Trustees and Trustee Duties

Question 1

Express trusts (an obligation has been intentionally imposed on the trustee)

Answer 1

• Testamentary and other family trusts
• Trusts for commercial purposes
• Charitable purpose trusts
• Bare trusts

Question 2

Trusts arising by operation of law

Answer 2

• Resulting and constructive trusts

- Statutory trusts

Question 3

Role of a trustee

Answer 3

• No one is required to accept the office of trustee. They can refuse, and an alternative trustee will be appointed instead.
• It is a key principle of trust law that equity will not allow a trust to fail for want of a trustee.
• The role of a trustee is a voluntary role and is generally unpaid, although they are able to recover expenses
• Professional trustees are entitled to charge for their services, and are held to a higher standard of care than lay trustees.

Question 4

How may trustees will a trust have?

Answer 4

• Trusteeship is a joint office; it is good practice for trusts to have more than one trustee. Where there are multiple trustees, they must act together. All trustees should take an active role in the trust and failure to do so may result in them being liable for breach of trust.
• Trustees that have been found to have committed a breach will be jointly and severally liable.

Question 5

What powers and obligations do trustees have?

Answer 5

• Trustees have broad powers curtailed by duties.
• It is not possible to have a trust in which the trustees have no enforceable obligations at all. There must be an obligation component.
• A general duty to act honestly and in good faith for the benefit of the beneficiaries is common to all trusts. This is often described as the irreducible core of trustee duties and is fundamental to the concept of a trust.
• Trustees have duties that relate specifically to their role as trustee; these are known as their trustee duties, and they can be subdivided into the categories of administrative duties and dispositive duties
• They also have a further set of duties stemming from the fiduciary nature of their relationship, fiduciary duties.

Question 6

Trustee appointment

Answer 6

• Trustees are usually appointed by the settlor when they establish the trust.
• The role of trustee is voluntary so a trustee can refuse. In some cases a settlor will simply ask another trustee to take on the role instead but there may be cases where this is not possible e.g. trusts found in a will.
• It is possible for the courts to appoint a trustee instead.
• Other people may also be given a power to appoint a trustee, which may be found in the trust instrument or in statutory powers.
• If a trust is charitable, the Charity Commission has a power to appoint trustees.
• The beneficiaries of a trust can also use their Saunders v Vautier rights to appoint new trustees.

Question 7

Trustee retirement

Answer 7

Trustees can voluntarily retire or can be compelled to retire by the beneficiaries, again in exercise of their Saunders v Vautier rights.

Question 8

Trustee removal

Answer 8

• Similar Saunders v Vautier rights apply to the removal of trustees as to their appointment. There is also a general statutory power to remove trustees and the Charity Commission also have the power to remove charity trustees.
• The court has powers to remove trustees, which it will exercise in situations where the trustee is insolvent or unable to exercise their functions.
• The court also has an inherent jurisdiction to remove trustees, which is exercised in situations where it is not appropriate for the trustee to remain in office, e.g. when they have acted dishonestly.

Question 9

Rights of trustees

Answer 9

• Generally trustees are the legal owners of trust property and therefore have all the rights of a legal owner. This is the proprietary component of the trust.
• A trustee’s legal rights must be exercised in accordance with the terms of the trust and the general law applicable to trustees. This means that the scope for trustees to exercise rights over the trust property is more limited than that for a legal owner and that trustees are also subject to duties.
• A trustee who exercises their legal rights improperly or fails to perform a duty will be personally liable for breach of trust. This is the obligation component.

Question 10

Three main sources of trustee powers and duties

Answer 10

1) The trust instrument (if there is one)
2) Statute
3) Common law
- Most statutory or common law powers or duties are default rules which can be expanded, modified or excluded by the trust instrument.

Question 11

Two main types of powers and duties

Answer 11

1) Administrative: relate to the management and protection of the trust property while it is held on trust.
2) Dispositive: relate to the distribution of trust property to beneficiaries or other objects.

