidence reposed in some other” which produces certain moral obligations that are conditioned on the basis of ethical principles.”4. Moffat clarifies that under English law, charitable trusts need to be registered but other kinds of trusts require only proper constitution and the underlying concept of the trust refers to the “duty or aggregate accumulation of obligations that rest upon a person described as a trustee…..A trustee may be a beneficiary, in which case advantages will accrue in his favor to the extent of his beneficial interest”5; however this is exclusive of his legal interest. Property held in trust for a beneficiary is generally meant to be assigned on the basis of principles of equity. For practical purposes however, a trustee holds the legal title of the property or the assets on behalf of the beneficiary. As spelt out by Lord Diplock in the case of Gissing v Gissing6, a trustee holds the beneficial interest of claimants as cestui que trust with such testator intention being spelt out in writing7. The powers and duties of the trustees are defined in the deed of trust and they must hold regular meetings to demonstrate that they are fulfilling their duties. If a co-trustee wants one of the other trustees replaced, he can invoke Section 36 of the Trustee Act of 1925, however if the beneficiaries want the trustee removed, they must do so under the provisions of section 19 of the TLATA8. Fraudulent activity of trustees: In the event of misappropriation of property by the trustee or wrongful transfer to someone else, legal recourse is said to be available to a beneficiary to reclaim the trust property, under the law of equity. This is possible through a process known as “tracing” but in this context Pettit clarifies, “Tracing is only possible so long as the fund can be followed in a true sense, i.e, so long as whether mixed or unmixed, it can be located and identified……….. if on the facts of any individual case, such continued existence is not established, equity is helpless.”9 For example, in the case of Re Diplock10 that concerned the disposition of a trust, the general principle that was laid down was clarified by Pettitt who states that whenever there is an initial fiduciary relationship, the beneficial owner of an equitable proprietary interest in property can trace it into the hands of anyone holding the property except a bona-fide purchaser for value without notice.11 The fiduciary duty of a trustee or a person/s in the position of trustees is set out in the case of Lloyds Bank Limited v Bundy12 wherein there is a special relationship between the trustee and beneficiary which places a fiduciary duty on a trustee’s shoulders to faithfully execute the testator’s will and honor his duties, holding him liable for a breach of that trust. Trustee powers and duties: Discretionary trusts ascribe considerable power to trustees in the decisions about administering of the trust estate when conceptual certainty exists.13 The Trustee Act14 also provides for impartial appointment of trustees by the Courts, which has been denied in some cases where there is a potential conflict of interest and impartiality of a trustee cannot be guaranteed15. In the case of a deadlock or disputes over trusteeship, intervention of the Courts may be sought16, so that the interests of the trust are considered first and foremost, and dissension between trustees and beneficiaries is not considered to provide sufficient grounds for removal of trustees. Unless fraudulent intent is established, trustees are protected from legal suit, however their fiduciary duties mandate their execution of the trust in an honest, socially beneficial manner. Trustees have the power to sell and the duty to invest a testator’s property in accordance with their discretion and Courts have not generally interfered with distribution of economic assets or in terms of investments which are to be made with the testator’s assets, as was the case in Tempest v Lord Camoys17 and Re Wright18. In the latter case, the trustees had the right to sell or the right to retain and the matter was left to their discretion, the courts did not interfere which established a very important principle that a corporate trustee is protected from any failure to sell in the event market conditions are not appropriate, through a depreciation in shares. The trustee is expected to act reasonably; the trustees cannot decide which receipts are capital and which are income, but they do have the right to make the initial determination and the courts will not set aside any decision made by trustees which has been made in the interest of the trust, unless it is unreasonable or been guilty of a breach of trust. Another reason why a trustee may be reasonably expected to act in a socially beneficial manner is the fact that he/she is expected to execute the trust with a standard of duty of care, or the level of care he would use in managing his own affairs and not be guilty of neglect. In ascribing their duty of care, the decision a trustee makes about whether to sell or retain shares is important, because it is up to trustees to make reasonable financial determinations which will benefit the trust not damage it. In the case of Fales v Canada Permanent Trust19 the Court held that the trustees could be held liable of there was a loss due to the passive attitude of the trustees - if they did nothing when they should have anticipated falling share prices and taken necessary steps to preserve the estate. This case is also important in that the Court made a distinction between an individual trustee, Mrs Wholleben and the corporate trustee – CPT, since Mrs Wholleben appealed under section 30 of the Trustee Act and contended that this was a case of a technical breach and that she was not informed about her co-obligation. When a trustee has been deemed to have acted reasonably, he will not be held liable. For example in the case of Speight v Gaunt20 a trustee who wanted to invest in stock for the benefit of the trust contacted a stockbroker who absconded with the proceeds but the trustee was not held liable. A survey conducted by Gribben and Frauk of trustees of several pension funds showed that they perceived good corporate governance to be more important than socially responsible investments, although no barriers existed that prevented