Does it fit the Bill?

What a difference a year makes. In mid-2022, hopes of trust law reform in Scotland were dwindling with no sign of a Bill, despite the pledge that it would feature in the 2022 parliamentary session. Fast forward to the end of 2023 and there has been a flurry of activity as the new Trusts and Succession (Scotland) Bill (the Bill) makes its way through the Scottish legislative process.

Given it will be the foundation of Scots trust law moving forward, practitioners in Scotland should be aware of the Bill’s progress and the debates on its terms.

Where are we now?

The Scottish government introduced the Bill to the Scottish Parliament on 22 November 2022.[1] The Bill largely reflects a draft prepared by the Scottish Law Commission (the Commission) in 2014 (and updated in 2018), which had been prepared following several in-depth consultations. Part two of the Bill contains amendments to the law of succession, where there are other changes to be aware of.

Within stage one, the general principles and purpose of the Bill are considered, followed by stages two and three, where amendments can be made.

The Delegated Powers and Law Reform Committee (the Committee) is moving the Bill forward. The Committee opened a consultation, which ran from 6 January to 17 March 2023 and received over 25 responses. It then held sessions at parliament in May 2023 seeking evidence on key issues that came out of the consultation process. The first session invited Lady Ann Paton and Lord Drummond Young to speak to the initial work undertaken by the Commission and provide reasoning for how the Bill was drafted. Evidence was then heard from trustees, academics, firms and representatives for the Faculty of Advocates, the Law Society of Scotland and STEP Scotland, which covered a variety of questions on the draft Bill and its practical and legal implications.

The Committee published its stage one report (the Report), which summarises the views and evidence heard on the draft Bill. The Report was debated in parliament on 28 September 2023 and it is now to progress to stage two.

What issues are being discussed?

Among the issues raised in the above sessions, one fundamental point arose regarding the expenses of litigation. Essentially, s.65 of the Bill provides that where a trust becomes insolvent and cannot cover sums awarded as part of a litigation, any shortfall would be met by trustees personally. This appears to fly in the face of the very principles of trust law, which is that a trustee’s personal patrimony is separate to that of the trust (except where trustees have breached their duties).

This may set a dangerous precedent. It makes the role of acting as a trustee unattractive if personal liability is the default and it makes the Scottish jurisdiction undesirable for creating or administrating trusts because other UK jurisdictions may provide more protection to trustees.

The reason for the proposed change was to protect pursuers who raise actions in good faith but cannot recover costs. However, the unintended consequence is that it reduces risk to pursuers and may encourage vexatious litigators who see the possibility of applying financial pressure to trustees to settle, which may not be in the interests of the beneficiaries.

There were strong objections at the evidence sessions and it was suggested that ‘good faith’ pursuers are sufficiently protected at s.65(3) and so s.65(1) and (2) could be removed entirely. The Report reflects the Committee’s sympathy to the starting point, being there ‘should be no personal liability’, and asks the government to reflect on the evidence and consider whether trust law needs to be amended.

What other issues have been debated?

Removal of trustees

New grounds were introduced where co-trustees have the ability to remove a trustee without going to court: a welcome change for a swifter (and inexpensive) removal. This includes instances where a trustee has been convicted of an offence involving dishonesty or sentenced to imprisonment. These grounds are not retrospective and it was therefore put to the Committee that, to have real benefit, this option ought to apply regardless of when the conviction occurred.

Similarly, it was suggested that the grounds should be broadened to allow removal of professional trustees who have been struck off by their regulator or to allow removal of anyone who was appointed in their professional capacity but is no longer registered as such.

Incapable trustees

There was significant debate around the removal of incapable trustees. In most situations, having this power is a good, practical step forward from the current law. However, concerns were raised about the potential for abuse by allowing decisions about capacity to be made by co-trustees. A suggested solution was the provision of a statutory authority that any attorney or guardian could resign on behalf of a trustee, therefore shifting the onus from the co-trustees to the representative of the trustee in question. This would also remove any requirement for a power of attorney or guardianship to include that specific power.

The Report records that the Commission and the government did not share these concerns but does ask that the Bill is amended to include the right of a removed trustee to challenge their removal in the courts. Additionally, the government is requested to consider if further safeguards should be added to mitigate potential abuse of these powers by trustees.

Trustees’ duties to provide information

Section 26 allows a ‘potential beneficiary’ to raise court proceedings if trustees are unwilling to release information. It was argued at the evidence sessions that this was too broad a term given how most modern discretionary trusts are drafted, whereby any person can be added as a beneficiary and thereby be within the definition of ‘potential beneficiary’.

A solution would be to restrict this right to those who have a genuine interest in the trust, excluding beneficiaries whose interest is so remote as to be negligible. This may avoid disruptors from litigating, particularly as the Trust Registration Service now allows data requests, which could be used to access information on a trust, assuming His Majesty’s Revenue and Customs chooses to disclose.

The Report supports the principle of ensuring beneficiaries have access to information, ‘in particular when it may be necessary to enable them to hold trustees to account’. In addition, the Committee recommended that the government consider whether the ability to request information should be more limited.

The role of protectors

Section 49(1) reflects what most practitioners will recognise from other jurisdictions, which is that a trust deed can appoint a protector whose consent is required for certain decisions, although there are examples in Scots trusts, particularly in religious charities, where a ‘protector’ has been appointed to protect trust assets being dissipated by doctrinal changes, etc. However, s.49(2) states that a trust deed can confer ‘powers’ on protectors and s.49(3) goes on to provide examples of such powers, including the power to change the domicile (or governing law) of the trust.

This suggests protectors would have powers to act, rather than merely an ability to veto a decision or direct the trustees. From the evidence, most practitioners agreed that protectors should not be given powers that ought properly to be reserved to trustees but there are examples of such powers in other jurisdictions.

The Report asks the government to clarify the scope of the power for a protector to determine the domicile of a trust, whether this provision should remain in the Bill and the standard of care applicable to protectors.

A new power to alter trust purposes

Section 61 introduces a new power that enables certain parties to apply to the court to change a trust’s purposes if there has been a material change in circumstances. There are a wide range of parties who can apply to the court under this section. It has the potential to open the doors for what could be some very interesting case law. Broadly, this would apply to family trusts only, given that commercial and public trusts are specifically excluded.

In its current form, s.61 provides that at least 25 years must have passed since the trust was created (or 25 years after the settlor’s death for an inter vivos trust). The consensus among practitioners seemed to be that there should not be a requirement to wait for an arbitrary period of time, provided there was a ‘material change in circumstances’.

The Report considers that a 25-year period is appropriate but asks the government to consider amending this provision so that the courts have discretion to alter that period in exceptional circumstances.

Looking ahead

It is reassuring to see that the stage two process has commenced and we wait with interest to see how the Scottish government proposes to amend the Bill in light of the Report. Hopefully, practitioners will soon have the delights of operating within a new, fully enacted Trusts and Succession (Scotland) Act 2024, only 103 years after the Trusts (Scotland) Act 1921 was introduced.