Trustees: appointment, duties, powers, and liabilities - Tru...

Learning Outcomes

This article outlines trustees’ general duties and duty of care for SQE1 FLK2, including:

• the distinction between overarching fiduciary obligations and the specific duty of care, and how these interact in trust administration
• the core fiduciary duties of loyalty, avoidance of unauthorised profit and conflicts, impartiality between beneficiaries, confidentiality, and accountability
• the standard of care expected of trustees at common law and under the Trustee Act 2000, with emphasis on the higher standard imposed on professional trustees or those claiming special expertise
• the application of the statutory regime to investment decisions, including the general power of investment, the standard investment criteria, the need to obtain and consider proper advice, portfolio review, and the treatment of ethical investment policies
• the extent to which trustees may delegate administrative functions to agents, nominees, and custodians, together with continuing duties of selection, policy-setting, supervision, and intervention
• trustees’ obligations to keep accurate accounts, disclose core trust documents to beneficiaries, and the limits on providing minutes or reasons for decisions
• the practical identification of breaches of duty and the correct standard to apply in SQE1-style multiple-choice questions and short problem scenarios.

SQE1 Syllabus

For SQE1, you are required to understand trustees' general duties and duty of care, with a focus on the following syllabus points:

• the nature and scope of trustees' fiduciary duties, such as loyalty (no unauthorised profit, no self-dealing) and impartiality
• the standard of care required of trustees at common law, including the higher standard for professional trustees
• 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, subject to any express majority mechanisms in the trust instrument
• trustees’ investment powers and duties under the Trustee Act 2000 (general power of investment; standard investment criteria; proper advice; ongoing review)
• permissible delegation of administrative functions (appointment of agents, nominees, custodians) and corresponding duties of supervision and policy-setting
• trustees’ duties to keep accounts, disclose core trust documents, and the limits on disclosing reasons for decisions
• the relationship between common law prudence and the statutory duty of care, and the areas where the statutory duty does and does not apply

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. Which of the following best describes the core principle of a trustee's fiduciary duty?
   1. To maximise the financial return of the trust fund above all else.
   2. To act solely in the best interests of the beneficiaries, avoiding personal profit or conflict.
   3. To strictly follow only the express instructions given by the settlor.
   4. To ensure equal distribution of assets among all potential beneficiaries.
2. Under the Trustee Act 2000, the statutory duty of care applies to which of the following trustee functions?
   1. Exercising the power of investment.
   2. Distributing trust assets to beneficiaries.
   3. Deciding whether to exercise a discretionary power.
   4. Appointing a new trustee.
3. 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?
   1. Both are held to the standard of an ordinary prudent person of business.
   2. Both are held to the standard of a reasonably competent professional in their field.
   3. The lay trustee is held to the standard of an ordinary prudent person; the professional trustee is held to a higher professional standard.
   4. 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 equity, in the form of fiduciary duties, and statute, primarily the Trustee Act 2000 which modernises trustees’ powers and codifies a specific duty of care for certain functions. General fiduciary obligations include loyalty and good faith, accountability, confidentiality, and fairness between beneficiaries. The duty of care requires trustees to exercise reasonable care and skill, taking into account any special knowledge they have or hold themselves out as having, and imposes a higher standard on professional trustees.

Understanding how these duties apply in practice requires attention to trustees’ powers (especially investment powers), their ability to delegate administrative functions, the obligation to keep clear accounts and disclose core information, and the collective nature of decision-making among co-trustees. It also requires differentiating between common law standards which continue to apply to functions outside the statutory scheme and the statutory duty that governs specified functions.

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.

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 beneficiaries.

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, and they must not profit from their position without proper authorisation.

Unauthorised profits must be accounted for to the trust, whether obtained directly from trust dealings or indirectly through information/opportunities arising from the trusteeship. Classic examples include renewing leases for personal benefit rather than for the trust (as in Keech v Sandford) or exploiting trust information to take control of a company and profit personally (as in Boardman v Phipps). Trustees’ receipt of directors’ fees linked to trust shareholdings, or charging for services, is tightly controlled and generally requires authorisation (for example, by express charging clauses or statutory provision for professional trustees).

Key Term: Self-dealing rule
A transaction in which a trustee purchases trust property. Such transactions are voidable at the instance of any beneficiary, regardless of fairness; trustees must not act as both vendor and purchaser.

Key Term: Fair-dealing rule
A transaction in which a trustee purchases a beneficiary’s beneficial interest. Such dealings are not automatically voidable, but the trustee must prove full disclosure, absence of advantage-taking, and overall fairness.

Key Term: Delegation
The permitted appointment of agents, nominees, or custodians for administrative functions under the Trustee Act 2000, with continuing duties to set policy, supervise, and review the delegate’s performance.

Key Term: Proper Advice
Advice from a person reasonably believed to be suitably qualified by ability and practical experience in financial and other relevant matters, which trustees must obtain and consider before exercising certain investment functions.

