Role of Trustee
Any person may act as a trustee although for reasons of prudence and convenience, it is best to appoint a trustworthy and experienced person. Companies or so called “trust corporations” may be formed to provide trustee services. A professional trustee will require to be paid. This will require a clear power and right in the trust document for the trustee to charge for his services.
Ideally, the trustee should be somebody independent of the beneficiaries. This will avoid conflicts of interest. However, it is common in simpler wills and trusts, for reason of cost and convenience, that one of the beneficiaries acts as trustee.
A single trustee may be appointed to act alone. It is possible to have multiple trustees and the matter will be determined by whatever provision is made by the trust document. In practice it is desirable, to have at least two trustees, so that there are checks and balances and so that decisions are more objective and less vulnerable to claims of bias.
It is possible to provide for a number of trustees, who may act by majority. Alternatively, the trust documents or deed may require unanimity, in relation to some decisions or in relation to key decisions. In the absence of an indication otherwise trustees must act unanimously. Where one of a number of trustees is a beneficiary, he would generally not be entitled to vote or act in matters where he has a conflict so that the other trustees make the requisite decisions.
Two trustees are necessary in order to give a receipt to a third party free of a trust under a trust for sale. This makes it desirable that there be two trustees in the case of a trust of land. See our section on trusts of land. A sale by two trustees of land may transfer title to the property, clear of any third party interests. It is not necessary to investigate whether the trustees are acting in compliance with the trust deed.
Duties of Trustees
The position of trustee carries potentially strict and onerous duties and obligations. They may be made personally liable for default. It is desirable that the trustees have power to obtain insurance insofar as possible, against negligence and breach of duty.
The primary point of reference for trustees’ duties is the trust deed. Trust deeds usually modify many of the default rules, some of which are now antiquated. It is expected that new trustee legislation will come into force in the near future.
The first duty of the trustee is to familiarise himself with the terms of the trust, including in particular his obligations and powers. All trust property must be ascertained and brought under the trustees’ control. This requires that they take and maintain legal title and authority and control over the assets. The essence of the trust is that the trustee holds the assets and that the trust obligations are enforceable against them personally by the beneficiaries.
Trustees are under a duty to invest trust funds in order to preserve the capital for the beneficiaries in future years and for future beneficiaries. Their duty is to act as a prudent man would in the circumstances, in investing on behalf of other persons for whom he was morally obliged to provide.
Trustees often have powers to act in their absolute discretion under the trust deed. However, this does not mean that they may do what they want or act on a whim. They must act in good faith and honestly.
The default investment rules for trusts are somewhat outdated, although they have been updated in modest ways from time to time. In the absence of power to do otherwise, trustees may only invest in authorised trust investments. These are specified by law.
The Minister for Finance may specify additional authorised investments from time to time. In effect, authorised investments are confined to government backed securities, bank accounts, securities of certain public quoted companies, interest-bearing deposit accounts, and certain mutual funds. These investments were perceived as ultra safe although the financial crisis has exposed some of these investments as less safe than formerly assumed.
A trustee must not profit from the trust. If he makes any profits or gains, they will belong to the trust by way of constructive trust. The trustee must not buy trust property because of the obvious conflict of interest. Exceptionally, trustees may be permitted to deal at arm’s length with the other trustees, subject to under the terms of the trust. It may, for example, be provided that one trustee may purchase property with the consent of other trustees.
The default position is that a trustee is not entitled to any renumeration for the time spent in performing his duties. He is entitled to reimbursement of expenses incurred in the administration and management of the trust. The Courts may award renumeration to a trustee who has acted honestly, if there is no power in this regard.
Trustees must segregate trust funds and keep them separate. They must not mix them with their own or other funds. They must be able to account for all funds received and held. If they mix the trust funds with their own funds, any losses, etc. even those legitimately incurred, are likely to fall on their own funds.
Delegation of Powers
Trustees may not generally delegate their powers. If a person has been appointed trustee, it is presumed that they have been selected by reason of their own personal attributes and qualities. However, a trustee may be allowed to delegate his powers by the trust deed.
Even in such case, he must ensure that the person to whom they are delegated is appropriate, reputable and competent. The agent appointed must be monitored. If they do not do so the trustee may remain responsible notwithstanding the permitted delegation.
The trustees will usually have an express or implied power to retain the services of advisers and agents. For example, financial advisers, lawyers, auctioneers and estate agents would of necessity be retained for advice. If an ordinary prudent person would retain such an agent, then the trustee may do so and this does not constitute a delegation.
Distribution of Trust Assets
Trustees must distribute the income and capital of the fund according to the terms of the trust. They would be in breach of the trust, if they failed to do so and the beneficiaries could take the requisite legal action against them.
Trustees must ensure that they obtain proper receipt. They may only pay trust assets to persons with legal capacity to give them a discharge and receipt (i.e. of full age and sound mind). If they do not do so, they may remain liable to the beneficiary who may assert rights upon cessation of the disability.
