Duties of Trustees – Liabilities and Risks: Don’t Leave Yourself Exposed

The duties of trustees are many and varied and require due care and skill. To a large degree, these duties determine the liabilities of trustees and the possible personal exposure of trustees to legal costs. Trustees can usually expect to be indemnified for any legal costs but not if a duty of care is breached. The duty is of course to the beneficiaries, often referred to as the cestuis que trust in legal parlance. Express trusts are generally formed pursuant to a will, taking effect on the death of the testator, or a deed of trust, usually taking affect during the life of the settlor.

The first matter trustees should be attending to is to acquaint themselves with the terms of the trust instrument. This has be expressed such that the trustees know “precisely the nature and circumstances of the trust property, and that they should know exactly what they are required to do with that property” (Jacobs Law of Trusts at 1701). The terms of the trust must be adhered to and carried out. Legal advice should be sought if there is any doubt or ambiguity as to the provisions of the trust or the provisions are incapable of being carried out for any reason.

Without going into detail, a trustee has duties of impartiality, to invest funds, keep proper accounts and to exercise reasonable care. The trustee should exercise the same diligence and prudence as an ordinary prudent person of business would exercise in conducting that business as if it were his or her own (Jacobs Law of Trusts at 1714 and see Austin v Austin (1906) 3 CLR 516). This is an objective test meaning that it is tested against the standard expected of an ordinary person, not against the standard or skills of the trustee themselves. The word prudence imports a standard that the trustee must not take undue risks, according to the purposes of the trust. For example, a trustee may well take risks with his or her own property that would not be prudent to take in regard to another’s property. In the event of a breach the trustee can be held personally liable for his or her decisions and actions.

The duties of the trustee, and therefore the personal liability of the trustee, cannot be delegated to another. This applies in respect of a co-trustee in that a trustee cannot delegate to another named trustee. A trust may allow such delegation, but in general a trustee can be held personally liable for the decisions and actions of another person or trustee. The trustee may of course have a right to seek indemnity from that person, but that may involve liability for legal costs and depend on enforcing any such liability through the Courts. This common law position is ameliorated by s59 of the Trustee Act 1925 (NSW).

The Trustee Act 1925 (NSW), and similar acts in each state provide remedies and impose duties for many situations that might befall trustees. It is not the purpose of this summary to list these provisions, although a relevant section has been referred to above. Broadly speaking, the Act covers such issues as new and additional trustees, powers and duties, improvements and repairs to property, seeking the advice of Court and relief from breaches of trust duties.

A trustee can, and should seek professional advice if there is any doubt as to the terms of the trust or any actions or decisions to be made in respect of the trust. In the normal course, the trustee is entitled to be indemnified for the costs of any such advice sought. If the issues raise a potential liability for the trustee, or it is unclear as to the course that should be taken, for example in respect of a dispute between the beneficiaries and, on the other hand, beneficiaries and trustees, then the advice of the Court (s 63 of the Trustee Act) should be sought and this will provide protection for the trustees from claims or actions by beneficiaries.

This advice is a general summary only and legal advice should be sought in respect of any specific issues arising in this context.