LAW5010 – TRUSTS EXAM NOTES
TABLE OF CONTENTS
EXAM ANSWER STRUCTURE ... 2
CREATION OF TRUSTS ... 5
THREE CERTAINTIES ... 5
QUISTCLOSE TRUST ... 27
CHARITABLE TRUSTS ... 32
STATUTORY FORMALITIES OF CREATING A TRUST... 41
CONSTITUTION OF TRUSTS (FOR TRUSTS BY TRANSFER) ... 47
POWERS & DUTIES OF TRUSTEES ... 56
TRUSTEE DUTIES - CUSTODIAL DUTIES ... 57
TRUSTEE DUTIES - FIDUCIARY DUTIES ... 59
TRUSTEE DUTIES - ONGOING MANAGEMENT DUTIES ... 62
TRUSTEE DUTIES - INVESTMENT DUTIES ... 77
DEFENCES - INVESTMENT DUTIES ... 84
GENERAL DEFENCES ... 84
RIGHTS OF TRUSTEES ... 88
RIGHT TO INDEMNIFICATION ... 88
RIGHT TO APPROACH THE COURT FOR DIRECTIONS ... 94
RIGHTS OF BENEFICIARIES ... 96
RIGHT TO GIVE CONSENT ... 96
RIGHT TO CALL (GET) TRUST PROPERTY ... 96
RIGHT TO REMOVE A TRUSTEE ... 99
RIGHT TO SEEK REMEDIES FOR BREACH OF TRUST – PERSONAL REMEDIES ... 102
RIGHT TO SEEK REMEDIES FOR BREACH OF TRUST – PROPRIETARY REMEDIES ... 105
Duty to act personally / duty to not delegate– managerial duty
• Trustees must act personally and cannot delegate their decision-making powers. Most modern trust instruments contain an express power to delegate. N.B. Delegation is different from appointing an agent (we will return to this).
• The duty to act personally has several overlapping aspects to it:
▪ Trustee cannot delegate their power
▪ Trustee cannot act under dictation
▪ Trustee cannot fetter their discretion
▪ Trustee must act unanimously Step 1 –
Introduction
• TEST: Trustee must act and turn their mind to the decision personally
Step 2 – Duty to not delegate
• TEST: At equity, [trustee] is required to act personally and is not able to delegate his powers and discretions without express authority.
• Not even to co-trustees (Re Mulligan) ANALOGISE/DISTINGUISH
• Mulligan: A life interest beneficiary/trustee was making all the important calls because the trustee company (other trustee) thought she was well informed. HELD:
acting under dictation/delegating to Mrs Mulligan Step 3 – Duty
not to act under dictation
• Trustee cannot blindly follow order from another (Mulligan - even to co-trustees;
Brockbank – even from other beneficiaries).
ANALOGISE/DISTINGUISH
• Mulligan: A life interest beneficiary/trustee was making all the important calls because the trustee company (other trustee) thought she was well informed. HELD:
acting under dictation/delegating to Mrs Mulligan
• Brockbank: Bs want to appoint a professional T and wants current T to use power to appoint a co-trustee. Current T disagrees. HELD: Beneficiaries cannot dictate how T uses his power. Where the beneficiaries tried to dictate who a new trustee should be.
Step 4 – Duty to not fetter discretion
• TEST: Trustee cannot fetter their decision (e.g. by pre-determination of future distributions (Re Vestey’s Settlement)
▪ “Equity’s rule is that a fiduciary cannot effectively bind himself as to the manner in which he will exercise a discretion in the future. He cannot by some antecedent resolution, or by contract with … a third party – or a beneficiary – impose a “fetter” on his discretions” (Finkelstein J in Fitzwood Pty Lt v Unique Goal Pty Ltd)
ANALOGISE/DISTINGUISH
• Re Vestey’s Settlement – trustees set out to do distribute allocation of income by a
‘framework’. HELD: The framework pre-determination of discretionary distributions was void as it was an attempt to bind the trustees at the future time when the discretion should be exercised
Step 5 – Duty to act unanimously
• TEST: Where the trust has multiple trustees, they are under an implicit duty to act unanimously (Cowan v Scargill).
