Duties of Trustees

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The position of a trustee involves a number of duties which the trustee owes to the beneficiary. Since the duties of trustees and the legal principles which go with them are too long and complex to present in this brief, there is a a short outline with the basic principles and tests for duties of trusties (see Duties of Trustees (Outline)) which complements our detailed explanations below.

This article is a topic within the subject Property, Equity and Trusts 1.

Contents

Required Reading

Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012, pp. 564-602 [31.1-31.64]

Introduction

A trustee owes a variety of duties to the beneficiaries which must not be breached. Duties are binding (unlike powers), and a trustee who breaches his duty would be liable for any loss arising from that breach.

  • The trustee is not protected by any remoteness test (ie, loss does not need to be foreseeable).[1]

Duties are derived from three sources of law:

  1. Rules of equity (including orders of court).
  2. Default rules of the Trustee Act 1925 (NSW).
  3. The trust instrument itself, which can make specific provisions and exemptions to the above two sources

Initial Duties

[2] Upon accepting the position of a trustee, the trustee is firstly obliged to ensure that he has been properly appointed, and what the trust property consists of.[3] In doing so, the trustee obtains and acquaints himself with all documents concerning the trust and with the state of the trust property.[4]

  • This knowledge, once acquired, must be retained for the period of the trusteeship.
  • Where a trust has already been in existence, the trustee must seek information about the trust from previous trustees.[5]

Duty of Loyalty

[6] In basic terms, the duty of loyalty dictates that the trustee must adhere to all the terms of the trust and cannot go against the trust. It is derived from the basic principle that a fiduciary places the interests of the principles ahead of his own. Broken down more particularly, the duty of loyalty means that:

  • A trustee cannot depart from the words of the trust without approval of the court.
    • Obviously, if the trust contains an express power of variation (allowing the trustee to change the terms of the trust), a trustee will not be considered as breaching his duty of loyalty if he exercises that power.
  • A trustee who has accepted his appointment, and not disclaimed himself, cannot question the validity of the trust,[7] and cannot impeach it.
  • A trustee is bound to defend the trust against those who challenge it.

The requirement to place interests of the beneficiaries (especially financial) over any other interest includes any moral or social interest of the the fiduciary. This requires the trustee to always accept the best offer (as long as it is legal), regardless of any sort of considerations (such as honour, personal etc).[8] This was discussed in Cowan v Scargill:[9]

  • Facts: The beneficiaries were all related to the coal mining business, and the trustees refused to invest the trust money in business which competed with the coal business (ie, a personal or moral consideration).
  • Held: the interests of the beneficiary are mainly seen as financial (they rarely go into moral interests etc). The failure to place the beneficiaries' financial interest over the the trustee's personal interest amounted to a breach of the duty to place the interests of the beneficiaries over any other interest.

However, it has been recognised that in the cases of particular groups with particular concerns, other interests might supersede financial interests.[10]

Duty to Preserve Trust Property

[11] This duty is fairly straightforward - a trustee ensures that the trust property doesn't deteriorate (eg, keep a house in good condition). This 'preservation' is given an expansive meaning, and it includes the following 'sub-duties':

  • Ensuring the collection of debts:
    • This includes commencing legal proceedings for the recovery of the debt, unless the trustee can prove that the prospects of recovery were so poor as to justify not taking action.[12]
  • Duty to insure:
    • The trustee must insure the trust property as a prudent would be expected to act if he owned the trust property.[13]
  • Duty to invest properly.
    • Trustee should invest trust monies properly to secure the best possible income rather than letting it sit, or trying speculative investments (discussed below).

Duty to Insure

There has been some debate regarding whether the trustee has a duty to insure the trust property. In NSW, the authority for this is Pateman v Heyen:[14]

  • Facts: the trustee insured the property initially, but forgot to renew it. The property then burnt down.
  • Held: The trustee must insure the trust property as a prudent would be expected to act if he owned the trust property. In other words, the court employs an objective standard and determines whether the conduct of the trustee in insuring the trust property fell below that of the prudent person).
    • This means sometimes full market value insurance will be required, sometimes partial etc.
    • When the trust is not making any money with which insurance can be paid, it is reasonable not to insure the property.

