Trust management expenses: ‘properly chargeable to income’ in general trust law: Carver v Duncan: trust law points
In trust law, trustees are entitled to be indemnified out of capital and income of the trust fund against all obligations incurred by them in the performance of their duties and the exercise of their powers. The trustees must debit each item of expenditure either against income or capital.
Carver v Duncan states the general rule in trust law: income ‘must bear all ordinary outgoings of a recurrent nature, such as rates and taxes, and interest on charges and incumbrances’ while capital ‘must bear all costs, charges and expenses incurred for the benefit of the whole estate’.
Lord Templeman refers to In re Bennett (1896) 1 Ch 778, for the meaning of ‘ordinary outgoings’. ‘By an outgoing is generally meant some payment which must be made in order to secure the income of the property.’
The fact that something is recurrent does not necessarily mean it is of an income nature. The annual premiums in Carver v Duncan were ‘a recurrent charge but not an ordinary outgoing’, and remained capital.
In re Bennett and Carver v Duncan establish that anything expended for the benefit of the whole estate, that is both income and capital, is to be charged to capital. There is no suggestion that there is any basis for apportioning expenses that are incurred for the benefit of the whole estate into income and capital elements.
Carver v Duncan establishes that annual fees paid to a firm of investment advisers are capital. Such fees ‘are incurred for the benefit of the estate as a whole because the advice of the investment advisers will affect the future value of the capital of the trust fund and the future level of income arising from that capital.’ This confirms that even if income is affected, the item remains chargeable to capital because it is for the benefit of both income and capital. But see TSEM8740 about temporarily investing income.