Estate Planning
Estate Planning
Estate Planning
INTRODUCTION TO TRUSTS
Keeton in his book ‘The Law of Trusts’ defined a trust as a relationship which
arises whenever a person called a trustee is compelled in equity to hold property
for the benefit of some persons or some object in such a way that the real
benefit of the property accrues not to the trustee but to the beneficiaries or
other objects of the trust.
From the above definitions, it follows that three persons have to be there to
create a trust namely a settlor, trustee and beneficiary.
Blacks Law Dictionary defines a settlor to mean the grantor or donor in a deed of
settlement. He is also the one who creates a trust.
The same Blacks Law Dictionary defines a trustee as one who, having legal title
to property holds it in trust for the benefit of another and owes a fiduciary duty
to that beneficiary.
For there to be a properly constituted trust, the position of the law as enunciated
by Lord Langdale in Knight V Knight is that there has to be three certainities
namely certainty of the intention, subject matter and object. The subject matter
is the trust property whereas object of a trust is the beneficiary.
It is a general rule that any person is able to hold property as a trustee as long
as that person is of full age and has legal capacity. However, there are some
qualifications and limitations as it can be seen in the discussion on the capacity
of the following persons to act or be appointed as trustees.
The general rule is that infants do not have capacity to act as trustees in a trust
arrangement. This general rule is affirmed in section 35(1) of the Trustees Act.
However, there are certain instances where an infant may be capable of acting
as a trustee especially in resulting trusts. For example in Re Vinogradoff
(1935), a woman had transferred 800 pounds of war loan stock into the joint
names of herself and granddaughter. When the woman died, in the absence of
evidence proving a gift, the granddaughter held the stock on resulting trust for
the woman’s estate.
From the above discussion, Musika can only act as a trustee on a resulting trust
and if not that, Musika who is an infant generally can’t act as a trustee.
Further, the Trustees Act under section 35(1) does not exclude women
as being capable of acting as trustees. The section provides for power of
appointing new or additional trustees as the existing ones are incapable of
acting or are substituted.
From the above discussion, it’s evident that Mrs. Mugaga can act as a
trustee
(d) Kamanzi who was declared bankrupt by the High Court but
had prior to that been appointed as trustee by the Late Benjamin.
The general rule is that a bankrupt is not excluded from acting as a trustee
if he is not declared bankrupt due to his fraudulent acts.
The general rule can be read into section 40(2) of the Trustees Act
which provides that “Without prejudice to the generality of section
40(2), the Court may make an order appointing a new trustee in
substitution for a trustee who is convicted of a felony, or is a person of
unsound mind or is a bankrupt or is a corporation which is in liquidation or
has been dissolved. The use of the word ‘ MAY’ does imply that a bankrupt
can continue to act as a trustee until he is removed from that office of a
trustee.
The Insolvency Act under section 37 provides for vacation of the office of
a trustee. It does provide that the office of a trustee shall become vacant
if the person holding office is removed from office under sections 52 or
209 resigns, dies or becomes unqualified under section 204 of the
Insolvency Act.
Section 204(2) of the Insolvency Act does provide for vacation of office
a trustee among which includes an undischarged bankrupt.
From the reading of section 40(2) of the Trustees Act, section 204(2)
and in the case of Re Banker’s Trust. It is the duty of court to remove a
bankrupt trustee.
It is also important to note that upon the trustee being declared bankrupt,
the trust property that person is holding does not vest to that person’s
trustee in bankruptcy and this was illustrated in Taylor V Plumer, where
Court laid down the principle of tracing in respect of property that belongs
to the principal on the trustee becoming bankrupt as long as such property
is capable is being identified and distinguished from other property.
From the foregoing, Kamanzi being declared bankrupt by the High Court,
he cannot continue acting as a trustee even when he was appointed by
the Late Benjamin before declaration.
The position of the law in Re Norris is that Solicitors to the trust may also
be appointed trustees although in principle, the court does not make or
sanction such appointments. In Re Norris, the case involved the
appointment of trustees by the continuing trustee, who was the solicitor to
the trust of which this happened upon one of the trustees retiring. What
was in contention was that the trustee who was appointed to replace the
retiring one was a son and a partner in the business of the continuing
trustee who was already a solicitor to the trust. Parson J noted that court
would not sanction such an appointment of such a trustee. Citing the case
of Wheel Wright V Walker, it is noted that c’estui que trust are entitled
to have independent trustees in such circumstances.
It should also be noted that a solicitor must fully and only act for the best
interests of beneficiaries. Competence of a person is also key which Court
looks at.
Section 1 of the Public Trustee Act does give the Minister Power to
appoint some fit and proper person to be public trustee for Uganda,
competent to discharge any of the duties and exercise any of the powers
of the public trustee. Section 2 of the same Act does provide the public
Trustee as being a corporation sole by the name of the public trustee. A
public trustee may by virtue of section 5 also be appointed as a trustee by
a person creating trust by the trust deed.
