Chapter 14: Protection of Trustees

Question 1

Trusteeship is onerous

Answer 1

Trusteeship is an onerous ofce and even the most careful trustee may find themselves in a situation where they risk liability for breach of trust because they have inadvertently acted outside their powers or failed to act in accordance with their duties. (Such breaches may, of
course, also be committed negligently or even intentionally.)

Question 2

Actions to protect trustees

Answer 2

This chapter considers the actions that can be taken to protect trustees:
(a) When the trust is first established;
(b) During the administration of the trust (but before a potential breach is committed); and
(c) After a breach has been committed.
For ease of reference, this Workbook uses the terminology of ‘trustees’ but please note that
personal representatives can use the same methods of protection.

Question 3

Protecting trustees from the outset

Answer 3

Before taking on the role of trustee, it is important to understand the nature of the role and the
risk of personal liability for breach of trust. This enables the prospective trustee to take action to
mitigate such risks.
The easiest way to avoid liability is, of course, to simply avoid becoming a trustee in the first
place. If a settlor asks an individual to act as trustee, they can turn down the role

Question 4

Minimise future potential liability

Answer 4

If the intended trustee does choose to act, there are still things that can be done to minimise their
future potential liability, such as requiring the settlor to include an ouster or exemption clause in
the trust instrument or by taking out trustee liability insurance.

Question 5

Ouster clauses

Answer 5

If the trust is created in a formal document such as a trust deed or will, the trustees may be
involved in the drafting of that document. This is very common in cases involving professional
trustees.

Question 6

Entirely removes duty

Answer 6

In some cases, they may include an ouster clause, which entirely removes a duty that they would
otherwise have. Not all trustee duties can be ousted (because this would render the trust
meaningless) so they should be used sparingly. A common example in practice is the removal of
the duties that ordinarily arise when a trust holds a majority shareholding in a company (under
the Bartlett v Barclays Bank line of case law).

Question 7

Exemption Clauses - Different to an Ouster Clause

Answer 7

It is also possible to exclude or limit liability for breach of trust by way of an exemption clause. This is diferent to an ouster clause because the duty still exists but the trustees will be protected
from personal liability if they breach it. Because the duty still exists, it may still be possible for the beneficiaries to pursue action in respect of the breach (eg by making a proprietary claim or a personal claim against a stranger) but the
trustees will be protected against claims. An exemption clause cannot exclude or limit a trustee’s liability for fraudulent breaches of trust.

Question 8

Trustee Liability Insurance

Answer 8

Trustees may also choose to take out insurance against personal liability for breach of trust. Such
insurance is commonly known as ‘trustee liability insurance’ or ‘trustee indemnity insurance’.
Like any insurance policy, it will contain restrictions on when the policy will pay out. Similarly to
exclusion clauses, insurance can protect trustees against liability for negligence but not
fraudulent breaches of trust.
It will often be possible to have the insurance premiums paid out of the trust fund as an expense
of the trust.

Question 9

Protecting trustees during administration
3.1 Uncertainty as to powers or duties

Answer 9

There may be times when trustees are unsure of their powers or duties. For example, the provisions
of the trust instrument may be difcult to interpret, leaving them unclear as to whether they are
permitted or required to take a particular course of action.

Question 10

Legal advice on interpretation of trust terms

Answer 10

Where trustees seek legal advice on the interpretation of the trust instrument, they may simply
choose to rely on that advice and act accordingly. However, this will not necessarily prevent the
trustees from liability for breach of trust if they take action on the basis of the legal advice which
turns out to be incorrect (ie the court takes a diferent view).

Question 11

Good advice

Answer 11

Good advice will therefore acknowledge how confident the lawyer is that their interpretation is
correct and advise the trustees as to further steps they can take to protect themselves. These
include:
(a) Seeking court directions
(b) Applying to the High Court under s 48 Administration of Justice Act 1985 (‘AJA 1985’) to rely
on Counsel’s opinion
(c) Surrendering their discretion to the court
(d) Obtaining beneficiary consent

Question 12

Seeking Court Directions

Answer 12

If the trustees are unsure of their obligations or wish to ensure that their plans for distributing the
trust property will not expose them to a claim for breach of trust, the safest thing to do is seek
directions from the court.
There are many reasons why a trustee may want to take this action. For example, the wording of
the trust instrument may be ambiguous, leaving the trustees unsure of the scope of their duties or powers. Similarly, they may be concerned about how to interpret a piece of legislation or apply
case law in the context of the trust.

