The overlooked risk in recommending trusts

Financial planners spend a significant amount of time wondering if a trust is suitable for their clients’ objectives, whether for estate planning, tax planning or wealth preservation requirements.

One area that they might overlook in this process is the practical composition of the trust itself.

Conversations usually focus on the settlor, beneficiaries and the trust’s intended outcomes. And they might not pay enough attention to things like the number of trustees appointed and, more importantly, restrictions that can arise during trustee appointments in the future.

Failing to consider this at the outset can create difficulties for the trust many years later. Here we look at these potential pitfalls, what they can mean for advisers and trusts, and how to get it right. 

The common assumption

Firstly, advisers will likely already understand that trusts benefit from having multiple trustees. Additional trustees can help provide continuity and the trust can be administered effectively when an existing trustee retires, dies or is otherwise unable to act.

But as a result, settlors may be tempted to appoint a large number of family members, friends or advisers as trustees from the outset.

Understanding the Trustee Act 1925 

Secondly, there can be confusion between sections 34 and 36 of the Trustee Act 1925. Section 34 generally limits the number of trustees of a trust of land to a maximum of 4. It does not impose the same general limit on a trust holding only investments or other personal property. 

Financial planners will be more familiar with investment-based trusts, so attention should also be paid to section 36 of the Act. 

What this means in practice 

Consider a trust set up with two trustees. The person holding the power of appointment may appoint up to two more trustees under section 36(6). If the trust has three trustees, one more trustee may be appointed.

Getting the trustee numbers right from the outset

For a trust that doesn’t hold land, the legislation doesn’t impose a general maximum of four trustees when the trust is originally created. This is subject to the terms of the trust deed and any other applicable requirements. 

This means that, if a non-land trust is set up with more than four trustees, it may be possible to maintain that number through replacement appointments under section 36(1), where the relevant statutory conditions are met. This is different to appointing an additional trustee under section 36(6).

For example, a non-land trust starting with six trustees might be able to maintain that number by replacing an outgoing trustee. But this will depend on the terms of the trust deed, the nature of the trust property and the circumstances surrounding the replacement. If the trust holds or later acquires land, the separate restrictions applying to trusts of land must also be considered. 

Considering the correct number of trustees at the outset reduces the risk that the trust later won’t be able to appoint the number of additional trustees desired. However, a larger trustee body can also create practical difficulties, so the number appointed should remain appropriate to the trust.

The minimum number of trustees

For a trust holding land in England and Wales, a sole individual trustee may hold and administer the property. But where proceeds of sale or other capital money arise on a disposition, the money must generally be paid to at least two individual trustees or a trust corporation. 

This allows the beneficiaries’ equitable interests to be overreached and transferred from the property to the capital proceeds.

As a result, while a trust of land can continue with only one individual trustee, a second trustee will normally need to be appointed before completing a transaction involving capital money.  

By contrast, an investment-related trust that doesn’t hold land may generally be administered by a sole trustee, unless the trust deed or another applicable requirement dictates otherwise.

Nevertheless, appointing at least two trustees is usually prudent to provide continuity and shared oversight. If a sole or last surviving trustee dies, the trust deed should first be checked for a nominated appointor. If there is no nominated person who is able and willing to act, the power to appoint replacement trustees will generally pass to the deceased trustee’s personal representatives.