Trustees: appointment, duties, powers, and liabilities - Breach of trust: personal liability and measure of liability

Learning Outcomes

After reading this article, you will be able to identify how trustees are appointed, outline the main duties and powers of trustees, and explain the consequences of breach of trust. You will understand the personal liability of trustees, the measure of liability, and the main statutory protections available. This knowledge is essential for answering SQE1-style MCQs on trusteeship and breach of trust.

SQE1 Syllabus

For SQE1, you are required to understand the legal framework governing trustees, including their appointment, duties, powers, and liabilities. You must be able to apply these principles to scenarios involving breach of trust and assess the remedies and defences available.

• The appointment, removal, and retirement of trustees
• The statutory and fiduciary duties of trustees
• The powers of trustees under statute and trust instruments
• The consequences of breach of trust, including personal liability and the measure of liability
• The main statutory protections and defences for trustees

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Who may appoint a new trustee if a trustee retires and no one is nominated in the trust instrument?
   1. The settlor
   2. The beneficiaries
   3. The remaining trustees
   4. The court
2. Which of the following is a core fiduciary duty of a trustee?
   1. Duty to act in the trustee’s own interest
   2. Duty to act impartially between beneficiaries
   3. Duty to delegate all decisions
   4. Duty to avoid keeping records
3. If a trustee invests trust funds in an unauthorised asset and the trust suffers a loss, what is the usual remedy?
   1. The trustee is not liable
   2. The trustee must restore the loss to the trust fund
   3. The trustee is only liable if they acted dishonestly
   4. The trustee is automatically removed

4. True or false: A trustee can always rely on an exemption clause in the trust instrument to avoid liability for fraud.

Introduction

Trustees are central to the operation of trusts. They are appointed to hold and manage trust property for the benefit of others and are subject to strict legal duties. This article explains how trustees are appointed and removed, the main duties and powers they hold, and the consequences if they breach those duties. You will also learn about the personal liability of trustees for breach of trust, how liability is measured, and the main statutory protections available.

APPOINTMENT OF TRUSTEES

Trustees are usually appointed by the settlor in the trust instrument. If a trustee retires, dies, or is otherwise unable to act, a new trustee may be appointed by the person nominated in the trust instrument, or if none, by the continuing trustees or the court.

Key Term: trustee A person who holds legal title to trust property and is responsible for managing it for the benefit of the beneficiaries.

Key Term: settlor The person who creates the trust and transfers property to the trustees.

Key Term: beneficiary The person or persons entitled to benefit from the trust property.

The minimum number of trustees depends on the type of trust property. For trusts of land, at least two trustees (or a trust corporation) are required. For trusts of personalty, a sole trustee is permitted, but more than one is common for practical reasons.

Trustees must be adults with mental capacity. A bankrupt or a person convicted of dishonesty may be disqualified from acting as a trustee, especially for charitable or pension trusts.

Trustees may retire by deed, provided at least two trustees (or a trust corporation) remain. The court may remove or appoint trustees if it is expedient and cannot otherwise be done.

Worked Example 1.1

A trust instrument appoints Alice, Ben, and Carla as trustees. Ben wishes to retire, but the trust instrument is silent on appointment of new trustees. Who may appoint a replacement?

Answer: The continuing trustees (Alice and Carla) may appoint a replacement trustee by deed, provided at least two trustees remain after the appointment.

DUTIES OF TRUSTEES

Trustees owe strict fiduciary and statutory duties. These duties are designed to protect the interests of the beneficiaries and ensure proper management of the trust.

Key Term: fiduciary duty A duty to act in good faith, for the benefit of others, and to avoid conflicts of interest or personal profit from the position.

Key Term: duty of care The obligation to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or experience.

The main duties of trustees include:

• Acting in accordance with the trust instrument and the law
• Acting impartially between beneficiaries
• Avoiding conflicts of interest and not profiting from the trust (unless authorised)
• Investing trust property prudently and in accordance with statutory powers
• Keeping proper accounts and providing information to beneficiaries

Trustees must act personally and cannot generally delegate their powers, except as permitted by statute or the trust instrument.