Question 13

Apply to Court for Guidance

Answer 13

To protect themselves from liability for breach of trust, the trustees can apply to the court for
guidance on the matter. Trustees who act in accordance with the directions of the court will not
be liable even if there is a subsequent claim from a beneficiary

Question 14

Section 48 AJA 1985 application

Answer 14

Although seeking court directions is the safest option when there is uncertainty, it is also an
expensive option and trustees need to weigh up the cost of doing so against the risk of being
successfully sued for breach of trust if they do not.

Question 15

Cheaper Available Options

Answer 15

In some cases, there is a cheaper option available which still involves applying to court but
without the expense of a full court hearing. In cases where there is a question about the
construction of the terms of a will or trust, s 48 AJA 1985 allows the trustees to take the following
actions:

Question 16

Two Steps

Answer 16

Step 1 Seek a written legal opinion from a person satisfying s 71 Courts and Legal Services Act
1990 (usually a barrister or solicitor with 10 years of experience); and
Step 2 Apply for High Court authorisation to rely on that legal opinion

Question 17

Grant Order Unless there is a dispute

Answer 17

The High Court will grant an order without hearing arguments unless there is a dispute which
would make it inappropriate. This course of action is therefore most useful in cases where there is
no disagreement between the trustees or beneficiaries but where the trustees simply want clarity
as to the interpretation of the trust instrument.

Question 18

Surrendering discretion to court

Answer 18

Another reason that trustees may require input from the court is if there is a dispute between the
trustees about how they should exercise their powers. For example, the trustees of a discretionary
trust may be in disagreement as to how to exercise their discretion.

Question 19

May surrender discretion to court

Answer 19

In cases where the trustees are deadlocked, or where they are precluded from acting due to a
conflict of interest, they may surrender their discretion to the court. Unlike simply seeking
directions from the court (which provide guidance as to a lawful course of action) this course of
action involves the court making the decision for them.

Question 20

Exceptional Course of Action

Answer 20

This is an exceptional course of action and can only be sought in relation to a specific problem
which requires addressing. The trustees cannot simply give up all their powers and obligations
and leave the court to administer the trust on an ongoing basis.

Question 21

Seeking beneficiary consent

Answer 21

If trustees are unsure of their powers and duties, or want to do something which they know would
be a breach of trust or fiduciary duty, one option that may be available to them is to seek the
fully informed consent of the beneficiaries

Question 22

Only available if known or locatable

Answer 22

This will only be an option if all the beneficiaries are known, locatable and are over 18 (and of
sound mind). In such circumstances, rather than going to the expense of seeking court directions, the trustees may instead request the consent of the beneficiaries to the action they intend to take.

Question 23

Full Information

Answer 23

The trustees will only obtain full protection if they obtain fully informed consent from all the
beneficiaries:
* It is essential that the beneficiaries are given full information to enable them to provide
consent. If the trustees withhold important information about their intended actions, they will
not be able to rely on the consent obtained.

Question 24

Some beneficiaries means partial defence

Answer 24

If consent is only obtained from some beneficiaries, the trustees will have a partial defence to
breach of trust against claims by those beneficiaries but not against the other beneficiaries.

Question 25

Unidentified or missing beneficiaries

Answer 25

When it comes to distributing a trust fund, trustees can sometimes run into difculties because
they either cannot identify or locate beneficiaries. Consider the example of trustees who hold a
fund on trust for the settlor’s wife during her lifetime, with the remainder to be distributed equally
between such of the settlor’s children and grandchildren who are living at the wife’s death

Question 26

Exposes other beneficiary’s claim

Answer 26

If the trustees get it wrong, and only distribute between the beneficiaries they can identify and
locate, they will be liable to any unknown or missing beneficiaries who later come forward and
make a claim. This also exposes the other beneficiaries to a potential claim because they have
received more than their rightful share of the trust fund

Question 27

Benjamin orders: Missing beneficiaries (Know of existance but unable to locate, presumed dead)

Answer 27

A common type of order sought from the court by trustees is known a Benjamin order. This is a
court order permitting the trustees to distribute on the basis of a particular assumption, which will
depend on the circumstances of the particular case.