Duty to Invest the Trust Fund Properly

[15] A part of 'preserving' the trust includes to invest its monies so as to not let the money be devalued through inflation etc.

  • Trustees invest as per the trust instrument. An investment contrary to a trust specifications is an immediate breach.
  • In practice, however, settlors often grant wide powers of investment upon trustees.
  • s 14 of the Trustee Act 1925 (NSW) also gives trustees a practically unfettered discretion to invest, except where expressly prohibited by the instrument.

In investing, the trustee must invest properly (ie, make smart investments). Some of the duties of the trustee in investing the trust fund are specified in s 14B of the Trustee Act, which is summarised below:

  • (1) all existing principles (case law) are preserved unless they conflict with the following:
  • (2) (a) Act in the best interests of the beneficiaries;
  • (2) (b) Not engage in speculative/hazardous investments;
  • (2) (c) Act impartially toward beneficiaries and different classes of beneficiaries; and
  • (2) (d) Take advice, the reasonable costs of which can come out of the trust fund (4).
  • (3) The trust instrument can expressly exempt the operation of these duties.

Standard of Care in Exercising Care

s 14A of the Trustee Act 1925 (NSW) requires trustees to exercise care, skill and diligence in investing. The standard of care, skill and diligence is determined according to whether the trustee is a professional trustee or not.

  • Professional trustees are held up against a professional standard of care (ie, how a prudent professional trustee would act). [16]
  • Non-professional are held up against a normal standard of care (ie, how a prudent normal person would act).[17]

The legislative provisions were statutory reenactments of Bartlett v Barclay’s Bank Trust (No 1):[18]

  • Barclay’s Bank was held to be under a higher standard of care than that of the ordinary prudent person in business, due to its having held itself out as having the skill and expertise to carry on the specialised business of trust management.

Considerations of the Trustee

The trustee must also consider the guidelines specified in s 14C (1), unless expressly forbidden by the trust instrument. They are not exhaustive.

  • Uni Study Guides notes: these are really straightforward and obvious. Examples include considering the purposes of the trust, nature of trust investments, risk, potential for profit, timing etc.

Determining Whether the Trustee Has Breached the Duty

The following rules apply for when determining whether the trustee has invested the fund properly:

  • The trustee's actions cannot be judged in hindsight; they must be judged on the basis of the facts and circumstances in existence at the time of the decision.[19]
  • The trustees are not meant to be infallible investors - they are merely expected to act prudently in investing the funds. If a trustee acted with due diligence and good faith, but then made a reasonable mistake or error of judgment which ended up causing a loss, he will not be deemed in breach of the duty to invest properly.[20]
    • However, this does not mean that the trustee can make speculative investments (unless permitted so by the instrument)...he must act with due diligence.[21]
  • Under ss 90 - 90A, courts now use the ‘portfolio theory’ in determining the prudence of a trustee’s investments.
    • This means that rather than looking at the individual investment in question, they will look at the overall ‘investment strategy’ of the trustee. Certain losses may be offset by other gains in the portfolio of investments, so as to not constitute an imprudent investment. Under the old rules, investments were viewed individually.

The issue of an honest, prudent investor making an error of judgement came up in Re Speight; Speight v Gaunt:[22]

  • Facts: the trustee employed a stockbroker who fraudulently misappropriated the funds. This resulted in a loss to the trust.
  • Held: since the trustee acted honestly and with reasonable due diligence, was held not to be liable for the loss.
    • 'A trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee'.[23]

Whilst it has been noted that speculative investments are usually a breach of the duty, the trust instrument itself may sometimes authorise the trustee to engage in speculative investments. In such an instance, the trustee is still under a duty to act prudently and in good faith in exercising those express powers. This issue was discussed in Re Whiteley; Whiteley v Learoyd:[24]

  • Facts: the trustees invested in a brick-pit business that went into liquidation. The amount they lent was less than the security they had. The beneficiaries sought restitution from the trustees in the circumstances.
  • Held: The money advanced by the trustees was substantially more than the value of the business, meaning it was a seriously imprudent investment and not just a speculative one.

