The core duties owed by trustees

The classic statement in this area of the law comes from Millet LJ in Armitage v Nurse, where it was said that the "irreducible core of trustees' obligations" requires the trustee to act honestly and in good faith for the benefit of the beneficiaries.  In practical terms, this means that the trustee must not deal with the trust assets as if they were his or her own.

Other trustees' duties recognised by the law

Trustees must take steps to know and understand the terms of the trust. The Commission suggests that this duty could be considered part of the irreducible core, since, if it is not adhered to, it is doubtful that a trustee would be able to carry out his or her role at all.

Trustees are under a duty to comply with the terms of the trust,  regardless of whether the terms of the trust are expressed in writing or orally by the settlor (unless those terms are illegal).  However, if adherence to the terms of the trust has become impractical (due, for instance, to changes in the law), then a trustee may seek a variation of the terms by obtaining consent from the beneficiaries or by applying to the court for an amendment.

When making investments, the trustee is required to act with "strict impartiality and maintain a balance between the interests of life tenant and remainderman" (Re Mulligan).  This means that the trustee must choose between investments which maximise income and investments which increase capital in an impartial manner.

The trustee is under a duty not to profit from trusteeship.  Liability is strict, and even in situations where the trustee acts honestly to benefit both himself and the trust, he will be required to account for all profits made.

Generally trustees are under a duty to act gratuitously, but there are a number of exceptions to this duty, for example, where provision for remuneration is made in the trust deed, where remuneration has been authorised by the beneficiary or the court, or where the trustee has incurred out-of-pocket expenses.

When investing trust assets, trustees must exercise, pursuant to s13B of the Trustees Act, the level of 'care, diligence and skill that a prudent business person would exercise when managing the affairs of another person'.  Professional trustees will be held to a higher standard under s13C.

lt is generally held that the trustee is subject to a duty not to delegate, but exceptions to this duty exist under s31 of the Trustee Act.  They include temporary physical incapacity and absence from the country.

A trustee must actively perform his/her duties, as the law will not distinguish between an active or passive breach.

Where the trust instrument provides for more than one trustee, trustees must act unanimously.

The duty to maintain accounts and records and give information as required is often regarded as an unsettled and contentious area of the law.  lt was held in Schmidt v Rosewood Trust Ltd that it is a matter of the court's discretion as to whether to enforce access by beneficiaries to information about trust accounts, and regard will be had to the purpose of the access, and the impact on the trustees, other beneficiaries, or third parties.

Exclusion of trustees' duties

Often trust deeds will exempt a trustee from liability for a breach of some of the duties listed above.  lt is generally considered that any duty, apart from the irreducible duty to act in good faith, may be excluded by the trust instrument.

Scope for law reform

The Commission raises the issue as to whether trustees' duties should be expressly listed in legislation.  lt suggests that the duties which form the irreducible core of the trustees' obligations should be clearly enumerated in statute, so that trustees and settlors have clear guidance as to which duties can and cannot be excluded by a trust instrument.

The Commission queries whether greater clarity is needed in relation to the trustees' duty to provide information.  lt also appears to consider that the law should be tightened to prohibit trustees from excluding liability in regard to non-irreducible duties, so as to prevent negligent performance by trustees.

Written by: Katie Lynch - Legal Assistant  www.denniskinglaw.com

Disclaimer: This newsletter discusses its topic in general terms and should not be relied upon as legal advice.