Incapable trustee/settlor

Trusts Discussion
1

Settlor wrote 4 investment bonds into trust:

Trust 1 is an 80 yr discretionary trust with a wide class of beneficiaries. The trustees are the Settlor and a daughter (D1). Power to appoint or remove trustees is vested in the Settlor during her lifetime.

Trust 2 is similar to Trust 1 but the Settlor is the sole trustee.

Trust 3 is an absolute trust for the Settlor’s three adult children. The Settlor is the sole trustee. The power of appointing new trustees is vested in the Settlor during her lifetime but there is no express power to remove trustees.

Trust 4 is a discretionary trust which terminates 24 months after the death of the Settlor. The trustees are the Settlor and D1, and the class of beneficiaries is limited to the Settlor’s three children. The power to appoint/remove trustees is vested in the Settlor during her lifetime.

The bonds are with three different insurance companies and the Settlor is excluded from benefiting from each trust. None of the trusts include express provision for dealing with a trustee who lacks capacity.

Settlor has LPAs which appoint her three adult children as attorneys but has now lost capacity.

Looking at each step in turn, my thoughts were:

  1. D1 could appoint a replacement trustee under s.36(1) Trustee Act 1925 for trusts 1 and 4
  2. If the power of appointment for trusts 2 and 3 is vested in the Settlor in that capacity, rather than as a trustee, is it capable of being exercised by the attorneys on her behalf? If so, presumably s.36(1) could then be used to remove the Settlor?
  3. If the attorneys cannot exercise those powers then an application to the Court will be required.
  4. Even if we are able to remove the Settlor as a trustee and appoint replacements without a Court order there is then the issue of vesting the bonds in the new trustees. The Settlor’s financial adviser is of the opinion that the insurance companies may not require an assignment but, as I see it, if they do we will still need a vesting order from the Court.

Any thoughts?

Nathan Bowles
Williamson & Barnes

2

Hi Nathan

  1. If D1 is a trustee she can appoint a replacement under s.36 in place of the settlor. If the settlor has a beneficial interest in the trust property (she might not do if a distribution has not been made to her as its DT) then an application to COP is required see s.36(9).

  2. An attorney’s ability to exercise the donor’s trustee functions are limited to those set out in s.1 TDA 1999. This doesn’t apply to your scenario.

3/4. Sounds like an application is made to either the COP or B&P court. the COP can make a vesting order and is cheaper than going through the chancery division.

Feel free to email me fcollinson@kingschambers.com if you need further assistance.

Fay collinson
Kings chambers

3

Hi Fay

Thank you for your reply.

The Settlor is excluded from benefiting from all 4 trusts.

With regards the ability of the attorneys to exercise powers, is there a distinction if the power to power to remove/appoint trustees is vested in the Settlor (as defined in the trust deed)? Is that not the exercise of a Settlor power rather than a trustee power and, if so, is it therefore capable of being exercised by an attorney? Her ability to exercise those powers (if she had capacity to do so) applies during her lifetime and is not conditional upon her also being a trustee - e.g. if the Settlor had retired as a trustee she would still have power to appoint/remove trustees.

Nathan Bowles
Williamson & Barnes

4

Power to appoint trustees is normally considered to be fiduciary and not capable of exercise by attorneys

Simon Northcott

5

What if the trust deed provides the settlor’s power to appoint trustees is not held in a fiduciary capacity?

Jon Zigmond