An example of how the duty to invest properly is related to the duty to preserve the property is given in Elder’s Trustee and Executor v Higgins:[25]

  • Facts: a trustee failed to exercise an option to buy some property which later proved very important for the preservation of the trust property.
  • Held: the failure to invest in buying the property constituted a breach of the duty to preserve the trust property. It was not the act of a prudent person to let the option expire .

As always, the court will have regard to the whole of the circumstances in relation to determining whether a trustee has committed a breach of duty. This is illustrated in Re Lucking’s Will Trusts:[26]

  • Facts: Lucking was the trustee of his mother’s estate, which held shares in a company to which he personally held the remaining shares. Lucking let the manager do everything, including letting him overdraw cheques in an alarming rent. The manager eventually became bankrupt and lost a lot of money for the trust. Lucking’s niece and another beneficiary took proceedings against him, claiming damages for breach of trust.
  • Held: Lucking was held not to be liable for the manager’s undue business expenses, but he was liable for the manager’s overdrawing. Lucking knew of the overdrawing, but not the business expenses. The latter was held to be an error of judgment, but not a breach of trust.

Another case which discussed investing trust property was Nestle v National Westminster Bank:[27]


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And also Re Mulligan (dec’d):[28]


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Duty to Act Gratuitously

[29] A trustee should not profit from being a trustee. Being a trustee is an honorary position, not one which is taken up for commercial reasons. However, there are circumstances in which a trustee can receive remuneration for his role as a trustee:

  1. If the trust instrument expressly or impliedly allows it.[30]
  2. If an agreement to that effect has been reached between the beneficiaries and the trustee. The beneficiaries must be legally capable of entering a contract to do this (eg, not a child).
  3. If the court allows it.
    • A court may award remuneration (or vary existing terms of remuneration) based on the amount of time and effort which the trustee's office involve.[31]

Duty to Keep Proper Accounts and Provide Information

[32] In general terms, the trustee needs to keep clear records of all of the trusts business, and provide them to the beneficiaries if they are asked for. More particularly, this extends to:

  • Keeping accounts of all trust property.[33]
  • Keeping evidence.[34]
  • Provide this information it to the beneficiaries upon request,[35] including evidence verifying investments[36] and any legal advice obtained in connection with the administration of the trust.[37]
    • In Kemp v Burn,[38] it was held that a failure to render accounts when requested to do so would make the trustees personally liable to pay the cost of any proceedings brought to obtain an account.
  • Inform a beneficiary who comes of age of his/her rights under the investment.[39]

On the other hand, trustees are not obliged to:

  • Provide information about their internal deliberations ('working papers') unless those documents are 'trust documents'.[40]
  • Give access to confidential documents,[41] or documents that could prejudice the ability of the trustee to administer the trust.[42]

The issue of keeping proper accounts was discussed in Clark v Inglis:

  • In examining such questions, the first step is always to look at the trust instrument.
  • The second step is to look at the law – usually statute – giving deference to the principles, practice and approach of the relevant industry.

The principle that trustees do not have to provide information about their deliberations or reasons was held in Re Londonderry’s Settlement:[43]

  • Facts: the trustees made a distribution. The plaintiff objected to their distribution and demanded to see documents of their deliberations (minutes of the meetings etc).
  • Held: As trustees were not bound to disclose to their beneficiaries their reasons for exercising a discretionary power, the trustees were not bound to disclose documents detailing their reasons and meetings to the beneficiaries ('deliberations' or 'working papers'). They are only obliged to reveal 'trust documents', which are:
    1. They are documents in the possession of the trustees as trustees;
    2. They contain information about the trust which the beneficiaries are entitled to know; and
    3. The beneficiaries have a proprietary interest in the documents and, accordingly, are entitled to see them.

There has been a long debate about the rule in Londonderry's but it was finally reaffirmed in McDonald v Ellis,[44] which ruled that:

  • With documents such as 'working papers' and deliberations, the beneficiaries’ right is merely to inspect, not to take them away (legal title to the documents inheres in the trustee and not beneficiary).

Duty to Act Personally

[45] As a general rule, the trustee must act personally (ie, cannot be delegated to someone else). Exceptions include:

  • When it is permitted by the trust instrument.
  • When it is permitted by statute.
  • When the trustee, as a matter of necessity, must employ an agent.

