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A bold new world? Aspects of the Trusts and Succession (Scotland) Bill
Trusts – An Introduction
Trusts have been an important feature of Scots Law for centuries and they continue to be of huge relevance today. That said, the law relating to trusts in Scotland has largely stood still for the last 100 years. Changes have long been overdue and, in November 2022, the Trusts and Succession (Scotland) Bill was introduced in the Scottish Parliament. If passed, this will represent the biggest change to the law relating to the administration and management of Scottish trusts since 1921. This article looks at a few of the issues that the draft legislation aims to address:
Incapacitated Trustees
Trusts allow someone (the ‘truster’ or ‘settlor’) to gift assets to one or more persons (the ‘trustees’) to be held for the benefit of others (the ‘beneficiaries’). Examples include trusts created for the protection of young or vulnerable individuals. They may last only a short time or they may go on for many years. The potential longevity of trusts means that it is not uncommon for trustees to lose capacity during the lifetime of a trust. As can be imagined, this can cause major problems for the running of the trust. Currently, under Scots Law, trustee decisions must be made by a majority of the trustees. However, because this does not exclude trustees who may be incapable, it may be the case that a majority verdict cannot be reached and the trust can no longer operate effectively. In terms of the Trusts (Scotland) Act 1921, the only recourse for trustees in such a situation is to apply to the Court to have the incapable trustee removed. The need for formal application to the Court inevitably incurs expense to the trust and can be a long-winded process.
Under the proposed legislation, a majority of other trustees would have power to remove an incapable trustee without having to go through a court procedure. This would be a significant step forward. The Bill further includes a definition of “incapable” which dovetails nicely with the existing terminology used in the Adults with Incapacity (Scotland) Act 2000 in other words someone who is incapable, through mental disorder, of making, communicating, understanding, or retaining the memory of, decisions, or who, through physical disability, is unable to communicate.
Validity of Deeds and Documents
It has always been clear that a body of trustees can make a valid decision if a majority of the trustees are in agreement. In other words, unlike in many other jurisdictions, trustees do not have to agree unanimously to a particular course of action. However, it has been less certain as to whether this means that only a majority of trustees is required in order to execute a valid deed or document. Let’s take the example of the sale of a property by trustees – it is accepted that, so long as a majority of the trustees agree to sell, then that decision to sell is a legally binding one. When it comes to actually signing the document that transfers the property to the purchaser, however, there has been much debate over whether, under the current law, such a document signed by, say, only three out five of the trustees is valid. The proposed legislation would stipulate that a deed executed by a majority of the trustees is an effective legal document, providing much needed clarity.
Duration of Trusts and other Restrictions
Unlike in many other jurisdictions, it has always been recognised that a trust created under Scots Law can, if necessary, last forever. However, there have long been restrictions on the length of time that income can be accumulated within a trust. These rules have been much criticised over the years for their arbitrary and unpredictable effects and they can often lead to additional income tax liabilities arising within a trust. The draft Bill would repeal the restrictions on accumulations, giving trustees considerably more flexibility.
Conclusion
While the Trusts and Succession (Scotland) Bill, if passed, would not constitute a comprehensive statement of Scottish trust law, it would represent a significant step forward in both restating and clarifying aspects of the current law. It would introduce important changes, particularly in relation to the law on incapable trustees, which will allow for the more effective management of trusts for a new generation.
For advice on setting up or managing a trust please contact our Private Client team on 01224 332400 or by email.
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