Investment of Trust Funds Varying and Terminating the Trust PDF

9/11/24 Express Trusts: Investment, Variation and Termination LAWS2500/8010 DR MICHAEL NANCARROW 1 Trustee’s Power of Investment OFFICE | FACULT...

9/11/24 Express Trusts: Investment, Variation and Termination LAWS2500/8010 DR MICHAEL NANCARROW 1 Trustee’s Power of Investment OFFICE | FACULTY | DEPARTMENT 2 2 1  9/11/24 The trustee is appointed as essentially the manager of the trust property. Yes, they're a legal owner but that is for the bene t of the bene ciaries. Investment of Trust Funds Since 19th c, trustees have had a duty to invest trust funds, and not just keep them safe Must invest within 6 months or less, and actively manage investments Invariably, the trust deed gives powers of investment – see discretionary family trust on iLearn. But if trust deed does not, in the past, trustees could only invest in conservative assets e.g. government bonds. Now, modern portfolio theory = don’t put all eggs in one basket. Diversification in investment can be achieved by investing in indexed funds which have a wide range of shares This theory has been adopted by trustee legislation, including NSW OFFICE | FACULTY | DEPARTMENT 3 3 Very often clients want the solicitor to undertake this role, particularly in a testamentary type of situation. Trustee Act 1925 (NSW), Div 2 First, check the trust deed – Trustee Act 1925 (NSW) this applies first and foremost Power to invest, s14 and will override the legislative Difficult for prof and non-prof Duties in respect of investm ent: s14A – powers to the extent of prof and non-prof standard trustees to act unanimously if inconsistency e.g. if it says, different standard. Prof ‘blue chip shares only’, it does standard should apply: Bryan. not matter that Trustee Act says otherwise. Review individually and as a 3. Duty to review at least whole, and each time annually: s14A(4), but may investment made (although need to be more latter is not legislated in NSW). OFFICE | FACULTY | DEPARTMENT 4 4 2  9/11/24 Other duties from law and equity means in the best nancial interests for the bene ciaries Existing equitable Duty to act in best principles are preserved interests of beneficiaries if not inconsistent with = financial interest, legislation (s14B). unless modified by deed OFFICE | FACULTY | DEPARTMENT 5 5 What's interesting about this particular period of history is that it was a tumultuous period and a UK government that was trying to drive forward a conservative agenda but there was a Union and there was a major strike in the UK concerning Mining operations. They went on strike. Other duties from law and equity COWAN V SCARGILL CH 270 SB 18.5A McGarry "...we must identify particularly with their Facts: nancial interests in their capacity as bene ciaries." Mineworkers’ pension scheme. 5 trustees from National Coal Board and 5 trustees from National Union of Mineworkers. Mineworker trustees blocked investment in South Africa (opposing apartheid) and energy other than coal. Held: Union appointed trustees would be in breach of duty if they refused to adopt the investment strategy. Definition of the best interests of members must be identified specifically with their financial interests in their capacity as beneficiaries Cf modern ethical investment – environment and social issues OFFICE | FACULTY | DEPARTMENT 6 6 It gave rise to a situation that involved the Miner Workers Pension scheme which had been set up with trustees that represented the national coal board (gov regulator) and trustees from the National Union of Mineworkers (NUM) who were trying to exercise their power to block investments in di erent ways. Arguing that it was unethical to support mining investments in South Africa (under apartheid at that time). They were saying that they didn't want to support 3 businesses that were wrapped up in apartheid at that time.  The second point NUM argued was that even in 1985 coal was not the only fossil 9/11/24 fuel that was used for energy. Di erent sources of natural resources were used e.g. coal and oil. But what was going on was that the Coal Miners Pension scheme was making investments in companies that had oil interests (which was taking away miner's jobs and prospects for future employment). The Court was not impressed with these sorts of arguments. Other duties from law and equity cont. Duty to invest in non-speculative investments s14B(2)(b) = a duty to invest trust funds in investments that are not speculative or hazardous But modern portfolio theory would allow theses as part of a diversified portfolio Bryan suggests some investments are so hazardous they would not be allowed e.g. cryptocurrency, lottery tickets Duty to act impartially between beneficiaries This applies generally but has specific relevance to investment and duty to be impartial between classes of beneficiaries. Some investment might favour income beneficiaries and some favour capital beneficiaries. Re Mulligan: trustees completely failed to consider capital beneficiaries = breach Duty to take advice on investment when necessary – will depend on trust and trustee OFFICE | FACULTY | DEPARTMENT 7 7 Brian has suggested that some investments are so hazardous that they shouldn't be invested in at all e.g. cryptocurrency Matters to be considered when investing Matters to be considered