Trustees: liability

Question 1

How is liability apportioned between multiple trustees who have breached the trust?

Answer 1

Where multiple trustees have breached the trust, they will be jointly and severally liable.

Question 2

Will a trustee be liable for a breach of trust which took place before they were appointed?

Answer 2

No, a trustee will not be liable for a breach of trust which took place before the trustee was appointed: Re Strahan (1856).

On appointment, if a trustee discovers that a breach of trust 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.

Question 3

Will a trustee be liable for any breaches committed during the time they acted as a trustee, even after they have retired?

Answer 3

Yes, they will continue to be liable.

Question 4

In what two circumstances will a trustee be liable for breaches of trust that occur after they retire?

Answer 4

-Where the trustee retired to facilitate the breach; or

-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 5

Can trustees liability be excluded/limited?

Answer 5

Yes, liability of trustees can be excluded or limited by an exemption clause in the trust instrument, other than where the breach is fraudulent: Armitage v Nurse (1998).

Question 6

What does S61 TA 1925 provide for in relation to trustees liability?

Answer 6

S61 TA 1925 gives the Court discretion to excuse a trustee in circumstances where the trustee ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust’ e.g. where trustees have sought and relied on legal advice before taking a course of action.

Question 7

What is the limitation period for a claim for breach of trust?

Answer 7

6 years from the breach, for 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.

Question 8

Can trustees obtain indemnity insurance?

Answer 8

Yes, indemnity insurance can be obtained to prevent the trustee personally bearing the cost of a breach. It will often be possible to have the insurance premiums paid out of the trust fund as an expense of the trust.

Question 9

Can trustees be excused from liability by consent/acquiescence?

Answer 9

Yes, if they can show that they obtained the fully informed consent of the beneficiaries or that the beneficiaries acquiesced (s36(2) Limitation Act 1980).

Question 10

What is an ouster clause and how can it protect trustees?

Answer 10

Ouster clause: this entirely removes a duty that a trustee may otherwise have. Not all trustee duties can be ousted but a common example is the removal of the duties that ordinarily arise when a trust holds a majority shareholding in a company.

Question 11

What is an exemption clause and how can it protect trustees?

Answer 11

Exemption clause: this limits or excludes trustee liability for particular sorts of breach. The duty still exists but the trustee is just protected. A trustee cannot rely on an exemption clause if they have acted dishonestly.

Question 12

What is trustee liability insurance and how can it protect trustees?

Answer 12

Trustees may choose to take out insurance against personal liability for breach of trust. It may contain restrictions in the policy but the premiums can be paid out of the trust fund as an expense of the trust.

Question 13

What is the safest thing for trustees to do if they are unsure of their powers or duties throughout the administration of the trust?

Answer 13

Seek Court directions-trustees can apply to the Court for guidance on the matter if they are unsure about the wording of a trust instrument or how to interpret a piece of legislation. Trustees who comply with Court directions will not be liable.

Question 14

Describe the process of a S48 AJA 1985 application as a method of protecting trustees from liability during the administration of a trust.

Answer 14

This is a cheap method and involves applying to Court but without the expense of a full hearing. In cases where there is uncertainty about the construction of the terms of a will or trust, this section allows trustees to:

1. Seek a written legal opinion from a person satisfying s71 Courts and Legal Services Act 1990;
2. Apply for High Court authorisation to rely on that legal opinion.

The High Court will grant an order without hearing arguments unless there is a dispute.

Question 15

Can trustees surrender their discretion to the Court?

Answer 15

Yes, in cases where there is a dispute between the trustees as to how to exercise their discretion, they may surrender their discretion to the Court. This course of action involves the Court making the decision for them.

This is an exceptional course of action and can only be sought in relation to a specific problem.

Question 16

Can trustees seek beneficiaries consent to protect themselves from liability for breach of trust?

Answer 16

Trustees may seek the fully informed consent of the beneficiaries, which will only be valid if all beneficiaries are known, locatable and are over 18/of sound mind.

The trustees will only obtain full protection if they obtain fully informed consent from all the beneficiaries.

Question 17

Outline the defences of instigation, consent and acquiescence as a way to protect trustees after the breach.

Answer 17

Consent: fully informed from all beneficiaries over 18 and of sound mind.

Instigation: trustees will also have a defence against beneficiaries who instigate or request the breach.

Acquiescence: this can be used against beneficiaries who have indicated by words or actions after a breach that they consent to the action taken.

Question 18

Outline the defence of impounding a beneficiary’s interest.

Answer 18

This means using some or all of the instigating beneficiary’s share of the trust fund to indemnify the trustees against a claim by other beneficiaries.

The Court has a discretion to do this under s62 TA 1925.

Question 19

Outline the equitable defence of laches.

Answer 19

In cases where limitation has not yet expired, trustees may still be able to rely on an equitable doctrine known as ‘laches’ to argue that a beneficiary has waited too long to bring a claim.

It requires the trustees to demonstrate that the beneficiary knew of a breach but has delayed their claim unacceptably, making it unconscionable for the beneficiary to assert their beneficial interest.

Question 20

Outline the process of relief under S61 TA 1925.

Answer 20

This gives the Court discretion to excuse a trustee in circumstances where the trustee ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust’. Three requirements must be established:

1. Honesty
2. Reasonableness
3. They ought ‘fairly’ to be excused

Question 21

What is a Benjamin Order?

Answer 21

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 e.g. when a missing beneficiary is presumed dead.

Before an order is awarded, the trustees must make full enquiries to attempt to establish the true position.

Question 22

What is a S27 TA 1925 notice and where must it be placed?

Answer 22

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. The notice must be placed in:

-the London Gazette;

-a newspaper circulating in the area in which any land held on trust is situated; &

-any other newspaper which is appropriate

Question 23

What are retained funds and how can this protect trustees when distributing?

Answer 23

Trustees can 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 the beneficiaries but cannot locate them all.

Question 24

What is payment into Court under S63 TA 1925?

Answer 24

This gives the Court legal control over the funds and effectively allows the trustees to retire. It is more attractive than retaining funds as it means there are no ongoing administrative duties in respect of the trust fund.

It is however seen as a last resort.

Question 25

What is missing beneficiary insurance?

Answer 25

Trustees may decide to take out insurance to guard against the risk of missing or unknown beneficiaries emerging after distribution.

It is a significantly cheaper option than seeking a Benjamin order.

Question 26

How can obtaining indemnity from beneficiaries protect a trustee when distributing?

Answer 26

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 cheap and quick but it is risky as an indemnifying beneficiary may resist future payment resulting in expensive litigation.