This is useful in the situation where the trustees know of the existence of a beneficiary but are
unable to locate them. A Benjamin order can be granted allowing the trustees to distribute the
trust fund on the basis that the missing beneficiary is presumed dead.

Question 28

Before Benjamin Order

Answer 28

Before an order is awarded the trustees must make full enquiries to attempt to establish the true
position and demonstrate there is no reasonable prospect of knowing the true position without
disproportionate expense.
The order relieves the trustees from personal liability if they distribute the trust property but the
assumption turns out to be incorrect.
However, a disappointed beneficiary or creditor can make a claim against other beneficiaries to
whom the property had been distributed.

Question 29

Key case: Re Benjamin [1902] 1 Ch 723

Answer 29

In Re Benjamin [1902] 1 Ch 723 itself the son of the testator had disappeared approximately a
year before the testator died. The trustees made an application to the court for directions as to
how to distribute the estate.
After reviewing evidence that it was highly likely the son had died, a special order was made by
the court allowing the trustees to distribute the estate on the basis that the son had not survived.

Question 30

Key case: Re Green’s Will Trusts [1985] 3 All ER 455

Answer 30

The Benjamin order was expanded by Re Green’s Will Trusts [1985] 3 All ER 455, where the testator
had expressly left all her property to her son in her will, fully aware that he had gone missing
several years previously and was certified presumed dead.
The testator set out in her will that, should her son not claim the estate before 2020, it would go to
charity. Nourse J went against the testator’s express wishes and made an order that the executors
could distribute the estate to charity.

Question 31

Section 27 TA 1925 notice: Unknown beneficiaries (Unsure if all beneficiaries have been identified)

Answer 31

In some cases, the trustees may be unsure as to whether they have properly identified all the
beneficiaries. For example, the trustees may have an obligation to divide trust property equally
between a conceptually certain class of individuals (eg the nieces and nephews of the settlor) but
be unsure who all those people are.

Question 32

Prevent liability to unidentified beneficiaries

Answer 32

To prevent liability to unidentified beneficiaries, the trustees may publish a notice of their intention
to distribute to known beneficiaries two months after the advertisement. This puts unknown
beneficiaries on notice that they must identify themselves to the trustees. After the two months’
notice period, the trustees may distribute to known beneficiaries and will have no personal liability
to the unknown beneficiaries

Question 33

Notice should be placed in

Answer 33

The notice must be placed in (i) the London Gazette, (ii) a newspaper circulating in the area in
which any land held on trust is situated, and (iii) any other newspaper which is appropriate (for example, if the deceased owned a business the relevant trade paper may be an appropriate place
to advertise).

Question 34

Rights of beneficiaries coming forwards later

Answer 34

The options above will have serious implications for a beneficiary who comes forward later. As the
trustee will be protected against any personal claims from such a beneficiary, they will not have a
right to recover personally from the trustees.

Question 35

Rights of beneficiaries coming forwards later

Answer 35

Where the property has been distributed the only option for a beneficiary will be a proprietary or
personal claim against the recipient of the property. However, if the property has not been fully
distributed, it will still be possible for the beneficiary to claim any undistributed property from the
trustee.

Question 36

Retained funds

Answer 36

Another option is for the trustees to retain a fund setting aside trust assets in order to be able to
discharge liabilities if missing beneficiaries come forward after distribution. This is useful in cases
where the trustees are able to identify all beneficiaries but cannot locate all of them. It allows
them to distribute to the beneficiaries they can find, while still having the funds to satisfy the
claims of the other beneficiaries if they come forward later. However, it does mean that the
trustees may be required to hold the retained fund for a long time, meaning ongoing
administrative duties.

Question 37

Unsure that all beneficiaries have been identified

Answer 37

Retaining a fund is also an option in cases where the trustees remain unsure as to whether they
have identified all potential beneficiaries. They may choose to distribute to the known
beneficiaries but hold some money back in case other beneficiaries come forward in future.

Question 38

Difficult to quantify respective interests

Answer 38

This is quite a risky strategy in cases of unknown beneficiaries as it will be difcult for the trustees
to quantify the respective interests of the known and unknown beneficiaries, and could well result
in a claim against the trustees for having paid out the wrong amount to the known beneficiaries.

