Understanding the STEP provisions
In this month’s CPD paper we will consider the STEP (Society of Trust and Estate Practitioners) provisions in detail. We will specifically be looking at the 2nd edition of the STEP provisions as this is the most up to date version. There are a lot of provisions to cover so this will be a two-part paper.
WHY DO WE NEED ADMINISTRATIVE PROVISIONS IN A WILL?
It is important to include administrative powers when drafting a will. Without express powers in the will executors and trustees are reliant only on statutory powers, which are spread out across multiple different statutes. These statutory powers may not cover all powers that the executors or trustees need in some cases, for example there is no statutory power for trustees to make loans.
Since 1992 the easiest method of incorporating the administrative powers that an executor or trustee might need has been by incorporating the STEP provisions by reference in the will. This is much easier than writing out all of the powers within the will itself and can make wills quite a bit shorter and more to the point.
In 2011 an updated version of the STEP provisions was introduced (the 2nd edition). While it is still possible for drafters to incorporate the 1st edition and previously drafted wills that referenced the 1st edition aren’t invalid, it is best to now incorporate the 2nd edition. This newer version takes account of some changes in legislation since the 1st edition, namely the Trusts of Land and Appointment of Trustees Act 1996 and the Trustee Act 2000. It also incorporated some changes that drafters commonly made to the provisions anyway.
Administrative powers apply to executors and trustees. They may not ever need to exercise all of the powers granted to them by the STEP provisions, but as the saying goes it is better to have and not need than to need but not have. Powers that are irrelevant to the executors do no harm, for example the power to accept the receipt of a treasurer for a charity when there are no charitable gifts in the will.
WHY USE THE STEP PROVISIONS?
The STEP provisions were drafted by James Kessler QC, a leading barrister and author in the areas of wills, trusts, and taxation as well as one of the founders of STEP. They are drafted in a way that makes them easy to understand for drafters, and more importantly for testators and their executors. They are also accompanied by a set of guidance notes to explain each provision in more detail, which is also useful for testators.
They are split into the standard provisions, which is the main bulk of them, and the special provisions that cover some more unique aspects of administration. It is possible to pick and choose which should apply. The standard provisions are contained in provisions 1-13 and the special in 14-23.
They are easy to incorporate as it can be done by reference. For example:
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“The standard provisions and all of the special provisions of the Society of Trust and Estate Practitioners (2nd Edition) shall apply.”
Different wording can be used if you only wish to incorporate the standard provisions, or the standard provisions and only a few select special provisions.
If incorporating the STEP provisions a full copy of them should be provided to the client as they do form part of their will. They should not be bound to the will though, incorporation by reference is enough.
A drafter should familiarise themselves with the STEP provisions and be aware of each provision’s use and effect on a will. Care should be taken to avoid conflict between the provisions and the testator’s wishes, especially with the special provisions.
It should also be noted that where there is a conflict between a STEP provision and an express provision in the will the will prevails:
“2.2 These provisions have effect subject to the provisions of the Principal Document” (Principal Document being the will or trust in which the STEP provisions are incorporated in).
THE STANDARD PROVISIONS
We will now examine the standard provisions in detail. This section should be read alongside a copy of the STEP provisions, which can be found here: https://www.step.org/sites/default/files/Comms/SSP2_rebrand.pdf
1. Incorporation of STEP provisions
This section gives guidance on what wording should be included in the will or trust in order to incorporate the provisions. This includes how to incorporate the full set, just the standard provisions, or only select provisions.
2. Interpretation
This section details key definitions used throughout the provisions. It is important to note that these definitions relate only to the STEP provisions and do not alter any definitions already used within the will. An important definition here is at 2.1.2 for ‘income beneficiary’. This term is often misinterpreted by drafters as simply meaning a ‘life tenant’ but note that it also refers to a beneficiary who may have income paid to them at the trustees’ discretion. Any references to powers the trustees have in relation to an ‘income beneficiary’ must therefore not be limited to just a life tenant of an interest in possession trust:
“2.1.2 “Income Beneficiary”, in relation to Trust Property, means a Person to whom income of the Trust Property is payable (as of right or at the discretion of the Trustees).”
