Trust disputes - personal liability of trustees

Together we are Forbes


17 October, 2018

A trust, unlike a limited company, has no legal personality and the assets of the trust are vested in trustees. Trustees are the only persons capable of assuming rights and obligations in relation to the assets and administration of the trust.

A person who is appointed as a trustee assumes the liabilities of a trustee and that liability exposes the trust assets and his/her own personal assets to those liabilities.

So what are the duties of a trustee, and what is the extent of a trustee's liability?

Duties of a trustee

Duties of a trustee can be fairly onerous, and in short a trustee must:

  1. Bring the trust property under their control.
  2. Acquaint themselves with the nature and extent of the trust property, and the terms of the trust.
  3. Disclose circumstances with might cause them to exercise discretionary powers improperly (conflict of interest).
  4. Obey the lawful directions of the trust instrument.
  5. Act impartially.
  6. Invest in authorised investments.
  7. Maintain the appropriate standard of care.
  8. In exercise of powers, act within those powers, act honestly and act in the interests of the beneficiaries.
  9. Pay the rights persons.
  10. Not delegate the exercise of duties, powers or discretions except as permitted.
  11. Inform beneficiaries of their position.
  12. Supply beneficiaries with such information as to the management of the trust as they are entitled to.
  13. Be ready with accounts.
  14. Not enter personally into transactions with the trust property.
  15. Not to co-operate with third parties to deny or disturb the settlor's title to the trust property.
  16. Act gratuitously save as permitted by statute or the trust instrument.

These duties can be wide ranging, and a breach of these duties can lead to a claim against the trustee personally.

Trustee liability

Trustees must understand that they can be held personally liable for poor decisions made in relation to the trust, whether made directly by them or by another trustee. It's important that trustees understand this before accepting an appointment.

The primary remedy for a breach of trust is the reconstruction of the trust estate. This means a trustee's obligation is to restore the trust fund to the position it would have been in had the breach not occurred. The trustee will be personally liable to account to the trust for loss that occurs as a result of their breach of trust. This can act fairly harshly against a trustee, and so:

  1. No account is taken of loss which would have arisen if the trust had been strictly performed.
  2. Loss will include all loss suffered until restoration (even if further losses are caused after a trustee has been removed or ceased active management).

A claim against the trustee for loss suffered will usually be accompanied by a an application to remove a trustee.

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