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MARCH 2014

Trustee Obligations

What does a Trustee have to do?

The most common question asked of us by our clients about Trusts concerns the duties and obligations of Trustees.

As I was driving over the summer holiday period I was conscious of the police’s “zero tolerance for speeding” campaign and the importance of keeping within the speed limit. Driving is a bit like being a Trustee. As drivers we are responsible to know and obey the road rules, make sure our vehicle is safe and road-worthy, stay in control, look after our passengers and get them all safely to their destination. Our actions are under scrutiny and we will be held to account if something goes wrong.

The fundamental nature of a Trust is that a Trustee acquires and holds the legal ownership of Trust property not for themselves but for the Beneficiaries of the Trust. The Trustees must use the Trust property only for the benefit of the Beneficiaries of the Trust and in accordance with the terms of the Trust. The terms of the Trust are set out in the Trust Deed and also provided for in the Trustee Act.

There are four principle duties of a Trustee:

1. The duty of efficient management.

  • To fulfil this duty a Trustee should do the following:
  • thoroughly familiarise themselves with the terms of the Trust as set out in the Trust Deed;
  • take title to or ownership of the Trust assets jointly with the other Trustees;
  • keep the Trust property separate from their own personal property and ensure that the Trust assets are used only for proper Trust purposes;
  • carefully look after the Trust’s property and invest it as a prudent business person would in managing their own affairs.

2. The duty to keep and render full and proper accounts.

This duty involves a Trustee:

  • keeping proper accounting records and making sure financial statements are regularly prepared;
  • providing information to the Beneficiaries including information requested by them unless the Trust Deed or other good reasons exist for restricting the flow of such information;
  • keeping a good record of all Trustee decisions and transactions.

The complexity of accounting records will depend on the nature of the Trust and its property. For a simple Trust, basic “special purpose accounts” will be sufficient. Advice should be taken from an accountant about what is required or necessary.

3. The duty to act personally.

Except in some specific situations, a Trustee cannot delegate their powers and discretions to someone else. A Trustee should:

  • be actively involved in decisions about the Trust. While it is wise to seek professional advice and the Trustee must take note of documents such as the Settlor’s Memorandum of Guidance, a Trustee cannot leave it to others to make decisions;
  • obtain and consider all relevant information when exercising Trust powers and discretions. For example, find out about the Beneficiaries’ circumstances and be familiar with the Trust property;
  • act unanimously with the other Trustees and by consensus unless the Trust Deed specifically allows majority decisions;
  • be aware that Trustees are personally responsible for Trust actions and will be personally liable for the liabilities of the Trust (although they have indemnities available from the Trust provided the Trustees act properly)

4. The duty of loyalty.

This means putting the Beneficiaries first. A Trustee hold Trust property not for themselves but for the Beneficiaries. Therefore, a Trustee must:

  • act exclusively in the best interests of all the Beneficiaries, both present and future;
  • act impartially and even-handedly. Preferential treatment for one or more Beneficiaries should be given only for good and proper reasons authorised by the Trust Deed rather than for capricious or irrational reasons;
  • not profit or benefit from their position as Trustees unless specifically authorised. Where a Trustee is also a Beneficiary they may receive benefits in that capacity provided they avoid conflicts of interest;
  • not allow themselves to be in a position where they have a conflict of interest between their duties to the Trust and the Beneficiaries and their own personal interests.

Conclusions

As we have frequently highlighted, Trustees’ actions can come under intense scrutiny from Beneficiaries, and also from the Court. Trustees can be personally liable to third parties, including the Inland Revenue Department. Anyone who is or intends to be a Trustee should ensure that they are getting our legal advice and advice from their accountant to help them fulfil their duties and responsibilities.