Question 12

Administrative power: Buying, selling and charging

Answer 12

• Trustees commonly have powers to buy and sell trust property
• They may also have the power to raise money by charging existing trust property.

Question 13

Administrative power: Investment

Answer 13

• Trustees commonly have wide ranging powers of investment.
• There is a broad statutory power of investment (which can be, and often is, modified)
• There are extensive statutory and common law duties associated with the exercise of these powers.

Question 14

Administrative power: Delegation

Answer 14

• Trustees commonly have powers to delegate some of their functions, including their investment powers.
• These are curtailed by associated duties.

Question 15

Dispositive power: Appointment

Answer 15

• Trustees may have a power to create or transfer a beneficial interest in trust property.

Question 16

Dispositive power: Advancement

Answer 16

• Trustees can in certain circumstances apply capital for the benefit of a beneficiary who has a contingent interest.
• This requires the consent of other beneficiaries.

Question 17

Dispositive power: Maintenance

Answer 17

• A power of maintenance is common in trusts involving minors (and some beneficiaries with contingent interests).
• It allows the trustees to pay trust income to beneficiaries who would benefit from receiving it immediately, instead of waiting for their interest to vest in possession.

Question 18

Exercise of trustee powers

Answer 18

• Trustees have discretion as to the exercise of their powers. As long as they comply with any positive obligations, a court will not impugn the decision just because it could have been made differently.
• There is no requirement for trustees to provide beneficiaries with reasons for why they have or have not exercised a power. However, if they do give reasons, the court may set aside the decision if they find the reasons inadequate.
• Trustees must generally act unanimously when exercising any powers
• If trustees are in disagreement as to the exercise of their powers or are unsure as to the precise scope of their powers/duties, they can seek directions from the court.
• Trustees cannot surrender their powers entirely to the court.

Question 19

Duties of trustees

Answer 19

(1) Their primary duty is to comply with the terms of the trust. They will have dispositive duties to distribute property in accordance with the trust terms and a custodial duty in the meantime.
(2) They have a duty to exercise their administrative powers in accordance with a prescribed standard of care and skill. There are common law and statutory rules to be considered, as well as anything specifically set out in the terms of the trust.
(3) Trustees also have fiduciary duties to consider. They have an obligation of undivided loyalty to their beneficiaries, which gives rise to rules preventing them from acting in conflict with the rights of those beneficiaries.
- The first two categories are trustee duties and the third is fiduciary duties.

Question 20

Key administrative duties which are common to most trusts

Answer 20

• Familiarity with trust: Upon appointment, trustees must familiarise themselves with the terms of the trust, ensuring they are fully aware of their powers and duties.
• Accounting and information: Trustees have a duty to keep accounts and provide them to the beneficiaries upon request. Trustees are also required to provide reasonable information about the investment and management of the trust to beneficiaries and inform beneficiaries when they become entitled to trust assets.
• Impartiality: Trustees must act impartially between the beneficiaries.

Question 21

How can trustees commit a breach of trust?

Answer 21

(1) Acting outside their powers (e.g. by distributing trust property to someone other than a beneficiary or making an unauthorised investment)
(2) Failing to act in accordance with their duties

Question 22

How can trustees commit a breach of fiduciary duty?

Answer 22

(1) Creating conflict between their personal interests and their duties
(2) Making an unauthorised profit from their role as a trustee

Question 23

Why must fiduciary and trustee duties be distinguishes?

Answer 23

It makes a difference when assessing liability and identifying the appropriate remedy.

Question 24

Administrative powers - trust instrument

Answer 24

Many express trusts confer extensive administrative powers on trustees. These are often set out in the trust instrument.

