Out with the auld

 

Trust law in Scotland has been through a journey over the past year as a Bill set to introduce reforms made its way through the scrutiny of the legislative process. Royal Assent was granted on 30 January 2024, yielding the new Trusts and Succession (Scotland) Act 2024 (the Act).

The Act has largely been lauded by practitioners as long overdue and much needed, as it has been over 100 years since the last substantial reform of trust law.^[1] Indeed, the Act does a great many things to bring Scotland in line with other jurisdictions and to assist with the practicalities of managing trusts. However, the journey will continue as practitioners navigate their way through the Act and traverse new problems.

What are the highlights of the Act?

First, it must be borne in mind that this is a wholesale reform of trust law and one of the key things that the Act does is consolidate the various historic legislation and common-law principles into a single codified piece of legislation that will now govern all trust law in Scotland. That alone is no mean feat.

The Act does go much further than a mere rewriting of the existing law, as it addresses some practical problems and introduces new concepts into Scots law. These include:

• Section 4, which provides for a general conveyance of trust property where trustees are appointed other than by deed of assumption and conveyance.
• Section 6, which now provides a statutory basis for an attorney or guardian to be able to resign office on behalf of an ‘incapable’ trustee (whether such an act could be delegated by a trustee was historically a point for debate).^[2]
• Sections 7–8 now give a statutory recourse to the court to seek the removal of a trustee, which, historically, could only be done under common law by application to the nobile officium.^[3]
• Section 9 gives co-trustees the ability to remove one of their own in certain circumstances, including where a trustee is incapable or has had some form of arrest. However, this is one area where the Act may not adequately deal with all scenarios.
• Section 9(2) is worth a particular mention as it allows co-trustees to remove a trustee who was appointed by virtue of their profession. After several issues with ex-solicitor trustees seeking indemnities and payment before resignation, this will be a massive relief to former clients who previously had no recourse for certain family protection trust issues.^[4]
• Section 16 lessens the burden when applying to court for a power not available under the trust deed. Whereas the previous law required the powers sought to be necessary or ‘expedient’ for the administration of the trust, s.16 only requires it to be shown that the powers provide some benefit.
• Section 19 provides clarity (or perhaps comfort) to trustees that, in making investment decisions, they may have regard to non-financial considerations too, such as ethical or social considerations. Unfortunately, this does not apply retrospectively to trusts created before the Act comes into force.
• Section 21 confirms that sales and purchases of heritable property between charities can be at less than market value but like s.19 it does not apply retrospectively.
• Section 31(2) now applies a higher duty of care on professional trustees, being the standard that would be expected from a member of that profession. This now aligns with what many laypersons assume to be the case and may allow litigation against trustees that previously could have failed if professionals were merely held to the standard of a lay trustee.
• Section 65 introduces brand-new law that allows for the trust purpose to be altered if there is a ‘material change’ in circumstances. This provision seems to open the door for what could be some fascinating case law, as it can be utilised in a number of creative ways by trustees, beneficiaries and other parties alike.

What are some of the ‘troughs’ to be aware of?

During the legislative process, the STEP Scotland Committee, together with other organisations, including the Law Society of Scotland and the Faculty of Advocates, consulted with the Scottish government on key issues within the Bill. Amendments were introduced at stages two and three of the process to address some of these concerns. However, there remain a number of sections that are either open for interpretation, clash with one another or just do not quite go far enough.

Appointment of trustees

Following the introduction of the Bill to parliament, various parties commented that, although the removal of trustees sections were robust, the sections relating to appointments (ss.1–2) were lacking. This was mentioned during the evidence hearings at parliament, as well as in the consultation process. Regardless, no changes were made to expand these sections.

It remains the case that if a trust has no trustees, or no capable/traceable trustees, then a court application is required to seek the appointment of new trustees.

During the consultation, two additions were proposed to assist in these scenarios and to reduce unnecessary court actions, namely to allow the:

• executors of the last trustee to die to appoint new trustees (akin to the ability to do so under the Trustee Act 1925, applicable in England and Wales); and
• beneficiaries of a trust where they are absolutely entitled (and over 18) to appoint new trustees.

Both would have solved this very common problem, particularly with life policy trusts where the trustees have not survived the death of the life assured.