It should be noted that apart from his power to appoint the first trustees
when creating the trust, the settlor in a voluntary trust (inter-vivos) has as
such, no power to appoint new or additional trustees unless such a power is
expressly reserved to him by the trust instrument.
Further, section 35(2) of the Trustees Act is to the effect that where a
trustee has been removed under a power contained in the instrument
creating the trust, a new trustee or new trustees may be appointed in the
place of the trustee who is removed as if he were dead, in case of a
corporation, a corporation is discharged from trust.
The use of the word ‘May’ does imply that the appointment by Court is not
mandatory or it may even be delayed. This was observed in Re Pauling’s
Settlement where Court delayed making an appointment in order to protect the
old trustees against possible liability for costs and estate duty.
Cases in which the Court has made an appointment under the statutory
power, apart from those specifically referred to in section 40 include:-
i. Where all of the named trustees predeceased the testator as seen in Re
Smirthwaite’s Trusts.
ii. Where no trustees were named as seen in Re Gillett’s Trusts (1876).
iii. Where a trustee had gone abroad with the intention of residing there
permanently as noted in Re Bignold’s Settlement Trusts.
iv. Where a trustee was incapable of acting by reason of old age and
consequent bodily and mental infirmity as observed in Re Leman’s
Trusts.
v. Where a trustee was, so far as was known in enemy – occupied territory
as was the case in Re May’s Will Trusts.
vi. Where there was a doubt as to whether the statutory or an express power
of appointment was exercisable as noted in Re Woodgate’s
Settlement.
vii. Where an infant had been nominated to appoint new trustees, because
although an appointment by an infant may not be void, it is at least liable
to be set aside and, accordingly, it would not be safe to act upon it as
seen in Re Parsons.
viii. Where there was friction between trustees, there being no disputes as to
the facts, even though this involved removing a trustee against her will as
evidenced in Re Henderson.
It is apparent that the powers of appointment under the section 35(I) of
the Trustees Act must be exhausted before an application is made to court
for appointment of new trustees. Thus in Re Higginbottom, it was
established that the Court has no jurisdiction under the statutes to appoint
a new trustee against the wishes of persons who have statutory power to
appoint under the sections of the Act. This is so even where the
application to court has been made by a majority of beneficiaries.
The capacity of a trust corporation to act as a trustee was illustrated in the case
of Bankes V Salisbury Diocesan Council of Education, where inter alia the
issue was whether a corporation sole can hold property under trusteeship. It was
held that as a general rule, a corporation sole may hold property upon trust
either alone or jointly with one or more individuals.
Further section 40(1) of the Trustees Act does grant court power to appoint
new trustees whenever it is expedient to do so. Section 40(2) also grant court
powers to make an order appointing a new trustee in substitution for a trustee
who is convicted of a felony, or a person is of unsound mind or is a bankrupt or
is a corporation which is in liquidation or has been dissolved.
From the foregoing discussion, it’s trite law according to section 40 of the
Trustees Act and in the case Bankes V Salisbury Diocesan Council that
Mbenu International Company can be appointed by court to act as a trustee
provided it has share capital that is not below 2 million or its equivalent in issued
capital and the MOA expressly authorizes the same.
(b)Administrator General
Article 247 of the constitution provides that parliament shall by law establish an
efficient, fair and expeditious machinery for the administration and management
of the estates of deceased. The same Article 247 under clause (b) does
provide that the law so enacted in Article 247(a) should ensure that the
services of the department or organization established for the purpose are
decentralised and accessible to all persons who may reasonably require those
services and that the interests of all beneficiaries are adequately protected.
In a bid to give effect to Article 247 of the constitution, parliament enacted the
Trustees Act, the public trustees Act as well as the Administrator Generals Act,
among others.
Section 1 of the Public Trustees Act does give the Minister powers to appoint
some fit and proper person to be public trustee for Uganda, competent to
discharge any of the duties and exercise any of the powers of the public Trustee.
Section 2 of the Administrator General’s Act provides for the appointment of the
Administrator General, who shall be corporation sole with perpetual succession
capable of suing and being sued.
It should be noted that the Administrator General is also referred to as the public
Trustee.
Section 7 of the Public Trustees Act provides for appointment of Public Trustee
by Court. However, section 4(b) of the Public Trustees Act provides that a public
trustee shall always be the sole trustee and it cannot be lawful to appoint the
public trustee to be a trustee with another person.
From the above discussion, It’s evident that Court can appoint the Administrator
General as a trustee by virtue of section 7 of the Public Trustees Act.
Vesting of property in trustees is provided for under sections 39, 43-53 of the
Trustees Act and section 5(2) of the Public Trustees Act.
The position of the law in Antiobus V Smith (1805) is that a trust is not duly
constituted until the property has vested in the trustee. All steps have to be
taken to vest property in the trustee and the appropriate methods of transfer
must be employed. If the intending donor/settlor himself only possesses an
equitable interest in the property, he can transfer that.
