To appoint out of a Discretionary Will Trust to a Beneficiary who is also a Trustee,
is an independent trustee required?
or likely required?
All the original 3 trustees are alive
Will was drawn up in 2002
Will says
“The standard provisions of the society of trust and estate practitioners (1st edition) shall apply to this my will provided that my trustees shall not exercise any of their powers so as to conflict with the beneficial provisions of my will.”
No direct references in Will to Provisions 1 clause 9
There is no let out under Provision 9 of the STEP Standard Provisions for a trustee to benefit themselves without there also being an “Independent Trustee”.
However, does the STEP Provision exclude the principle that an “original” executor or trustee may act to benefit themselves, as they have been placed in that position of conflict by the settlor/testator (applying Sargeant v. National Westminster Bank plc, 1990)?
To my mind, Provision 9 does exclude that principle on the basis that the more specific provision will oust the general rule.
The requirement for an Independent Trustee was relaxed in the STEP 2nd Edition and ay be further relaxed in the forthcoming 3rd Edition. However, I appreciate that these changes, occurring subsequent to the date of the settlement in question have no retrospective effect.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I am confident Paul is right but I have reservations about after-appointed replacements. I always vary this provision to include the original trustees, and any replacements, as long as there are two. A consent requirement may sometimes be appropriate. And a tie-in to the appointment of new trustees clause.
Thank you for your replies
The 3 Original Trustees are the only living beneficiaries and there is an unclosed class of unlikely unborn beneficiaries.
I had been reading your article on the following link before posting
I wanted to confirm what I thought was the case an independent trustee is currently required to benefit any of the will trust beneficiaries as they are all trustees.
In your article a possible solution
If a trust includes a power of appointment, permitting the trustees to appoint all or part of the trust fund upon such terms as they see fit (or wording to similar effect), this can be used to include the appropriate dispositive powers.
The Will trust wording on the power of appointment,
“The Trustees shall hold the capital and income of the settled legacy upon trust for all or such one or more of the beneficiaries at such age or such time in such shares and upon such trusts for the benefit of the beneficiaries as my trustees may by deed or deeds revocable or irrevocable at any time or times during the trust period appoint and in making any such appointment my trustees shall have powers as full as those they would possess if they were the absolute beneficial owners of the settled legacy”
No mention of Terms, so not sure if the will trust appointment power allows the trustees to appoint all or part of the trust fund upon such terms as they see fit?
The will trust does say the trustees hold the trust assets like they were the absolute beneficial owner. Implying the Trustees can appoint to the beneficiaries who, when and how the trustees like.
As identified in the last paragraph of the LawSkills article under the STEP Provisions heading, yes, an Independent Trustee will need to be appointed if any of the trustee beneficiaries are to benefit.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Who does the Independent Trustee need to be independent from? Does the Independent Trustee only need to be independent to the trustee beneficiary who is to benefit, or should the Independent Trustee be independent of all the trustees?
Hello Amy, I am a lay person,
My question related to STEP 1 provisions which are incorporated in to a Will these Provision can be found here
The STEP 1 provisions defining an Independent Trustee are-
“9. CONFLICTS OF INTEREST…
(b) An Independent Trustee, in relation to a Person, means a Trustee
who is not:
(i) a brother, sister, ancestor, descendant or dependent of the
Person;
(ii) a spouse of the Person or of (i) above; or
(iii) a company controlled by one or more of any of the above…
9(3) The powers of the Trustees may be used to benefit a Trustee (to the same
extent as if he were not a Trustee) provided that there is an Independent
Trustee in respect of whom there is no conflict of interest.”
There is also a STEP 2 version of the Standard Provisions which have similaraties and differences.
So this is STEP 1 standard provisions definition of Independant Trustee what i believe is not a general legal definition of Independant Trustee.
Does your question relate STEP provisions 1 or 2?
Neil
The reason that the STEP provisions define “independent trustee” is that otherwise the words would have to have their ordinary meaning as English words but against the background of the established rules of Equity. Those rules derived from case law seek to prevent a person acting in a fiduciary role, such as a trustee, from benefiting personally in relation to any trust property or transaction involving it.
While a judge would have no difficulty deciding on any given set of facts whether that had occurred, advisers and their clients prefer greater certainty and not to find out for sure only by going to Court at great expense and possibly then finding that past actions are overturned. So the drafter of the STEP Provisions seeks to define the precise circumstances in which an independent trustee must be involved to guard against these dangers.
The rules also say, but with the same element of uncertainty, that the Settlor must be presumed to have intended that the original trustees, if they are also beneficiaries, should not be caught but this does not apparently extend to a replacement trustee who is also a beneficiary.
In many family trusts the trustees, whether original or replacement, are very likely also to be beneficiaries. The last thing anyone wants is to have to go to court so I do not use this particular STEP provision unamended. I make it clear that the need for an Independent Trustee does not arise as long as there are two trustees. It is then up to the settlor to choose his original trustees wisely confident that if they have the right to appoint replacement or additional trustees they too will choose wisely. The Settlor can control this in a lifetime trust by being the person who can appoint new trustees and, after his death, so also in a will trust, he can give the right to someone else e.g. his surviving spouse or even a third party. I also make it clear that any trustee who is also a beneficiary is not to be affected by the rule
The right of trustees to act as if they were absolute owners does not allow them to breach the rules of Equity in exercising a power of appointment. In principle, but subject to the trust document. they are nonetheless bound by the self-dealing rule and the doctrines of fraud on a power and invalid execution.
A lay person is entitled to expect a professional adviser to explain how all the provisions of a trust document work and why. This is usually done in writing without being specifically requested.