In relation to matters concerning the business of the trust, the trustee only needs to ensure, as far as is reasonable and practicable, that the agent is doing their job.

  • In Ex Parte Belchier,[46] a trustee was not held liable when an employed broker went into liquidation.
  • However, in Wyman v Patterson,[47] a trustee was held liable for money lost by a solicitor with whom he had left certain funds for investing. However, his liability turned not on the loss itself, but on the fact that he kept the money with the solicitor for so long, without investing it elsewhere.

s 53 of the Trustee Act 1925 (NSW) permits delegation only of the power to receive and hold trust moneys in the bank. Thus, trust instruments would need to expressly mention further powers of delegation to overcome this.

Duty to Act Unanimously

Where there is more than one trustee, the trustees must act unanimously,[48] except where the trust instruments allows majority approval.[49]

  • The principle of unanimity of trustees does not apply in the case of public or charitable trusts, where the rule is that a majority may act.[50]
  • If the trustee's cannot agree, the court may intervene.[51]

Duty to Consider

[52] A trustee is obliged to 'consider' how best to exercise his power and discretions, in relation to the manner and time for the exercise of the discretion/power.

  • For discretionary trusts, this means the trustee should consider how to make a distribution (to whom, when, and what amount).
  • For mere/bare powers (where the trustee does not have an obligation to distribute at all), the trustee still has the duty to:
    • Obey the trust instrument.
    • Periodically consider whether or not the power should be exercised.
    • Consider the appropriateness of individual appointments.
  • In other words, even if the power conferred on trustees is not a trust power and doesn’t oblige them to distribute, they still have to consider how to use it.[53]

The duty to consider is a bit problematic, since discretion can be unfettered and trustees do not have to provide reasons for their distribution. Also, whilst a trustee is under an obligation to consider the objects of the trust before making an appointment, courts do not actually say what he must consider.

  • The obligation is best cast in the negative: a trustee must not act 'capriciously' (there is no simple definition, but 'arbitrarily' would be the closest).
    • An example of failing to consider and acting capriciously would be to make a distribution based on rolling dice or picking a short straw.

An 'Irreducible Core'

[54] Because of frequent exemption clauses in trust instruments, the court have sought to establish an 'irreducible core' of duties which cannot be exempted. However, there has been significant disagreement over what this core really is.

  • In Armitage v Nurse,[55] the core was said to constitute only to act in good faith and honesty.
  • The author of the Equity Textbook (Evans) disagrees with this, saying that the duty to keep proper accounts of the property held must also be a core duty.
  • In Green v Wilden,[56] exemption clauses were held not to extend to breaches of fiduciary obligations, ‘whether advertent or not’.

Duty to Pay Correct Beneficiaries

[57] The trustee has a duty to pay and transfer the trust property to the persons entitled to it.[58]

Initially, if trust property was destroyed or stolen, the trustee could escape liability only if s/he had taken proper care of it. However, these difficulties have been ameliorated by statute and modern trust instruments which give trustees broad powers, discretions and exemptions.

  • Under s 60 of the Trustee Act 1925, trustees have protection when distributing trust property after advertising for claims.

Duty to Act Impartially

[59] The trustee is supposed to act completely impartially between the beneficiaries.

  • Obviously, a discretionary trust authorises the trustee to act otherwise.

This duty applies most often in the cases of life tenancies, where the trustee must balance the rights of the life tenant and the remainderman (which involves producing income for the life tenant whilst preserving the capital value of the property for the remainderman). This was discussed in Howe v Lord Dartmouth, which specified the rule as follows:[60]

  • In the case of a trust which:
    1. Involves successive beneficiaries (such as a life tenancy) and
    2. Has wasting[61] or reversionary[62] personal property and
    3. Where there was no contrary intention expressed in the isntrument, then:
  1. A trustee is required to convert this personal property into forms of recognised investment within 1 year of the trust coming into being.
    • This is because property remains as personal property, it is likely that the remainderpersons will receive nothing after the life estate ceases.
  2. A trustee is required to apportion the profits made from the investment. As a general rule, the life tenant is entitled to all income earned after the trust becomes effective, and the remainderman is only entitled to profits before the trust becomes effective, and after the death of the life tenant.