• If trustees cannot agree, go to court for directions (Cowan).
• N/B: Where one trustee commits a breach of trust, the rest will also be personally liable unless otherwise excused by the court or able to invoke the wilful default provision (see defences).
Step 6 – Consider exceptions
Delegation is allowed where:
1. Permitted by trust instrument
• The delegation is specifically permitted by the trust instrument (together with s 2(3) of the Trustee Act);
2. Permitted by statute (e.g. holiday provision)
• The delegation is specifically permitted by statute (eg s 30(1) of the Trustee Act allowing delegation when the trustee is out of Victoria, usually to account for holidays); or
s 30 of the Trustee Act
• If the Trustee:
o has never resided in Victoria;
o or is absent from Victoria;
o is about to depart from Victoria
he may, by power of attorney delegate, to any person
(including a trustee company) the execution or exercise of all or any trusts, powers and discretions vested in him.
• This applies not only to situations where trustees leave temporarily but also so situations where the absence is permanent.
• There is no time limit on the delegation period.
• There is no limit on the number of times it can be delegated.
3. To do an administrative act
• TEST: A trustee may delegate any of their powers or duties (including the receipt and payment of money) to any person, including an administrative act (c.f. making a decision) by an agent (s 28 Trustee Act)
• → But the trustee is still obliged to ensure that they are choosing a suitable agent and they need to continue to supervise the agent.
• → The agent must also be employed in their normal course of work. For example, a trustee who employed a lawyer to collect rent, would be personally responsible as the lawyer is not acting in their ordinary work.
Agent vs. delegate:
• Look to see if trustee is making the decision and agent is implementing. If agent is making decisions, then this exception won’t be satisfied.
ANALOGISE/DISTINGUISH:
• Speight: Trustee employs sharebroker to purchase bonds.
Sharebroker defrauds trust. HELD: Reasonable for trustee to hire broker to invest as expert in field outside of trustee’s expertise.
4. Agency • TEST: A trustee may delegate any of their powers or duties (including the receipt and payment of money) to any person (s 28 Trustee Act)
• → trustee may need help to make a decision, they are entitled to get that advice. In fact, if they need advice, they may come under a duty to get the advice (otherwise may be in breach).
Liability – s 36 Trustees Act 1. Was it done in good faith?
• TEST: For [T] to not be liable for [AGENT]’s action, s/he must prove that they acted in good faith (s 28(1) Trustee Act) which requires sufficient care upon to ensure s/he is properly qualified and proper supervision by the trustee (Speight).
• Requirements:
o 1. Agent must be suitable
o 2. Trustee must supervise agent’s performance (Speight – T was deemed to have applied the requisite supervision)
2. Wilful default
• TEST: Under s 36 of the Trustee Act, the trustee is not
responsible for the acts of others, or any loss, unless it happens through the trustee’s own wilful default.
• Wilful default is defined as “conscious knowledge that they are not exercising their duties properly or recklessness as to whether they are executing their duties properly” (Dalrymple).
• Applies:
o Fraud/Breach by Co-Trustee o Fraud by Agent
• Requirements (Dalrymple):
o 1. [T] has conscious knowledge that they are not exercising their duties properly; OR
o 2. [T] is reckless as to whether they are exercising their duties properly.
CASES:
Name Facts/Issue Held
RE MULLIGAN [1998] 1 NZLR 481
→ no delegation (even to co- trustees)
• The testator died leaving his widow (Mrs Mulligan) a substantial legacy and a life interest in a farm with nephews and nieces as residual beneficiaries under his will.
• Mrs Mulligan was only entitled to the income; nieces and nephews only entitled to the capital
• The trustees of the estate were a trustee company and Mrs Mulligan.
• The farm was eventually sold and the money invested into fixed-interest securities until Mrs Mulligan died.
• From the time the farm was sold until Mrs Mulligan’s death, different officers of the trustee company tried to persuade her to invest in other types of property to counter inflation but she adamantly refused to agree.
• She also refused to let the trust company contact the beneficiaries directly.
