Trustees’ powers of advancement

The statutory power of advancement is provided by section 32 Trustee Act 1925, giving trustees powers to apply capital to or for the benefit of a beneficiary of a trust.

Section 32 applies to all trusts unless a clause in the trust deed expressly excludes it. This power allows trustees to pay or apply capital for the ‘advancement or benefit’ of any person who has a vested or contingent interest in the capital of a trust fund.

Previously, this power could only be used to advance up to one-half of a beneficiary’s interest. However, the Inheritance and Trustees’ Powers Act 2014 amended section 32 to remove this limit and allow this power to advance the whole of the beneficiary’s interest. The amendment made by the Trustees’ Powers Act 2014 only applies to trusts and will trusts created or arising on or after the 1 October 2014.

Section 32 does not apply to a discretionary trust. In these types of trust, the beneficiaries do not have an interest in the capital, only the possibility of obtaining an interest. The trustees have a power of appointment and may choose to exercise their discretion in a beneficiary’s favour to benefit them.

The power of advancement does not apply to a life tenant of an interest in possession trust who only has an interest in the income. If they are given a separate interest in capital, then the trustees could make advancements in their favour.

It is important to note that the power of advancement is a discretionary power. It is totally up to the trustee’s own discretion whether they make an advancement or not, or what terms they make it on within the bounds of what the law allows. No beneficiary can compel the trustees to exercise this power in their favour.

Advancement or benefit

The trustees can advance capital for a beneficiary’s advancement or benefit. The term ‘advancement’ refers to both the act of bringing something forward, in this case, the beneficiary’s entitlement to capital, as well as the act of somehow advancing the beneficiary’s position.

The term ‘advancement’ was originally thought to be quite narrow and meant to ‘advance’ a beneficiary’s life somehow or help them take a significant step in life.

The term ‘advancement’ is now thought to have a much wider meaning than this. In the case of Pilkington v IRC [1964] AC 612, the leading case on advancement, Lord Radcliffe described an advancement as ‘any use of the money which will improve the material situation of the beneficiary.

The second part of the power refers to its use for the beneficiary’s benefit. The words ‘or benefit’ were often added to trusts because the meaning of ‘advancement’ was originally thought to be quite narrow, as discussed above. Again, we have Lord Radcliffe to thank for his definition of ‘benefit’ as ‘any use of the money which will improve the material situation of the beneficiary’.

This makes it a very wide power and has led to a wide range of advancements being allowed on the basis that they are of benefit to the beneficiary. 

Some notable uses are:

• To discharge the beneficiary’s debts (Lowther v Bentinck (1874) LR 19 Eq 166)
• To save tax (IRC v Pilkington)
• Paying maintenance (Re Breeds’ Will (1875) 1 Ch D 226)
• Making a payment to a charity to discharge a moral obligation felt by a wealthy beneficiary (Re Clore’s Settlement Trusts [1966] 1 WLR 955).

The widest possible use of the power is to provide a benefit to a beneficiary’s family, which in turn is a benefit to the beneficiary as it relieves them of a duty to make their own provision. 

The trustees must consider the benefit both objectively and subjectively. They must turn each case on its own facts.

Consent

If there is a beneficiary with a prior interest in the trust fund, then they must give their consent for the trustees to make an advancement. This is because the advancement of capital to a remainder beneficiary would reduce the benefit that the beneficiary with the prior interest would receive. Only a beneficiary who is over 18 and has mental capacity can consent.

If the beneficiary is under the age of 18 or lacks capacity, the beneficiary receiving the advance in their favour does not need to consent to the advancement, even if the result of the advancement is to defer their entitlement to a later date. This allows the trustees to make advancements for the benefit of minors or beneficiaries lacking capacity.

This means that if, for example, where a child is the beneficiary under the terms of a deceased’s will, the executors will have the power to draw for their inheritance a sum that can be used for the child’s ‘advancement or benefit’. This can be done without their consent. 

As we have seen, the meaning of ‘advancement or benefit’ is extremely wide, and testators should be aware of this power when drafting their will.

Bringing advances into account

If the trustees exercise their power of advancement, then the amount advanced to a beneficiary must be brought into account when the beneficiary later becomes entitled to their share in the trust fund.

The value brought into account will be the value of the advance at the date the advance was made. However, the trustees can bring an advance into account on the basis of it representing a proportionate share of the beneficiary’s interest. The trustees should be clear on this point when making an advance.

Limitations on settled advances

It is suggested that it is not possible for trustees to use the section 32 powers to advance assets to an immediate discretionary trust for the beneficiary. Given the wide scope of ‘benefit, this could be possible. However, there is a danger that a trustee would be found to have acted in breach of trust if they relied upon the power of advancement to create a discretionary trust.

Conclusion

Trustees have many options available to them when considering how to provide for beneficiaries. The statutory powers of advancement grant a trustee a great degree of flexibility. 

However, there is still much to consider when deciding whether an advancement can be made, how it should be made, and how it will then affect the beneficiary’s entitlement if or when they become absolutely entitled to their share of the trust fund. This paper has only examined one of the trustee’s major statutory powers.

Contact our private client solicitors

SO Legal has offices across the South East. Our team of solicitors in Brighton, Eastbourne, Hastings, London and Uckfield can help you understand trustee powers of advancement.