It should be noted that mere appointment of the trustees does not itself vest
property in him or her. Therefore, the settlor shall have to perform a sufficient
act to effect transfer of the trustee property and among others. This is governed
by the specific branch of law, practice or form that regulates transfers such
property, the subject matter of the trust e.g
(a)Land. If land is not registered, there must be a deed of conveyance in
writing. If the land is registered, section 92 of RTA requires a settlor
to sign a transfer instrument.
(b)With chattels, there must be delivery of a deed of a gift.
(c) In respect of shares, there must be an entry and registration in the
Companies register of shares following proper instrument of transfer.
(d)With respect to a testamentary trust, the Will operates to vest the
property in the trustees named in the Will.
As for retiring and continuing trustees, section 39(2)(a) of the Trustees Act is
to the effect that where by a deed a retiring trustee is discharged under the
statutory power without a new trustee being appointed, if the deed contains
such a declaration as aforesaid by the retiring and continuing trustees or any
person empowered to appoint trustees, the deed shall without any transfer or
assignment, operate to vest in the continuing trustees alone as joint tenants.
Section 39(1)(a) and 39(2)(a) read together with section 38 are to the
effect that such a deed is only effective for vesting if it is executed by the retiring
trustees, the continuing trustees or any person with power to appoint new
trustees.
The above provisions are to the effect that if the deed (of appointment) is
executed after the commencement of the Trustees Act, a vesting declaration is
implied in absence of an express provision to the contrary.
For this provision to come into play, the deed must have satisfied the
requirements for the appointment by the appointor, but silent as far as the
vesting is concerned, it operates as if it had contained such a declaration by the
appointor.
Section 39(3) expands the body of section 39(1)(b) and 39(2)(b) to the
effect that “where the vesting declaration is express whether made before or
after the commencement of the Act, shall not withstanding that the estate,
interest or right to be vested is not expressly referred to and provided that the
other statutory requirements were or are complied with, operate and be deemed
always to have operated (but without prejudice to any express provision to the
contrary contained in the deed of appointment or discharge) to vest in the
persons respectively referred to in subsections (1) and (2) as the case may
require, such interests and rights are capable of being and ought to be vested in
those persons”. The subsection cures the defect of not expressly referring to the
subject matter of the trust property or any rights) incidental to the appointment
in respect of such property, so long as the statutory requirements that governs
such transfer were complied with, property shall be deemed to have vested.
The rationale for the exclusion or limitation is that with such property, other laws
have dictated the statutory requirements needed to effect transfers and vesting
e.g
(i) Section 92 of the RTA dictates that transfer of title in such
land can only be effected under a transfer form and requirements
described therein.
(ii) As for company shares, they can only be transferred by
registration of the same in the company register and delivery of
the share certificate.
(iii) As for mortgages, the object is to keep the trusts off the face
of the mortgagor’s title, trustees who lend money on a mortgage
of land do not disclose the fact in the mortgage deed, nor is it
disclosed in transfer of mortgage which must be executed on the
appointment of trustees’
(iv) As for leases, the rationale is to avoid the possibility of
inadvertent breach of covenant, which would render the lease
liable to be forfeited.
(c) Vesting through a vesting order of Court
Wide powers to make vesting orders are given to court under sections 43-53
of the Trustees Act.
Alternatively, Court may under section 49 appoint a person to convey the land
or any interest therein, if it is more convenient.
As for stock and other things in action, court can by virtue of section 50 make
an order vesting in such persons the right to transfer or call for a transfer of
stock, or to receive the dividends or income thereof, or to sue for or recover a
thing in action.
It has also been observed that for the trust property to vest in the trustee, the
trustee must have consented to the appointment i.e must have accepted the
office of the trustee. This was discussed in the case of Nylander V Thomas
(1968) where three executors appointed were also to act as trustees but only
one of them took probate of the will and administered the will for approximately
ten years. The trustee appointed the respondent to administer the will and the
issue was whether the other trustees who did not prove the will could be
regarded as trustees. It was held that where a testator has appointed a person
an executor and also a trustee, the fact of his renouncing probate and not acting
as a trustee is strong evidence that he has refused the trust. That although there
was no formal renunciation of the probate, the omission to act for ten years
must be regarded as a refusal to act as a trustee. Therefore, in such
circumstances and others of a similar nature, property cannot be said to have
vested in the trustees.
If the trust has not been accepted, the position of the law in Re Schar is that it
may be disclaimed, the proper form being by a deed pool. The disclaimer deed
should be executed by a person named trustee who refused to accept the trust
because such deed is clear evidence of the disclaimer.
It should further be noted that if one has already intermeddled with the estate or
even already accepted the trust, the position of the law in Nylander V Thomas
is that one cannot turn around to disclaim the trust.
Lastly Court in Urche Vs Walker, held that the essence of the disclaimer is to
remove all difficulties and vest the estate in other trustees. A party who releases
and declares that he will not take the trusteeship gives the best evidence that he
will not act as a trustee.
Currently, a trustee may retire from his duties by being discharged from the
same and this could be by express provision in the trust instrument, by statutory
provisions or by an order of the court. The above is possible through the
following ways:-
(i) Under an express power in the trust instrument.