▪ The trustee company was not acting personally – you could argue they were acting under dictation or that they were delegating to Mrs Mulligan.
▪ Justice Clifford noted that on entering the office each
individual trustee has a separate responsibility to ensure that the terms of trust are carried out.
▪ It is not open for one trustee to defer to the wishes of another trustee in the absence of proper reasons for doing so.
▪ Even more so when one trustee is a professional trust company, and the other trustee an individual affected by a plain conflict of interest arising from an
entitlement to the income of the trust during her lifetime.
RE BROCKBANK [1948] CH 206
• One of the two trustees of the Brockbank trust wanted to retire.
• The beneficiaries could not dictate the exercise of the trustee’s discretionary powers.
→ no acting under dictation (even of the beneficiaries)
• The beneficiaries wanted a professional trustee to replace him.
• The continuing trustee disagreed.
• The beneficiaries sought an order directing the continuing trustee’s consent to the appointment
• The beneficiaries either had to
‘put up’ with the trustee’s exercise of power or wind up the trust: i.e. they unanimously direct the trustee to transfer the trust property to them (Saunders v Vautier).
RE VESTEY‘S SETTLEMENT [1950] 2 All ER 891
→ no fettering of discretion (eg by predetermination of future
distributions)
• The trustees of a large discretionary trust made by Lord Vestey and his brother Sir Edmund Vestey exercised their discretion over the allocation of income with the apparent intention of income being accumulated during the minorities of a number of beneficiaries. They set out to do this by a sort of ‘framework’ resolution that income should ‘belong’ to the minor beneficiaries in specified shares, followed by further half-yearly resolutions to the effect that income was not required for the beneficiaries’ maintenance, and should therefore be accumulated under section 31 of the 1925 Act.
• The framework pre-
determination of discretionary distributions was void as it was an attempt to bind the trustees at the future time when the discretion should be exercised.
COWAN V SCARGILL [1985]
Ch 270
→ co-trustees must act unanimously
• Half the trustees of a miner’s pension trust were appointed by the miner’s union and the other half by employers.
The trustees were unable to unanimously agree on adoption of a proposed
investment plan.
• Co-trustees hold a single, joint, inseparable office, and must act unanimously (see also Beath v Kousal [2010] VSC 24 @ [18]-[19])
• In the absence of a provision in the trust deed for resolving deadlocks, the trustees should apply to the Court for directions as to the resolution of the deadlock
SPEIGHT V GAUNT (1883) 22 CH D 727
→ agency
• Gaunt was a trustee who was buying municipal bonds. The bonds were going to be bought on the stock exchange, so he instructed a stockbroker to buy the bonds.
• The trustee put the broker in funds and the broker ran away with the money.
• Speight was a beneficiary of the trust. He sued Gaunt for breach of trust.
• The issue was whether it was appropriate for the trustee to appoint the broker to assist in the purchase of the bonds on behalf of the trust.
• The trustee had not breached his duty.
• A trustee is not bound to do everything himself. A trustee is entitled to employ brokers and solicitors to do that which in the ordinary course of business other people would employ brokers and solicitors to do.
• In the ordinary course of
business, a business man may get the assistance of a broker to help him invest in securities, and it was reasonable for the trustee to hire the broker.
• But a trustee must supervise the agent and employ someone who is appropriate
• Lindley LJ noted if it was not appropriate, the trustee would be responsible for the
consequences.
• N.B: Case also important for standard of care.
DALRYMPLE V MELVILLE (1932) 32 SR (NSW) 596
→ agency
• Blackmore, a solicitor, and Melville were executors and trustees under a will. They decided to sell some of the trust’s shares to finance the payment of legacies.
Melville signed transfer of shares in blank and gave them to Blackmore to arrange the sale, even though he understood that this was risky.
• Blackmore sold the shares,
misappropriated the proceeds, and absconded. The beneficiaries sued Melville for breach of trust.
• Melville was liable to compensate the trust for the value of the shares. He had acted in wilful default and was therefore held to be responsible. [Accounting on a wilful default basis to be covered under remedies; also see s 36 of the Trustee Act @ slide 43]
