Taking on the responsibilities of a trustee should never be taken lightly. There are obligations, often complex, that must be navigated carefully and it’s a foolish trustee who takes them on without professional help.
In this article, I examine the key trustee duties and make the point that getting the professional help you need to execute those duties, protect yourself as the trustee and the trust assets from potential litigation is critical provided that it is done ‘within’ the provisions of the Trust Deed.
Trusts are a common means of managing assets and funds, which essentially empower an individual or corporate entity to take on the responsibilities holding and managing assets on behalf of others.
If you’re a trustee, or a director of a corporate entity that acts in the capacity of a trustee, it means you are responsible for controlling the administration of the trust assets. In this role, you’re legally obligated to administer the trust and perform key duties in accordance with the purpose specified in the trust deed. Failing to do so can expose the trustee to personal liability and the trust assets to unwanted claims by beneficiaries.
In a discretionary trust (or family trust), the trustee has the ‘discretion’ to determine which beneficiaries receive the capital and income of the trust, and how much each will receive. The beneficiaries themselves do not have a fixed entitlement or interest in the trust funds.
Although it’s described as a discretionary trust, that doesn’t mean the trustee can do whatever they feel like. There are certain duties trustees must be conscious of, and act in accordance with, under the provisions of the Trust Deed and the law.
There are six key duties a trustee must uphold, which I’ve overviewed here.
1. Duty to preserve trust property:
A trustee has to act to preserve and safeguard the Trust Property against loss. Generally, this will mean doing all of the following:
a) Collecting all debts of the trust;
b) Insuring any insurable assets where someone would usually insure those assets (for instance, building insurance for any real property owned by the trust);
c) Investing the assets of the trust – usually this will mean not letting the assets of the trust sit idle, only investing in the investments permitted by the trust, and not engaging in highly speculative or unreasonably risky investments.
2. Duty to exercise reasonable care in managing the affairs of the trust:
Trustees must perform their duties with the reasonable care and skill that an ordinary business person would expend in managing their own affairs. For professional trustees, this threshold will be that of a professional with the requisite degree of skill.
3. Duty to act in good faith and not to profit personally out of the trust:
As trustee, you are not entitled to make any profit out of the relationship of trust between you and the beneficiaries and, if you do so, you must account for such profit to the Trust. Sometimes the Trust Deed may allow for transactions where both parties may stand to benefit or where there may be a conflict of interest, but in those instances, you must act strictly in accordance with the provisions of the Deed.
4. Duty to keep accounts and duty to provide information:
You must keep proper, up-to-date and accurate accounts, and make them available to beneficiaries on request. The Deed may impact upon exactly what your requirements will be in this regard.
5. Duty to consider and act impartially:
Trustees are provided with powers and discretions under the Trust Deed, but are also under a duty to consider how best to exercise them, and, depending upon the nature of any particular discretion, whether to exercise it at all. The trustee must exercise their powers and discretions in good faith with a proper regard for the fiduciary duties imposed on the trustee. Trustees must act impartially between beneficiaries and not favour the interests of one beneficiary more than another.
6. Duty to act in person:
Unless the Trust Deed provides otherwise, trustees are personally responsible for exercising the duties of trustee. It is important to note, Trust Deeds often contain provisions allowing a trustee to retain professionals, commonly lawyers and accountants, to assist them in the performance of their duties but any engagement must be done strictly within the terms of the trust deed.
On this last point, there are certainly plenty of complexities that will frequently cross between legal, tax and accounting and the personal financial matters of the beneficiaries. These matters usually require professional advice and guidance, often collaboratively, as it is not generally the case that one professional discipline is qualified to advise on all matters.
For example, usually your accountant will assist in preparing minutes of the trust that properly deal with issues involving distributions and beneficiaries. However, if there are potential family issues or concerns, your accountant may need assistance from a lawyer with specific wording around considerations given to, and determinations around why, a discretion was not exercised in favour of a trustee when making distributions, which can prove particularly beneficial when faced with claims from disappointed beneficiaries.
Your accountant may also wish for you to take certain steps in administration of the trust, and sometimes these may require assistance from a lawyer to confirm that the proposed exercise of power is “within scope” of the terms of the trust deed and to prepare the required documentation for that exercise of power.
Make time to review your trust deed and take a highlighter to any terms you’re unsure of or provisions that seem unclear. In particular, check that the trust deed empowers you, as a trustee to engage the professional advice necessary for discharging your duties and guidelines are clear for fee reimbursements.
Seeking legal advice so you clearly understand your obligations as a trustee is not only beneficial for safeguarding your trust assets, it provides important insights for business and personal decision-making. Engaging qualified professionals can help you avoid legal claims made by beneficiaries that can rob you of huge amounts of time and cause significant cost and personal stress.
For further information, please contact Craig Hong on +61 (0) 7 3007 2000 or email firstname.lastname@example.org.
Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting & business advisory services for executives, professionals and business owners in the mining and resources sectors.
The information in this article is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.