Understanding Maintenance Power for Trustees under Trustee Act 1925, Study notes of Law

Download Understanding Maintenance Power for Trustees under Trustee Act 1925 and more Study notes Law in PDF only on Docsity! Page 1 of 5 Trustee Powers of Maintenance This month’s CPD paper follows on from the statutory powers of advancement covered last month. This time we will examine the powers given to trustees in relation to trust income under s31 of the Trustee Act 1925 (TA 1925). This power is known as the statutory power of maintenance and like its s32 counterpart an understanding of how this power works is integral to the drafting of trusts. OVERVIEW The statutory power of maintenance is provided by s31 TA 1925. This gives trustees powers and duties in relation to trust income. Unamended, this covers powers to apply and accumulate income for beneficiaries under 18, as well as a duty to pay trust income to a beneficiary over 18. This paper will mainly consider the power of maintenance as it applies to trusts created after 1 October 2014, though the changes made in 2014 will be discussed. Last months paper covered the statutory power of advancement under s32 TA 1925. It is recommended that if you missed last month’s paper you go back and read it for a rounded understanding of how these key statutory powers work. WHEN DOES SECTION 31 APPLY? s31 is implied into most lifetime and will trusts and so it will apply unless expressly excluded or there are contrary provisions. It will apply where a legacy carries with it the intermediate income. We will examine these rules separately. It does not apply to discretionary settlements where the trustees have a general power of appointment. None of the beneficiaries of this type of trust have a defined interest in the fund, only a hope of obtaining an interest if the trustees exercise their discretion in their favour. The trustees may exercise their power of appointment to create a vested or contingent interest for a beneficiary, so s31 would apply from that point. s31 also applies to contingent interests for minors under a trust for a bereaved minor and contingent interests of beneficiaries of bereaved young person’s trusts. This latter one can cause issues for the trust which will be discussed separately. WHEN DOES A GIFT CARRY THE INTERMEDIATE INCOME? It was previously mentioned that the statutory power of maintenance only applies if the interest carries the intermediate income. This means that the beneficiary must be entitled to the income earned by the share of the legacy that they have an interest in between the date of the gift and the date that the Page 2 of 5 legacy is actually paid to them. Do not confuse this with the entitlement to income granted by a life interest trust. The rules for working out whether a gift carries the intermediate income are complex, but we will consider them briefly here to give you at least a cursory understanding of them. 1. Vested gifts Vested gifts carry the intermediate income unless there is a contrary intention, for example if the income if directed elsewhere. 2. Contingent gifts of residuary personal property These types of gift carry the intermediate income from the date of the testator’s death. 3. Specific devises or bequests Under s175 of the Law of Property Act 1925 (LPA 1925) a contingent specific gift of property, either personal or real, carries the intermediate income from the date of the testator’s death unless it is otherwise disposed of. 4. Contingent pecuniary legacies These are not covered by s175 LPA 1925 and as such do not generally carry the intermediate income. There are three exceptions to this rule. This first exception is where a father or someone standing in loco parentis for a minor beneficiary leaves a contingent pecuniary legacy. The legacy will then carry the intermediate income if the contingency is the minor reaching the age of majority, and there is no other fund provided for the child’s maintenance. The second exception is where the gift is made with the clear intention of providing maintenance for the minor. In these cases, it is not necessary that the contingency is the minor attaining the age of majority. In Re Churchill [1909] 1 Ch 642 it was held that a contingent pecuniary gift to a grandnephew carried the intermediate income as it directed the trustees to pay, at their discretion, any part of the fund ‘towards the advancement in life or otherwise for the benefit’ of the beneficiary. The third exception is ‘set aside’ gifts, where the testator directs for a pecuniary legacy to be set aside as a separate fund for the beneficiary’s benefit to be paid to them when the contingency is met. HOW DOES IT WORK? The power is twofold; it draws a distinction between a minor who is contingently interested in a fund and an adult who has a similar contingent interest. When s31 applies the trustees will have a discretionary power to apply the income until a beneficiary reaches 18. The trustees may apply the income for the minor’s ‘education, maintenance, or other benefit’. The income may be applied either to the minor directly, or by paying it to their parent or guardian. Once the minor reaches 18, if the contingency is not yet met and the trust continues, the trustees’ discretion is extinguished and is replaced by a duty to pay the income to the beneficiary until their