Trustees need to exercise their powers correctly. If not, then the ‘exercise’ can be void.
Commonly, trustee powers are grouped as either ‘dispositive’ (giving the trustee the power to decide who should benefit and how) or ‘administrative’ (which allow the trustee to protect and enhance the value of trust property). Trustee powers can also be divided into those that are ‘personal’ or ‘fiduciary’ in nature, which is not addressed in this article.
Both dispositive and administrative powers can be included in the trust document, and a number of these powers are included in various statutes; a helpful backup for trust drafters. In practice, these powers provide trustees with flexibility to deal with trust property (be that investing, lending or conferring benefits) in the best interests of the relevant beneficiaries.
Certain dispositive powers may only be exercised if to do so would be for the ‘benefit’ of one or more trust beneficiaries. This requirement is often expressed within the terms of the power itself but need not necessarily be the case.
If a trust is created for the benefit of Beneficiary A, and subject to that for Beneficiary B, then Beneficiary B is going to want to ensure that the trustees are acting correctly when they transfer assets to Beneficiary A. If the power to transfer assets to Beneficiary A requires that the transfer is made for the benefit of Beneficiary A, then what is a ‘benefit’ becomes an important question – for Beneficiary A, Beneficiary B and the trustees!
Understanding trustee ‘benefits’
What is a ‘benefit’? In the context of a trust, a ‘benefit’ will not be conferred unless it can answer the question “will [it] improve the material situation of the beneficiary?” (In re Pilkington’s Will Trusts [1964] AC 612, 635). Previous examples of providing a ‘benefit’ have included:
- using trust capital to settle a beneficiary’s debts;
- paying a beneficiary’s family member (a) to provide the (minor) beneficiary with a home and (b) as part of a marriage settlement;
- making payments to a charity where a beneficiary feels a moral obligation to make such donations themselves; and
- generally supporting a beneficiary financially.
This might appear to give trustees a wide range of powers, but each case must be scrutinised carefully. Trustees must be satisfied that not only are they conferring a benefit on the beneficiary concerned, but that they are also exercising their powers for a proper purpose that was intended when the trust was created (Grand View Private Trust Co. Ltd v. Wong [2022] 25 ITELR 630). This may not be the case, for example, if a beneficiary used a trust distribution to pay a third party deliberately to circumvent the trust and the ‘purpose’ for which it was established.
If a beneficiary takes pleasure in supporting a charity, can a trustee then distribute funds to a beneficiary in the knowledge that this is how the funds will be directed? Almost two decades on, the decision in X v A & Ors ([2006] WLR 741) remains the key authority on whether charitable giving can constitute a ‘benefit’ to a trust beneficiary. In that case, it was decided that the benefit must ‘improve’ the material situation of the beneficiary, which itself requires examining the particular facts – including the extent of the provision, the ‘moral obligation’ the beneficiary was looking to satisfy, and the beneficiary’s own financial situation.
On first glance, trustees have quite the wealth of levers available to them to support their management of trust assets. Why they pull those levers, however, is as important as whether they choose to do so in the first place.
Please get in touch with James Jarvis, Associate, or Jonathan Riley, Partner, for any queries.