It is possible for a trust deed to contain a provision for the automatic retirement
of trustees, particularly where a trust is likely to continue beyond a single
generation. The trust instrument may contain provisions such as for a trustee to
retire upon reaching a certain age, requested to do so by his co-trustees or by
one or more of the beneficiaries and or for the automatic retirement of trustees
at set intervals (for example every five years) again if so requested.
However, where no such provision is included in the trust instrument, it has been
held in Davis V Richards and Wallington Industries that the power to resign
arises by implication and that a trustee could retire from his trusteeship by
writing a letter of resignation to the secretary of the trust.
However, it appears under the provision that for one to retire under section
38(1), there has to be atleast two trustees to remain performing the trust duties
or a corporation. Secondly, the retirement has to be by deed.
A trustee may also retire by virtue of provisions of section 40 of the Trustees Act.
This is done by court subject to appointment of new trustees. Section 40 is to
the effect that court may, under this section, on the appointment of a new
trustee, remove an existing trustee. It will not, however, simply discharge a
trustee without appointing a new trustee as emphasized in Re Harrison’s
Settlement Trust, nor Will it exercise its statutory jurisdiction to remove a
trustee where there is a dispute as to the facts as observed in Re Combs.
For retirement under section 40 to take effect, the trustee has to move Court.
It should also be noted that where a sole trustee wishes to retire and it is
impossible to find anyone who is willing to become the new trustee, the Court
will not discharge him so as to leave the trust without a trustee. An order may,
however, be made in such a case for the administration of the trust by the court
and although the trustee retains his office, the position of the law in Courtenay
V Courtenay is that the court will take care in working out the order that the
trustee does not suffer
(c) REMOVAL
As it is with the case under retirement of trustees, trustees could also be
removed by virtue of provisions to that effect of the trust instrument under
statutory provisions and by an order of court. The above ways are discussed
below:-
(i) By express provisions in the instrument . A trustee could be removed for
any reason which may be specified in the trust instrument.
On the ground of incapacity to act, the position of the law in Re East (1873) is
that a trustee may be removed from his trusteeship if he has become senile or
can no longer exercise good judgment by reason of old age.
(iii) Removal by an order of court
It should be noted that court has inherent jurisdiction to remove a trustee with
or without appointment of a new one, as it can be seen in the decisions below:-
In Adesege V Williams, Court held that Court has powers to remove a trustee
from that office if his continued stay will be prejudicial to the trust.
In Lettersdet V Browers, trust and respect between the Trustee and the
beneficiaries had broken down and where even though no evidence of
misconduct had been alleged by the beneficiaries, the court allowed an
application for removal of the trustee in exercise of its inherent jurisdiction.
In Clarke V Heathfield (1985) ICR 606, Court removed trustees of the funds
of the National Union of Mineworkers on grounds of attempt by the trustees to
place the trust property abroad and out of reach of sequestrators appointed by
the court, placing the trust funds in jeopardy, making trust funds unavailable for
the purposes for which they were contributed by the general membership.
(d) DEATH
Trustees are invariably joint tenants and, accordingly, on the death of one of two
or more trustees, the trust estate, by reason of the ‘jus accrescendi’, devolves on
the surviving trustee or trustees. This was affirmed in Warburton V Sandys.
Termination by death can also be read in section 18(1) which provides that
‘where a power or trust is given to or imposed on two or more trustees jointly,
the same may be exercised or performed by the survivors or survivor of them for
the time being. In addition to that, section 35(1) provides for the appointment
of new or additional trustees where a trustee is dead.
It’s further provided under section 18(2) that upon the death of a sole or last
surviving trustee, the trust estate devolves on his personal representatives and
that such representatives (excluding an executor who has renounced or has not
proved as per sec 18(4)) shall be capable of exercising or performing any
power or trust which was given to, or capable of being exercised by, the sole or
last surviving or continuing trustee.
(e) BANKRUPTCY
Whereas section 2 of the Insolvency Act does not define bankruptcy, it defines
a bankrupt to mean an individual in respect of whom a bankruptcy order has
been made under section 20. The ground for bankruptcy is inability to pay debts.
It should be noted that bankruptcy per se does not terminate trusteeship. The
position of the law in sections 37 and 204 of the Insolvency Act and section
35(1) of the Trustees Act is that it renders a person unfit to act as a trustee.
Another exception is where his insolvency has arisen solely from misfortune and
he is himself entirely free from any moral stigma.
By section 51, provision is made for the transfer of stocks and shares and
things in action in similar terms to those indicated in section 44. These
provisions have the effect of causing a trustee to vacate his office in the
circumstances indicated.
POWERS OF A TRUSTEE
Trustees commonly have many and varied powers that may be conferred on
them by the trust instrument or by statute. Many of them will be administrative
but they may be dispositive giving them power to decide which of potential
beneficiaries shall take an interest and what the extent of that interest shall be.