Question 25

Administrative powers - statutory powers

Answer 25

• In the absence of such express powers, there are default powers set out in the Trustee Act 2000 (TA 2000):
• s 1: Statutory duty of care
• s 3: General power of investment
• s 4: Standard investment criteria
• s 5: Advice
• s 8: Power to acquire land
• s 11: Power of delegation

Question 26

s 3 TA 2000: General power of investment

Answer 26

• A trustee may make any kind of investment they could make if they were absolutely entitled to the assets of the trusts.
• When exercising the general power of investment, trustees must:
• Consider the standard investment criteria set out in s 4
• Take advice in accordance with s 5
• Act in accordance with the general duty of care set out in s 1
• These obligations can be excluded, restricted or extended (s 6)

Question 27

s 4 TA 2000: Standard investment criteria

Answer 27

• Trustees must consider the criteria when deciding whether to make an investment (s 4(1)) in the first instance.
• Trustees also have a duty to regularly review investments with reference to the criteria and decide whether they ought to be varied.
• Two key components to the criteria:
• (1) Suitability (s 4(3)(a))
• (2) Diversification (s 4(3)(b))

Question 28

s 4(3)(a) TA 2000: Suitability

Answer 28

Two key questions:

• General suitability: is the investment of a suitable kind?
• Specific suitability: is the particular investment suitable?
• Trustees must balance the duty to preserve the trust assets against the need to produce appropriate growth.
• Key issues that trustees will need to consider:
  (a) The size of the trust fund
  (b) The period of time for which the trust is intended to subsist
  (c) The respective rights of different beneficiaries
• The trustees of a large, commercial trust fund which is intended to subsist for many years will have a greater degree of freedom to invest in assets which are intended to produce long-term growth, compared to the trustees of a small family trust only intended to last for a short period of time.
• If the family trust includes both life and remainder interests, the trustees will also need to ensure that any investments produce income for the life tenant as well as capital growth for the remainderman.

Question 29

s 4(3)(b) TA 2000: Diversification

Answer 29

• This involves taking an overall approach to the risk profile of the trust fund rather than considering each investment on an individual basis. It allows trustees to invest in a mixture of high and low risk investments, rather than investing exclusively in low risk (and therefore probably low yield) investments.
• Trustees should also invest across a range of different types of assets, so that the trust fund is not overly exposed to the risks of losses in a particular sector.
• The extent to which trustees can diversify the investments will depend on the size and nature of the trust fund, with larger funds able to spread their investments across a wider range of assets.
• Smaller funds may not be able to diversify in the same way but the trustees may consider investing in investment funds, which pool the assets of multiple investors and allow them to obtain the benefits of diversification.

Question 30

Cowan v Scargill - Guiding principles on power of investment

Answer 30

Sets out the following principles:

(1) When considering the suitability of trust investments, the trustee obligation to act in the best interests of beneficiaries means their best financial interests.
(2) The trustees must balance the interests of all beneficiaries (current and future).
(3) The personal views of the trustees are not relevant to this assessment.
(4) Taking into account moral and ethical concerns will be extremely rare in practice.
(5) Although trustees are not bound to follow advice they receive on investments, they cannot ignore it simply because they personally disagree with it. They can only do so if they consider that a reasonably prudent trustee would act in the same way.

Question 31

Cowan v Scargill - Facts of the case itself

Answer 31

• Involved a pension trust for British coalmine workers. Although such investments were permitted in the terms of the trust, the trustees wanted to adopt a policy of refusing to invest in oil or overseas.
• The court disagreed with the policy. The obligation of the trustees was to produce the best financial return for the trust fund.
• ‘It is the duty of trustees, in the interests of their beneficiaries, to take advantage of the full range of investments authorised by the terms of the trust, instead of resolving to narrow that range.’

Question 32

Qualifications to general principles - Investment

Answer 32

• Although moral and ethical considerations will not generally be relevant to trustee decisions, this does not stop trustees preferring ethical investments if they have a straightforward choice between two investments of economic equivalence. The trustees can take into account the ethical views of beneficiaries, where the beneficiaries are all of sound mind and agree on the decision.
• There is more scope to take non-financial considerations into account in the case of charitable trusts. Charitable trustees may refrain from making investments which may conflict with the aims of the charity or hamper its work e.g. trustees of a cancer research charity would not be expected to invest in the tobacco industry, even if this was the most profitable investment.

