The Trustees wish to make a loan of the entire Trust Fund to two of the Discretionary Beneficiaries - the intention is for the beneficiaries to purchase the property to reside in. The Trust Deed contains the following Power to lend to a Beneficiary.
Lending to a Beneficiary
10.1 The Trustees shall have power:
10.1.1 to lend money from the Trust Fund to any Beneficiary who is, for the time being, entitled to the income of that money;
10.1.2 to lend money from any part of the Trust Fund in which no Beneficiary has an interest in possession to a Beneficiary.
10.2 A loan may be interest free and unsecured, or on such terms as the Trustees think fit.
Am I correct in thinking that there is no prohibition to the loan being made as 10.1.2 allows for this. My colleague has suggested that we may not be able to make the loan without first doing a Power of Appointment over income to the beneficiaries and then making the loan in terms of 10.1.1.
My view is that 10.1.1 contains an express power to lend to an income beneficiary. 10.1.2 permits a loan to be made from funds held n discretionary trusts, so deals with the source of lending. 10.1.3 allows any permitted loan to be interest free.
I don’t interpret 10.1.2 as authorising general lending to anyone, so long as the source is a discretionary fund within the trust. If that had been the intention there would have been no need to make a distinction between beneficiaries with an interest in possession and others, such as appears at 10.1.1.
There isn’t a statutory power to lend as such, though it might be possible to regard it as an authorised investment by the trustees depending n the terms of the investment powers. But then probably the trustees would need to justify an interest free loan as being commercial, which might be difficult. Otherwise they would be in breach of trust. That might not be the end of the world, depending on who the trustees are and the identity of the other beneficiaries.
Why not just grant a revocable interest in possession in respect of the intended loan fund to the intended borrowers? Easy enough to do and resolves the uncertainties.
No doubt I’m being dim but I cannot follow the difficulty here. I don’t understand why there seems to be doubt.
10.1.1 provides that funds where a beneficiary has a right to income can be lent only to the beneficiary with that right to income. Clear, but not relevant to the question unless made relevant by giving a beneficiary a right to income.
10.1.2 provides that funds where no beneficiary has a right to income can be lent to any beneficiary. Isn’t this exactly what the trustees wish to do here, so why the doubt?
The two different sub-clauses exist to make the distinction between the source of the funds, rather than the type of beneficiary. The document simply wants to ensure that money is not lent to a beneficiary if it ‘belongs’ to someone else (and thus prejudices their income entitlement).