A trust is a vehicle through which property is legally held by a trustee for the benefit of others. It separates the beneficial and legal ownership of property.
The parties to a trust are the settlor (person creating the trust), the trustee (the legal owner of trust property with the responsibility of administering the trust) and the beneficiaries (the persons for whose benefit the property is held).
The trustee must act in the best interests of the beneficiaries in accordance with the terms of the trust, which is usually established by a deed.
Have you been or, are you about to be, appointed as a trustee? If so, it is vital to understand your duties as a trustee so you can reduce the risk of being held personally liable under the trust.
The common law (court decided law) and legislation (Government made law) provide duties that all trustees must comply with. The duty between a trustee and beneficiary is referred to as a “fiduciary duty“, meaning beneficiaries in the trust have a right to expect the trustee will act in their best interests whilst managing the trust.
Table of Contents
- Duties as Trustee Under Common Law
- Duties Under Relevant Legislation
- When Can I Be Held Personally Liable?
- Limiting Liability – Corporate Trustee
- Conclusion
- Get Legal Help
Duties as Trustee Under Common Law
As mentioned above, a trustee owes a fiduciary duty to beneficiaries of a trust, some of these are to:
- Act in good faith and impartially between beneficiaries. This means a trustee must be honest and reasonable and must not favour one beneficiary over another.
- Act in the best interests of beneficiaries. This requires a trustee to act with the reasonable care, skill and diligence that an ordinary business person would expect.
- Duty to preserve trust property. A trustee must conserve the trust property (including the income and capital) against loss.
- Not to make a personal profit from the trust. A trustee has no right to make a profit from the trust; if any profit is made, the trustee has a duty to account for it to the trust and the beneficiaries.
- Duty to account and provide information to beneficiaries. A trustee must keep updated and accurate records and make these available to beneficiaries upon request.
- Duty to act in person. Generally, a trustee has no right to delegate their duties to a third person, except in some cases such as engaging accountants or lawyers to assist.
As is clear from the above, a trustee has many varied duties under a trust. These duties can become more onerous depending on the complexity of the trust. We recommend you speak to one of our lawyers who can provide you with further advice on your duties as a trustee or help you decide whether to accept a trustee role.
Duties Under Relevant Legislation
In Western Australia, the Trustee Act 1962 provides that a trustee must, in exercising a power of investment, exercise care, diligence and skill that a prudent person engaged in that position would exercise in managing the affairs of other persons.
Our lawyers can provide you with further advice on your responsibilities under the Trustee Act.
When Can I Be Held Personally Liable?
If a trustee breaches any of their duties under a trust or the general law, they may be held personally liable. For example, if a trustee fails to exercise their duties in good faith and the best interests of the beneficiaries by placing their interests above those of the beneficiaries.
If a trustee is found to have breached their duties, they may be liable to pay compensation into the trust to restore the trust estate to the same position as before the breach. The trustee may also have to pay beneficiaries any profits made as a result of the breach.
Not all breaches result in personal liability. The Trustee Act states that where a trustee acted honestly and reasonably, they may be excused from liability. This is decided case by case. We recommend you speak with one of our trust lawyers to see if this applies to your situation.
Limiting Liability – Corporate Trustee
The trustee does not have to be an individual; a company can be appointed as trustee, legally holding the trust’s assets for beneficiaries.
Individual trustees are often appointed due to lower costs, but corporate trustees offer benefits including protection from personal liability and limiting liability to the company’s assets.
The pros and cons of appointing an individual or corporate trustee should be considered in consultation with your lawyer.
Conclusion
Trustees play an important part in the performance of a trust deed and their duties are equally important.
Deciding to appoint a corporate or individual trustee is not always straightforward, so seek legal advice to ensure the right structure is in place for your circumstances.
To reduce personal liability risk, trustees must understand their duties under relevant laws and demonstrate acting in good faith and the best interests of beneficiaries.
Get Legal Help
This is general information only and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs legal help or advice, please call 08 9336 6300 or email [email protected].