The Might of the Trustee: Liabilities incurred by trustees (and when they can be recovered!)
It looks like we're almost 'trustee geniuses' after The Might of the Trustee series! Think you know everything about trustees yet? Hint: not quite! In this blog we're learning about liabilities incurred by trustees, and the importance of rights and indemnities that protect them.
The big one - costs incurred by trustees administering the trust
In short, liabilities are financial obligations. A person is liable if they are responsible to pay that financial obligation. Examples of liabilities incurred in the operation of trusts include tax liabilities and monies owed under contracts. Legally speaking:
- liabilities can only be incurred by natural persons or legal persons (companies). Technically, though, a trust is neither; and
- a person's role as trustee does not give them a legal personality separate from their personal identity.
As such when a cost is incurred in relation to a trust's operations, it is generally said that the trustee incurs it personally.
Can a trustee recover these costs?
Most of the time, yes! An indemnity refers to an exemption from liability. In a trusts scenario an indemnity would in some way exempt a trustee from the financial obligations arising in the course of trust operations.
When a trustee incurs liabilities as a result of the proper administration of a trust, the trustee is considered to have a right of indemnity from that properly-incurred liability. The indemnity may be in the form of:
- the trustee initially paying the liability and being reimbursed the money out of the trust assets (called a right of recoupment); or
- the trustee appropriating trust monies to pay those properly incurred liabilities (called a right of exoneration).
In regard to those rights, it is important to note that:
- if the trustee seeks recoupment for trust-related costs paid, but there are not enough trust funds to recoup the entire amount, then the trustee will bear the excess liability unless there is a right of indemnity against another person (see below); and
- it is a breach of trust for a trustee to exercise its right of exoneration but use the funds for reasons other than discharging trust-related liabilities.
In limited circumstances (and only certain types of trusts), a trustee may be able to recoup monies paid for the proper administration of the trust from beneficiaries or the settlor - however this is uncommon.
Contracting to avoid personal liability
In some situations the trustee, contracting on behalf of the trust in the proper administration of the trust, may be able to limit their personal liability with third parties. In order to achieve this, the relevant circumstances (including but not limited to the nature and wording of the contract) must demonstrate that the parties intend for payment to be made from trust assets and not the trustee personally.
An example of a situation in which a trustee will usually contract to avoid personal liability is when purchasing land. A certificate of title for land will simply display the trustees name, and not whether it was purchased in the trustee's personal capacity or as trustee. In order to demonstrate that the land is a trust asset, the trustee will usually state that the purchase of the land is in their capacity as trustee on the contract of sale.
Situations where the right to recoupment or exoneration is not available
The rights of recoupment and exoneration are not available when:
- the trustee incurs the cost is in breach of trust or breach of duty;
- the cost is not incurred in the proper administration of the trust; and
- the trustee is a debtor to the trust. In this situation the trustee must first repay the debt, then the rights become available.
Though not a settled issue, the law generally weighs towards a trustee's right to recoupment or exoneration being excludable in the trust deed. That is - it may be possible for a trust deed to disallow a trustee to recoup or exonerate its liabilities. However this is unlikely.
If a trustee breaches the terms of the trust or any of its trustee duties, it creates a liability on the trustee to 'make good' on the loss or unauthorised profit. Making good means repaying to the trust assets any money lost or any unauthorised profits received. Any cost the trustee incurs not in the proper administration of the trust, usually by way of a breach, is also not available for recoupment or exoneration.
Further, a trustee who breaches a duty and is sued will be liable to pay their own legal fees.
Court relief from liability for breach
The trustee statutes state that a court may relieve a trustee's liability to make good for a breach if:
- the trustee acted honestly; and
- the trustee acted reasonably; and
- given the circumstances, the trustee ought fairly to be excused.
This is intended to provide relief, for example, in situations when a trustee acts on poor professional advice which leads to a breach.
That's it for trustees!
Aside from trustees, did you know there's a lot of other People Power involved in trusts? Settlors, beneficiaries, appointors, guardians. What do they all do? Are they all necessary? Stay sharp everyone, People Power is coming soon!
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