Trusts: reform at last

In the early 2000s, the Scottish Law Commission (“SLC”) undertook an extensive review of trust law and produced various discussion papers, reports and consultations. This led to its comprehensive Report on Trust Law of 2014 (Report No 239) setting out the SLC’s recommendations, followed by an initial draft Trust Bill. 

The Scottish Government’s response in 2015 confirmed it would give the report “full consideration”, when priorities allowed. In October 2021, the Minister for Community Safety notified the SLC that the Government would begin work on the SLC’s proposals. Responding to that news, Lady Paton (chair of the SLC) predicted that there would be “considerable rejoicing and relief amongst the legal community who deal with clients and find the 100-year-old law a major handicap”. Lady Paton was referring to the Trusts (Scotland) Act 1921, which recently marked its centenary. 

The Trusts and Succession (Scotland) Bill was introduced to the Scottish Parliament on 22 November 2022. The first part of the bill focuses on trusts, and the second (shorter) part on succession. The bill presently sits at stage 1 of the legislative process, and so practitioners will need to remain patient for a while longer. However, this programme of reform has been gestating for some time, and it is worth practitioners being aware of the main features of the bill. Here follows a summary.

Removal of trustees

The “Resignation and removal” section of the bill (ss 5-8) appears to be welcome news for practitioners, in that it simplifies the process for removing trustees under various circumstances. 

A trust deed may occasionally (and fortuitously) provide a mechanism for removing a trustee; however that is very often not the case. In the absence of such a provision, it is necessary for an interested party to take court action in terms of s 23 of the Trusts (Scotland) Act 1921, which enables the court to remove a trustee who has become “insane or incapable of acting by reason of physical or mental disability or being absent from the United Kingdom continuously for a period of at least six months”. Such a solution is difficult and expensive.

The bill seeks to address this point in a number of ways:

A trustee can be removed from office by a majority of their co-trustees in the event that they are mentally incapable or are convicted of an offence involving dishonesty or are imprisoned. This power would be available irrespective of when the trust was created, which may be useful for existing trusts where the administration is being hampered by a trustee who has become incapable.

A trustee can also be removed from office by decision of all the beneficiaries of a trust, though only where all beneficiaries are absolutely entitled to the trust property, and all have attained the age of 18 and are mentally capable. The power is therefore limited to cases where vesting has already occurred, and so would not be available to beneficiaries where, for example, the trust fund is still subject to discretionary terms.

It may be useful in cases where an absent or intractable trustee is preventing the timely resolution of an age-based trust where all beneficiaries have come of age. 

The court retains power to remove a trustee on a variety of grounds, including mental incapacity; unfitness to carry out the duties of a trustee; carrying out of duties in a way that is or may be inconsistent with the fiduciary duty; neglect of duties; or the trustee having become untraceable. Applications on these grounds would become a resolution of last resort, given other mechanisms that the bill creates as above. There may be no other option in instances such as a sole trustee who has become incapable.

Appointment of additional or new trustees

By s 3 the current trustees are given the power to assume new trustees unless the trust deed provides otherwise. This does not directly address the situation whereby a truster has reserved for themselves the power to appoint trustees during their lifetime, but with no provision for incapacity.

The truster is given power (s 2) to appoint a new trustee where no capable trustee exists or is traceable.

Under s 1 the court is able to appoint an additional trustee where it is “expedient to do so for the administration of the trust”.

While beneficiaries would have a certain power to remove trustees as mentioned above, there is no corresponding power for beneficiaries to appoint a new trustee. In cases where there are no surviving or capable trustees, in the absence of the truster the beneficiaries are left with no option than to apply to the court for appointment of a new trustee. 

In cases where there are no surviving trustees, the workaround of using the Executors (Scotland) Act 1900 would still be available to allow executors of the last-deceasing trustee to append details of the trust fund to the inventory of the estate. That option is only available where there are no remaining administrative acts required other than paying over to the beneficiaries, and also involves waiting until confirmation is granted in the estate, which could take time.

The appointment or assumption of new trustees would operate as a general conveyance of the trust property in favour of the new and existing trustees: s 4. This would align Scots law styles more closely with English law styles.

Protectors

For the first time, by chapter 7 protectors are given formal recognition within Scots law. This
is a useful step: protectors are a common feature of trust practice in other jurisdictions, and thus appear commonly in practice within trusts created using pro forma deeds, or with trusts which have come to conduct some or all of their affairs in Scotland. 

Trustee decisions

The current default position is that trustee decisions are made by quorum, defined as “a majority of the trustees accepting and surviving”. That does not exclude trustees who become mentally incapable. Section 12 of the bill addresses this by providing that a decision is binding when it is made by a majority of the trustees “for the time being able to make it”.  

Trustee duties

The bill gives a statutory basis for trustee duties, while also effectively restating and expanding on the existing defences available.

On the duty of care, s 27 specifies the standards of care which are to apply irrespective of when the trust was created, though these standards apply only in respect of management of trust affairs after the section comes into force. Trustees are required to exercise “such care and diligence as any person of ordinary prudence would exercise in managing the affairs of another person”. Further, and of particular interest to those in the profession, the bill imposes a higher standard of care for trustees who are in the business of providing professional services in relation to trust management, and where they have been appointed or assumed as a trustee and are remunerated on that basis. Those trustees are required to exercise “such skill, care and diligence as it is reasonable to expect from a member of the profession in question”. This will doubtless cause a ripple of action in the field of risk management, as lack of oversight and/or involvement in the affairs of trusts where a professional is named as trustee could become sources of liability. 

On the fiduciary duty, the bill includes several sections specifically on breaches of duty, although it does not define “the fiduciary duty” itself. Section 30(2) confirms that the statutory position is to apply “without prejudice to any provision of a trust deed which authorises a particular transaction, or a particular class of transactions, which but for that authority would constitute a breach of a fiduciary duty”. This should therefore mean that provisions in trust deeds allowing conflicted parties to participate in such decisions will continue to be permissible, albeit the section refers only to “transactions” rather than trustee decisions.

On the duty to supply information to beneficiaries, there has long been debate within the profession as to what trustees are required to provide and when. The bill does not provide a list of documents that ought to be given, other than trustee names and contact information. Instead, s 26(1) states that trustees have a duty to disclose “information requested by the beneficiary… unless the trustees consider it would be inappropriate, in all the circumstances”. This leaves the onus on the trustees, though beneficiaries may seek a direction from the court if they do not consider that the trustees have fulfilled this duty. Helpfully, the bill does go on to confirm that certain information can generally be excluded, including information on other beneficiaries, reasons for decisions and letters of wishes which are relevant to the exercise of the trustees’ discretion.  

Trustee powers

Chapter 3 sets out the powers and duties of trustees in one place. Chapter 8 also consolidates the provisions from the 1961 Act on variations, together with some, but not all, of the common law principles, to assist where the chapter 3 provisions cannot be used. 

Succession

Aside from a self-explanatory amendment to the Succession (Scotland) Act 2016, the bill makes only one change of note, to the order of succession to the free estate in an intestacy. In short, the surviving spouse or civil partner of a deceased person is “promoted”, such that they will now rank second only to the children and remoter issue of the deceased. Previous Law Commission reports have recognised that the present order of succession is now out of step with public expectation, and so on that basis alone this reform is welcomed. 

At time of writing, there is no word on further reform of succession law on the lines suggested in the SLC’s Report on Succession, where broader changes to the systems of legal rights, prior rights and financial provision for unmarried cohabitees were at issue.