The Scottish Law Commission (SLC) has recently published a report on the reform of the law relating to trusts, and if the recommendations are implemented a large number of existing trusts could be affected. The modernisation of trust law is felt to be long overdue, given that apart from some piecemeal legislation over the years, the last major reform was almost a century ago under the Trusts (Scotland) Act 1921. The tax treatment of trusts was also substantially overhauled under the Finance Act 2006, and charities are mainly regulated by the Charities and Trustee Investment (Scotland) Act 2005.
A trust is essentially a legal mechanism whereby a ‘truster’ hands over assets to one or more ‘trustees’ to hold and control those assets for the benefit of one or more ‘beneficiaries’. A trust is usually taxed and treated for practical purposes as a separate entity from the truster, trustees and beneficiaries, and this is what confers many advantages.
Trusts are used for many diverse purposes. Examples include the protection of vulnerable beneficiaries, the ring-fencing of compensation received as a result of a personal injury from the loss of means-tested benefits, preserving assets for our children whilst enabling our partner to enjoy those assets during their lifetime, the holding of insurance policies and pension funds, protection of assets in the event of insolvency, and of course tax-mitigation; not to mention the fact that many charities operate as trusts. Accordingly, any change to trust law may have implications for many of us, either directly or indirectly.
Indeed, several continental and other foreign jurisdictions which do not recognise the concept of a trust appear to be interested in these proposals, and therefore the implications of the proposed legislation may have far-reaching effect beyond the shores of Scotland.
Whilst the recommendations of the SLC are lengthy and extensive the main suggested areas of reform are as follows:
1) The court will have power to rule upon decisions made by trustees, or which it is anticipated they will make in the future, and will extend to granting an interdict preventing those decisions from being put into effect. These issues can arise where trustees are thought to be acting unreasonably or have failed to take into account all relevant circumstances, which have all been the subject of expensive and lengthy litigation within the UK.
2) Another area often involving litigation is the provision by the trustees of information relating to the trust to the beneficiaries. In view of the lack of clarity on the trustees’ duties in the eyes of the law it is proposed that the extent of the beneficiaries right to information be clearly set out, and that the court be permitted to rule upon this where a dispute arises.
3) It will be possible to appoint a Supervisor to monitor the acts of trustees, and a Protector to ensure that the wishes of the truster are taken into account when the trustees make decisions.
4) Trusts designed for specific purposes, rather than to benefit specific beneficiaries, will be formally acknowledged. An example might be in the area of land development where the parties wish to establish a fund to be held in a trust to meet potential future claims under environmental or other legislation.
5) The complex and sometimes confusing rules regarding the restrictions on trustees to accumulate income arising from the trust will be abolished.
6) The current restriction on making successive liferents is also to be abolished. A liferent is where the trustees hold an asset for the use of a beneficiary (often the spouse of the truster) during their lifetime, but so that upon the spouse’s death that asset then passes to another beneficiary (typically the children of the truster).
7) Long-standing trusts, having been in existence for at least 25 years, may be changed by the court where circumstances have materially changed since the trust was created.
8) Clarification and extension of the powers of trustees.
It will be interesting to see to what extent these proposals are implemented, particularly in the light of the SLC’s earlier report on reform of the laws of succession.
If you have any queries regarding the issues referred to in this article please contact our Private Client Department.