It is trite law in Swales V IRC that trustees cannot fetter the exercise by them
at a future date of discretion, possessed by them as trustees. In the exercise of
their discretionary powers, the position of the law in Pitt V Holt is that trustees
must take into account all relevant considerations and disregard irrelevant
considerations.
The powers of a trustee among others include the power of sale, power to
insure, power of maintenance, power to give receipts, power of advancement,
power to raise money by sale, mortgage, power to delegate, power to employ
agents.
(a)Power of sale
This is provided for under section 12 of the Trustees Act. This power may be a
creature of statute, trust instrument, or by court’s authority or by the consent of
all beneficiaries.
While exercising this power, the position of the law in Buttle V Sounders is
that a trustee has an obligation of obtaining the best price he can for
beneficiaries and he must act prudently.
The test for the duty of care while exercising power is that ‘would a reasonable
prudent business man take that offer’.
Where the sale has already taken place, the position of the law in section
13(1) of the Trustees Act which position was affirmed in Dance V Goldingham
is that a beneficiary has a right to apply to have the sale impeached if it appears
the consideration rendered was inadequate.
It was also stressed in Cowan V Scargill that trustees must throughout the sale
process put beneficiaries’ interests as paramount.
Section 19 of the Trustees Act confers power on all trustees, whenever the
trust is created, to insure any trust property against loss or damage by fire and
to pay the premiums for such insurance out of the income of the building or
property subject to the trust without obtaining the consent of any person who is
a beneficiary to such income.
From the wording of section 19(1), it does not impose a duty to insure. The
imposition of such a duty might cause difficulties if the trustees had no funds out
of which to pay premiums and a trust fund comprising trustee investments, such
as government bonds, would be secure without insurance. In Re McEacharn,
Eve J, held that insurance was not to be maintained at the expense of the tenant
for life, but expressly decided nothing as to whether the trustees ought to insure
the premises at the expense of the estate generally, because he had not been
asked that question.
In case of happening of any peril, the position of the law under section 20(4)
of the Trustees Act and as illustrated in the case of Sinnot V Bowden is that
subject to obtaining consents specified in the instrument if any money realised
from the insurance policy will under the direction of court be used in rebuilding,
reinstating, replacing or repairing the property lost or damaged.
(c) Power to compound liabilities
This is provided for under section 15 of the Trustees Act. It provides that a
personal representative, or two or more trustees acting together or subject to
the restrictions imposed in regard to receipts by a sole trustee not being a
trustee corporation, a sole acting trustee whereby the instrument, if any,
creating the trust or by law, a sole trustee is authorized to execute the trust and
powers reposed in him or her, may, if and as he/she or they think fit:-
(i) Accept any property before the time at which it is made transferable or
payable.
(ii) Sever and apportion any blended trust funds or property
(iii) Pay or allow any debt or claim on any debt or claim on any evidence
that he/she or they think sufficient.
(iv) Accept any composition or any security movable/immovable, for any
debt or for any property, movable/immovable, claimed.
(v) Allow any time for payment of any debt or
(vi) Compromise, compound, abandon, submit to arbitration or
otherwise settle any debt, account, claim or thing whatever relating to
the testator’s or intestate’s estate or to the trust.
It was also stressed in De Cordon (1879) App. Cas 692 that the
trustee must however ensure that a compromise is not detrimental to
the trust.
(d) Power to give receipts
Section 14 provides for this power. Notwithstanding anything to the contrary in
the instrument as per section 14(3), section 14(1) provides that the receipt
in writing of a trustee for any money, securities, investments or other personal
property or effects payable, transferable, or deliverable to him under any trust or
power shall be sufficient discharge to the person paying, transferring or
delivering the same and shall effectually exonerate that person from seeing to
the application or being answerable for any loss or misapplication thereof.
Section 14(2) however does provide that section 14 does not, except where
the trustee is a trust corporation, enable a sole trustee to give a valid receipt for
the proceeds of sale or other capital money arising under a disposition on trust
for sale of land. There is need for accountability and transparency. Failure to do
so, the sale may be impeached.
It should be noted that section 16(2) excludes the exercise of this power in
respect of property held in charitable trusts.
It should also be noted that the donee only acts when the trustee has left
Uganda and when the trustee returns, the POA are revoked and the trustee
assumes his powers.
Section 31(2) is to the effect that during the infancy of the beneficiary, if his
interest so long continues, the trustees have powers to accumulate all the
residue of that income in the form of compound interest by investing the same
and the resulting income thereof from time to time in authorized investments
and shall hold those accumulations for the benefit of the beneficiary.
It is trite law under section 32(1) that a trustee may at any time pay or apply
any capital money subject to a trust for the advancement or benefit of the
entitled beneficiaries. However, the money so paid or applied shall not exceed
half of the presumptive share that the beneficiary may be entitled and the
money so applies shall be brought into account as part of the beneficiary’s share
at the time of distribution.
Much as the trustee has powers of advancement, the position of the law in
Molyneux V Fletcher is that he must exercise such powers in a bonafide
manner and failure to do so will amount to breach of trust and the trustee can
be held liable.