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End

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References

Property Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

Equity Textbook refers to Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012.

  1. Youyang v Minter Ellison.
  2. Equity Textbook, pp. 464-5 [31.2-31.3]
  3. Harvey v Olliver (1887) 57 LT 239
  4. Hallows v Lloyd (1888) 39 Ch D 686.
  5. Harvey v Olliver (1887) 57 LT 239; Hallows v Lloyd (1888) 39 Ch D 686.
  6. Equity Textbook, pp. 565-7 [31.4-31.7]
  7. McGregor v McGregor [1919] NZLR 286.
  8. Cowan v Scargill [1985] Ch 270
  9. [1985] Ch 270
  10. Harries v Church Comissioners for England [1992] 1 WLR 1241.
  11. Equity Textbook, pp. 567-9 [31.8-31.9].
  12. Re Brogden; Billing v Brogden (1888) 38 Ch D 546; Partridge v Equity Trustees Executors and Agency Co Ltd
  13. Pateman v Heyen (1993) 33 NSWLR 188.
  14. (1993) 33 NSWLR 188.
  15. Equity Textbook, pp. 569-81 [31.10-31.29]
  16. Trustee Act 1925 (NSW), s 14A (2) (a).
  17. Trustee Act 1925 (NSW), s 14A (2) (b).
  18. [1980] Ch 515.
  19. Nestle v National Westminster Bank [1994] 1 All ER 118, 134.
  20. Re Chapman [1896] Ch 763, 768.
  21. Sidley v Huntly (1900) 21 LR (NSW) Eq 14.
  22. (1883) 22 Ch D 727.
  23. (1883) 22 Ch D 727, 739.
  24. (1886) 33 Ch D 347.
  25. (1963) 113 CLR 426.
  26. [1968] 1 WLR 866.
  27. [1994] 1 All ER 118, 134.
  28. [1998] 1 NZLR 481.
  29. Equity Textbook, pp. 581-3 [31.30-31.31]
  30. Re Thorley [1891] 2 Ch 613.
  31. Re Duke of Norfolk Settlement Trusts [1982] Ch 61.
  32. Equity Textbook, pp. 585-91 [31.32-31.41].
  33. Kemp v Burn (1863) 66 ER 740.
  34. Christensen v Christensen [1954] QWN 37.
  35. Manning v Commissioner of Taxation (1928) 40 CLR 506.
  36. Walker v Symonds (1818) 36 ER 751.
  37. Hawkesley v May ]1956] 1 QB 304.
  38. (1863) 4 Giff 348 [66 ER 740].
  39. Hawkesley v May [1956] 1 QB 304.
  40. Re Londonderry’s Settlement [1965] Ch 918; Re Fairbairn [1967] VR 633.
  41. Hartigan Nominees v Rydge (1992) 29 NSWLR 405.
  42. Rouse v IOOF Australia Trustees (1999) 73 SASR 484.
  43. [1965] Ch 918.
  44. [2007] NSWSC 1068.
  45. Equity Textbook, pp. 591-3 [31.41-31.44].
  46. (1754) 27 ER 144.
  47. [1900] AC 271.
  48. Luke v South Kensington Hotel (1879) 11 Ch D 121.
  49. Dulhunty v Dulhunty [2010] NSWSC 1465, [36].
  50. Re Whiteley; Bishop of London v Whiteley [1910] 1 Ch 600.
  51. In the Estate of William Just, Deceased (No. 1) (1973) 7 SASR 508.
  52. Equity Textbook, pp. 593-5 [31.45-31.51].
  53. McPhail v Doulton [1970] UKHL 1.
  54. Equity Textbook, pp. 595-7 [31.52-31.53].
  55. [1997] 2 All ER 705.
  56. [2005] WASC 83.
  57. Equity Textbook, p. 597 [31.54].
  58. Davies v Hodgson (1858) 53 ER 604.
  59. Equity Textbook, pp. 597-9 [31.55-31.59].
  60. (1802) 7 Ves 137.
  61. Property depreciating in value.
  62. Property not presently producing income, but may do so in the future.
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