Authorisation can be obtained through an express charging clause in the trust instrument, informed consent of all adult beneficiaries, or, in rare cases, court approval. Professional trustees may also rely on statutory rights to reasonable remuneration where conditions are met. Absent authorisation, profits are held on constructive trust for the beneficiaries and must be surrendered.

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 do not unduly favour income generation over capital growth, or vice versa. Impartiality requires careful consideration of the trust’s duration and beneficiaries’ circumstances. For long-running trusts, diversification and an appropriate balance between income-producing and growth assets are consistent with modern portfolio theory and the Trusts (Capital and Income) Act 2013 approach to capital–income classification and apportionment. Impartiality does not necessarily mean equal treatment; rather, it means fairness according to each beneficiary’s interest and the trust’s terms.

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. Beneficiaries are entitled to core trust documents, such as the trust instrument (or will) and trust accounts, and to general information about the investment portfolio. However, trustees are not obliged to provide minutes of deliberations or disclose reasons for decisions, nor must they disclose confidential letters of wishes, subject to the court’s supervisory jurisdiction.

The modern position focuses on the court’s supervisory jurisdiction to supervise trusts. Where justified—for example, to investigate potential mismanagement—the court may order disclosure of certain materials. Otherwise, trustees can withhold documents that would reveal their confidential deliberations.

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). This objective standard required caution and diligence. Where a trustee is a professional or holds themselves out as having special specialist knowledge, a higher standard applies at common law. For example, a bank or solicitor acting as trustee is expected to demonstrate the degree of care reasonably to be expected of a competent professional, particularly in complex investment or tax matters.

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 (including the general power of investment)
• acquisition of land
• appointing agents, nominees, and custodians
• insuring trust property
• compounding liabilities and dealing with reversionary interests, valuations, and audits

It does not apply to all trustee functions, such as the exercise of discretion regarding distributions or decisions that are essentially dispositive rather than administrative.

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.

This introduces both an objective element (“reasonable in the circumstances”) and a tailored element (linked to the trustee’s actual or purported knowledge/experience), thereby reflecting and modernising the common law position.

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.

Investment Powers and Duties under the Trustee Act 2000

The Act grants trustees a broad, modern power of investment (s 3), allowing them to make any kind of investment as if they were the absolute owners of the trust assets, subject to the duties below. When investing, trustees must have regard to the standard investment criteria (s 4):

• the suitability of the investment to the trust, and
• the need for diversification of investments, so far as is appropriate to the trust.

Key Term: Standard Investment Criteria
The duty to consider suitability to the trust and appropriate diversification when making, retaining, or varying investments.

Trustees must obtain and consider proper advice (s 5) before exercising the power of investment and when reviewing investments, unless it is clearly unnecessary or inappropriate (for example, if the sum is very small relative to the trust fund or the cost of advice is disproportionate).

Trustees must also review investments from time to time and consider whether they should be varied, taking account of the standard investment criteria and any advice received. A prudent approach follows modern portfolio theory: trustees assess overall portfolio risk and return rather than judging each investment in isolation.

Delegation of Administrative Functions

The Act allows trustees to delegate certain functions to agents, nominees, and custodians (e.g., investment management), while retaining ultimate responsibility. Trustees must:

• select suitable delegates, taking account of competence and integrity
• set out and agree an appropriate policy statement where delegating asset management (s 15)
• keep the delegation under review and take reasonable steps to ensure the delegate’s compliance (s 22)
• intervene or replace the delegate where necessary (with liability arising if trustees fail to satisfy their duty of care in selection, monitoring, or review)

Dispositive decisions (e.g., deciding who to pay and how much under a discretionary trust) must not be delegated.

Ethical Investment

Trustees must act in the best financial interests of beneficiaries. Non-financial considerations (ethics, environmental or social factors) may be taken into account only if (1) authorised by the trust instrument, (2) all adult beneficiaries consent, or (3) the trustees can reasonably conclude that adopting a policy will not result in significant financial detriment compared with viable alternatives. In general, trustees should not allow their own political or moral views to override beneficiaries’ best financial interests (as highlighted in case law). Where an ethical policy is appropriate, trustees must still comply with the investment criteria and proper advice requirements and demonstrate that the overall portfolio remains financially sound.

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.

Worked Example 1.2

Three trustees delegate asset management to an investment firm. They sign a brief engagement letter but do not produce a policy statement and leave the firm unmonitored for several years. Losses arise. Are the trustees protected because they delegated?

Answer:
No. While delegation of asset management is permitted, trustees must set an appropriate policy statement (s 15), select a suitable agent, and review performance regularly (s 22). Failure to set policy and monitor is a breach of the statutory duty of care. Trustees may be personally liable for the losses caused by that breach, even though an agent was appointed.

Worked Example 1.3

Trustees of a private family trust decline to invest in energy companies for ethical reasons, despite expert advice that such investments are likely to outperform alternatives. The beneficiaries complain. Are the trustees in breach?

Answer:
Likely yes. Trustees must act in the beneficiaries’ best financial interests. Absent express authority in the trust instrument, informed consent of all adult beneficiaries, or robust evidence that the ethical policy is financially neutral, trustees should not reject financially sound investments purely on ethical grounds. They must comply with the standard investment criteria (s 4) and proper advice (s 5) and select investments suitable for the trust in a diversified portfolio.