by trustee when investing: s14C These can be expressly excluded by the trust instrument: s14C(3), but if not, trustee must comply with them. Not all will be appropriate for all trusts. Consult beneficiaries about their needs and circumstances? Maybe. Diversification? Generally necessary, but not always e.g. farming trust OFFICE | FACULTY | DEPARTMENT 8 8 4  9/11/24 This means that it's not just about being mindful about the investment itself but also about anything we've been told by our client concerning the investment strategy. Exculpatory provisions INVESTMENT There are general principles of equity that may allow a trustee to be excused from breaches of trust (later topic), but there are specific ones in relation to investment: s90 court may take into account investment strategy when determining if a trustee is in breach of a duty in relation to investment s90A when considering an action for breach of trust arising from investment at a loss, the court can set off the loss against gains from other investments. This is broader than pre-legislative situation which only allowed set off within the same transaction or class of investment. Now against all investments. OFFICE | FACULTY | DEPARTMENT 9 9 Variation of the Trust OFFICE | FACULTY | DEPARTMENT 10 10 5  Bene ciaries can't direct trustees to act in certain ways because 9/11/24 that will be tantamount to a breach of trust (because the trustee will be acting under dictations) but they're not allowed to do this they must make their own decisions. You can't go to the Court as a bene ciary either and plead for the Court to change your trust. Variation of Trusts What if it is clear that a trustee cannot take a particular action either under the trust instrument or pursuant to legislation? Can the trust instrument be changed? Beneficiaries cannot direct trustees to act in particular ways = breach of trust by trustee; they must not act pursuant to dictation. But, trust deeds often empower trustees (or a 3rd party) to vary the trust If not, there is no inherent equitable jurisdiction to vary the terms of a trust. OFFICE | FACULTY | DEPARTMENT 11 11 However, there were some provisions in the Trustee Act prior to the amendments that may prove relevant (s81 Advantageous dealings). Expedience jurisdiction S81 ADVANTAGEOUS DEALINGS If there is no power in the trust instrument for the trustee to sell, lease, mortgage, purchase, invest or enter transactions etc and the court may confer on the trustees the necessary power Not a general variation of trust provision; authorises specific transactions s81 could not authorise variation of trust to give trustee broad discretion to vary the trust; this was not a transaction: Re Dion’s Investments. Extending the vesting date (date that someone finally gets all capital) to minimise capital gains tax was also not a transaction within s81: Cisera v Cisera Holdings. OFFICE | FACULTY | DEPARTMENT 12 12 A trust deed needs to show where the property will ultimately vest so as not to go against the rule against perpetuities. The rule against perpetuities (also known as the rule against remoteness of vesting) requires that future trust interests (that is, interests that do not take e ect immediately) must be certain to vest within a de ned period of time known 6 as the perpetuity period.  9/11/24 Court power to vary trust Unlike other jurisdictions, NSW did not have a But, general statutory power s86A-86C Trustee Act for courts to vary trusts – now gives the court this this is what the Textbook power. assumes OFFICE | FACULTY | DEPARTMENT 13 13 Court power to vary trust CAMPBELL V CAMPBELL NSWSC 554 See paragraph for more information Facts: on the equitable proceedings in this case Farming family dispute. Discretionary trusts set up by Bruce before his death with wife, Julian, and 4 children as beneficiaries. Julian died. 4 children fought extensively. Agreed that best to bring forward vesting date of trust to 2022, rather than 2035. Could court do this with s86A? Slattery J: Yes, children were within s86A(2)(b). The power to vary the trust extends to varying the Perpetuity Date defined by the trust. “The provision is plainly remedial and should be construed beneficially. As the second reading speech in the Parliament pointed out the provision is aimed at aligning New South Wales legislation with that of other States and remedying an existing limitation in the operation Trustee Act, s 81 which were identified in recent New South Wales authorities, Re Dion Investments Pty Ltd (2014) 87 NSWLR 753; NSWCA 367 and Cisera v Cisera Holdings Pty Ltd (2018) 98 NSWLR 747; NSWCA 286 (“Cisera”). The legislation takes up Bathurst CJ’s suggestion in Cisera for legislative reform to cure this deficiency.” OFFICE | FACULTY | DEPARTMENT 14 14 7  9/11/24 You can see that the Court is still being driven by this overarching goal to achieve practical justice and use the mechanisms that are available to achieve that objective. The Court was trying to do something that the settlor was trying to achieve as well. In fact so locked in they were in disputation that the property had to be sold to deal with the costs of their fractious legal disputes. Campbell v Campbell cont ‘making of the orders will enable the parties to these proceedings to move past their present costly and paralysing legal