Question 33

s 5 TA 2000: Advice

Answer 33

• Trustees are required to obtain and consider ‘proper advice’ before exercising their powers of investment (s 5(1)) and when reviewing their investments (s 5(2)).
• ‘Proper advice’ is defined in s 5(4) as being provided by a person ‘who is reasonably believed by the trustee to be qualified to give it’ by their ‘ability in and practical experience of financial and other matters relating to the proposed investment.’
• There is an exception set out in s 5(3) which provides that trustees need not seek advice if they reasonably conclude that in all the circumstances it is unnecessary to do so, e.g. where the cost of the advice outweighs the benefit or where the trustee has sufficient knowledge and expertise to make the decision without advice.

Question 34

s 1 TA 2000: Statutory duty of care

Answer 34

• Requires trustees to ‘exercise such care and skill as is reasonable in the circumstances.’
• Section 1(1)(a) requires the assessment to take into account ‘any special knowledge or experience’ that a trustee has or holds themselves out as having.
• Section 1(1)(b) applies to professional trustees and requires the assessment to take into account any ‘special knowledge or experience’ that is reasonable to expect of a person acting in that capacity.
• The standard of care is therefore always higher for professional trustees.
• It is also raised for lay trustees who may have been appointed on the basis of having or purporting to have particular skills.
• The statutory duty of care does not apply to all acts of a trustee, but only to those set out in Sch 1 TA 2000.

Question 35

Common law duty of care

Answer 35

• Applies more widely

- Requires trustees to exercise the standard of diligence and care expected of an ordinary prudent business person.

Question 36

s 8 TA 2000: Power to acquire land

Answer 36

• Trustees have a statutory power to acquire freehold or leasehold land in the UK (but not overseas).
• If the land is acquired for investment purposes, the trustees must consider the standard investment criteria and take advice in accordance with ss 4 and 5.
• The statutory duty of care applies.

Question 37

s 11 TA 2000: Power of delegation

Answer 37

• Provides trustees with broad powers of delegation.
• Although there are some functions which trustees cannot delegate (e.g. their distributive obligations) they are permitted to delegate their powers of investment and powers to acquire land.
• Trustees cannot delegate their investment powers except by an agreement evidenced in writing (s 15 TA 2000). This agreement should include a term ensuring compliance with a written ‘policy statement’ to be prepared by the trustees.
• The agent to whom the function is delegated is bound by any restrictions on the exercise of its investment powers in the same way the trustee would be (s 13(1) TA 2000)

Question 38

Two primary reasons why a trustee might want to delegate their functions:

Answer 38

• (1) The trustee may be incapable of discharging their duties for a limited period.
• (2) The trustee lacks the expertise to discharge the particular responsibility.

Question 39

Delegation: the trustees should ensure:

Answer 39

(a) An appropriate agent is selected for the function.
(b) The agreement complies with their requirements under statute.
(c) The arrangement is reviewed regularly.
- If trustees comply with their duties when exercising the power of delegation, they will not be vicariously liable for any loss caused by the agent acting negligently.

Question 40

Establishing liability for breach of trust

Answer 40

(1) Did the trustee(s) act in accordance with their powers?
(2) If so, did they comply with their trustee duties?
- If the answer to either of these questions is ‘no’, there has been a breach of trust and the following issues need to be considered:
(1) Who has breached the trust?
(2) Is there anything that might exclude or limit the liability of any of the trustees?
(3) What remedy should be awarded?
(4) If more than one trustee is liable, how should liability be apportioned between them?

Question 41

Examples of a trustee acting outside their powers

Answer 41

(a) Misapplying trust property

(b) Making an unauthorised investment.

