Purpose and intended effect
For some time it has been widely recognised that the Scots law of trusts has become badly out of date. It needs to be modernised so that Scotland keeps pace with developments in the rest of the world.
Under Scots law, a trust provides a simple legal mechanism allowing property to be held by one or more persons (the trustee or trustees) for the benefit of others (beneficiaries) or in furtherance of certain specific purposes. The trustees have powers to manage the property and, usually, to dispose of it in appropriate circumstances. They must exercise those powers for the benefit of the beneficiaries in line with the trust's purposes.
Recognised by Scots law for centuries, the concept of a trust has a number of important and practical advantages. First, a trust provides protection against the insolvency of a trustee; if the trustee becomes insolvent, the trust property continues to be held for the purposes of the trust, and does not pass to the trustee's personal creditors. Secondly, when property is held in trust, it receives a considerable degree of protection against any attempt by the trustee to give it away in breach of trust purposes. Thirdly, the ease with which a trust may be created has proved advantageous in practice. This explains the extensive use of trusts in commercial transactions in modern Scottish practice. Finally, the trust device provides great flexibility; for over 40 years, it has been possible for a truster to declare himself or herself trustee of his or her own property.
In modern Scots law, the trust also plays a fundamental role in both estate planning and in the commercial world. With respect to the former, trusts are frequently used in connection with wills and estates, and also to regulate shareholdings of family businesses, and to secure the continuity of business. It can, therefore, be seen that far from being an obscure legal technique, trusts play a vital part in everyday life for many people. In relation to the business world, trusts are used for the creation and administration of life assurance and pension policies, debt factoring and invoice discounting, securitisation, holding of collateral in project finance agreements, segregation of funds to protect against future environmental liabilities, stakeholder and similar security arrangements (escrow), and provision of security in agency agreements. For the Scottish financial services sector, trusts are especially important.
Yet, despite the prominence of trusts in Scots law, the institution is badly served by existing legislation. The main statute, the Trusts (Scotland) Act 1921, is over a century old, and its structure and language have become antiquated. The Act has been heavily amended over the years, leading to a lack of clarity and practical difficulties for trustees and beneficiaries. It is, moreover, necessary for trustees to have regard not merely to the 1921 Act but to subsequent legislation to begin to comprehend the proper ambit of their powers and duties.
By its very nature, the trust remains a versatile institution. It is important that the law of trusts should be accessible to a wide range of users and their advisors. The law should be expressed clearly and coherently in modern statutory language. As Simon Mackintosh, then a Partner at Turcan Connell told the Scottish Law Commission: "the international trust business is a competitive one" and whilst we do not wish "to replicate whatever structures some remote Pacific Island had thought of, we do need to recognise that there is a choice as to the system of trust law which most people can use, and we therefore need to have a set of legislation which meets modern standards. This needs to provide a suitable default system for those who choose not to draft extensively or who, perhaps, create a homemade document; but also to provide a range of powers and flexibilities which are what Settlors look for in modern trusts."
It is thus clear that this is an area where reform is not merely desirable but essential, in order to ensure that Scots law remains fit for purpose; modernisation will also mean that Scotland has the potential to develop into an attractive jurisdiction for international trust work. Financial services companies will not be drawn away from Scotland by the attractions of more modern trust laws elsewhere.
The Bill also implements a longstanding Scottish Government commitment on the Scots law of intestate succession, which provides a default position in cases where an individual dies without leaving a will.
The Bill implements the recommendations contained in the Report by the Scottish Law Commission ("SLC") on Trust Law which was published in 2014.
It will affect all those who use trusts. The legal profession and their clients will be directly affected as the majority of trusts are drafted by solicitors. It is important to appreciate, though, that the proposed reforms will not only benefit the business or legal sectors. They will also help anyone in the running of private trusts for the benefit, for example, of children or adults with disabilities, and they will assist executors in winding up the estates of deceased persons. Charities and other public trusts, such as those used for recreational or sporting purposes, will also benefit from the modernisation and streamlining of the law.
Arguably the most significant change proposed is that trusts legislation should be contained in a single, coherent statute, drafted in modern form to cater for modern conditions. In addition to updating the current law, the SLC recommend a number of innovations:
- The complex, arbitrary and unpredictable restrictions on the lifetime of private trusts, including the rules restricting accumulations and successive liferents, are abolished.
- Power is conferred on the court to alter trust purposes to take account of a material change in circumstances that has occurred since the trust was set up. This power will normally only be exercisable once 25 years has elapsed since the creation of the trust.
- Express provision is made for private purpose trusts; that is to say, private (non-charitable and non-public) trusts that do not have defined persons as beneficiaries but rather exist to achieve defined purposes, frequently of a philanthropic or business nature.
- Express legislation is proposed to permit the courts to remedy defects in the exercise of trustees' fiduciary powers.
- New provisions are introduced to deal with practical problems that frequently arise in the administration of trusts which include ex officio trustees.
- Provisions are made to clarify the law surrounding the duty of trustees to provide information to beneficiaries.
Many of the provisions found in the Bill are default provisions; that is, they apply in the absence of any contrary provision in the trust deed. The legislation governing trusts invariably contains a large number of such provisions; that is true of the Trusts (Scotland) Act 1921, and also of legislation found in other jurisdictions. In selecting default rules, a policy of adopting current best practice has been pursued. In determining best practice, the Scottish Law Commission derived great assistance from consultees and advisory group members and considers this an essential aspect of updating trust legislation.
The one substantive provision on the Scots law of intestate succession implements a recommendation from the SLC's Report on Succession (2009) and was consulted on by the Scottish Government in 2015. The law on intestate succession provides a default position in cases where an individual dies without leaving a will. A statutory scheme for intestacy provides a default set of rules about what should happen to someone's estate when they die without a will. The substantive provision of succession law in this Bill will amend the order of intestate succession so that a surviving spouse/civil partner's entitlement to the whole of the net intestate estate will rank second in line behind any surviving children of the deceased.
There is a problem
Thanks for your feedback