3. Protection for interest in possession trusts
This provision prevents any other provisions accidentally overriding any IPDI trusts created by the will, preventing any IHT benefits of such trusts being undermined.
4. Additional powers
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4.1 Investment
This provision grants trustees wider powers of investment than are allowed by the general law. It allows them to invest in property situated anywhere in the world and also in secured and unsecured loans. As with all other powers executors and trustees exercise they have a duty of care and must also consider the standard investment criteria set out in section 4 of the Trustee Act 2000. These criteria include a duty to review the trust investments from time to time, to consider the suitability to the trust of investments of the same kind, and the need for diversification of investments.
4.2 Management
This provision grants trustees wide management powers over trust property. They can affect any transaction, carry out maintenance or repairs, or develop it as though they were absolutely entitled to the trust property. Wide powers of management are already granted by TLATA 1996, so an express provision is not strictly necessary but is included to make the position clear to trustees.
4.3 Joint property
The trustees may acquire property jointly with any Person. This allows the trustees to act together with any other person in purchasing and holding trust property. This is beneficial when downsizing property held in an IPDI trust where the life tenant is also a co-owner of the property. STEP’s own guidance notes give a useful example of this power being used by trustees purchasing a property for young beneficiaries jointly with their parent or guardians.
4.4 Income and capital
Income may be set aside by the trustees and invested so that a fund is available to pay any liabilities payable out of the trust fund. Non-professional trustees of an interest in possession trust should be encouraged to take advice before exercising this power as setting aside income in this type of trust may cause an issue. Ordinarily the life tenant of an interest in possession trust is entitled to the income of the trust, so the trustees would need good justification to set aside income in theses cases as they are depriving the life tenant.
4.5 Accumulated income
This provision allows trustees to apply income as though it is income arising in the year that it is applied. This does away with some fairly complicated rules relating to apportionment of trust funds, where income arising at different times would be treated differently and have to be separately considered. Now, all income that is accumulated may be treated as though it arose in the year it is paid. This change was also made by the Trusts (Capital and Income) Act 2013, shortly after the 2nd Edition of the STEP provisions were published.
4.6 Use of trust property
This provision gives trustees wide powers in relation to acquiring interests in property for the use of an Income Beneficiary. Remember that this is not just those beneficiaries with an entitlement to income.
The trustees may purchase property anywhere in the world and allow an Income Beneficiary to occupy it or use it on whatever terms the trustees see fit, for example to rent it out to produce an income for them. This power, for obvious reasons, does not conflict with any powers that a person with an interest in
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4.7 Application of trust capital
This power only applies if the trust grants the trustees the power to transfer Trust Property to an Income Beneficiary absolutely, or if they have a power to do so with the written consent of another person and that consent is given (this second power is more common in lifetime settlements, with the person who can provide permission often being the settlor).
If it applies, this power allows trustees to make loans of the Trust Property to an Income Beneficiary on terms the trustees decide. It also allows them to guarantee the debts of an Income Beneficiary, or to pay capital to them as a means of augmenting their income.
4.8 Trade
This provision is straightforward and allows trustees to carry on a trade in any part of the world. There is no statutory power to trade so an express power is necessary if the testator wants the trustees to do more than simply immediately sell the business interest. This would normally be used to carry on the testator’s own business. Drafters often choose to supplement this clause with further clauses in the will itself which provide more express guidance to the trustees when it comes to employing managers in the business, indemnifying the trustees for losses, and selling the interest to surviving shareholders or partners.
4.9 -4.14
These provisions are all self-explanatory and no further explanation of them than the provisions’ own wording should be necessary.
4.15 Appropriation
The statutory powers of appropriation given by section 41 of the Administration of Estates Act 1925 allows executors to transfer any undisposed of assets in their ‘actual condition or state of investment’ to a beneficiary to satisfy that beneficiary’s interest under a will. A simple example of this in action would be where the executors transfer undisposed of chattels of a certain value to a beneficiary to satisfy a cash legacy rather than selling the chattels and transferring the cash. Exercising the statutory power requires the beneficiary’s consent. This provision in the STEP provisions widens this power of appropriation and allows the trustees to exercise the power without the beneficiary’s consent.