DUTIES OF A TRUSTEE
Upon being appointed a trustee, the starting point is that a trust has a duty to
disclose any potential conflict of interest. This was stressed in the case of
Peyton V Robinson (1823), where Court emphasized that before a person
accepts a trusteeship to which a discretionary power is annexed, he is bound to
disclose any circumstances in his situation which may give him in a bias or an
interest against the due exercise of that discretionary power. If he accepts the
trusteeship without disclosing such circumstances in his situation, he cannot
afterwards exercise the discretionary authority for his benefit.
It is trite law as held in Re Brodgen, that where a trustee fails to perform this
duty, he will be held personally liable. The law of trusts imposes duties or
obligations on a trustee and the moment these duties are breached, the trustee
will be held liable.
The trustee should also ensure that he transfers to himself any property which
did not pass to him under the deed of appointment as well as the transfer of all
the documents affecting the trust property such as title deeds and share
certificates.
In instances where the trust fund includes an equitable interest, the trustee’s
duty is to give notice as soon as possible to the person in whom the legal estate
is vested. This is the position of the law in Dearle V Hall (1828), where court
noted that where the equitable owner of an asset purports to dispose equitable
interest on two or more occasions and the equities between the claimants, the
claimant who first notifies the trustee or legal owner of the asset shall have a
first priority claim.
The purpose of the notice was discussed in Jacob V Lucas where court noted
that it enables the claimant to obtain priority over any subsequent encumbrance.
If the trust estate includes a chose in action, the trustee should get in at the
earliest opportunity and if he fails to do so, the position of the law in Re
Brodgen is that he would be liable. A chose in action is rights to property which
a person does not have present enjoyment but can recover it through an action.
Where trust property includes chattels, the position of the law in England V
Downs (1842), is that the trustees should ensure that there is a proper
inventory.
Where a trustee fails to realise the trust property within at least a year of the
testator’s death, the position of the law in Grayburn V Clarkson is that the
trustee has a burden to justify the delay.
ii. Money
The general principle of law is that a trustee/an executor should never allow
trust money to remain outstanding on the personal security of a debtor because
the quality of the debtor may change from day to day. This was laid in Re
Medland.
If the trustee/executor fails to recover the debt within a reasonable time,
the position of the law in Lawson V Copeland, is that a trustee himself
becomes the debtor’s surety (guarantor).
In addition, it’s trite law in Holmes V Dring, that trustees should not generally
lend money on personal security even with a guarantor. However, an exception
to this rule as stated in Pickard V Anderson is where Court held that if a
trustee is expressly authorized to lend on personal security, he may do so.
The trustee has to consider the life tenant and the remainder man that is the
investment must not only produce income but also capital. Much as a trustee has
a duty to invest, a trustee is required to take due care as an ordinary prudent
man would take when investing trust property. This is the position of the law in
Re Whiteleg.
However, if those entitled receive nothing under the distribution so ordered, the
position of the law in Lord Woodhouselee V Dalrymple is that they may later
come forward and establish their claim.
In situations where the trustee overpays a beneficiary in good faith, he can ask
for a refund of the amount over paid or deduct the same from any future
payments due to the particular beneficiary. This was affirmed in Re Musgrave.
When the trustee has fully distributed the trust property, the trustees should
present their final accounts to the beneficiaries and obtain a discharge from
them, which can appropriately be done through a release by Deed and the trust
is thereby determined. A trustee who makes an erroneous distribution may by
virtue of section 58 be relieved by court from liability if he acted honestly and
reasonably and ought to be fairly excused.
The trust requires that all beneficiaries should benefit other than waiting to
accumulate at the expense of others. For example, the trustee should act
impartially between a life tenant beneficiary who is entitled to income out of the
trust property and the remainder man, who is entitled to the capital under the
trust.
The same was reiterated in Low V Bouvery, where it was stated that it is a
cardinal duty of a trustee to provide accounts of the trust property and equally
furnish necessary information as regards the same, as may be required by the
beneficiaries.
Section 22(4) of the Trustee Act provides that trustees may in their absolute
discretion cause the accounts of the trust property to be examined or audited by
an independent accountant and this should be done once in three years. Where
a trustee fails to keep accounts of the trust, the beneficiaries on application to
the court can compel him to do so.
The right in the above decision was fortified by the Privy Council in Schmidt V
Rosewood Trust (2003) where court held that:-
No beneficiary has any entitlement as of right to trust documents.
The right to seek disclosure was an aspect of the court’s jurisdiction.
The court had to carry out a balancing exercise weighing the
interests of claimants, trustees and third parties.
FIDUCIARY DUTIES
A fiduciary was defined in Bristol and West Building Society V Mothew to
mean a person who has undertaken to act on behalf of someone else.
Fiduciary duties are duties imposed by equity with a view to ensuring that a
trustee’s interests do not conflict with those of the trust.
Just like other general rules, there are exceptions to this rule as
discussed below:-
(i) Authority by the trust instrument.
