Learning Outcomes
This article outlines the fundamental duties imposed upon trustees, distinguishing between general fiduciary obligations and the specific duty of care. For the SQE1 assessment, you need to understand the nature of a trustee's fiduciary duties, including loyalty and impartiality, and the standard of care expected under both common law and the Trustee Act 2000. This includes the higher standard applied to professional trustees. Understanding these principles will enable you to identify breaches and apply the correct legal standards in SQE1-style multiple-choice questions.
SQE1 Syllabus
For SQE1, you are required to understand the duties and standards expected of trustees in the administration of a trust. It is likely you will need to identify the relevant duty in a given scenario and apply the appropriate legal standard, particularly concerning the duty of care.
As you work through this article, remember to pay particular attention in your revision to:
- the nature and scope of trustees' fiduciary duties, such as loyalty and impartiality
- the standard of care required of trustees at common law
- the statutory duty of care under the Trustee Act 2000, including its scope and the standard expected, especially from professionals
- the duty for trustees to act personally and unanimously.
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.
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Which of the following best describes the core principle of a trustee's fiduciary duty?
- To maximise the financial return of the trust fund above all else.
- To act solely in the best interests of the beneficiaries, avoiding personal profit or conflict.
- To strictly follow only the express instructions given by the settlor.
- To ensure equal distribution of assets among all potential beneficiaries.
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Under the Trustee Act 2000, the statutory duty of care applies to which of the following trustee functions?
- Exercising the power of investment.
- Distributing trust assets to beneficiaries.
- Deciding whether to exercise a discretionary power.
- Appointing a new trustee.
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A lay trustee (non-professional) and a professional trustee (e.g., a solicitor) are appointed as co-trustees. What standard of care applies when they exercise their investment powers?
- Both are held to the standard of an ordinary prudent person of business.
- Both are held to the standard of a reasonably competent professional in their field.
- The lay trustee is held to the standard of an ordinary prudent person; the professional trustee is held to a higher professional standard.
- The standard depends entirely on the terms explicitly stated in the trust instrument.
Introduction
Trusteeship involves significant responsibilities and legal obligations. Trustees are entrusted with managing assets for the benefit of others (the beneficiaries) and must follow strict standards of conduct. These standards derive from both equity, in the form of fiduciary duties, and statute, primarily the Trustee Act 2000 which codifies a specific duty of care. Understanding these duties is essential for advising trustees and beneficiaries and for identifying potential breaches of trust.
The Trustee's Fundamental Duties
Trustees owe overarching duties derived from the fiduciary nature of their role. A fiduciary relationship is one of trust and confidence, requiring the fiduciary (the trustee) to act with utmost loyalty towards the principal (the beneficiaries).
Key Term: Fiduciary Duty
An obligation to act solely in the best interests of another party (the beneficiary), characterised by loyalty, good faith, and the avoidance of conflicts of interest or unauthorised personal profit.
Duty of Loyalty
Loyalty is fundamental to fiduciary duty. Trustees must act exclusively for the benefit of the beneficiaries. This means they must not allow their personal interests to conflict with their duties to the trust. Any profit made by a trustee through their position, unless authorised by the trust instrument, the beneficiaries (who are sui juris and fully informed), or the court, must be accounted for to the trust. This includes profits from competing with the trust or using trust information for personal gain.
Duty to Act Impartially
Trustees must act impartially between different beneficiaries or classes of beneficiaries. This is particularly relevant where a trust benefits individuals successively (e.g., a life tenant entitled to income and remaindermen entitled to capital). The trustees must balance the interests fairly, ensuring investment strategies, for instance, do not unduly favour income generation over capital growth, or vice versa. This does not necessarily mean equal treatment, but rather fairness in considering the differing interests according to the terms of the trust.
Duty to Account
Trustees have a duty to keep clear and accurate accounts of the trust property and be ready to provide these accounts and other relevant information to the beneficiaries when requested. This transparency allows beneficiaries to monitor the administration of the trust and hold trustees accountable.
The Trustee's Duty of Care
Beyond the broad fiduciary obligations, trustees must also exercise a specific standard of care and skill when managing the trust. This standard is defined both at common law and by statute.
The Common Law Standard
Historically, the standard of care expected of a trustee was that of an 'ordinary prudent man of business' managing their own affairs (Speight v Gaunt (1883)). This objective standard required caution and diligence.