Question 42

Examples of a trustee failing to act in accordance with their duties

Answer 42

• the trustee falling below the standard of behaviour expected of them as a trustee.
• (a) Failure to take into account the standard investment criteria or properly consider advice when exercising investment powers.
• (b) Failure to comply with the duty of care when exercising investment powers.
• (c) Failure to properly monitor investments.

Question 43

Bartlett v Barclays Bank Trust - Example of monitoring investments

Answer 43

• A trust fund includes a majority shareholding in a private company.
• Where trust investments include company shares, the trustees will need to monitor the investment to ensure it produces an appropriate amount of income and capital growth (and to enable them to determine whether to sell the shares if not).
• If the trust has a majority shareholding in the company, this gives the trustees power over that company, which they are expected to make use of to safeguard the investment. This could include using their shareholding to have a trustee appointed as a director, giving them greater oversight and an ability to affect decisions of the company.

Question 44

Who has breached the trust?

Answer 44

• As trusteeship is a joint office it will often be the case that more than one trustee will be liable, although they may be liable for breaches in different ways.
• e.g. one trustee may misapply trust property and be actively responsible for a breach while the other trustees may be liable for failing to monitor the actions of their co-trustees.
• Where multiple trustees have breached the trust, they will be jointly and severally liable.

Question 45

Liability for breach of trust before appointment as trustee

Answer 45

• A trustee will not be liable for a breach of trust which took place before the trustee was appointed.
• On appointment, if a trustee discovers that a breach of trust has occurred, they should commence proceedings in order to recover from the former trustee.
• Failure to take such action may result in the new trustee becoming liable for their own breach of trust.

Question 46

Liability for breach of trust after retirement

Answer 46

• A trustee will continue to be liable for any breaches committed during the time that they acted as a trustee, even after they have retired.
• A trustee will only be liable for breaches of trust that occur after they retire in two cases:
  (1) Where the trustee retired to facilitate the breach or
  (2) The trustee parts with trust property in retiring without due regard, so loss is suffered when the property is transferred to the new trustees.

Question 47

Exclusion and limitation of liability

Answer 47

• It is possible for the liability of trustees to be excluded or limited by an exemption clause in the trust instrument.
• The courts have recognised that it is possible to exempt trustees from liability for breach of trust, other than where the breach is fraudulent.
• If there is no exemption clause, trustees may seek to rely on s 61 Trustee Act 1925 (TA 1925). This gives the court discretion to excuse a trustee in circumstances where the trustee ‘acted honestly and reasonably, and ought fairly to be excused’
• The courts will not use s 61 lightly, although it can be used to excuse individual trustees while others remain liable. A good example is where trustees have sought and relied on legal advice before taking the action.

Question 48

Limitation periods

Answer 48

• Under s 21(1)(a) Limitation Act 1980, the limitation period for bringing a claim for breach of trust is six years from the breach.
• This only applies to claims by beneficiaries with interests vested in possession. For beneficiaries with future interests, the limitation period only starts to run when their interest vests in possession.
• The limitation period does not apply to fraudulent breaches or proprietary claims against the trustee (i.e. claims to recover trust property or its traceable proceeds).
• If a trustee is also a beneficiary, and receives an unfairly large distribution of the trust, only the excess can be recovered after the normal six year period.

Question 49

Insurance

Answer 49

• Another means of protecting trustees from liability is by indemnity insurance.
• This will be common in the case of professional trustees.
• It will often be possible to have the insurance premiums paid out of the trust fund as an expense of the trust.
• Similarly to exclusion clauses, insurance can protect trustees against liability for negligence but not fraudulent breaches of trust.

