Asking Trustees for capital sums

Background

1. It is not uncommon for a will to gift a specific sum which is left to trustees to administer with express instructions that the income from that sum should be paid to an individual during their lifetime, and that the fund can be used to pay all or any of the capital for the benefit of that individual while their interest continues.
2. It is not uncommon for a will to state that when the life interest ends and the legacy fund falls to form part of the testator’s residuary estate, it must be left to (for example) a charity to be chosen at the trustees’
3. The question is, if the person with a lifetime interest makes a request for a capital sum, is there is any reason that the trustees might refuse?
4. In addition, is there likely to be a threat from others with a beneficial interest? For example, the charity that stands to gain once the lifetime interest ends.

Trustees powers

5. Where trustees have a power to pay or apply capital for the “advancement or benefit” of a beneficiary this means, in legal terms, improving the material situation of that beneficiary (Pilkington v Inland Revenue Commissioners [1964] AC 612). The term “benefit” has a wide legal   Case law has established that this power allows the trustees to apply capital in any way that:
   1. Viewed objectively, can be seen as being for the benefit of the individual concerned; and
   2. Subjectively, the trustees believe to be for that person’s

Benefit, in this context, need not mean a direct financial advantage to the beneficiary, it can also mean benefit to a close relation.

6. The power to use or apply capital for the benefit of any beneficiary is limited in a trust created before 1^st October 2014 by statute, to only half of the beneficiary’s share in the trust fund, unless extended by the trust document.

The operation of the trust in relation to charities

7. There is a requirement in law for trustees to inform objects (potential beneficiaries) of the existence of discretionary trusts and the nature of that interest (Chaine-Nickson v Bank of Ireland (1976) IR 393). It is likely that trustees will have a deadline set by the will to select the charity or charities and will need to inform them shortly thereafter.
8. Once a potential beneficiary has been notified, they must ask the trustees to provide them with further information if they wish to see it. There is no entitlement as of right to a trust document, but potential beneficiaries do have in law, a legitimate expectation of disclosure of trust information (Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] UKPC 26).  A remainder beneficiary under a will trust with an intervening life interest (as is the case here) is also entitled to see up-to-date trust accounts.  As a result, trustees may need to consider their actions carefully.
9. Trustees have a right of indemnity for liabilities that they incur as trustees, provided that they have acted properly (see s.31(1) of the Trustee Act 2000). That right of indemnity is supported by an equitable lien over the trust fund which takes priority over the equitable interests of the beneficiaries.
10. When trustees part with trust assets, they continue to have a right of indemnity, but when assets are transferred to a beneficiary because the trustees have exercised a dispositive power in that beneficiary’s favour, they may lose the lien as they have relinquished rights in the assets as trustees. As a result, it is not uncommon for trustees to retain sufficient trust assets to meet known liabilities.  It is also not uncommon for trustees to be cautious of capital expenditure that may be questioned by remainder beneficiaries who have kept themselves appraised of the use of capital.

Conclusion

11. It is possible for someone holding a lifetime interest to be given capital from trust assets for their benefit or the benefit of a close relative.
12. It is likely any remainder beneficiaries (once they are aware of the situation) will follow the accounts of the trust and may question trustees about decisions that affect the level of the remaining funds.
13. Trustees’ liability is protected, but that protection may not remain if assets of the trust are disposed of. That means if a potential beneficiary (on receipt of their share of the remainder) challenges a disposal of assets the trustees may not be protected.
14. Where agreement between the lifetime beneficiary and the trustees cannot be reached, an application can be made to court to decide if a request for capital is reasonable. A claim for determination can be brought under Civil Procedure Rules (CPR)2(a) using a Part 8 procedure.  If you need assistance in making an application, or advice about this area of law, contact Becket Chambers Clerks for more information.