Question 39

Payment into court: s 63 TA 1925

Answer 39

Another option in circumstances where trustees can establish genuine doubt as to the location of
beneficiaries is to distribute to those beneficiaries they can find and pay the remaining funds into
court: s 63 TA 1925.
This gives the court legal control over the funds and efectively allows the trustees to retire. This is
likely to be a more attractive option to the trustees than retaining a fund, because it means that
they do not have open-ended administrative duties in respect of the trust fund.

Question 40

Payment into court: s 63 TA 1925

Answer 40

However, from the court’s perspective this course of action is a last resort which should only be
taken if all realistic options for tracing the beneficiaries have failed. It is not an easy route for
trustees to free themselves from their obligations.

Question 41

Missing beneficiary insurance

Answer 41

Trustees may decide to take out insurance to guard against the risk of missing or unknown
beneficiaries emerging after the trust fund has been distributed.
The trustees may simply take out insurance and then distribute in accordance with the
information they have available. If a beneficiary later comes forward, the trustees will be liable to
them but can claim on the insurance policy.

Question 42

Does not involve upfront costs

Answer 42

Obtaining insurance does involve an upfront cost (which can usually be met by the trust fund) so
trustees will need to decide whether it is worth paying for the certainty of having the insurance
policy to guard against a future claim. It is also significantly cheaper than seeking a Benjamin
order. Risk-averse trustees may well choose to use insurance alongside another mitigation
measure.

Question 43

Obtaining indemnity from beneficiaries

Answer 43

A final option available to the trustees who cannot identify or locate the beneficiaries, but still
want to distribute the entire trust fund, is to seek an indemnity from the beneficiaries to whom
they plan to distribute. This involves the beneficiaries promising to reimburse the trustees if the
trustees are successfully sued by other beneficiaries later. It has the benefit of being cheaper and quicker than some of the options above, as well as avoiding part of the trust fund being tied up on
trust for a long period of time.

Question 44

Does not actually protect trustees from claims

Answer 44

However, like with the insurance option, an indemnity does not actually protect the trustees from
claims by beneficiaries who come forward later. It simply gives them someone else they can seek
to recover the loss from. Although cheaper than taking out insurance, it is also riskier because an
indemnity is only worth anything if the person giving the indemnity is able to pay. There is also a
risk that the indemnifying beneficiary will resist payment, resulting in further expensive litigation by the trustees to recover.

Question 45

Claims against third parties

Answer 45

Trustees who find themselves potentially liable for breach of trust might also consider the
possibility of taking action against third parties. In particular, we have already considered the
situation in which the trustees have acted in reliance upon advice from a professional such as a
lawyer or a financial adviser. If that advice was negligent, the trustees should consider making a
claim against the adviser in their capacity as trustee.

Question 46

Identify negligence early

Answer 46

If they identify the negligence early, and take swift action against the adviser, they may be able
to prevent a personal claim for breach of trust altogether (because they will have complied with their duties as trustee in taking action and recovering the funds on behalf of the trust). Alternatively, they may need to bring a separate claim against the adviser alongside or following the proceedings for breach of trust.

Question 47

Pay equitable compensation

Answer 47

If a trustee is successfully sued for breach of trust and required to pay equitable compensation,
they may wish to seek a contribution or indemnity from other liable parties (including their cotrustees). This process was considered in detail in the chapter on ‘Liability of trustees’.

Question 48

Practical steps after breach has occured

Answer 48

Once a breach of trust occurs, advising a trustee involves assessing the scope of liability and
identifying existing protections. The following steps should be taken:
(a) Check the trust instrument for an exemption clause.
(b) Consider whether any of the following may provide a full or partial defence:
- Reliance on court directions
- Instigation/consent/acquiescence
- Statutory limitation rules/laches
- Statutory relief under s 61 TA 1925

Question 49

4.2 Practical steps after breach has occurred

Answer 49

(c) If there is likely to be a successful claim, check for relevant insurance (and inform the insurer
of the claim) or an indemnity from other beneficiaries.
(d) Identify whether there are any potential claims against third parties (such as financial or
legal advisers to the trustees who may have given negligent advice).
(e) If a trustee is required to pay equitable compensation, consider Civil Liability Contribution
Act 1978 claims against co-trustees or third parties.