Relationship between Common Law and Statutory Duty

The statutory duty under the Trustee Act 2000 applies to the functions listed above. For functions not covered by the Act (e.g., decisions about distributions or appointments of beneficiaries under a discretionary trust), the common law standard of the “ordinary prudent man of business” still applies, tempered by any higher standard for professional trustees. In practice, the statutory scheme informs the modern approach even to functions outside its formal scope, but the strict statutory requirements (such as the need for proper advice or policy statements) do not apply to purely dispositive decisions.

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, and setting out standard investment criteria and requirements for proper advice.

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 must be active in trust administration, monitoring co-trustees and intervening as necessary. Trustees cannot abdicate their responsibilities to a dominant co-trustee or to an adviser.

Administrative delegation is permitted under statute (e.g., investment management, custodianship), provided trustees meet the duties of selection, policy-setting, supervision, and review, and do not delegate dispositive decisions. Temporary delegation by power of attorney is permitted under the Trustee Act 1925 (s 25), subject to strict formality and notice requirements and a time limit. Even where delegation is permitted, trustees retain a duty to select agents carefully and supervise their actions appropriately; failure to do so can result in personal liability.

Worked Example 1.4

One of three co-trustees unilaterally invests a substantial sum in land, although the trust instrument is silent on majority decisions. The other two trustees were passive and did not check what was being done. The investment performs poorly. Who is liable?

Answer:
Trustees generally must act unanimously, unless the trust instrument provides otherwise. The unilateral investment is a breach. The active trustee is liable for committing the breach; the passive trustees may also be liable for breach by omission (failure to act personally), as they did not supervise or correct their co-trustee. Liability is joint and several, though contribution and indemnity may be available depending on blameworthiness.

Duty to Act Unanimously

Where there is more than one trustee, they must act unanimously, unless the trust instrument allows for majority decisions. Decisions regarding the exercise of powers or discretions must be agreed upon by all trustees. One trustee cannot bind the others unilaterally in the ordinary course of trust administration. Unanimity supports collective responsibility, reduces risk of abuse, and ensures thorough consideration.

When unanimity is required but not observed, actions may be invalid and give rise to breach. Trustees should record decisions and ensure all are participating. Where majority decision-making is permitted (by express terms), trustees must follow the specified mechanism and still act within the duty of care and fiduciary obligations.

Worked Example 1.5

A beneficiary demands minutes of trustee meetings and the trustees’ written reasons for refusing a capital advance. The trustees provide the trust deed and latest accounts but decline to disclose minutes or reasons. Is that permissible?

Answer:
Yes, generally. Beneficiaries are entitled to core documents (trust instrument, accounts, schedules of investments), but trustees are not obliged to disclose minutes of deliberations or reasons for decisions. The court may order disclosure in its supervisory jurisdiction where appropriate (e.g., to investigate mismanagement). Otherwise, confidentiality of deliberations is preserved.

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.

Worked Example 1.6

Two co-trustees—the first a solicitor, the second a layperson—appoint a custodian and nominee without checking qualifications or agreeing a policy statement. Later, significant administrative errors occur. Are they equally liable?

Answer:
Both owe the statutory duty of care when appointing and supervising a custodian/nominee. The solicitor is held to a higher professional standard (given their professional knowledge and what it is reasonable to expect), while the lay trustee is held to a reasonable lay standard. If both failed to take reasonable steps, both may be liable for breach, but the solicitor may bear a greater share on contribution because of their greater responsibility and specialist knowledge.

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; a higher standard applies to professional trustees and those holding themselves out as having special specialist knowledge.
• The common law standard is that of the “ordinary prudent man of business”; functions outside the Trustee Act 2000 remain subject to this standard.
• The Trustee Act 2000 imposes a statutory duty of care for specific functions (e.g., investment, acquisition of land, appointment of agents, insurance), requiring reasonable care and skill considering the trustee's knowledge and professional status.
• Trustees exercising investment powers must comply with the standard investment criteria (suitability and diversification), obtain proper advice, and review investments periodically.
• Administrative delegation is permitted under statute, but trustees must set policy, select suitable delegates, supervise performance, and review regularly; dispositive decisions cannot be delegated.
• Trustees generally must act personally and cannot abdicate responsibility to co-trustees or advisers; passive trustees can be liable for breaches by omission.
• Co-trustees must act unanimously unless the trust instrument permits majority decisions; unilateral action can be invalid and lead to liability for loss.
• Trustees must keep accounts and disclose core trust documents to beneficiaries; they are not generally required to disclose minutes or reasons for decisions, subject to the court’s supervisory jurisdiction.
• Ethical investment policies may be adopted only if authorised or if they do not risk significant financial detriment; trustees must prioritise beneficiaries’ best financial interests.

Key Terms and Concepts

• Fiduciary Duty
• Duty of Care
• Prudence
• Trustee Act 2000
• Standard Investment Criteria
• Proper Advice
• Self-dealing rule
• Fair-dealing rule
• Delegation