EQUITY AND TRUSTS
It will examine Learning Outcomes 1, 2, 4, 6, 7, and 9.
CASE STUDY
You are a trainee solicitor at Hutton Guisborough, a law firm in Helmsley. Your training principal hands you the following brief one morning:
Mrs Joyce Watts created the Hoylandswaine No.1 Settlement on 5 April 1967 with 450 acres of agricultural land and buildings at Cat Hill, her family farm near Penistone, South Yorkshire. The drafting work was completed by Jenny Quayle, Joyce’s previous solicitor in Barnsley. Joyce appointed herself and her brothers Max and Roger Hardman as the initial trustees, with Jenny as a fourth, professional, Trustee. The class of Discretionary Beneficiaries was defined as “my husband Eric Watts and my children and remoter descendants, whether living on the Commencement Date [5 April 1967] or born after it at any time before the Vesting Date”. Eric and Joyce have four adult children together: Robert, Brian, Linda, and Louise. Robert has two twin boys – Jackson and Charlie – who were born on 1 October 1999. Louise has two girls and a boy: Amy, born on 4 August 2015, Lauren, born on 20 April 2017, and Zak, born on 4 February 2020. Brian and Linda have no children.
As the trust is discretionary, the Trustees were given a power to pay or apply “any or all of the capital and income of the trust funds to such one or more of the Discretionary Beneficiaries, at such times and in such shares as they may during appoint at any time or times before the Vesting Date”. The trust deed then goes on to say that “In default of any exercise of the said power of appointment before the Vesting Date, the Trustees shall hold the capital and income of the trust funds for such of the Discretionary Beneficiaries as shall be living at that date, and if more than one in equal shares per capita absolutely” The Vesting Date is defined as 5 April 2017* (see note at end).
When drafting the trust deed, Jenny Quayle had defined the Trust Period as “the period beginning with the Commencement Date (as defined above) and expiring twenty-one years from the death of the last survivor of the following individuals living on the Commencement Date:
The Settlor’s father Robert Hardman;
The Settlor’s cousin Clive Sidebotham;
The Settlor’s sister-in-law Yvonne Hardman; and
The Settlor’s brother-in-law Thomas Watts.
Unfortunately Joyce has lost quite a number of her relatives: Robert was killed in a farming accident on 10 August 1970, whilst Clive died of mesothelioma on 26 December 1990. Thomas died of a heart attack in the early hours of 1 January 2000 and Yvonne committed suicide on 1 September 2001. Max has lost mental capacity, having been diagnosed with dementia in 2016, and is the subject of a court order certifying that he no longer has the necessary mental capacity to manage his own affairs. All of Joyce’s children and grandchildren are alive today, but Eric died in an accident during a walking trip to the Cairngorms in 2016.
Because of the nature of Joyce’s business and the make-up of the trust assets, the trust has largely been left to its own devices over the years, and has led a fairly quiet existence. Farming income has generally come in on time and after settling expenses etc, the Trustees have paid it out to the beneficiaries in whatever proportions they feel most appropriate, having regard to the respective ages, financial requirements and general wishes of the beneficiaries at the relevant time, and after consulting Joyce. In the year ended 5 April 2018, for instance, the trust income was £30,000 and the Trustees decided to allocate £20,000 for Jackson and Charlie to share equally, £15,000, for Amy, Lauren and Zak to share equally, and the remaining £5,000 to Louise. In the year to 5 April 2019 the trust income was £30,000 again and the Trustees paid all of it to Brian so he could build an extension to his house. In the year to 5 April 2020 the trust income was £20,000 and the Trustees split that equally between Robert and Linda. In the year to 5 April 2021 the trust income was £40,000 and the Trustees split that equally between Robert, Brian, Linda and Louise. There have been no distributions of capital assets so far, and the Trustees have never needed to sell any land (e.g. to raise money to invest in other assets), because the farm has generally washed its face every year Joyce’s approach has been to keep the family farm intact as a unit for future generations.
Joyce made it clear to the other Trustees that they did not need to worry about being sued by the beneficiaries if anything went wrong. She asked Jenny to include an exclusion clause in the trust deed confirming that “No Trustee shall be liable for any loss occasioned to the trust funds, whether as a result of carelessness, incompetence, gross negligence or even deliberate wrongdoing, so long as such wrongdoing shall (if committed) not be of a criminal or fraudulent nature”. Unfortunately, it has recently been discovered that Roger has been using trust funds to prop up his own business. It transpires that this has gone somewhat further than “just borrowing” the money: Roger has in fact been using some of the cash in the Trustees’ bank account to pay off some of his creditors. Added to that, Jenny was struck off as a solicitor after filing for bankruptcy when her firm went bust in 2020. Joyce is therefore unsure who the current Trustees even are.
When Joyce looked at the Trustees’ bank balance in June this year, she saw that it was £500,000 less than it should have been. She therefore decided to address the cash position by trying to sell some fields at the edge of the farm, which have planning permission for a residential development. These fields were put on the market at £750,000 and a housebuilder in Sheffield has already offered asking price. Joyce was pleased with this, because she felt it was high time that a capital distribution should be made from the trust to her four children. Negotiations went smoothly in the first couple of weeks, but the buyer’s solicitor has recently started asking who actually has the power to sell the land. Joyce has drawn rather a blank at this, because Max has lost mental capacity and Roger and Jenny have both disappeared (Joyce suspects together, as the two of them had an affair a few years back). Joyce is anxious to make sure that the sale can go ahead so that the cash position can be resolved, but the buyer’s solicitors are threatening to pull out if the transaction doesn’t pick up speed.
Because Jenny seems to have disappeared, Joyce felt she had to instruct a different firm of solicitors to advise on the various issues. I am meeting her next week, so please could you therefore prepare a briefing paper covering the points set out below.
* NOTE: In case you are unsure what the expression “the Vesting Date” means, its effect is that from 5 April 2017 onwards, the Trustees have to allocate the trust capital and income equally among all the beneficiaries who had already been born before then. In other words, after that date they do not have quite the same discretionary powers as before.
The other point to consider here is that on 5 April 2017 the class of beneficiaries also closed, so anyone born after that date cannot benefit from the trust. However, Joyce may or may not be aware of that, so you may need to check carefully what the Trustees have done with the trust capital and income in the last couple of years (and indeed what, if anything, they are proposing to do). In case you are wondering what the purpose of a Vesting Date is, it is broadly there to ensure that the trust will never fail for lack of beneficiaries.
The areas on which your training principal has asked for particular advice are as follows:
Joyce is unsure of how long the trust can actually last and when it will end. What does she need to know?
As matters stand, can Joyce make the land sale mentioned above? Give reasons for your answer, referring to both the Trustee Act 1925 and the Law of Property Act 1925 to support your arguments. If your view is No, explain what steps could be taken in order to enable the transaction to complete.
Given that the Vesting Date passed a couple of years ago:
Can the Trustees actually make the £250,000 distribution in the manner she is proposing?
If your answer to (a) is No, what (if anything) would have to happen instead, and how much would each beneficiary receive?
(c) What are the implications of the income distributions that the Trustees have made since the Vesting Date; and
(d) Depending on your answer to (c) above, what options do the beneficiaries have now?
In view of the query at 3(c) above, and given the £500,000 hole in the trust finances:
How much protection will the exclusion clause give to Max, Roger, and Jenny in their capacity as Trustees?
What are the beneficiaries’ available remedies as regards the missing £500,000 and which ones are likely to offer the best outcome?
Does Joyce need to be worried on her own behalf?
Total word limit: 2,000 (+/- 10%)
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