Most people of heard of a Family Discretionary Trust or an Estate Trust known as a Testamentary Trust. But what of the obligations of the people appointed to manage the trust? Can there be risks of a claim if you fail to get it right? Indeed there are risks in failing to act on qualified advice in a reasonable time and acting prudently taking account of the people the trust was set up for in the first place.
A trustee is a person formally appointed usually by a Deed to manage property on behalf of a class of people called the “beneficiaries”. This role comes with obligations and duties that the trustee owes to the beneficiaries. The fundamental duty of a trustee is to adhere to the terms of the trust deed and they must act in the beneficiaries’ best interests at all times. The key duties that a trustee owes are as follows:
1. Duty to preserve
Trustees hold trust property on behalf of the beneficiaries. The property must be in their name as trustee so that it is in their control. In cases of multiple trustees, the title of the property needs to be held in all names.
The trustees have a duty to preserve that property. Assets need to be adequately insured otherwise the trustee may be responsible for the replacement value of the property if it is stolen or damaged. If monies are lent there needs to be adequate security. Any debts should be paid promptly. Assets should be maintained and repaired as needed.
Assets should be invested to preserve capital and earn income.
2. Duty to invest
Trustees have a duty to maximise the trust property, including investing the trust fund. The trustee must exercise reasonable care and diligence and act the way an ordinary prudent businessperson would when managing their own affairs.
The trust deed itself will usually authorise a range of investments, otherwise, the authorised investments are governed by statute. When considering the possible investments a trustee should consider:
- The purpose of the trust;
- The risks associated with certain investments;
- The benefits of diversification;
- Securing the best income return while ensuring the capital is maintained;
- The needs of the beneficiaries.
3. Duty to account and provide information
Trustees have a duty to keep proper accounts. The accounts should show the incoming and outgoing funds and be supported by receipts, invoices and any other documentation. The accounts need to be up-to-date and accurate and any errors corrected as soon as they are found. Generally trustees engage an agent to prepare the accounts and tax returns for the trust.
Beneficiaries have a right to request a copy of the accounts and they must be provided. The trustee is entitled to be reimbursed for the reasonable costs of producing those accounts. The trustees are also obliged to provide beneficiaries with full details of the trust fund, including particulars of the investment.
However, trustees are not obligated to provide their reasoning when they exercise discretion. They do not need to provide minutes or any other notes.
4. Duty to act impartially
Trustees must act in the beneficiaries’ best interests, including present and future beneficiaries. The interests of the beneficiaries must be balanced impartially when the trustee distributes income and capital. A trustee cannot favour the interests of one beneficiary over the others. When exercising their powers, a trustee must ensure that they act in good faith.
5. Duty to act personally
A trustee must act personally and cannot have someone make the decision for them, however, the trustee is able to obtain assistance, such as employing an accountant. The trustee needs to be cautious of beneficiaries dictating how they are to exercise their decision to ensure they are making the decisions personally.
There are circumstances where statute authorises the trustee to appoint a delegate, such as if they are incapacitated or absent from the jurisdiction.
6. Duty of undivided loyalty
The trustee has a duty of undivided loyalty to the beneficiaries. They must avoid conflicts between the interests of the beneficiaries and their own interests. If a conflict does arise then it is important that the beneficiaries are immediately informed. The beneficiaries can give informed consent to the conflict if they agree to.
Trustees also cannot profit from the trust and cannot deal with trust property for their own benefit. A trustee is able to receive remuneration for their role if allowed by the trust deed, as ordered by the Court or with the agreement of the beneficiaries.
7. Duty to act jointly
If there is more than one trustee appointed they must act unanimously unless otherwise stated in the trust deed. This can cause difficulties where the trustees cannot agree. Clauses should be inserted into the trust deed or the Will to minimise this risk arising, such as:
- Stating that decisions can be made by way of majority;
- Appointing an ‘umpire’ who can make a decision that is binding on all trustees or allowing one trustee to be able to make the decision;
- Dispute resolution or arbitration clauses.
If you require further information regarding Estate Planning, please call us today on (07) 3839 7555.