4.16 Receipt by charities
These provisions are necessary powers in relation to charitable gifts and gifts to companies to make administration easier. Inclusion of them in this way also makes the drafting of charitable gifts in a will much easier, as the drafter can simply draft the gift without having to worry about including additional wording in relation to who can give a valid receipt. This provision also protects a trustee who pays a legacy to a person who appeared to be the treasurer or other proper officer.
The second part of this provision at 4.16.2 is what is known as a cy-près clause. An old French term for “so near”. This clause prevents a charitable gift from failing as long as the testator had a generally charitable intention. If by the time of the testator’s death the charity ceases to exist or changes its name
Page 4 of 8 the trustees can make the gift to an alternative charity with similar aims to the original recipient of the gift.
4.17 Release of powers
This allows trustees to release powers under the trust or fetter their discretion, and they may make such a release revocable. This power can be used to release a power that has detrimental tax consequences for the trust or even to narrow their powers to benefit a certain class of a discretionary trust.
An interesting use of this power was seen in the case of A and others v B and others [2016] EWHC 340 (Ch). In this case the trustees were allowed to partially release their powers of appointment over a discretionary trust. This allowed them to temporarily exclude the interests of remoter beneficiaries so the trustees could make a variation under the Variation of Trusts Act 1958. If the trustees couldn’t partially release this power the variation would not have been possible, as all potential beneficiaries of a trust must consent to a variation. If there are minors or potential unborn beneficiaries, then the court must consent on their behalf. Excluding these people temporarily did away with the need for this. Once the variation was complete the trustees then revoked the release. 4.18 Ancillary powers
Incredibly wide ranging, this power allows the trustees to do anything that is necessary as part of their duties even if the power is not specifically set out, as long as it is allowed by law. This has the effect of not excluding any statutory powers that executors and trustees have naturally.
5 Powers of maintenance and advancement
This provision made some express amendments to sections 31 and 32 of the Trustee Act 1925. These are known as the statutory powers of maintenance and advancement. The changes to the legislation that this provision made was actually so commonplace in will drafting that the legislation itself was amended to reflect it by the Inheritance and Trustees’ Powers Act 2014, so this provision actually has no effect now. There are no plans to release a 3rd edition just to remove this provision though. 6 Minors and beneficiaries without capacity: powers over income
This power is twofold and deals with both minor beneficiaries and beneficiaries who lack capacity so are unable to give a valid receipt.
Where assets are held on trust for a minor beneficiary this provision allows the trustees to pay or apply income to a minor’s parent or guardian. They may also pay income to the minor themselves if they are at least 16. To be able to exercise this power the trustees must already have the power to apply income for the minor’s benefit. This power will either be granted in the will itself, or if not excluded then by section 31 of the Trustee Act 1925 which gives trustees a power to apply income for the use and benefit of a minor for their ‘education, maintenance, or other benefit’.
Where assets are held on trust for a beneficiary who lacks capacity and who cannot make an LPA for his property and financial affairs the trustees may apply the income for that person’s benefit at their discretion. This is subject to directions of the court of any Deputy acting on behalf of the incapacitated person.
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If there is someone appointed to care for the incapacitated person’s financial affairs, such as an Attorney or Deputy, the trustees may pay income to that person and accept their receipt.
In both cases the trustees have no obligation to enquire about the use of the income unless they have knowledge of circumstances that calls for enquiry. If they have reason to believe that the parent, guardian or other authorised person will misappropriate funds intended for the beneficiary’s use the trustees mustn’t make any payments to that person without a means of protecting the beneficiary’s interests.
7 Disclaimer
Any beneficiary can disclaim their interest under a trust if they wish and receive no benefit or reduce their benefit.
8 Apportionment
Similar to provision 4.5, this power does away with the need for complex calculations to apportion income and expenditure, taking an administrative burden off of the trustees. Income and expenditure are treated as arising when payable. As above though, these statutory and equitable rules regarding apportionment were abolished on 1 October 2013 anyway.