Question 50

Consent and acquiescence

Answer 50

• Trustees will be excused from liability for breach of trust if they can show that they obtained the full informed consent of the beneficiaries or that the beneficiaries acquiesced (s 36(2) Limitation Act 1980).
• Both can provide a partial defence against individual beneficiaries, even if other beneficiaries still have a valid claim.
• Acquiescence involves the beneficiary being passive (knowing there has been a breach but failing to take action against the trustee) while consent requires a positive act of authorisation.
• In both cases, the effect will be that the relevant beneficiary is barred from making a claim.
• In cases involving the written consent or instigation of the beneficiary, it can also affect the interest of the beneficiary. Under s 62 Trustee Act 1925, the court has the discretion to ‘impound’ the beneficiary’s interest under the trust in order to satisfy the claims of the other beneficiaries, meaning compensation will be paid out of their share of the fund. The court will only do this where it is considered ‘just’ to do so (usually in cases where they have actively encouraged the breach)

Question 51

Remedies

Answer 51

• Depend on the nature and consequences of the breach.
• If the trustee has misapplied trust property, the beneficiaries may seek to recover the property itself, or its traceable proceeds. A beneficiary may decide to make such a claim where the trustee is insolvent and/or when the substitute property has increased in value.
• If it is not possible or desirable to recover the trust property, the beneficiaries will instead seek compensation to reflect the loss.
• If a breach does not result in a loss, there may be no substantive remedy although it is possible in serious cases that the beneficiaries will wish to have the trustee removed from office.

Question 52

Compensation for loss to the trust fund

Answer 52

• As a broad rule, trustees will only be liable for losses where their breach can be shown to be a ‘but for’ cause.
• This loss is assessed at the date of the trial, rather than the date of the breach.
• In simple cases, the loss may be obvious e.g. if a trustee misapplies a single trust asset, the loss caused will be the value of that asset.
• If a trustee was required to make a specific investment but failed to do so, the loss will be calculated based on the profit the trust fund would have made.
• If a trustee had a discretion as to how to invest the trust fund but acted in breach of duty when investing, the loss will be based on the investments that a hypothetical prudent trustee would make.

Question 53

Offsetting losses against gains

Answer 53

• Generally, trustees are not permitted to set off the losses caused by a breach of trust against profits they have made on other investments or transactions.
• However, it is possible to offset losses against profits where they arise from the same transaction or course of dealing.
• This is illustrated by Bartlett v Barclays Bank Trust. The trustees had a majority shareholding in a company but failed to properly supervise it. The company made two investments in property, one of which was profitable but the other made a large loss. The trustees could offset the profit against the loss as they arose from the same breach (i.e. the failure to monitor the company’s speculative investments).

Question 54

Apportionment of liability

Answer 54

• Trustees are jointly and severally liable for breaches of trust.
• From the perspective of beneficiaries, this means they can choose who to sue.
• From the perspective of trustees, there is a further question of how liability should be apportioned between them under the Civil Liability Contribution Act 1978.
• If one trustee is sued for the full amount of the loss to the trust fund, they are likely to seek a contribution from their co-trustees.
• A claim can be made under s 1(1) of the Act where two or more parties are liable for the same damage. The court has discretion to require one party to make a ‘just and equitable contribution’ to another (s 2(1))
• In rare cases, the court may award a full indemnity to a trustee (s 2(2)).

Question 55

Indemnity

Answer 55

• Rare
• Generally, an indemnity will only be awarded where the indemnifying trustee has benefitted from the breach or where a trustee is found to have been solely responsible.
• Very unlikely in practice but might happen where there is significant disparity in the knowledge and experience of the trustees, resulting in one trustee taking responsibility for a particular course of action. The most likely scenario where this will occur is where one trustee is a solicitor and another relies upon their advice as to the legality of a decision.

Question 56

Indemnity - case examples

Answer 56

• Re Partington: a testamentary trust had two trustees. One was a solicitor and the other was the testator’s widow. The solicitor took sole responsibility for the administration, failed to properly inform the widow and negligently made an unauthorised investment. The court awarded a full indemnity on the basis that it was reasonable for the widow to have relied on the solicitor’s advice.
• Head v Gould: the lay trustee took an active role in the breach of trust. Unlike in Partington, the solicitor did not have a controlling influence over their co-trustee so an indemnity was inappropriate.