disputes. Whatever be the financial benefits from accelerating the vesting date, they all equally benefit from this reduction in conflict’. Order is consistent with settlor’s desire for children to share capital equally at vesting date Even though power to vary Perpetuity Date was in the trust, the trust was in deadlock. Court variation was preferable. Some younger Eligible Beneficiaries might be disadvantaged by their only ever having had rights to proper administration of discretionary trust, no right to income or capital. OFFICE | FACULTY | DEPARTMENT 15 15 Termination of the Trusts I.e. How can an express trust be brought to an end? OFFICE | FACULTY | DEPARTMENT 16 16 8  9/11/24 This will bring the trust and the duties assigned to the bene ciaries to an end. Termination of trusts Private trusts (cf charitable trusts) will come to an end, with the property that has not been distributed already ‘vesting’ (becoming owned by) particular beneficiaries. The rule against perpetuities in s7 Perpetuities Act 1984 (NSW) requires property to vest within 80 years. This pushes property (land, shares, money etc) back into the market But, the rule in Saunders v Vautier can allow a trust to be brought to an end earlier. OFFICE | FACULTY | DEPARTMENT 17 17 But be mindful of what constitutes property in Equity since it's broader than property law. Saunders v Vautier (1841) 49 ER 282 SB 24.2A Facts: Nephew left stock on trust till he was 25. Stock, dividends and interest to be transferred to him at 25. When he was of age (21 then, 18 now), he asked for it to be transferred to him. Held: As nephew was of age and fully entitled to trust property, he could have it at 21. The rule cannot be excluded by the trust instrument. All beneficiaries must be of age (unless beneficiaries rely on variation of trust power in legislation). If fixed trust, one beneficiary can take their share: Beck v Henley, if it is easily divisible and won’t adversely affect remaining beneficiaries. If it is a discretionary trust, they must all agree (but not applicable if trust only satisfies McPhail criterion certainty because it may not be possible to draw up a list of the beneficiaries who have to agree). OFFICE | FACULTY | DEPARTMENT 18 18 But if it's a discretionary trust there tends to not be a list anyway But what Saunders and Vautier (1841) gives us is that the trustee's essentially have this right to actually bring the trust to an end and have the property distributed to them if they are all of age, of majority and of capacity. 9  Those professional trustees could charge fees. But the fees you still have signi cant responsibilities to ful l. The CPT guardian case is about people 9/11/24 investing their own money for a return and the superannuation schemes are another example of this. So following the English position from Saunders v Vautier the Australian position agreed that Australians have this right to bring the trust to an end and to bring the trust to an end if they qualify and if they are of age, and if they have capacity. CPT Custodians v Commissioner for State Revenue (Vic) HCA 53 Page 646 of our SB SB 24.3A Facts: Unit trust = people purchase a bundle of ‘units’ as an investment that gives them a financial return. Professional trustee and manager entitled to significant fees. Good example of the way modern trusts are often not a settlor generously giving money to a trustee to hold for a beneficiary, but rather people investing their own money for a return (investment and super trusts). Trust owned land. The units were all equal but did not give an interest in any particular part of the trust fund. The Commissioner argued that subject to the trustee’s right to reimbursement, the beneficiaries could collectively terminate the trust under the Rule in S v V and so they had a beneficial interest in land that was liable to land tax. S v V= Saunders v Vautier Held: Discussion of rule in S v V. HCA held that unit-holders did not have equitable interests in the land liable to land tax S v V had no application to the particular unit trust OFFICE | FACULTY | DEPARTMENT 19 19 The implication of this is that the bene ciaries are putting themselves at odds with the intention of the settlor. Is this acceptable? In the Australian context it is. (Applies to above) Beck v Henley Facts; this case involves a brother and a sister who were indefeasibly entitled to a share of the trust property- which is a requirement of Saunders v Vautier. They also had two of four voting shares in a private company. One of those bene ciaries requested one of the trustee's to transfer a portion of the shares over to him. The other bene ciary opposed this transfer and the other bene ciary sought judicial advice on whether s/he should accede to the request. Essentially Justice Leeming walked through a series of steps with regard to S v V- and that still does not prevent the bene ciaries from being able to activate their right and there are issues around practical considerations and convenience and risk or prejudice to other bene ciaries and comments that the critical question is whether there is prejudice to those who oppose the S v V direction? Held; There were no special circumstances preventing the application of the rule in S v V from applying and ordered a transfer of the shares that the bene ciary was requesting. 10