Worked Example 1.2

A trustee is also a beneficiary of the trust. Can they purchase trust property from the trust?

Answer: No, this is prohibited by the self-dealing rule. Any such transaction is voidable at the instance of the beneficiaries, even if the trustee pays full value.

POWERS OF TRUSTEES

Trustees have powers conferred by the trust instrument and by statute. These powers enable them to manage the trust effectively.

Key Term: power of investment The authority to invest trust property as if the trustee were the absolute owner, subject to the standard investment criteria and duty of care.

Key Term: power of advancement The power to pay or apply capital for the advancement or benefit of a beneficiary before their interest vests.

Key Term: power of maintenance The power to apply income for the maintenance, education, or benefit of a minor beneficiary.

Statutory powers include:

• The general power of investment (Trustee Act 2000, s 3)
• The power to acquire land in the UK (Trustee Act 2000, s 8)
• The power to delegate certain functions to agents (Trustee Act 2000, ss 11–15)
• The power to insure trust property (Trustee Act 1925, s 19)
• The power to advance capital and apply income for beneficiaries (Trustee Act 1925, ss 31–32)

Trustees must review investments regularly, seek proper advice where appropriate, and act impartially between beneficiaries.

Worked Example 1.3

A trust fund is held for two children until they reach 25. The trustees wish to advance half the fund to one child at age 20 to pay university fees. Is this permitted?

Answer: Yes, under the power of advancement, trustees may advance up to the beneficiary’s presumptive share (for trusts created after 1 October 2014), provided the trust instrument does not exclude this power.

BREACH OF TRUST: PERSONAL LIABILITY AND MEASURE OF LIABILITY

A breach of trust occurs when a trustee fails to comply with their duties or exceeds their powers, causing loss to the trust or unauthorised gain.

Key Term: breach of trust Any act or omission by a trustee that is contrary to the duties imposed by the trust or the law.

Key Term: personal liability The obligation of a trustee to compensate the trust from their own assets for loss caused by a breach of trust.

Key Term: measure of liability The amount the trustee must pay to restore the trust fund to the position it would have been in but for the breach.

Trustees are personally liable for loss caused by their breach, regardless of intention or good faith. Liability is strict: the trustee’s state of mind is generally irrelevant. The measure of liability is usually the amount required to restore the trust fund to its pre-breach position.

If more than one trustee is in breach, liability is joint and several. A trustee may seek contribution or indemnity from co-trustees in some circumstances.

Worked Example 1.4

Trustees invest trust funds in unauthorised shares, which fall in value by £50,000. What is the measure of liability?

Answer: The trustees must restore the £50,000 loss to the trust fund from their own assets.

DEFENCES AND PROTECTIONS FOR TRUSTEES

Trustees may be protected from liability in certain circumstances.

Key Term: exemption clause A clause in the trust instrument that limits or excludes trustee liability for certain breaches, except for fraud or dishonesty.

Key Term: statutory relief The court’s power to relieve a trustee from liability if they acted honestly and reasonably and ought fairly to be excused (Trustee Act 1925, s 61).

Trustees may also be protected if the beneficiaries consented to the breach, or if the claim is time-barred under the Limitation Act 1980 (six years from the date of breach, with exceptions).

Exam Warning

Exemption clauses cannot exclude liability for fraud or dishonesty. Trustees remain liable for deliberate wrongdoing even if the trust instrument purports to exclude liability.

SUMMARY TABLE: BREACH OF TRUST AND LIABILITY

Key Point Checklist

This article has covered the following key knowledge points:

• The appointment, retirement, and removal of trustees, including statutory powers
• The main fiduciary and statutory duties of trustees
• The principal powers of trustees under statute and trust instruments
• The consequences of breach of trust, including strict personal liability and the measure of liability
• The main statutory and trust instrument protections available to trustees

Key Terms and Concepts

• trustee
• settlor
• beneficiary
• fiduciary duty
• duty of care
• power of investment
• power of advancement
• power of maintenance
• breach of trust
• personal liability
• measure of liability
• exemption clause
• statutory relief