Have you ever considered if it is likely that you may be asked to become a trustee and if so, what does that mean for you personally?
Trusts have become somewhat commonplace in the 21st century and are not just limited to very complex financial or business arrangements so it is not uncommon for persons to be in a situation where they might be requested to accept a trustee role.
What Is a Trust?
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.
When Can Trusts Be Created?
A testamentary trust can be created by a will – A testator (will maker) appoints their nominated executor & trustee: The trustee role pursuant to a testamentary trust comes into effect on the death of the testator after a Grant of Probate has been given when the assets of the deceased have to be managed until the assets can be distributed.
Some trust appointments are created by court order such as:
- The appointment of a trustee for sale when there has been a dispute between registered owners of a property which requires the intervention of a court order and court appointed trustee for sale to control the sale and distribute the sale proceeds pursuant to that court order.
- A financial management order might be made under the NSW Guardianship Legislation appointing a person (or the NSW Trustee) to be the financial manager acting as trustee for the financial affairs of someone deemed unable to manage their own financial affairs satisfactorily.
Other trusts for various commercial purposes can be created by deed.
For example: Every self-managed superannuation fund [SMSF] is a trust. That is the control for investment and compliance with regulatory obligations is held by the trustee, but the benefits can only be paid in accordance with the trust deed by which the fund was created – usually on retirement. The trustee/s may be individuals who are the members of the fund or a corporate trustee subject to the superannuation rules that all members of a SMSF must be directors of the corporate trustee.
Public superannuation funds are managed by a corporate trustee for members.
The parties to a trust created by Deed are typically 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).
What is a trustee’s overarching obligation?
A 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 or by a Will in the case of a testamentary trust. The trustee role has a “fiduciary duty”, to beneficiaries of the trust to act in their best interests whilst managing the trust.
If you have you been or, are about to be, appointed as a trustee, it is vital to understand your duties as a trustee so you can reduce the risk of being held personally liable under the trust for breach of fiduciary duty.
Rules controlling trustee obligations may in part be included in the document which created the trust but in addition rules have been legislated by statute and at common law. The latter refers to directions the courts have given as to how trustees must act when courts have had to investigate trust issues or interpret statutory obligations.
What are Trustee Duties Generally?
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.
As mentioned above, a trustee owes a fiduciary duty to beneficiaries of a trust, which requires the trustee:
- 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.
- To 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.
- Has a duty to preserve trust property. A trustee must act reasonably and use their best endeavours to conserve the trust property (including the income and capital) against loss.
- Must not 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.
- Has a 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.
- Has a 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. A trust deed including a will may make provision for change of trustee if appropriate.
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.
When can a trustee 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.
What if the Trustee makes an honest mistake?
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.
Is it better to appoint corporate trustees?
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.
In some circumstances there are benefits of having a corporate trustee appointed. 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.
Conclusion
A trustee must understand their duties and be able to show that they acted in good faith and the best interests of the beneficiaries while managing the Trust Deed. It is important for the person creating a trust to appoint a reliable competent individual as trustee or if appropriate a corporate trustee.
If you or someone you know wants more information or needs help or advice, please contact us on 02 9699 9877 or email [email protected].