them from doing so20a. Trustees are obliged to act in an even handed manner without any partiality or undue favoring of one beneficiary over the other21, for example in the case of Re Smith, the courts held that a failure to act impartially constituted a breach of trust. A trustee is not only expected to exercise a duty in care, he/she is also expected to exercise a duty in cautionary investment and balance them between capital and income investments, so that he/she refrains from selecting risky or speculative instruments. Several new provisions in the trustee Act have ensured that the duties of trustee scan be carried out in an economically more responsible manner. For example, section 2 of the Act lays out the duty of care imposed upon a trustee when taking up duties, allows the trustee a road map to consider when investing, specifies that all eggs cannot be placed in one basket, and most significantly allows a trustee to exercise reasonable care and skill in the exercise of his/her duties, even to the extent of mixing funds of one with another and delegating investment powers, including the seeking of advice where necessary, thereby allowing trustees a wider latitude in the exercise of their functions with greater degree of standard of care by consulting experts. The extent of liability of a trustee has also modified to ensure responsibility and execution of trustee duties. While before the Act , the trustee liability was examined by the courts purely in the context of the losing investment, new standards have laid out the determination of trustee liability by assessing the overall performance of the trustee. This is an important development, since it establishes the fact that one aspect of a losing investment may not necessarily be an indication of overall trustee inability. Trustees also have a duty to convert – which means that he /she has a duty to convert (a) assets that lose their value over time – i.e, wasting assets, (b) hazardous assets or risky investments such as unauthorized investments or high flier stocks (c) reversionary assets, i.e, those assets to which there is no immediate right to enjoyment and (d) future assets or assets that do not show their return until much later, which could create potential losses for the trust’s beneficiaries. For example, in the case of Gibson v Bott22, the Courts held that trustees had the right to sell off unauthorized investments and get authorized ones. Gibson v Bott however is notable not only in that it established the trustee’s duty to convert, but also the trustee’s duty to apportion. The case of Gibson set out apportionment rules as follows: (a) valuation of assets at the time of the testator’s death (b) life tenant entitled to 4% of the annual value backdated to the day of death, for every year, until actual conversion with anything above 4% being treated as capital, and no facility for the life tenant to recoup out of capital when the value drops below 4%. In the case of reversionary trusts, the rule that was established in the case of Earl of Chesterfield’s Trust23 was that the life tenant would not be entitled to any income until the actual conversion took place. The Court did not impose any duty to convert in the case of Lottoman v Stanford24 either. Under such provisions that have been laid out, there is no justification for trustees to act in an irresponsible or negligent manner in distribution or disposition of assets that have been placed in their care. Moreover, the trustees also have the duty to account and provide information. All such measures help to prevent fraudulent acts by trustees. Charitable trusts: There is no set definition that has been set out for charitable status, rather a determination upon this must be made on the basis of case law. The existing Charity law is based upon the Act of Elizabeth I (now repealed) which is over 400 years old, and proposals for reform have been mooted as an urgent necessity. As stated by Tony Blair, “the current law is unclear, has not evolved in a way which best meets the needs of contemporary communities and does not reflect the diversity of organizations which operate for the public benefit.”27 Trustees of charitable institutions are obligated to execute administration of trusts in a manner conducive to advancing socially beneficial interests. The case of Commissioners for Special Purposes v Pemsel28 laid out four categories that would automatically qualify an organization to receive charitable status, which are (a) advancement of religion (b) advancement of education (b) advancement of religion (c) relief of poverty and (d) other purposes beneficial to the community. The Charities Bill of 199329 also has the provision whereby, when a charitable trust fails due to difficulties in literal compliance with the intention of a testator, the doctrine of CyPress can be applied as a flexible policy option to prevent a trust resulting to its donors or the crown. In the case of Re Lipinski30 Oliver J draws a distinction in a testamentary disposition, between a purpose which is invalid (excluding tombs, animals and monuments cases), and a ‘people trust’ which is valid. In the case of Chicester Diocesan Fund v Simpson31, a similar application of a broad purpose had been examined, where a distinction was made between a gift that was “benevolent” and one that was “charitable”. Viscount Simon C articulated the distinction as follows: “The words “charitable” and “benevolent” do not necessarily mean the same thing;…..the phrase ‘charitable or benevolent’ must, in its ordinary context, be regarded as too vague to give the certainty necessary before such a provision can be supported or enforced.” The extent to which charities may pursue political activities is a contentious issue, because charitable trusts are eligible for tax refunds and can thereby accrue economic benefits, also using their charitable status to influence the political process and passage of legislation with an unfair advantage. In 1995, the Charity Commission updated its guidelines for the involvement of charities and the activities of its trustees in the political arena32. According to Lord Parker in Bowman v Secular Society Ltd33 in the context of designating a political entity as a charitable one, the difficulties arise “because the Court has no means of judging whether