A trust is a vehicle through which property is legally held by a trustee for the benefit of others. It separates the beneficial and legal ownership of property.
The parties to a trust are the settlor (person creating the trust), the trustee (the legal owner of trust property with the responsibility of administering the trust) and the beneficiaries (the persons for whose benefit the property is held).
The trustee must act in the best interests of the beneficiaries in accordance with the terms of the trust, which is usually established by a deed.
Have you been or, are you about to be, appointed as a trustee? If so, it is vital to understand your duties as a trustee so you can reduce the risk of being held personally liable under the trust.
The common law (court decided law) and legislation (Government made law) provide duties that all trustees must comply with. The duty between a trustee and beneficiary is referred to as a “fiduciary duty”, meaning beneficiaries in the trust have a right to expect the trustee will act in their best interests whilst managing the trust.
What are my duties as trustee under the common law?
As mentioned above, a trustee owes a fiduciary duty to beneficiaries of a trust, some of these are to;
- Act in good faith and impartially between beneficiaries. This means a trustee must be honest and reasonable and must not favour one beneficiary over another.
- Act in the best interests of beneficiaries. This requires a trustee to act with the reasonable care, skill and diligence that an ordinary business person would expect.
- Duty to preserve trust property. A trustee must conserve the trust property (including the income and capital) against loss.
- Not to make a personal profit from the trust. A trustee has no right to make a profit from the trust, if any profit is made from the trust, the trustee has a duty to account for the profit to the trust and the beneficiaries.
- Duty to account and provide information to beneficiaries. A trustee must keep an updated and accurate record of accounts and make this available to a beneficiary upon their request.
- Duty to act in person. Generally, a trustee has no right to delegate their duties to a third person, there are exceptions to this rule, such as engaging accountants and lawyers to perform specific tasks. Trust deeds usually provide a list of professionals that may be appointed to assist with performing tasks under the trust.
As is clear from the above, a trustee has many varied duties under a trust. These duties can become more onerous depending on the complexity of the trust. We recommend you speak to one of our trust lawyers who can provide you with further advice on your duties as a trustee or help you decide whether to accept a trustee role.
What are my duties under relevant legislation?
In NSW, the Trust Act 1925 provides that a trustee must, in exercising a power of investment, exercise care, diligence and skill that a prudent person engaged in that position would exercise in managing the affairs of other persons.
Our trust lawyers can provide you with further advice on your responsibilities under the Trust Act.
When can I be held personally liable under a trust?
If a trustee breaches any of their duties under a trust or the general law, they may be held personally liable. For example, if a trustee fails to exercise their duties in good faith and the best interests of the beneficiaries by placing their interests above those of the beneficiaries.
If a trustee is found to have breached their duties, the trustee may be held liable to pay compensation into the trust to restore the trust estate to the same position it had been before the breach occurred. The trustee may also have to pay beneficiaries a monetary amount of any profits made as a result of the breach.
Not all breaches of a trustee’s duties will result in personal liability. The Trust Act states that where a trustee acted honestly and reasonably whilst carrying out their duties under the trust, then the trustee ought to be excused from being held personally liable.
This principle is decided on a case by case basis, hence we recommend you speak with one of our trust lawyers to see if this exclusion applies to your situation.
Limiting liability – corporate trustee
The trustee of a trust does not have to be an individual, a company that legally holds the title to the trust’s assets for the benefit of the beneficiaries of the trust can also be appointed as a trustee.
Individual trustees are often appointed because of lower upfront and ongoing administration and management costs, however, there are benefits of having a corporate trustee which can include protection from personal liability and limiting the liability of the trustee to the assets of the company.
The pros and cons of appointing an individual or corporate trustee should be considered in consultation with your lawyer.
Trustees play an important part in the performance of a Trust Deed and their duties as a trustee are just as important.
Deciding to appoint a corporate or an individual trustee is not always straight forward, you should seek legal advice to ensure that the right structure is put in place for your specific circumstances.
To reduce the risk of being held personally liable under the trust, a trustee must understand their duties under relevant laws and be able to show that they acted in good faith and the best interests of the beneficiaries while managing the Trust Deed.
If you or someone you know wants more information or needs help or advice, please contact us on 1800 618 869 or email [email protected].