The Might of the Trustee: Duties of Trustees

Howdy everyone! The last few blogs left us feeling full of power and might, right?! But, as we mentioned, with mighty power comes mighty responsibility, and this week we're looking at the duties owed by trustees in carrying out their role. Allawdocs is proudly supported by GV Lawyers. Should you have any concerns about complying with these duties, you are welcome to contact GV Lawyers for advice on 1300 729 914.

Fundamental duties owed by trustees

A legal duty is an obligation (to do or to not do something) owed to another person (or specific group of people), the breach of which constitutes a legal wrong. A trustee owes several fundamental duties to the trust and the trust's beneficiaries that are characterised as 'fiduciary' duties:

(1)  Duty to adhere to the terms of the trust

Adhering to the terms of the trust deed is imperative because the trust deed can modify other duties and statutory trustee powers. The trustee must act in accordance with the trust document unless:

• a court or statute provides otherwise;
• all beneficiaries unanimously consent to or direct the trustee to depart from a term of the trust; or
• adhering to a particular term of the trust would be illegal.

(2)  Duty of care

The phrase 'duty of care' expresses a trustee's duty to take reasonable care to avoid loss when administering the trust. Though business activities inevitably involve risk, a trustee must be cautious and exercise a certain standard of care, skill and diligence when administering the trust.

When managing trust assets, the trustee must act the way an ordinary prudent businessperson would when managing their own affairs. If the trust operates as a business then the trustee must operate it as if it were the trustee's own.

When using its investment powers, a trustee must exercise a higher standard of care: acting as a reasonable person would in managing the affairs of others. If the trustee's profession is being a trustee or investing others' money, it must achieve a standard higher-still: acting with the care, skill and diligence that a reasonable person engaged in that profession would in managing others' affairs.

(3)  Duty to act in the best interests of the beneficiaries, and to act impartially

It is imperative that the trustee act in the beneficiaries' best interests. The trustee must exercise its powers honestly and sincerely (in good faith) in the best interests of present and future beneficiaries; aiming to balance their interests fairly and impartially.

(4)  Duty to account

The trustee - or their employed agent (e.g. accountant) - must keep a complete record of trust activities, including financial accounts. The accounts should show incomings and outgoings of trust funds, be supported by receipts, and must be accurate (so must have any errors corrected as and when they are found).

This duty imposes related requirements that the trustee:

• the trustee give eligible beneficiaries copies of the accounts when asked; and
• inform each beneficiary of full age and capacity of their rights under the trust.

(5)  Duty to act personally

In essence, this duty holds that a trustee:

• cannot delegate its role unless permitted by the trust deed or by statute (where the trustee is absent or incapacitated for some reason). The trustee can usually, however, employ agents to help implement decisions, or in some cases to perform trustee duties (e.g. employing an accountant to keep accounts);
• must resist dictation, including from beneficiaries;
• must not in advance contractually commit to some future conduct as trustee (though they can enter the trust into contracts);[1]
• where there is more than one trustee, must make decisions unanimously (unless the trust deed provides otherwise).

(6)  Duty of undivided loyalty

A trustee owes a duty of undivided loyalty to the trust and to trust beneficiaries. This can be broken into two parts:

• Firstly, the trustee has  duty not to allow conflicts - between their own interests and the interests of the trust/beneficiaries; and between duties owed to the trust and duties owed to other trusts, entities or people. Where the trustee has a conflict, they must immediately inform the beneficiaries, who may then give fully informed consent to the conflict; and
• Secondly, the trustee must not take any unauthorised profit or benefit from the trust, except with the fully informed consent of the beneficiaries. However a trustee is allowed to receive remuneration for their role where allowed by the trust deed, by agreement with the beneficiaries, or by the court.

(7)  Duty to invest

Trustees are obliged to invest trust monies, and must do so in accordance with the trust instrument, or in accordance with a statute or court order. 'Invest' means investment of trust funds in order to receive a return. The trustee must act with the requisite standard of care when investing trust monies.

(8)  Duty to preserve trust property

A trustee owes a duty to preserve trust property. This includes repairing property, investing monies responsibly, and ensuring that monies lent are adequately secured. The trustee is not, however, required to maintain the real value of the property.

So, what can be done to ensure the trustee complies with its duties?

Ideally, an appropriate trustee is selected and problems don't arise. A guardian can also be appointed to oversee the trustee when exercising certain powers.

Worst-case-scenario, if a beneficiary or a co-trustee anticipates that a trustee is going to act in breach of trust, they can ask the court to:

• grant an injunction (a court order prohibiting or compelling a particular action);
• make a declaratory order for the proper management and administration of trust property; or
• grant a vesting order (to give rights over the trust property to another person).

What are the options if a breach of trustee duty has occurred?

Beneficiaries can provide fully informed consent to some breaches - notably including the duty of undivided loyalty.

However, beneficiaries and co-trustees may not wish to consent and would rather take action against a trustee that has breached a duty. The trust deed might provide for removal of the trustee in breach situations. If not, it may be possible for the beneficiaries or a co-trustee to sue for breach of duty seeking damages, account of (unauthorised) profit and/or removal of the trustee.

Can the trustee protect itself?

A trustee's best protection is to always act in accordance with its duties and powers. Additional avenues of protection include:

• seeking advice from the court if a trustee is concerned about a proposed course of action; and
• seeking permission from the court where a trustee wishes to breach the trust in order to benefit the beneficiaries.

So, being a trustee is a pretty big deal

As you can see, being a trustee is a mighty important job!

Next time it's all about trustee liabilities and indemnity thereof. Then we'll go on to learn that it's not only about you, trustees! Watch this space - there's a lot of other People Power involved in trusts too!

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[1] A good example is that a trustee cannot contractually commit to sell some trust property for a fixed price at a future date; it can only enter a current contract of sale (where it is empowered to sell trust property).