A trustee may be remunerated where the trustee instrument expressly sets out
that remuneration may be granted. The trustee’s right to remuneration under the
express clause is not contractual. It is a derivation of the settlor’s power to direct
how her property may be dealt with. Remuneration could take the form of
income from the estate as held in Public Trustees V IRC and payment there
out is regarded as a legacy to the trustee as observed in Re Pooley.
However, court in Ayliffe V Murray stated that the inherent power can only be
exercised in exceptional circumstances such as where the execution of the trust
is very difficult.
In Chan V Zachara (1984), Deane J felt that, wherever the trustee acquires
trust property, there is an irrebutable presumption that is has been obtained by
reason of the position of advantage occupied by the trustee, which can only be
defended by proof of consent or authorization. Whenever the trustee purchases
trust property, he or she holds it in the capacity of constructive trustee for the
beneficiaries.
The second justification was stated in Holder Vs Holder, where the COA held
that a trustee may purchase the trust property with the fully informed consent of
all the beneficiaries for a fair price. This rule is referred to as the ‘fair dealing’
rule. Herman LJ stated that the reason for prohibition was that a man cannot be
both a vendor and purchaser. If such a purchase does occur, the position of the
law in Tito V Waddell, is that equity has evolved the self-dealing rule under
which a sale of trust property to a trustee is voidable by beneficiary.
Trustees must account for personal profit gained as a result of use of trust
property, or opportunity/information gained as trustee. Alternatively,
beneficiaries may make a proprietary claim that the profit is held on constructive
trust for them.
Where trustees are acting as director the question arises as to whether trustees
who become directors by virtue of their trusteeship remuneration. In Re
Madam, the trustees had power under the AOA by virtue of their office to
appoint two directors of a company. They appointed themselves. It was held that
they were liable to account for the remuneration they received because they
acquired it by use of their powers as trustees court stated that ‘the root of the
matter is did the trustee acquire the position in respect of which he drew the
remuneration by virtue of his position as a trustee?
Where a trustee attempts to acquire a new lease or freehold for personal benefit,
the position of the law in Keech V Sandford is that he has to account to the
beneficiaries. In Kent V Sandford, the Trustee held property on trust for B, a
life remainder for C. trust property included a lease of a farm which was about to
expire. The Trustee’s request that the landlady grants further lease to the trust
was refused. The trustee then renewed the lease for his own personal benefit.
The issue was whether B & C can claim benefit.
In Re Gee, court held that if the trustee becomes a director without trust share
voting being decisive and they were appointed independently, the trustee can
keep the shares.
Where the trustee did not obtain remuneration by the use of his position as a
trustee but by an independent bargain with the firm employing him, the position
of the law in Re Lewis is that a trustee may not be accountable for the
incidental profits made.
(i) Trustee not to compete with the trust
It is trite law in Boardman Vs Phipps that a trustee should not place himself in
a position where his duty and his interest conflict.
A conflict may occur between the duties of a trustee and his personal interest
where the trust estate includes a business and the trustee is found to be
conducting a business of his own in competition with the trust.
BREACH OF TRUST
A breach of trust basically occurs where a trustee fails to perform any of his
duties or improperly exercises any of his powers.
It should be noted that the act in question need not be in respect of fraud or
dishonesty before it can amount to a breach of trust. Indeed, it may be a just act
of honest mistake or technical error, but that will not absolve a trustee from
liability. This same position was noted in Re Brogden (1888) where court
observed that ‘the beneficiaries may proceed against a trustee who commits a
breach even when where the trustee believed that what he was doing was in the
best interest of the trust.
LIABILITY OF A TRUSTEE
The trustee as held in Re Dawson is normally bound to restore the estate to the
position it would have been had the breach not occurred. If the loss was an
inevitable one and the breach merely increased the loss, the trustee shall be
liable only to the extent to which the breach increased the loss as seen in Lord
Grainsborough Vs Watcombe Terra Cotta Co. (1885).
A trustee will not, however, be vicariously liable for the breaches of his co-
trustees or dishonesty or negligence of agents who act for the trust, unless there
has been willful default on his part as happened in Townley Vs Sherborne
(1634), where a trustee was affixed with liability for allowing rents collected on
trust property to remain in the hands of his co-trustee who misapplied the
money.
In Segbedzi V Segbedzi (1999), A trustee who by his own neglect allowed his
fellow trustees to sell the principal asset of the trust at an undervalue was held
liable even though he did not participate actively in the breach.
It is also trite law in Head V Gould (1898), that a retired trustee will, for his
part, be liable for breaches he committed while in office but not for breaches
committed by other trustees after his departure, unless his retirement was
intended to pave the way for the commission of the beach in question.
(c) JOINT LIABILITY
Where two or more trustees are involved in committing a breach, their liability is
joint and several and the beneficiaries may sue all or any of them. This is the
position of the law in Income Tax Act section 71(7).
If anyone trustee is sued, he may claim a contribution from any other trustee
who is also liable.