9 Conflicts of interest
This is a power that should always be explained to testators. Under the general law a trustee cannot act where there is a conflict between their fiduciary duties and their personal interests. This places a trustee who is also a beneficiary in a position of conflict. However, it is very common for a testator to appoint a person as a trustee of a trust that they can themselves benefit from.
Clause 9.1.2 contains an important definition for an ‘independent trustee’: 9.1.2 “Independent Trustee”, in relation to a Person, means Trustee who is not:
(i) that Person (ii) a brother, sister, ancestor, descendant, or dependent of that Person (iii) a spouse or civil partner of (i) or (ii) above; or (iv) a company controlled by one or more Persons within (i), (ii), or (iii) above.”
This clause aims to prevent conflicts of interest by stating that the trust powers may only be used to benefit a trustee who is also a beneficiary if there is an independent trustee acting, or the trustees consist of all of the trustees originally appointed under the will or trust.
10 Trustee remuneration
This provision allows a professional trustee to charge a reasonable fee for any work they carry out on behalf of the trust. There must be a link between the work actually carried out and the professional skills of the trustee.
11 Trust Corporations
Trust Corporations may act as a trustee on the basis of its standard terms published at the date of the will or trusts execution. The parties to the appointment may also undertake that the Trust Corporation may act as a trustee and charge on the basis of its standard terms at the date of the appointment. In the event
Page 6 of 8 of a conflict between the STEP provisions and the Trust Corporations terms the Trust Corporation’s terms prevail. Often this is overridden though, as many appointment clauses for Trust Corporations will contain wording similar to “I declare that the Company shall be entitled to charge remuneration….in accordance with their terms including the scale of fees or charges in force at the date of my death…”.
12 Liability of trustees
This is another provision that should always be explained to testators. The Society of Will Writers have a template document for this that you will find in the Members area of the website.
A lay trustee is not liable for any loss to the trust fund unless it was caused by his own fraud and they are acting alongside another trustee who is not a lay trustee. For the purposes of this provision a lay trustee is defined in section 28(6) of the Trustee Act 2000: “(6) For the purposes of this Part, a person acts as a lay trustee if he –
(a) is not a trust corporation, and
(b) does not act in a professional capacity”
This provision indemnifies a trustee against any losses unless they were caused by the trustee’s fraud or negligence. This protects them from any liability for breach of trust as long as they have acted in good faith and with reasonable care.
This also protects a trustee who acts on advice given by counsel of at least five years standing. There are a number of exceptions to this though:
1. The trustee knows or suspects that Counsel’s advice was given in ignorance of some material facts.
2. There are pending court proceedings on the matter.
3. The trustee has a personal interest in the matter.
4. The trustee has committed a breach of trust that relates to the subject matter of the advice.
13 Subsequent editions of STEP standard provisions
Naturally only the version of the STEP provisions that are referenced in the will or trust are incorporated into the document. If a new edition is released the newer edition isn’t implied to overwrite the older edition that the will incorporated, which is why it is still perfectly possible for wills to be executed still using the 1st edition.
This final provision of the standard provisions allows a trustee, by deed, to declare that a subsequent edition of the STEP provisions applies. So, if between now and the testator’s death a 3rd edition is published the trustees could act to incorporate the newer edition instead, wholly or in part.
If the special provision were not incorporated in the original document, then the trustees may not declare that the special provisions now apply.
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CONCLUSION
This overview of the standard provisions has hopefully given readers a deeper appreciation of the administrative provisions required to administer an estate or trust and the usefulness of the STEP standard provisions. In the next paper we will examine the special provisions, which require a bit more discussion.
Important Reminder:
These notes are produced solely for the benefit of SWW members when completing the January 2020 CPD test to gain 1 hour of structured CPD towards their annual quota. The notes do not represent legal advice and no reliance can be made on the content of the notes in any or individual specific client circumstances. Having read the notes members should cement their understanding by considering further reading around the subject – cases details can be found by searching the case references using BAILII or GOOGLE.
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