Apologies for resurrecting this old chestnut, but thought it might be better than starting a new thread. Unfortunately, Paul’s article above is no longer available - if there is a fresh link I would appreciate it.
If A, B,C and D are all related, my understanding (also following STEP v3) is that:
if A,B and C were originally appointed as trustees, then there is no need to appoint an independant Trustee, if A, B or C are to ultimately benefit?
If D was to be subsequently appointed as trustee, they would not be able to benefit unless an independant trustee is also appointed. Even if all of A,B and C are happy with any potential transaction (they are likely to also be the beneficiaries).
And does this ‘benefit’ extend to just assets actually appointed out, or would it also include Discretionary Trustees allowing a Spouse (who is also a trustee) to continue to live in the Trust’s share of the marital home? If the latter, then sure there is a can of worms that are waiting to be opened? STEP (v1) doesn’t have the “Original Trustees” exemption that i can see.
My understanding of the law is that an original trustee who is also a beneficiary is to some extent excepted from the blanket effect of the conflict principle. This is on the implied supposition that the settlor would not have conferred this double status by oversight and must be taken to have impliedly assented to most potential technical breaches flowing from it. I doubt Equity would give carte blanche to this on egregious facts. If the person was a sole trustee or a domineering character of several trustees who proposed to do something drastic of which the settlor might well be assumed to have disapproved it will find a way to stop it or remedy it.
A sole will trustee is not at all unusual as where it is the surviving spouse. To prevent him or her from disinheriting her own children, for example, by exercising overriding powers over capital in which she has an IPDI, the Kessler precedents require 2 trustees to do the job but not an Independent Trustee. And it may not actually be a Conflict on the facts. If the sole trustee can appoint a second trustee as a stooge it may not even be breach of trust. It may be prudent to make the powers subject to an explicitly non-fiduciary personal consent power, in the example for one or more of the adult children. Although if the testator had a real concern perhaps his choice of trustee should have been different.
Replacement trustees who are also are not within the implied relaxation. I am not over-fond of paragraph 8 of the STEP Standard Provisions 3rd, though I am sure something like it is needed. I replace 8.4 with:
" 8.4 The powers of the Trustees may be used to benefit a Trustee (to the same extent as if he were not a Trustee) provided that:
8.4.1 there is in relation to that Trustee an Independent Trustee in respect of whom there is no conflict of interest or
8.4.2 the Trustees consist of or include all the trustees originally appointed under this Trust or, if a descendant of mine, appointed as replacement trustee."
As I say a consent requirement may give even more protection.
I am not even sure that an Independent Trustee is ever enormously helpful in family trusts. It may unnecessarily add to costs and professionals will understandably be more cautious on the spectrum of what is permissible, and even want to seek directions (Ker-ching!), on matters which lay trustees can properly decide, still on that spectrum but with the robust conscience of an unpaid well-trained hippopotamus. But I normally leave in the rest of paragraph 8 because 8,2 and 8.3 seem to me apt to cover most of the likely routine conflicts, keeping the big gun back for dispositive powers. Only a consent requirement can stymie the appointment of an Independent Stooge.
My understanding of the law is that an original trustee who is also a beneficiary is to some extent excepted from the blanket effect of the conflict principle.
Whilst this is the Common Law position, inclusion of the “Conflict of intertest “ provision in the STEP Provisions in a will or settlement ousts the Common Law. The change made to the relevant provision in STEP 3 effectively restores the Common Law position where a beneficiary trustee was an original trustee.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
For those who wish to appoint a replacement trustee who is also a beneficiary, and whose trust document does not expressly permit this, I doubt there is any need to despair. There is no statutory prohibition, like that against a beneficiary witnessing a Will.
The Supreme Court of Judicature Act 1873 which unified the rules of common law and equity and made the latter prevail. I would be surprised if equity adopted other than a case by case approach to a challenge on conflict grounds of a transaction or appointment by such a trustee in his own favour; though if a sole trustee, equitable scrutiny might be less lenient. This must happen thousands of times and the challenges reported are not memorable, at least not to me. I still think it worth drafting out if you can. More convenient than appointing another trustee as a safety measure where not required (two trustees for a trust of land).
Lewin on Trusts, 19th Edition @20-001 states: “a trustee is not allowed to derive any personal advantage from the administration of the trust property that is not authorised”, which draws on Lord Herschell’s words in Bray v. Ford (1896) : It is an inflexible rule of a Court of Equity that a person in a fiduciary position … is not, unless otherwise expressly excluded, …, allowed to put himself in a position where his interest and duty conflict.
Lewin goes to say, @ 20-174 “the rule … does not apply where the trustee has not placed himself in a position of conflict and interest but has been placed in that position by the settlor or the terms of the trust”.
It is my understanding, that the self-dealing rule applies unless specifically excluded or modified by the trust instrument, or the trustee-beneficiary was an originally appointed trustee (and has remained a trustee continuously). Where an application is made to court, whilst the court will consider the particular circumstances of the case, I believe it will normally start from the position that the self-dealing rule applies (to prohibit the transaction) and look to see if the circumstances are sufficiently exceptional to waive the rule.
As Jack observes, there may be many (thousands, even) cases where the self-dealing rule is breached and no action is taken. This may well be due to ignorance of the rule, the belief amongst the beneficiaries that the outcome is “fair”, or that, if the breach of the rule is recognised, the costs of any challenge would be disproportionate to the amount in question.
I also agree with Jack that there is no prohibition against the appointment of a beneficiary as a replacement trustee, even though the consequences of such an appointment could prove disastrous for that beneficiary.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals