Express Trusts – How do they work?
LAW351 Equity & Trusts, Week 12 Friday
Agenda Today * Trustees’ Powers * Trustees’ Rights * Beneficiaries’ Rights * Remedies for Breach of Trust
Trustees Powers * The trustee has the powers conferred upon him in the trust instrument. If any * First in the instrument then look at the act(statute), if that fails you go to the court and seek a court order

Statutory Trustees’ Powers * In addition to these, trustees have a variety of statutory powers, including: * The power to sell property (s27(1)(a), (b), (c)); * The power to lease property (s27(1)(d), (e)) including the power to renew leases under s36; * The power to expend money to repair, maintain or renovate property (s30(1)(a)). * If money is expended to improve or develop the property then the amount is limited to $20 000 ($50 000 if the trustee is acting on the advice of someone who the trustee reasonably believes to be competent to advise on improvement and development). * unless the Court consents (s30(1)(c)); * The power to “make decisions” with respect to any debts. (s42); * The power to insure the trust property (s46) and the power to use any insurance payout to replace, repair, rebuild etc damaged trust property (s47(4)). Here it is the power to insure – in the last lectures we have looked at the duty to insure. * The power to raise money by selling or mortgaging trust property (s43). If money is required then there is a power to sell even if the contrary is expressed in the trust instrument. This power is effective even if the trust instrument is to the contrary. * ss37-40 give the trustee particular powers where the trustee has invested the trust property by way of mortgage (i.e. where the trustee = mortgagee) e.g. to foreclose the mortgage, to exercise the power of sale etc. So not where you have mortgaged the property yourself it arises where the trustee has lent money to someone and taken a mortgage. What happens when a trustee has invested money in a particular way, normally a mortgagee has all the powers contained in the mortgage deed but it may be the trsut deed hasn’t taken into account that the trustee may be a mortgagee- this gives the trustee the power to foreclose, exercise the power of sale etc. so they are implied by the act. * The power to “make decisions” with respect to any interest in trust property that is not vested in the trustee (s49). * If part of the trust property is a business, to carry on the business (s55) * The power to use the income from a trust for the maintenance of an underage beneficiary (s58). * The trustee can also apply capital of up to $2000 or half of the trust fund (whichever is greater) for that purpose (s59). So maintenance of underagre beneficiaries – you can go beyond the income to dip into the capital so long as you don’t dip in to too much of it. If the trsut deed allows you to use almost all of the capital for the children beneficiaries there is nothing in section 59 that prohibits that, it just gives an extra power but a limited one. * The trustee can make the advancement of this money conditional (for example, on repayment by the beneficiary) (s60). It may be let’s say one of the children wins a scholarship and it is a half scholarship for a ballet school, so long as they can come up with the rest of the money they can take this opportunity. The trustee can give extra, on repayment. Or they can say I gave them more than their share so they can take up this wonderful opportunity but they are going to pay the difference later.

Pilkington v Inland Revenue Commissioners [1964] AC 612
Example of these powers * There was a power of advancement in s32 of the Trustee Act 1925 (UK). * The trustees wanted to use the power of advancement to create a fund for one of the beneficiaries in order to avoid death tax. * Held that this was an appropriate use of the power of advancement. * Although the purpose behind the move was to avoid tax. * It was clearly for the child’s “advancement or benefit”, in that it was to improve the material situation of the beneficiary. The existence of a collateral purpose does not detract from the fact that one of the purposes was for the advancement or benefit of the child. * It did not matter that there were others who were not beneficiaries under the will who might benefit. This doesn’t mean it wasn’t a proper exercise of the statutory power.

Tempest v Lord Camoys [1866] LR 1 Ch App 485. * Two trustees. * One wanted to purchase a ₤60 000 property by paying ₤30 000 of trust funds and providing the other ₤30 000 by way of a mortgage over the trust property. * The trust instrument gave a trustee the power to purchase property in his absolute discretion, and there was also a power to raise funds by mortgaging the property. * But the other trustee didn’t agree. So one trustee wanting to do what he is empowered to do under the deed but there is disagreement between the trustees. * Held that the Court will not intervene to force a trustee to exercise a power that is at his complete discretion. * However, the Court will be able to ensure that a power that is sought to be exercised is exercised properly and reasonably. * On these facts the Court was not willing to force the trustee to acquiesce to the purchase of the property. The court said yes there is a power to do these things but it doesn’t mean you are obliged to do these things and we are not forcing the trustee who doesn’t agree to agree.

Klug v Klug * Testamentary trust - one third of residuary estate was held for his daughter. * The trustees had discretion to advance at most half of the sum for the benefit of the testator’s daughter. * The daughter was, under the laws of the time, required to pay a legacy duty of 10%. * She could not pay, so she mortgaged her interest to attain money and negotiated with the Inland Revenue authorities to pay by way of 4 instalments. * She made the first two payments, but she was then unable to make the other payments due to the financial circumstances at the time. * One of the trustees (the Public Trustee) felt that he should exercise his discretion to make an advancement to her. * The other trustee, her mother, did not wish to exercise her discretion to do this. * Held that this was not a valid exercise of the discretion, and so the Court ordered that the advancement be made to pay off the mortgage and to make the further payments that were required. * Effectively, they found that the mother had not honestly exercised her discretion and, in those circumstances, so the Court could interfere.

Karger v Paul [1984] VR 161 * The plaintiff was a “remainder-person” under a will, with the life interest being held by the testatrix’s husband. The lady who wrote the will left her property to her husband for life and after he died the remainder was to go to the plaintiff. * However, there was a discretion exercisable on the part of the executors of the will to transfer all or part of the interest to her husband for his own use absolutely. The executors could convert that to an absolute interest which means that it would destroy the plaintiffs interest. * The Two executors, her husband and another co-trustee. The husband made a written request to himself and the co-trustee to exercise the discretion. He managed to convince the co-trustee to exercise that discretion. The remainder person challenged the actions of the trustees saying yes you had a discretion but you both exercised the discretion which destroyed my interest for reasons that were not appropriate in the fact that the husband was using his position in his favour. * Held: that the discretion was worded broadly, so that if it were exercised in good faith, with real and genuine consideration and in accordance with the purposes for which the discretion was granted, the Court would not interfere. So long as that was done the court wouldn’t interfere. * In deciding this, the Court can look at the reasons (if any are given) for the exercise of the discretion. * In the absence of this, the Court can look at the evidence to decide whether the discretion has been exercised in good faith. * In this case, the executors had made inquiries with the plaintiff as to her financial position, and had therefore taken into account the effect on the remainder-person. * There was no need to afford natural justice in the exercise of the discretion.
Even though the woman intended the husband have the capacity to do those things, as long as he could show that he took the other persons position into account.

The wife leaves her share of their home to her husband for life and thereafter to the oldest child but is concerned that the husband may be in a position to sell the house. She may trust him to provide for their daughter but if in fact his circumstances change and he might be able to sell it or my daughter wins the lotto, I want him to be in a position where he can convert his interest into an absolute interest. In this above case the court considered that he had done what he was supposed to do and had done so in could faith.

Mayo v Mayo * There is no difference in principle in the manner in which the Court will interfere with a statutory discretion that is provided to a trustee as distinct from a discretion that is provided by the trust instrument. So although some of these cases specifically dealt with the powers in the trustees act than others like Carger v Paul that dealt with the powers in the trust instrument, this case is saying the same considerations in each instance apply. Any of these cases you can apply exactly the same reasoning to a similar power whether it is applied by the act or in the deed instrument itself.

Rights of Trustees Remuneration – the right to be paid * As usual, look to the trust instrument. The trust instrument usually permits the trustee to be paid. * s98(1) Trustees Act states that “the Court may allow a trustee to take out of trust property ‘such commission or percentage for that person’s service as is just and reasonable’”. * However, this amount cannot exceed 5% of the value of the trust property (s98(2)). * The Court can decide that any amount that is divided between trustees be divided unevenly between them (s98(4)). Not required that trustees are paid evenly. You may find where you have 2 or 3 trustees, one of whom is an accountant or one puts in the bulk of the work and the other is a family representative who looks over and accepts the other trustees advice, you may justify that the person who does all the work, the active trustee is the one that is paid more than the others and this section takes that into account. One thing to note about section 98(1) and (2) - it is not alright for any trustee to automatically take remuneration if there is no express power in the trust deed. The statutory right only exists if the court permits it which means that the trustee must apply to the court to be paid. * If the trustee is engaged in a profession or business and is not being paid by the trust instrument, * then s98(5) permits the person to take out of trust property ‘all usual professional or business charges for business transacted, time expended, and acts done by him or his firm in connection with the trust’ – so where one is an accountant , lawyer or it’s their job to be a trustee this section permits that trustee to take charges from the trust property providing the trust instrument does not state otherwise (s98(5)). A professional trustee can without making an application to the court take their charges for their time. Unless you are a professional trustee anybody else can only take the money out automatically if there is an express power in the deed and if not they can make an application to the court. * The trustee does not need to apply to the Court to make an order under this subsection; * The right exists provided it is not excluded by the trust instrument.
Reimbursement and Indemnity – you have out laid funds and want to have them back * s71 of the Trustees Act - gives a trustee the right to reimburse himself for all expenses reasonably incurred in the execution of the trust duties and powers. * The trustee can make any payment directly out of trust property without having to go through the process of paying the amount themselves and then reimbursing themselves from trust property. * So if you look at most lawyers bills or accountant, the total is divided into reimbursement for money outlaid so for court fees. As you may expect section 71 says if you out lay funds as part of your role as trustee. So for example you have to register a transfer or organise a transfer be executed or in purchasing property you have to pay fees for registration, the trustee cannot be expected to take that burden of paying it or apply to the court under section 98. Section 71 gives the trustee the right to take that money, it even says that you have the right to take those fees directly out of the trust fund. * This is not the same as remuneration where you are charging for your services or time you don’t have the right to automatically take the funds out of the trust unless you are a professional. * s97 permits the Court to make an order directing that any costs and expenses relating to applications for orders under this Act and any conveyance or assignment arising from such be paid as the Court directs e.g. out of the trust. can always use this section to ask the court to for an order directing that they be paid accordingly * S108 permits a trustee to take any costs, expenses and charges associated with locating a beneficiary be taken out of the benefit that is to go to that beneficiary providing a contrary intention is not stated in the trust instrument.
Right to be Discharged –
What if you don’t want to be a trustee the best course of action is to disclaim before you become a trustee in the first place. We said if you accept the trust, which can happen if you start to act as a trustee, your only option is to retire - which is difficult. You have a right to discharge which may be in the trust instrument and if there is nothing look at section 9 of the act, but remember there are limitations * Providing no contrary intention is expressed in the trust instrument (s9(4)), * s9 permits a trustee to retire by declaring in writing that he wants to be discharged, providing at least two individuals or a trustee corporation remain as trustees (s9(1)).

Where there are two trustees and they are persons and one wants to retire that may be a problem , that’s why having a corporation as the second trustee is better because if the person trustee wants to retire they can. If you appointed two and now you have two remaining and one walks away, you will end up with one trustee, the only way you can get away with it is if that last person is a corporation. So if the sole trustee is a company it is not down to the whim of one person and the people controlling it will be accountable. Where there is one trustee and he wants to retire that is problematic because you can’t leave the trustee without a trustee. The only situation it won’t be problematic to retire is where there is 3 or more trustees.

* If the consent of the co-trustees and any person entitled to appoint trustees is obtained,then the retirement can take place without there being a new trustee appointed (s9(2)). However, the retiring trustee cannot be discharged until any conveyance required to vest the trust property solely in the remaining trustees is done (s9 (3)).

So if you are stuck as the sole remaining trustee or you are one of the two remaining natural persons as a trustee you may be permitted to retire without replacing yourself but you have to obtain consent of those other persons and even then you may not be discharged you may have to still fulfil those duties until the trust is out of your name and in someone else’s name. You will be labouring under those obligations until the property is no longer yours.

Right to Pay Trust Fund into Court * A trustee who has possession or control of money or securities can pay them into Court for the Court to deal with (s99(1)). * This can be done by a majority of the trustees by way of a court order, without the consent of the other trustees (s99(3)). * When the amount is paid into Court, the trustees will be given a certificate, and that will discharge them of their duties in re the sum paid (s99(2)). * If for instance you are not happy with the way the trust is run, you don’t want to retire, cant or you can see problems arising before you are able to be discharges you might be able to get wit the majority and say we are not happy for this to happen we want the money to be payed into court and protected accordingly. We don’t want money to be lost and be blamed.
Right to Assistance and Protection of Court – important one to remember. * Any trustee can apply to Court for directions concerning - s92(1) * the management or administration of trust property * or with respect to the exercise of any power or discretion vested in the trustee, whether granted by the instrument or by statute. * If you are unsure and the trustees act doesn’t tell you , go to court and ask for directions. So if for instance it might be a simple matter, so you want to make an investment and you don’t know whether it is authorised. Or you want to advance money to one of the beneficiaries for their advancement and you are concerned other beneficiaries may claim that that was an unacceptable use of your power , if you are unsure whether doing it or not doing it be a breach of you rduty , or you are unsure about whether something is within your powers you can go to court and ask for a declarations directing you about what you can and cant do under section 92. If you follow those directions, there can be no claim saying you did the wrong thing or acted in breach.
Rights of Beneficiaries
There will be repoirition, a lot of the beneficiaries rights correspond to the trustees duties. So what ever the trustees have a right to do the beneficiaries have the right to compel them to do. And where the trustee has breached their powers they have breached the rights of the beneficiaries.
The right to possession of the trust property * Where the trustee has no active duties to perform in managing the trust property, the beneficiary may insist on being given possession of the trust property (and the title deeds) Without actually terminating the trust – Turner v Noyes (1903) 20 WN (NSW) 266. We aren’t talking about shares, money. We are talking about a farm or a house or a painting and the trustee has no active duties, they are simply the owner of the property, but in equity the owners are the beneficiaries. In that situation it is acceptable for the beneficiaries to say while keeping the trust on foot I would like to live on the farm or in that house or have the art work in my house. Because in eyes of equity it is theirs and they have that right. * As only the possession (and not ownership) of the trust property is passed, the trust remains on foot. * Even if the trustee has active duties to perform in managing the property, the beneficiary may still apply to the court for an order allowing them to take possession of the trust property – Jenkins v Milford (1820) 37 ER 508. * So let’s say the trustee is obligated to rent the investment house and pay the money to the beneficiary. It may be that the house is in another state or jurisdiction so you wouldn’t think about the beneficiary living there but the beneficiary wants to live there and says don’t pay me the income I want to live in it instead. The trustee says no I can’t, I have active duties and I do not allow you to live in it. I don’t want to breach my obligations. The beneficiary can go to the court and seek an order which gives them the right to live in that property and later on there can be no breach by the trustee in allowing the beneficiary to live there.
The right to compel performance of the trust – broader right * Any beneficiary may sue to compel a trustee to do his duty and / or to protect the trust property – Bartlett v Bartlett (1845) 67 ER 800. * The beneficiary may sue either in his own name or using that of the trustee (or a receiver appointed to act in his stead). * If the suit is in the equitable jurisdiction and there are exceptional circumstances, then the beneficiary may sue in his own name - Ramage v Waclaw (1988) 12 NSWLR 84. – don’t worry too much about that. What it means is if you are suing in an equitable jurisdiction so for breach of trust for instance and you are in the equitable jurisdiction the beneficiary has standing to sue if you are suing in a common law jurisdiction and you are suing for breach of contract you may have to use a trustee or receivers name. * If the suit is a common law action or the circumstances are not exceptional, then the appropriate course of action is to bring a suit against the trustee to compel performance of his duty; and * apply: * for the appointment of a receiver; and * To bring the proposed action in the trustee’s name or that of the receiver.
For the purposes of the exam all we need to know is whether they bring the action in their name, another trustee or a receiver a beneficiary can sue to compel the performance of trust duties and proper performance of trust powers.
To restrain a breach of trust * If the trustee is about to breach of trust, then the beneficiary may apply for an interlocutory injunction. Let’s say the trustee is about to sell the trust property, and the deed prohibits that or they are about to sell it to their spouse – breach of fiduciary obligations because of a conflict of interest. In that situation a beneficiary can sue to obtain an interlocutory prohibitory injunction. The court will weigh up the balance of convenience. When getting an injunction before trial you have to prove that irremediable or irreversible damage will be caused if the injunction isn’t granted. Along with proving the balance of convenience you have to prove that the harm or damage which can’t be compensated by money may occur – however this is an exception. * Normally an applicant must prove that irremediable harm will be suffered if the injunction is not granted. * However, as the application is in equity’s exclusive jurisdiction, this requirement does not apply. You still have to convince the court that there is a reasonable argument made and otherwise show that the balance of convenience is in your favour.
The right to approach the court for determination of questions of construction and administration * Beneficiary has standing to apply for a declaration in relation to interpretation of the trust instrument. * However, this will not be granted in relation to matters in dispute between the beneficiaries or the beneficiaries and the trustees. If you are unclear as to what the trust instrument says you can go to the court and seek a declaration as to the meaning and you will not be turned away as having no standing. But if in fact you are in dispute with a trustee or a beneficiary you can’t use this as a short cut. Rather than go through the normal process of litigation. * s94 (1) Trustees Act 1962 provides that any person with an interest (vested or contingent – remainder man people where the beneficiaries are x, y and z for life and then a, b and c or the trust is for bill unless he doesn’t graduate from high school) in trust property or is, upon reasonable grounds, aggrieved by the actions of a trustee may apply to the court for a review of the trustee’s act, omission, decision etc. * the remainder person carger v paul – the husband who was also an executor exercisesd his disdretion to convert his interest to an absolute interest and depreived the remainder person - that person could have used this section to ask a review.
The right to approach the court for determination of questions of construction and administration, either with or without a decree for general administration * A beneficiary is entitled to apply to the court of Equity to have the trust administered by the court (Re Blake (1885) 29 Ch D 913). This is called an order for general administration. * The question is, is such an order actually necessary to the determination of the issues between the parties. * After such an order, the trustees powers are suspended and he requires the court’s supervision in order to act. * So if you are concerned that the trustee is about to do something that will permanently affect your interests or diminish them, and you do not trust the trustee to act or trust them to comply with an injunction, and remebver once the property goes to a bonafide purchaser for value with out notice it may not be retrived. If the action to replace the trustee or seek an injunction is too long or too risky you can go to the court and ask the court to administer the property atleast until new trustees are appointed. The trsutees powers in that circumstance are suspended.
The right to inspect trust documents * Beneficiaries are entitled to have all the records of the trust (and other information that the trustee has in relation to the trust property) furnished by the trustee promptly and readily. * O’Rourke v Darbyshire [1920] AC 581; Manning v FCT (1928) 40 CLR 506. * These records are not part of the trust property. * Nevertheless the beneficiaries are considered to have a proprietary right to them and are entitled to take possession of them. so if the trustee says no you cannot take this to the accountant you can look at it but then I want it back. As a beneficiary you can argue that you have sufficient interest that you can take it to your accountant or make copies. * While those rights are not limited to beneficiaries of a fixed trust. This right is held even by beneficiaries in a discretionary trust. * However, beneficiaries in a large discretionary trust (ie with many beneficiaries) will not have the same rights to disclosure as are held by the beneficiaries of a fixed trust or those under a discretionary trust with few beneficiaries - see Hartigan Nominees v Rydge (1922) 29 NSWLR 405). * Where there a lots of beneficiaries it won’t be practicable for any one of those to take the documents to their lawyer, they obviously won’t have the same rights. * So the trustees obligation is to keep track of the accounts and the beneficiaries have the right to inspect the documents, borrow them and make copies of them
To follow or trace trust property (in certain circumstances); and to terminate the trust and call for the corpus. * Also the difference between tracing and following
So your trustee gives the property to their spouse or their sister and you say that is a breach of trust and you want it back again, you don’t have to sue the trustee for compensation. If the new-owner (TP) was not a bona fide purchaser for value without notice, So they were a volunteer or they knew and didn’t take it in good faith, you can follow the property and get it back. Tracing doesn’t mean that, it means you trace the conversions of the property so let’s say it’s sold by the trustee to his brother for 1 million dollars. That is a breach of trust and the brother knows about the breach of trust, you can choose to follow it and take it back from the property or you can trace the funds, and say you have invested that 1 million and it is 3 million , I want that now. If he has bought other land with the money from the shares you can trace the sale proceeds out of his bank account to the shares and out of the shares to the land and say that was purchased with the money form the trust fund.
We will talk about tracing in a mixed fund at the end of this lecture * Unless a contrary intention is clearly and explicitly expressed, a beneficiary who is: * absolutely entitled (ie fixed trust, vested interest ie no contingencies or re-conditions outstanding) to an aliquot share of the trust property; and * of age and legally competent * may insist that the trustee conveys the legal ownership of the trust property into his name. * This will terminate the trust. This is the rule in Saunders v Vautier (1841) 41 ER 482.
My dad settled property on trust for me to my mum when I was a child. Upon attaining 18, I could say to my mother that property that you hodl on trsut for me and for me alone is in equity mine, thanks but no thanks I would like you to transfer the property in my name. she is obliged to have it transferred into my name
So let’s say dad settled on mum a block of land on trust for me and my 2 sisters in equal 1/3 shares. The law is my sisters and I can say we are no of age and all of capacity, and say we would like you to execute the transfer in our names as tenants in common with equal 1/3 shares. If my two sisters are happy for the trust to continue but I am not. So long as it is fixed trust and we each have specified shares I can go to the trustee and say I am of age and capacity and I want my 1/3 share transferred to me. My mother would be obligates under saunders v vautier to execute a transfer of 1/3 to me and she holds 2/3 on hold for my sisters.
Saunders v Vautier (1841) 49 ER 292 * The settlor of a testamentary trust left stock upon trust for Daniel Vautier. * Under the terms of the trust, the trust fund was to be paid to Vautier upon his attaining the age of 25. * At age 21, Vautier directed the trustee to pay over the fund to him. The trustee said no because it said that he had to wait till 25. * The court held that notwithstanding that the testator had preferred him to wait until 25, as Vautier was the only beneficiary of a fixed trust and therefore the absolute beneficial owner of the trust property, he was entitled to insist upon payment as soon as he was legally competent to validly discharge the trustee i.e. full age and legal capacity. * The fact that the trust had said pay him when he is 25 did not mean he couldn’t have the trust property earlier. * This principle also applies to fixed trusts, where there is more than one beneficiary who are sui juris(have the legal capacity) and absolutely entitled. * In such a case, the bens may unanimously agree to call for the trust property and terminate the trust. * It may even be exercised individually by one beneficiary of several, so long as he or she has been allocated an aliquot share - Quinton v Procter [1998] 4 VR 469. – where it is a fixed trust and they have a specified share that they can ask for.

* It may even apply to a discretionary trust - Sir Moses Montefiore Jewish Home v Howell and Co [1984] 2 NSWLR 406 – not binding however * Court held that at least where the class of objects is closed and all of the income of the fund must be paid each year to one or more of them. so lets say a typical family trsut , those individuals should be considered to be able to call for the corpus aswell. So lets say my father had left the property to my mother on trust for me and my 2 sisters with the direction she incvest the property and distribute all fo the income every year to us in what ever share sshe deemed fit that it is permissible for the three of us to agree that we get equal shares and ask mum to transfer it into their names. If that is the case it goes against the main justification for the rule which is the beneficiary is the owner of the property – in a fixed trust that is true but in a discretionary trust there is no actual property it is more an expectancy. This case is saying although no individual has property but if all of them come together and agree to distribute it against them we can see all of them acting together in concert do have an interest in property and can ask the trustee to distribute the property as they see fit. Although no individual has equitable ownership all of them acting in concert do. * However, both Meagher and Gummow (2316) and DP and C say (at 772) that the requirement that all bens be of full age and capacity together with the difficulty of attaining a unanimous decision, means that this rarely occurs in discretionary trusts. If you don’t want saunders v vautier to apply is to make the discretionary trust included amongst the beneficiaries to a charitable organisation. In that case you wont get a unanimous decision between the beneficiaies and that is the way that you avoid sanders v vautier being used. But if it is a fixed trust you can’t. * Saunders v Vautier * However, the ben must be absolutely and indefeasibly entitled to the trust property - Comptroller of Stamp Duty (Vic) v Howard-Smith (1936) 54 CLR 614. * There is no doubt that this rule can lead to the intentions of the settlor being frustrated. * For instance, if all of the bens agree, then even a protective trust may be terminated in this manner – Re Smith [1950] Ch 915; Re Coppel [1950] VLR 328. * Saunders v Vautier * According to DP &C (772), the basis for the rule in SvV is ‘threefold: * … equity treated a voluntary trust as equivalent to a common law gift; * … equity regarded the trustees as holding the balance between the differing interests of the beneficiaries, so that if the bens desired to terminate the trust, the rationale for the trustees’ existence disappeared; and * beneficiaries who are absolutely entitled are entitled to enjoy the property in any way desired.’ * However, as a matter of practicality, the settlor can prevent the beneficiaries from terminating the trust by naming a general charitable purpose as a discretionary object of the trust. * In order for this rule to apply, the trust property must be inherently divisible. * This may be a problem eg with land.
Termination of the Trust
1. Termination by Revocation * Occasionally there will be a power of revocation given to the settlor, the trustees or a third party in the trust instrument. * Unless this right is provided for in the instrument, the creation of the trust is irrevocable (Mallott v Wilson).
2. Termination by Beneficiaries Pursuant to saunders v vaundier – which we looked at above.
3. Termination by the Court * The Court has an inherent jurisdiction to terminate a trust in whole or in part. * The Family Court is also given jurisdiction to set aside family trusts by the Family Law Act 1975 (Cth). – as we saw last week when we looked at trusts that were set up to avoiud family court orders. They have the power to set them aside and terminate them. * s85 and s85A of the Family Law Act 1975 (Cth).
4. Termination by Distribution of Trust Property * The trust will be at an end when the trustees distribute all of the trust property to the beneficiaries. * This can occur either on the happening of a particular event (under a fixed trust) or due to the exercise of discretion by the trustees (under a discretionary trust). most trusts will have a distribution date. Must be 80 years or less and no longer a life in being and 21 years. * Before making final distribution, the trustees is required to settle all outstanding claims against the trust. To ensure that this requirement is met, s63 Trustees Act requires the trustees to publish a notice specifying a period in which claims against the trust are to be made. * What you don’t want is a situation where property settle don a trustee company, in order to avoid creditors the trustee distributes the trust property and pays it out , leaving debts outstanding. The creditors then are left to sue nothing. The beneficiaries will say we have nothing do with it. The trustee will be sued but no longer has any property.
Breach of Trust
What is it? * A breach of trust occurs when a trustee acts in contravention of duties that are imposed on him by the trust (including the duty not to exceed his powers). * So …a breach of trust consists of nothing more nor less than an act by the trustee: * In contravention of the duties imposed by the trust; or * exceeding powers granted. – where the trustee for example does not have the power to sell the property and purchase shares. Re Spedding (decd) [1966] NZLR 447 at 463-464.
These breaches can either be: * passive (where the trustee fails to act) or * active (where the trustee acts intentionally, negligently or dishonestly). * A trustee who acts is breach of trust is generally personally liable for the breach.
A trustee who acts in breach of trust can be sued by: * a beneficiary, * a co-trustees or * a replacement trustee (that is, a trustee who replaces the trustee who is alleged to have been in breach).
Remedies for Breach of Trust 1. Injunction * A beneficiary who anticipates a breach of trust may seek an injunction to prevent the breach from occurring or being repeated. May seek an interlocutory injunction right now or a final injunction. * This injunction may be: * mandatory (to force the trustee to properly perform his duties) or * Prohibitory (to prevent a trustee from acting in breach of her duties or beyond his powers). 2. Equitable Compensation
Where you have a breach which has caused loss and the beneficiary wants to be compensated. The law of mitigation etc doesn’t apply – we don’t use the law that pertains to common law damages * In determining the amount that is to be given to a beneficiary, the over-riding principle is that of compensation. * There is no power to punish the trustee. * Example - Re Dawson: - restorative in nature * There was a breach of trust. However, there was a fluctuation in the exchange rates between the time of the breach and the time that the action was decided, leading to an increase in the amount of required to compensate the trust fund. So lets say the trust property was in euros – 1 million and the trustee improperly diverted the funds and was required to pay equitable contribution and at the time there was parity between the euro and the dollar. Since the time of the breach and now the euro took off and it will now be more Australian dollars. Because the nature of equitable compensation is restorative. So it is about giving you the monetary equivalent of that property. You either give the beneficiaries 1 million euro or the Australian equivalent. So there is a difference between equitable compensation and common law damages. * The Court held that the date at which the damage is assessed is the date of judgment. * The trustee must place the trust in exactly the same position as if the breach had not occurred. * Interest is generally also awarded on any amount that is to be paid.
Account of Profits * This will normally be requested when the profit that the trustee has made through the breach in trust is more than the loss that the trust has suffered. Expert certifies the profit made and the trustee is authorized to pay to the beneficiaries the amount of improper profits that’s has been certified. Used where there hasn’t been a loss or the account of profits is greater than the loss. * This is an alternate remedy to equitable compensation.
Tracing
* Tracing * ‘Tracing is a doctrine whereby … the owner of property is treated as being the owner of anything into which that property has been converted.’ Meagher and Gummow, Jacobs’ Law of Trusts in Australia, 6th Edn, 736. * Tracing enables trust property to be followed through different owners and changes in the form of the trust property (for example, if property is sold, the money can be traced). * It is normally used as a remedy when the trustee’s pockets are not deep enough or if the compensation that can be obtained is insufficient. * In order to be able to “trace” an asset, it must be identifiable at all stages over which it is sought to be traced. If it is not identifiable the right to trace is lost. * So long as the trust funds / property remains identifiable, the trustee may follow it into the hands of third parties (not being bona fide purchasers for value without notice) and into property purchased with it. * In Equity, tracing permits a beneficiary to follow trust funds that have been mixed with other funds e.g. into a bank account in which the trust funds have been mixed with the trustee’s own funds. * If the trustee mixes the trust property with his own money, the rule in Clayton’s case does not apply and the trustee will be presumed to have withdrawn his own money first So you have a situation where the trustee has 100 in his bank account. He then takes the 100 out of his trust fund and puts it with his own 100 so now he has 200, he takes 1 out and fritters it away. The rule in clayton’s says the first money in, is the first money out. So until the ben spends 101 he has dipped into the trust funds. * If he has invested the first 100 and won, and the second 100 was at the pub. The rule in claytons would be bad because it would have been spent at the pub. Tracing does endeavor to figure out which money it was that was spent. This is highly artificial today. This claytons rule could work unfairly where the first money that the trustee took out was his own and frittered the rest. So equity developed other rules to assist. The first one was Re Hallets estate. – Re Hallett’s Estate (1880) 13 Ch D 696. Normally the rule in claytons is first in first out rule, equity provides in certain circumstances the rule wont apply. 100 of his own money then 100 of his trust and then 1oo of his own. He withdraws 200 and fritters it away. If we apply claytons – all the trust money is gone. Re hallet says no claytons case doesn’t apply. The trustee would be presumed to withdraw his own money first and the 100 left is the trust fund so that the beneficiaries can trace that money. * Re hallet can be problematic sometimes. What If the money taken out has been invested, and the money left has been frittered. So let’s say there was no money in the account at all. The trustee cleared it all out. He takes 100 of trust funds and he puts it in the account. He later puts 100 of his own money. He withdraws 100 and purchases shares and they double in value. He takes the remaining 100 and goes for a weekend down south and spends it at the winery. The effect of Hallets is he is presumed to have taken his own money out first. That would be unfortunate for the beneficiaries. So Oat way comes along. * Unless that money has been invested and the money that remains has been dissipated – Re Oat way [1903] 2 Ch 356; followed in Scott v Scott (1963) 109 CLR 649 AT 664. Where the money has been mixed and he dissipates the trust money and used his to invest – it will be assumed that the money invested is trust funds. * The courts have gone far to assist beneficiaries to get their money out. But there is only so much they can do as the following case shows.
James Roscoe (Bolton) v Winder: * The beneficiary may trace into a mixed fund only to the extent of the lowest balance maintained since the date of the mixing. – if it is clear that at some point trust funds have to have been dissipated because the account balance fell below the total amount of trust funds put in there. You can’t top it up and take more money from subsequent money deposited in the account. Lets say the trustee has 100 in bank account. He then puts in 100 of trust funds, he takes out 150 and blows the lot, the account balance falls to 50. Subsequently he is given some money and puts it in the bank account so lets say 200. So now the balance is 250. The beneficiary sues, it is clear the 100 was taken out of the trust , you can follow it in the trust account. You can say that the first money he took was his own – using re hallet. But at the end of the day when he took out 150 anyway you look at it, 50 of trust funds has been taken out and dissipated. The fact that he later put his own money in there to a greater amount, doesn’t enable the beneficiaries to say I want that 100 back. They can sue for equitable compensation and he might have to pay that out of his own money. But we are talking about the process of tracing, we can trace the money into that account, but not out because there is only 50 in the account. If he purchases shares with that 50 we can trace into that using oatway but we cannot trace beyond 50. * The trustee has 100 * The defendant was trustee for a certain sum of money, which he deposited into his account. * He used the money from that account for his own ends, and at one stage the account fell to a particular value “x”. * From that time he paid in money of his own and paid his expenses from the account. * At the time of his death, the account balance was “y”, a much greater sum than “x”, but still less than the trust amount. * The Court held that the only amount that could be traced was “x”. * If the account balance is gone to 0 or to overdraft you can no longer trace
Re Tilley’s Will Trust: * The beneficiary may not trace funds that have been paid to a bank to repay an overdraft. * So let’s say the trustee takes the your 100 and puts it into his bank account but at the time he had an overdraft of 500 not a zero balance, so now he is in overdraft 400. You have lost your money. Because what we have said is money in the bank is a debt so when you have a debit balance and you put 1000 in a bank account what you are actually doing is lending the bank the 1000 and you now have a debt. When you go into overdraft the bank is lending you money. So if your trustees bank account is 500 in overdraft he owes the bank, when he repays it with your money he is lending it to the bank. * These have passed to bona fide purchaser for value. * A testator appointed his wife as one of his executors, and she also held a life interest in his estate, with the remainder held by his two children equally. * On his death, she paid the expenses of the estate, about £500 out of her own funds, and was eventually left with a bit over £2000. * This amount was, over the years, confused with her own money. * At some time she purchased a property from the account, over which there was an overdraft. * She died, as did one of the beneficiaries, and the beneficiaries estate made a claim over property that had been purchased from the fund. * The Court held that the trust money had only been used to reduce the overdraft, and therefore were not used to purchase the property. * Therefore, the property could not be traced, and the beneficiary’s estate was only entitled to half of the bit over £2000.