The terms of a trustee’s relationship with the beneficiaries will depend on the terms of the trust. In some cases, the trustee is a bare nominee who may be compelled to transfer the assets to the beneficiaries on request. In other cases, the trustee holds the trust assets over time for the benefit of various beneficiaries. In discretionary trusts, the trustee may have power to decide if and when assets are distributed.
A beneficiary under a discretionary trust cannot compel the trustees to pay a particular share to him. However, he can require the trustees exercise a discretion in accordance with the terms of the trust deed
A trustee must act fairly in the discharge of his duties. He must maintain equality and must not be biased. This does not however imply that beneficiaries under a discretionary trust must obtain equal shares.
Records and Accounts
Trustees must maintain full records and accounts of all their dealings. Accounts need not generally be audited. Trustees generally retain professional accountants to prepare trusts. These are generally chargeable against the trust.
Beneficiaries and their advisers are entitled to inspect copies of the trust. Trustees have a right to information, even if the beneficiaries who are discretionary trustees with no fixed interest.
Trustees need not generally give reasons for their decisions. In a famous case, a trustee of a discretionary trust requested details of meetings, documents and correspondence between trustees in relation to the exercise of the discretion.
The Courts emphasised confidentiality between trustees and the risk that if Courts made such information available, they could be inhibited in their discussions.
Notwithstanding the general principle, if there is any suggestion of lack of good faith, beneficiaries may be entitled to access to documentation. In such cases, it is distinctly possible that on a discovery application, that the trustees will be required to produce trust minutes and documents.
Implied Powers of Trustees
The powers of the trustees are generally set out in the trust deed. The proposed legislation on Trusts is likely to significantly enhance the default powers of trustees. In the absence of specific rules, the default rules apply under the Trustee Act and under principles evolved by the courts.
Trustees are obliged to sell depreciating asserts, under the default rules. The rationale is that this is in the interests of future beneficiaries.
Trustees are authorised to insure trust property. The default rules provide that insurance coverage is not to exceed 75% of the value of the property although the prudence of this rule is extremely questionable.
Trustees have powers to compromise and settle debts and claims.
Maintenance of Minors
A common issue, is the power of trustees to maintain beneficiaries under the age of 18. The ideal is that the trust document provides comprehensive powers. Typically powers are provided, by which trustees may use trust assets to which beneficiaries are contingency entitled or will be entitle at a certain age, for their maintenance, education and advancement.
If trust assets are held for the benefit of a person under 18 for a life interest or greater, absolutely or conditionally of obtaining 18 or some event before 18, certain default powers are available. The trustees may in their discretion, pay funds to the minor’s parent or guardian or apply the funds for the maintenance, education or benefit of the person under 18. This may be done even if some third party has legal or moral duty to maintain the children concerned.
Any income surplus to requirements, must be accumulated and added to the trust fund. The power to apply to maintain only applies to trust income, if any. If the income has been directly applied for the benefit of another, then it is not available.
Trustees may spend capital or income to which the infant is entitled on their maintenance or education with the approval of Court. In the case of a benefit under a Will, trustees have a right to maintain the person if he is entitled on obtaining 18 or contingently upon becoming 18 or at a later age. Both capital and income be applied. There is no implied power to apply capital in respect of a person over 18.
Breach of Trust
Trustees may be sued for breach of trust. They are personally liable. They must make good any losses even if they did not benefit from the matter complained of. If trustees are obliged to repay trust assets they will be obliged to pay interest on them.
Trustees must account for unauthorised benefits and secret profits. They are liable irrespective of their good faith. Frequently trust deeds excuse trustees for actions honestly taken and in good faith. However the default position is as above.
Generally, a trustee is responsible for his own breach and not that of his co-trustees. However, if a trustee fails to maintain proper control and permits his fellow trustee to act to his exclusion, he may be liable on the basis that he was aware or should have been aware of the breach of trust and failed to take action. A trustee may be liable for failure to take action for breach of trust against his predecessors or other trustees.
Where a number of trustees have committed a breach of trust, each are jointly and severally liable. See our section on civil liability legislation and the implications of joint and several liability.
Trustees may limit or escape the liability for breach of trust in some cases. Beneficiaries may waive a breach of trust. They may do so after the event. They may consent to it by participating in it.
The Trustees Act provides for an indemnity to trustees in respect of breach of trust by co-trustees unless the trustee had been guilty of wilful default.
Generally legal action for breach of trust must be brought within six years. However if a beneficiary is are under age or subject to a legal disability, the relevant time limit will not run until he ceases to be so liable. There is no time limit were the trustee has been fraudulent.
Trustees may apply to Court for protection if documents are ambiguous in which event they may enjoy the protection of the Court’s interpretation.
Beneficiaries may take rights of action against trustees personally. They may also trace trust assets which have been misapplied. See our separate chapter on equitable remedies and the remedy of tracing. There is recent legislation allowing for variation of trusts.