Where two trustees are jointly liable for a breach, one may be able to claim an
indemnity from the other. In particular:-
(i) An indemnity may be claimed against a solicitor trustee by his co-trustee
who has placed complete reliance on the solicitor in the affairs of the trust
as seen in Re Linsley (1904) but not by a co-trustee who acting on his
own judgement, has actively participated as seen in Head V Gould.
(ii) An indemnity may also be claimed by a trustee against his co-trustee
where the latter has acted fraudulently in initiating the breach as noted in
Re Smith. However, where a trustee has been made liable for a breach of
trust which was not due to his fault, the position of the law in Bahin V
Hughes.
In Target Holdings V Redferns (1994), the COA went so far as to hold that
the obligation to make good the loss arising from a breach remained even if that
loss would have been incurred without the breach. This was however rejected an
appeal by the HOL which held that a trustee’s liability to make good a breach
was fault based.
The courts have laid various contexts upon which liability of trustees
can be determined and these include:-
(i) Where a trustee makes an unauthorized investment , the position of the
law in Knott V Cottee is that he is liable for all loss that is incurred when
the investment is realised i.e he is liable to pay the difference between the
cost of the investment and the price at which it is sold.
(ii) Failure to invest. Where, however, trustees were not directed to invest in
one specified investment, but were given a choice and yet made no
investment at all, the position of the law as held in Sheperd V Mouls &
Robinson Vs Robinson is that they are only liable to replace the trust
fund, on the ground that it would be impossible to say which investment
they would have chosen and for what other sum they could be held liable.
Also in Nestle V National Westminister Bank, trustees who fail to
follow a proper investment policy may be required to make good to the
trust fair compensation.
Where trustees were directed to make a specific investment and either made no
investment at all or invested in something else, they will be required to provide
the amount of that specified investment that could have been purchased with
the trust funds at the time when the investment should have been made as seen
in Pride V Fooks.
(iii) Improper retention on sale. Where the trustees were under a duty to sell
unauthorized investments and neglected or delayed doing so, they will be
liable for the difference between the price for which they could have been
sold at the proper time and the price eventually obtained on the actual
sale as was the case in Grayburn Vs Clarkson.
(iv) Breach of fiduciary duty. It has been said as noted in Swindle Vs
Harrison (1997) that the considerations that apply to a breach of trust
‘apply to a claim for breach of a fiduciary duty’. The claimant for a breach
of a fiduciary duty must show that the loss that he has suffered has been
caused by the defendant’s breach of duty. Furthermore, unless the breach
could properly be regarded as fraud, the claimant is not entitled to be
placed financially in the same position as he was in before the breach
occurred. In Nationwide Building Society Vs various solicitors (No.
3) (1999) (PNLR) and in Harrison (Properties) Ltd V Harrison, it
was said that the correct approach to equitable compensation for breach
of fiduciary had acted dishonestly or in bad faith, is to assess what actual
loss had resulted from the breach, having regard to the scope of the duty
broken.
DEFENCES OF A TRUSTEE TO PROCEEDINGS FOR BREACH OF TRUST
(a)Exemption clauses. The efficacy of a trustee exemption clause was
affirmed by the COA in Armitage Vs Nurse, in which a clause in the
settlement provided that no trustee should be liable for any loss or
damage to the fund or its income ‘ unless such loss or damage shall be
cause by his own actual fraud’. It was held that the clause was effective
no matter how indolent, imprudent, lacking in diligence, negligent, or
willful the trustee might have been, so long as he had not acted
dishonestly. The test of dishonesty was considered by Sir Christopher
Slade in Walker V Stones (2004)4 ALL ER 412, and the tests are:
first, that the deliberate commission of a breach of trust is not necessarily
dishonest, secondly, that it is only dishonest if the trustee committing it
does so either knowing that it is contrary to the interests of the
beneficiaries or being recklessly indifferent whether it is contrary to their
interests or not’.
(b)Beneficiary’s participation/consent or concurrence in a breach. A
trustee has a defence against a beneficiary who participates in or consents
to a breach even if the latter derived no benefit. It is trite law in Brice V
Stokes (1805) & Nail V Punter (1832) that a beneficiary who consents
to or concurs in a breach of trust will not in general be able to succeed in
a claim against the trustees, whether or not he has derived any benefit
thereby as noted in Fletcher V Collis (1905)2 Ch.24.
Byrne J in Re Turner (1897) explained that the courts have not sought
to lay down strict rules for deciding whether to grant relief but are guided
by the circumstances of each.
By contrast, cases in which such relief was refused include Re Barker (1898)
where a trustee, on the advice of a commission agent improperly retained an
authorized investments for 14 years.
(f) Statutes of Limitation & Laches
The Limitation Statute Cap 80 under section 20 provides that an action to
recover money or other property or in respect of any breach of trust may not be
brought against a trustee or any person through him after the expiration of six
years from the date on which the right action accrued. However, there are
exceptions to this general rule where there is fraud, where beneficiary is entitled
to a future interest, disability.
Basically, this doctrine is to the effect that where the defendant is unjustly
enriched at the expense of the plaintiff, the defendant must make restitution to
the plaintiff.