Options
Where property is purchased with trust funds you can: * Re Halletts said that where property is purchased solely with trust funds, then the beneficiary has a choice – take the property or assert a charge over the property for the full amount of the funds. * So my trustee has used 20,000 of trust funds to purchase a car and hasn’t put any money of his own in the car, I can say I want a lien over the car , or I will have the car thank you very much. * This charge = a fixed amount. It is not a percentage of the value of the asset. Re Hallet * If the property has increased in value, the former is the better option. So if you have the car, it is not going to be the better option because it is a depreciating asset. But if you are looking at land it will be better to take the land rather than the charge. If the amount of the asset is gone down, doesn’t lose your chance to sue the problem is if the value of the property is fallen it may not be enough to cover what is owed to you and what you can do is sue the trustee for equitable compensation. So you still owe me this much… so they may have to dip in to other property to pay you the equitable compensation but so far as tracing is concerned your charge doesn’t go up in property. * The latter is more attractive, if the property has decreased in value. The beneficiary can take all the sale proceeds, but does not have to be satisfied with that. He can still sue for the rest. * In Halletts, the court said that if the property was purchased with a mixed fund, then a charge was the only option. cannot take the property itself. * BUT in Scott v Scott the court said that: * so long as the property is specifically severable, shares / livestock, so not land, then the beneficiary may elect to assert absolute ownership of that proportion of the property as corresponds to the proportion of the purchase price represented by the trust funds. * Lets say he has taken 100,000 out of trust and the same amount of his own money and purchased 200,000 worth of shares at 1$, according to Re Hallet you can only seek a charge, so even if the shares have gone up you still only have a charge for 100,000 in Scott v Scott they say they are severable. So you own 100,000 and if they have tripled in value good luck for you. * IN OBITER IT HAS BEEN SAID - Even if the property is not severable, the beneficiary may claim a proportionate interest in the property purchased. Even if the trustee were to use the money to purchase a block of land worth 200,000 which is now 600,000 you can say you purchased that property 50% with trust funds therefor I claim equitable ownership of 50% of that land. * So there is choice! If the property has decreased in value, then the charge would be the better option.
Scott v Scott: * Where property is purchased with mixed fund, the trust funds may be the traced into property purchased with those funds and will give the beneficiary an interest in the property (a lien) proportionate to the percentage of trust funds used in the purchase. This interest will increase in value as the value of the property increases * The trustee used a combination of trust funds and his own funds to purchase a property. * He eventually repaid the trust the amount he had taken. * The Court held that the estate over which he was trustee was entitled to a share in amount by which the property had increased in value. * Where funds are mixed with those of other beneficiaries … * Where a trustee has mixed the funds of different beneficiaries. * Clayton’s case applies. * Trustee will be resumed to w’draw her own funds first. * However, after that she will be presumed to have w’drawn funds in the order that she deposited them. First in first out! Re Stenning [1895] 2 Ch 433. * Other Remedies * Removal; - of the trustee * Apply to inspect the trust documents or an account; * Call in his or her share – Manfred v Maddrell (1950) 51 SR (NSW) 95. * Seek a declaration as to whether particular conduct is a breach of trust; * Setting aside the transaction; ask court to set aside * Appointment of a receiver; particularly at an interlocutory basis * ask for an order for the trustee to Forfeiture of remuneration; * Loss of Indemnity.
Third Party Liability – applies to breach of trust * If a third party has received trust property and is a volunteer, then it may be possible to recover the property from that person. In Re Diplock executors mistakenly distributed money to 139 charities. * The residuary beneficiaries were able to recover the money from the charities when the trustees did not have deep enough pockets. * In Western Australia, s65 of the Trustees Act says that this applies to trusts as well as to estates. You can actually get compensation from third parties who have taken property when it wasn’t theirs. Re diplock – the trustee complying with a trust he thought distributed all the trust funds to various charities only to find when the members of th etestaotrs family sued that the trust was invalid and he shouldn’t have distributed the funds, there should have been a resulting trust and he should have held the trust for the residuary beneficiaries. The trustee was so distraught that he commited suicide. It is possible to pbtain your trust property back and recover from innocent volunteers who have taken trust property because they are not bonafide purchasers. * However, s65(7) states that the volunteer must be pursued before any action is commenced against the trustee, otherwise the right is lost. * s65(8) provides a statutory defence for the volunteer if he has changed his position. So if the volunteer says sorry we built a hisputal with that money you cannot get your funds back. So you try and get the funds back from the volunteer you can recover against the trustee. Same with if you could only get some of, you get that and sue the trustee for the rest
Defences for Breach of Trust
Informed consent of beneficiaries * If all of the beneficiaries, being of full age and capacity authorise a trustee to act in breach of trust, they will not be able to later pursue the trustee for breach of trust. – full disclosure of what the trustee is going to do and they have authorized that then it will not be a breach of trust. * s76 of the Trustees Act allows the Court to make any orders it thinks are just for impounding part of a beneficiary’s interest to indemnify a trustee who has acted with the written consent of that beneficiary
Acquiescence
* A beneficiary can acquiesce to a past breach of trust providing they have been given full details of the breach. * Even if the trustee doesn’t come to you and say this is what I want to do, if he breaches trust then tells you about it and you say whatever I don’t care you can’t subsequently sue on that breach
Delay
* An inordinate delay in bringing the action for breach of trust may result in a Court exercising its discretion not to give a remedy. * Secondly, the statute of limitations might prevent an action being taken. * In WA, the time limit is 6 years for an “innocent” breach of trust but is unlimited in the case of fraudulent breaches of trust (s47 Limitation Act). So essentially once you discover there has been a breach you should bring your acting as soon as possible because if it is innocent you lose the action in 6 years. if it wasn’t innocent the court may find it to be unreasonable at a certain time. * A longer time period (12 years) is allowed to recover land in WA (s4 Limitation Act).
Trust Instrument * Both complete defenses and limits on liability can be provided by the trust instrument, but they are interpreted strictly by the courts. There is also case authority to suggest that it will not save a trustee who is in positive breach of a duty (Seton v Dawson).
Statutory Power of Court to Excuse Breach * The Court has a power to exclude a trustee from liability or limit a trustee’s liability under s75 if the trustee has acted honestly and reasonably and ought fairly be excused from both the breach of trust and of failing to seek directions from the Court.