Although the latter would have narrower application (as there are methods of transferring trust property to beneficiaries who are absolutely entitled), there are various bare trusts that must remain active; for example, personal injury trusts where transferring assets to the beneficiary would be detrimental and trustees are required.

Concerns were raised around non-trustees appointing new trustees. However, given that any trustee appointed in this manner would be governed by the Act and would have the same duties and potential liability as a court-appointed trustee, it appears to have been a missed opportunity to address these issues.

Removal of trustees: incapacity

A highlight of the Act is the new s.9 ability for co-trustees to remove one of their own in certain circumstances without recourse to the court, including the ability to remove an incapable trustee. In the majority of cases, this will provide a practical way to remove a genuinely incapable trustee.

That said, it places the decision as to whether a person has capacity on the co-trustees, which could be abused in practice. An example may be a trustee that has mental health difficulties and has bad spells, albeit they can perform their duties with support. If there are only two trustees who do not get along, the co-trustee could make a unilateral decision to remove the apparent incapable trustee, leaving them as sole trustee.

In contentious family situations where different families are to be provided for in terms of a trust, it could also result in a sole remaining trustee favouring their family to the exclusion of all other parties. Although that may appear a rather draconian example, the Act would allow it.

Section 13(2) deals with steps that trustees must take to make such a decision, which include giving a trustee who is to be removed both adequate notice that the decision is to be made and an opportunity to express an opinion on the matter before the decision is taken.

That said, there is nothing in the Act to allow such a trustee to stop such a decision being made.

Without any other means in law to do so, an action could potentially be raised via the nobile officium to argue the point. However, in practice, a trustee is likely to need to take other steps to stop their co-trustee from taking any actions with the trust fund in the meantime.

Removal of trustees: criminal offences

Under s.9(1), this will include where a trustee is:

 ‘…

(b) convicted of an offence involving dishonesty,

(c) sentenced to imprisonment on conviction of an offence, or

(d) imprisoned for contempt of court or for not having paid a fine’

To put this in context, there had been calls to the Scottish Government to update the law, particularly where situations arose where a deceased’s killer could be their executor. A public appeal was made to pursue reform on the requirement to seek the removal of an executor in this situation. Section 8 deals specifically with this point and sets out the requirements for a court action.

However, s.8 does still require a court action. Section 9 can only be implemented if there exists a co-trustee to exercise the power; it cannot be exercised by beneficiaries or third parties.

In addition, s.9 will not apply where the conviction, sentence or imprisonment occurred before the section is enacted. This means that even where there do exist co-trustees to effect a removal, a court action may still be required depending on the timing.

Aside from the ‘killer executor’ issue, which caused public outcry, there were also similar concerns raised around other convictions. For example, a trustee may have been convicted of sexual assault or domestic abuse but potentially be in a position where they are overseeing the trust fund for their victim, which could further exacerbate any abuse. Court action to justify their abuser’s removal may be too intimidating a prospect and could put parties off doing so.

From a public policy point of view, it is unfortunate that s.9 does not go further in this regard.

Decision making and signature of documents

One area where the Act is inconsistent is in relation to the ability to make and then implement decisions.

Section 13 deals with the making of decisions and confirms that trust decisions can be made by a majority ‘of those for the time being able to make it’. However, ss.44 and 79 deal with the signing requirements to implement trustee decisions, both of which require a strict majority of the trustees. Take, for example, a trust with four trustees, albeit two have wavering capacity. Under s.13, it would be possible for the two capable trustees to validly make a trust decision. However, if a document required it be signed to be implemented, they could not follow through on that decision.

This resulted from various feedback from conveyancers who raised concerns about evidencing whether there was a majority of trustees ‘for the time being able’ to sign such documentation. Private client professionals strongly argued that if two trustees were to hold themselves out as being such a majority, then any deed signed by them should, on the face of it, be accepted, as there are sufficient provisions to deal with a situation where the trustees have acted improperly in doing so.

Despite this, it seems the conveyancers won and the requirements for a strict majority remain.

This may require some trustees to be removed from office between decisions being made and documentation being signed. As noted earlier, for that to happen there must be intimation and an opportunity for the trustees to express an opinion before the removal. If there are decisions required to be made and implemented timeously, it may mean trustees either miss potentially lucrative opportunities or breach their duties and remove a co-trustee without undertaking all proper procedures.