a proposed change in the law will or will not be for the public benefit.” However, Chesterman argues that politics and charity are inextricably linked32a, while A Dunn equates charity and politics as both being geared towards achieving public benefit32b. Moffat does not agree with this position and contends that an organization dealing with political causes can always redirect its campaigning activities into a subsidiary organization that is profit based, while retaining the charitable status for the parent organization, thereby deriving the benefits of the charitable status and also allowing for economic gains34. However, Trustees can be removed from their posts by the Charity Commission through the exercise of their statutory powers35 when the trustees have authorized expenditure for political purposes, since no tax relief will be provided to an organization in the event that its activities are not purely and completely charitable. A charitable trust incorporated within the UK will be exempted from tax on investment incomes, however the condition for this is that the income must be applied only towards charitable purposes36. However, when the political activities can be designated as subsidiary activities in an organization that is predominantly charitable, then the Courts have permitted charitable status, as for example in the case of Re Koeppler’s Will trusts38, where a donation was made to a political organization to promote greater cooperation in Europe. This serves to further establish the principle that trustee function must be such that it is socially beneficial. The guidelines laid out by the Charity Commission in reference to educational activities are that while a charity may propagate education, it must not overstep the boundary line that would transform the education into propaganda39 and its activities must be charitable with all incomes also being applied towards the advancement of charitable and socially beneficial causes of education40. Apart from the Pemsel classification, the new Charities Bill of 2004 establishes the requirement for an organization to show that its activities will benefit a “sufficient section of the public” before it can be accorded charitable status. In the case of Oppenheim v Tobacco Securities Trust Co Ltd41 the Court considered the meaning of the words “sufficient section of the public” in the context of a trust set up to educate children of employees and former employees and stated that “the possible beneficiaries must not be numerically negligible” and the quality that distinguishes relationship as a beneficiary must not be dependent upon a relationship with the founders of the trust. In the case of Dingle v Turner42 the personal nexus as laid out in the case above did not apply, but the Court still held that the perpetual nature of the trust must be established in the context of poor people. Conclusion: From the foregoing, it may be noted that trustee function is essentially based upon trust; a trustee is holding on to property or assets that have been designated for the benefit of others. Moreover a trustee also has a fiduciary duty towards beneficiaries of a trust which places an obligation upon him/her to execute his/her duties of administration of the trust in a manner that will be constructive, honest and geared towards achieving the economic and social benefits of others. The provisions of the law have allowed for trustee discretion and flexibility, however they may also be held liable for breach of their fiduciary duties and the position of trust that they hold. Moreover, inactivity or negligence on the part of the trustee may also be deemed to be grounds for non performance of duties, and a trustee will be held liable for losses accruing from losses that are caused to the estate that is in his/her charge. Legal suit may not be bought against a trustee, except in cases of breach of duty or abuse of trust. Therefore, on the basis of the legal protection afforded to trustees and the economic flexibility provided to them in administration of assets, especially through the new facility of mixing assets and soliciting professional services for financial management, there is no reason why trustees should not perform their duties in a responsible and socially productive fashion. The perception of trustees that corporate governance is most important must be changed in a move towards more responsible investing. Bibliography * Bowman v Secular Society Ltd (1917) AC 406 at 442 * Commissioners for Special Purposes v Pemsel (1891) AC 531 * Charities Act 1993, sections 16 and 18 * Charity Commission Guidelines of 1995. Charity Commission’s Home Page at: www.open.gov.uk/charity/cchome.htm * Chicester Diocesan Fund v Simpson (1944) 2 All ER 60 * Chesterman, M, 1999. Foundations of Charity law in the New Welfare State 62 MLR (3), pp 333-349 * Dunn, A, 1999. Charity law as a political option for the poor. 50 NILQ 234 * Dingle v Turner (1972) AC 601 * Earl of Chesterfield’s trust (1883) 24 Ch 643 * Fales v Canada Permanent Trust [1977] 2 SCR 302 * Government report of 2002 titled “Public Action, Public Benefit” * Gibson v Bott (1802) 7 Ves. 89 * Gissing v Gissing (1971) AC 886 (HL) * Gribben, C and Faruk , A, 2004. Will UK Pension funds become more responsible? A survey of trustees. Just pensions. [Online] Available at: http://www.uksif.org/J/Z/Z/lib/2004/files/01/jp-ukpf-will/ukpf2004-justpens.pdf * Hill, Nicola, No Date. Ethical dilemma.[Online] http://www.ncvo- vol.org.uk/vsmagazine/features/?id=1878 * Income and Corporation Taxes Act (1988) ICTA, section 505. * IRC v Educational Grants Association Ltd (1967) Ch 993 * Lottoman v Stanford (1980) SCC * Lloyds Bank Limited v Bundy (1975) QB 326 * Moffat, G, 1999. Trusts Law: Text and Materials London: Butterworths, at 756. * McPhail v Doulton [1971] AC 424 House of Lords (sub nom Re Baden) * Oppenheim v Tobacco Securities Trust Co Ltd (1951) AC 297 * Pettit, Philip (1993) Equity and the law of trusts London: Butterworths, pp 516. * Re Koeppler’s Will trusts (1986) Ch 423 * Re Lipinski (1976) Ch 235 * Re Smith1971) 16 Dominion Law Reports 130. * Re Wright (1976) ON HCJ * Re Diplock (1948) 2 All ER 318 * Re Moorhouse (1946) ON HCJ * Section 53(1) of the Law of Property Act of 1925 * Speight v Gaunt (1883) HL * Tempest v Lord Camoys (1882) 21 ChD 571 Read More