Trustees have strict duties to the beneficiaries of the Trust. Most duties are contained in the Trustee Act 1956. In certain situations trustees can be held personally accountable for their actions or for failing to act, so it is important trustees understand their rights and obligations.
All trustees must know the terms of the Trust (or the terms of the Will as the case may be), and must ensure the Trust (or Will) is managed in an efficient and economic manner. Trustees should take all precautions that an ordinary prudent business person would take in managing similar affairs of his or her own and must also act with care and diligence. An independent trustee is not a ‘rubber stamp’, meaning they must not blindly agree with and follow the instructions of the remaining trustees or settlors; trustees must carefully consider their decisions.
Trustees have a duty to make prudent investments. This duty applies to the methods trustees use to make the investment, rather than looking at the actual results of that investment. A failed investment is not necessarily a breach of trust as long as the trustees acted prudently when choosing that investment.
Trustees must be impartial. They must consider the needs of each beneficiary, and have a duty to manage the Trust assets in the best interests of those beneficiaries in accordance with the terms of the Trust deed or Will. Trustees must avoid being in a position of conflict between their duties to the Trust and its beneficiaries.
Trustees are accountable to beneficiaries. They must keep proper accounting records and may be required to give beneficiaries information and explanations as to the investment of and dealings with the Trust property.
A breach of trust by a trustee can mean he or she is personally liable to the beneficiaries for any loss caused, particularly if it was an intentional breach of trust, dishonesty, or negligence that caused loss. If a trustee can demonstrate that he or she acted honestly and in good faith and that the breach of the terms of the Trust was unintentional on their part, that trustee would not ordinarily be liable to the beneficiaries for the consequences of their breach.
When a Trust enters into a contract with a third party the trustees will typically be personally liable to ensure that the contract is completed. They may have a right to be indemnified from the assets of the Trust (meaning the liability they incur will be paid for from the Trust assets); however they will lose that right of indemnity if they act in excess of their Trust powers or in breach of their Trust duties. In addition to this, any right to be indemnified is only useful if the Trust actually has realisable assets. Recent case law has seen an independent trustee personally liable for Trust IRD debt, as the remaining trustees had left the country. While the independent trustee had the right to be indemnified, there were no Trust assets left to cover the debt. The independent trustee had to pay the IRD debt using their own funds.