This has both unlocked how trustee decisions can be made and tied one hand behind trustees’ backs to impede onward implementation.

Delegation of agents

Section 22(1) confirms trustees may delegate ‘the exercise of any of their powers’. Although s.22(5) does curb this by stating certain powers cannot be delegated, this is overridden if ‘the trust deed expressly provides otherwise’. It therefore appears that settlors could now permit any and all powers to be delegated, including those otherwise prohibited under s.22(5). For example, whom to appoint as trustee, whom to distribute to and other powers historically reserved to trustees.

In practice, it may be unlikely that trustees would choose to delegate any such powers to an agent given the potential for litigation if the agent were to act improperly. If trustees have delegated powers and not adequately supervised the agent, resulting in the breach, they can face personal liability (and may not be able to recover it in whole from the agent).

This appears to go much further than was anticipated. It was suggested during the legislative process that the s.22(5) restrictions should apply regardless of what the trust deed says to prohibit those traditionally dispositive powers (rather than administrative powers) from being delegated. However, it was felt that because it requires both the express provisions by the settlor to provide such powers and also a decision by the trustees to exercise them that protections were in place.

Whether such powers become a feature in Scots law will remain to be seen.

Trustees’ duties to provide information

Section 29 sets out the requirements for trustees to provide certain information to beneficiaries, while confirming letters of wishes and minutes relating to decisions may be withheld. If trustees refuse to provide information, s.30 does allow applications to be made to the court to seek disclosure by the trustees.

The class of persons who could raise such an action was incredibly broad, covering any ‘potential beneficiary’ and persons who had no interest in the trust (but were a descendant of the settlor, for example). During the amendments, these actions were restricted so that they would not be entertained by persons whose ‘interest in the trust is, or would be, so remote as to be of negligible value’. This brought it in line with parties who would be advised of a potential trust variation, i.e., those with a genuine interest.

That said, it may not stop the vexatious litigator if they are within the scope of persons permitted to raise an action. It would be for the trustees to argue that the action should not proceed on the basis the party’s interest is of negligible value. This may still have cost implications for the trust.

Accumulation periods

Section 45 ought to be lauded as one of the highlights of the Act as it abolishes accumulation periods for trusts, something many practitioners were keen to see.

The original wording of the Bill meant that it would not apply retrospectively to trusts created before the Act was in force. However, during the legislative process, feedback was given that it ought to be. The Bill was amended and, accordingly, s.45(5) now states that it can apply to trusts pre-dating the Act if ‘the trust deed expressly provides for accumulation in anticipation of any change in the law’.

Leaving aside how one might interpret whether a trust deed has expressly provided for a change in law, one of the key questions raised with the Scottish government in the consultations was whether it could apply if an accumulation period had already ended. For example, if a trust did have sufficient wording in it but the accumulation period ended ten years ago and all income was paid out now, could the accumulation period be ‘re-opened’, as it were, to allow accumulation again, or would the original period stand? In other words, is this just to apply to trusts where the accumulation period has not already ended?

There was a clear disparity in the responses as to what will apply. The legislation does not confirm the position, so if trustees are faced with a decision to re-accumulate or not, directions may need to be sought from a court for clarity (unless there is another means of agreeing the position, e.g., by agreement with the beneficiaries).

The role of protectors

Much like the issue with s.22 and the appointment of agents, a similar issue arises with protectors. Section 53(2) states that a trust deed can confer ‘powers’ on protectors without restriction.

A saving grace for trustees is that s.57 provides some protection from personal liability where they have complied with the direction of the protector. It is not absolute protection as the trust deed could overrule this and it is unclear whether a beneficiary could raise an action directly against a protector or if it would be against the trustees, who could then seek to rely on s.57.

Is this the end of the journey?

Royal Assent is not the end of the story, it is just the beginning. How the Act is implemented in practice will be down to how practitioners interpret and implement the provisions. This may give rise to professional practice developing in one or more areas, case law in others, or perhaps further amendment by parliament if appropriate.

At this time, the sections relating to succession (ss.76–77) will automatically come into force three months’ from Royal Assent being granted, but further regulations are required to enact the remainder of the Act.^[5]