Key Term: Prudence
Acting with care, caution, and foresight; the standard traditionally expected of trustees managing trust affairs as if they were their own.
The Statutory Duty of Care (Trustee Act 2000)
The Trustee Act 2000 introduced a statutory duty of care that applies to specific functions performed by trustees.
Scope of the Statutory Duty
The statutory duty applies, amongst other things, to:
- Investment decisions
- Acquisition of land
- Appointing agents, nominees, and custodians
- Compounding liabilities (settling debts owed to the trust)
- Insuring trust property
It does not apply to all trustee functions, such as the exercise of discretion regarding distributions.
The Standard Required
Section 1 of the Trustee Act 2000 requires a trustee to exercise such care and skill as is reasonable in the circumstances, having regard in particular:
- to any special knowledge or experience that they have or hold themselves out as having, and
- if they act as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in that kind of business or profession.
Key Term: Duty of Care
The legal obligation to exercise a certain level of care and skill in performing actions or duties; for trustees, this is defined by common law and the Trustee Act 2000.
This introduces both an objective element ('reasonable in the circumstances') and a subjective element (tailored to the trustee's actual or purported knowledge/experience).
Professional Trustees
The Act explicitly imposes a higher standard on professional trustees (e.g., solicitors, accountants, financial advisers acting as trustees). They are expected to demonstrate the level of skill and proficiency reasonably expected of a professional in their field. A lay trustee (someone without professional proficiency acting, for example, as a family favour) is held to the standard of a reasonable lay person, unless they possess or claim special knowledge.
Worked Example 1.1
An accountant and a retired teacher are co-trustees of a family trust. They need to make investment decisions. What standard of care applies to each?
Answer: The accountant, acting as a professional trustee (even if not charging, their profession implies proficiency), will be held to the higher standard expected of a reasonably competent accountant managing investments under the Trustee Act 2000. The retired teacher, a lay trustee, will be held to the standard of care and skill reasonable in the circumstances for a lay person, unless they have or profess special investment knowledge.
Relationship between Common Law and Statutory Duty
The statutory duty under the Trustee Act 2000 applies to the functions listed in its Schedule 1. For functions not covered by the Act (e.g., decisions about distributions), the common law standard of the 'ordinary prudent man of business' likely still applies. However, the statutory duty reflects a modernisation of the standard, and courts may interpret the common law duty in light of the statutory principles where appropriate.
Key Term: Trustee Act 2000
Key legislation modernising trust law, including defining a statutory duty of care for trustees in relation to specific functions like investment and delegation.
Duty to Act Personally
Trustees are appointed based on the settlor's trust in them and must generally exercise their powers and duties personally. They cannot delegate their decision-making responsibilities unless authorised by the trust instrument or by statute (e.g., delegation of investment management under TA 2000, or temporary delegation by power of attorney under TA 1925, s 25). Even where delegation is permitted, trustees retain a duty to select agents carefully and supervise their actions appropriately.
Duty to Act Unanimously
Where there is more than one trustee, they must act unanimously. Decisions regarding the exercise of powers or discretions must be agreed upon by all trustees, unless the trust instrument allows for majority decisions. One trustee cannot bind the others unilaterally. This ensures collective responsibility and consideration in trust administration.
Exam Warning
Failure to act unanimously can lead to a breach of trust. For instance, if one trustee makes an investment decision without the agreement of their co-trustees, that action may be invalid, and the acting trustee (and potentially the passive co-trustees for failing to supervise) could be liable for any resulting loss.
Key Point Checklist
This article has covered the following key knowledge points:
- Trustees owe fundamental fiduciary duties, primarily the duty of loyalty (acting solely in beneficiaries' interests, avoiding conflict and unauthorised profit) and impartiality (treating beneficiaries fairly).
- Trustees must exercise a duty of care in managing the trust.
- The common law standard is that of the 'ordinary prudent man of business'.
- The Trustee Act 2000 imposes a statutory duty of care for specific functions (e.g., investment), requiring reasonable care and skill considering the trustee's knowledge and professional status.
- Professional trustees are held to a higher standard than lay trustees under the statutory duty.
- Trustees generally must act personally and cannot delegate decision-making unless authorised.
- Co-trustees must act unanimously unless the trust instrument permits majority decisions.
Key Terms and Concepts
- Fiduciary Duty
- Duty of Care
- Prudence
- Trustee Act 2000
