Core principles of trust law - Trustees' duties, powers, and...

Learning Outcomes

This article sets out the core principles of trust law governing trustees’ duties, powers, and liability, including:

• The fiduciary framework: duty of loyalty, no‑profit rule, even‑handedness between life tenants and remaindermen
• The statutory duty of care under Trustee Act 2000 and the heightened standard for professional trustees
• Investment powers under TA 2000, ss 3–5: suitability, diversification, proper advice, ongoing review, and when ethical policies are permissible
• Maintenance and advancement under TA 1925, ss 31–32: scope, limits, and consent where prior interests exist
• Delegation of asset management under TA 2000, ss 11–15: policy statements, supervision of agents, and residual liability
• Diagnosing breaches and quantifying compensation; reconstitution, account of profits, and interest
• Defences and protections: exemption clauses (not for fraud), beneficiary consent, TA 1925, s 61 relief, and practical risk‑management steps (records, advice, indemnities, court directions)
• Limitation periods for personal claims and key exceptions
• Third‑party exposure: knowing receipt, dishonest assistance, and tracing

SQE2 Syllabus

For SQE2, you are required to understand the rules and practical application of the law relating to trustees’ duties, powers, and liability, with a focus on the following syllabus points:

• The core fiduciary duties owed by trustees, including loyalty, care, and disclosure.
• The scope of express, statutory, and residual trustees’ powers (including investment, delegation, and maintenance powers).
• The legal tests for breach of duty or power, including standards of care and liability.
• Trustees’ exposure to personal and collective liability.
• The legal remedies available for breach of trust and defences to liability.
• Practical advice for avoiding breach, and potential indemnities or protections.
• Application of the Trustee Act 2000 and Trustee Act 1925 to real and hypothetical trust issues.

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. What are the principal fiduciary duties all trustees owe to beneficiaries?
2. Are trustees entitled to make a personal profit from acting as trustee? Explain.
3. Can a trustee delegate all aspects of trust management to a third party? Under what conditions?
4. What standard of care is expected from a professional trustee?
5. State two circumstances under which a trustee can avoid personal liability for breach of trust.

Introduction

Trustees stand in a position of responsibility, managing trust assets for the benefit of beneficiaries. The law sets out a strict framework of duties, powers, and potential liabilities for trustees. These core principles ensure the fair management and protection of the trust property and the beneficiaries’ interests. Trustees must act in good faith, for proper purposes, and with reasonable care and skill, while keeping clear records, obtaining appropriate advice, and reviewing decisions periodically.

Trustee Duties: The Fiduciary Standard

Trustees are subject to fiduciary duties. These are duties of loyalty, honesty, prudence, and full disclosure—reflecting the trust and confidence reposed in them by settlors and beneficiaries. The fiduciary nature of the role prohibits conflicts and unauthorised profits.

Key Term: fiduciary duty
An obligation of loyalty and good faith requiring trustees to act solely in the best interests of the beneficiaries and avoid conflicts of interest.

Key Term: trust property
The assets (land, money, shares, chattels) held by trustees for the benefit of the beneficiaries.

Trustees:

• Must act for the benefit of all beneficiaries and be even‑handed between different classes (e.g., life tenant and remainderman), balancing income and capital interests.
• Must avoid conflicts of interest and cannot make a personal profit from their role (unless expressly authorised).
• Cannot purchase trust property for themselves (self‑dealing is voidable at the instance of any interested beneficiary), nor use confidential information obtained as trustee for personal gain.
• Must keep proper accounts and be prepared to disclose core trust documents (trust instrument, accounts, schedules of investments) to beneficiaries. Trustees are generally not required to disclose their reasons for decisions, but decisions must be rational and taken in good faith.

The Duty of Care and Skill

Trustees must administer the trust with reasonable care and skill.

The statutory duty of care is codified by the Trustee Act 2000, s 1:

Key Term: duty of care
Trustees must exercise such care and skill as is reasonable in the circumstances, considering their knowledge and professional status.

Professional trustees or those acting in the course of business are held to a higher standard than lay trustees. In investment decisions, the standard is applied across the portfolio (modern portfolio theory), not investment‑by‑investment, but trustees must still justify each component as suitable and consistent with overall risk and return.

Trustees should:

• Review the trust fund regularly and consider whether to sell or vary investments.
• Seek appropriate specialist advice (legal, tax, investment) and record it.
• Supervise co‑trustees and agents; passive trustees remain liable if they fail to act or to monitor their co‑trustees, particularly where losses occur.

Statutory and Express Powers of Trustees

Trustees may exercise only those powers given by:

• The trust instrument (express powers).
• Statute (e.g., Trustee Act 1925; Trustee Act 2000).
• Residual jurisdiction of the court (in certain cases).

Investment Powers

By default, trustees have wide powers to invest trust property, subject to specific restrictions in the trust deed.

• Trustee Act 2000, s 3 grants a general power of investment in all types of assets as if absolutely entitled, with s 8 confirming powers over land.
• When investing, trustees must have regard to the standard investment criteria: suitability and diversification (TA 2000, s 4). They must also keep investments under review.
• Trustees are required to obtain proper advice before making or changing investments (TA 2000, s 5), unless unnecessary or inappropriate given the circumstances and the trustees’ skill.

Key Term: standard investment criteria
Trustees must consider both the suitability of investments and the need to diversify trust assets.

Trustees must remain even‑handed. For example, in a trust for A for life, remainder to B, it is inappropriate to pursue capital growth at the expense of income, or vice‑versa, without balancing both interests. Ethical policies may be adopted only if they are consistent with beneficiaries’ best financial interests, if authorised by the trust instrument, or if all adult beneficiaries consent, and provided the chosen investments are as financially sound as alternatives.

Powers of Maintenance and Advancement

Trustees have powers to use income from trust assets for a minor beneficiary’s maintenance, education, or benefit (TA 1925, s 31), and to accumulate surplus income. The Inheritance and Trustees’ Powers Act 2014 broadened s 31 so that trustees may apply income for minors more flexibly and clarified default distributions at 18.

Trustees also have powers to advance capital for beneficiaries’ benefit (TA 1925, s 32). These may be extended or limited by the trust instrument. Key points:

• Advancement must not exceed the beneficiary’s presumptive share unless authorised; the amount advanced is brought into account when capital falls into possession.
• If there is a prior life interest, the life tenant’s written consent may be required for an advancement from the fund subject to that interest.
• Advancement can include prudent tax planning (where it materially benefits the beneficiary), but trustees must still act within their powers and for proper purposes.

Delegation

Generally, trustees cannot delegate their core discretionary functions (such as decisions as to distributions). Statutory exceptions permit delegation (especially for asset management and investment functions), subject to statutory controls and full compliance with the duty of care.

Under TA 2000, ss 11–15:

• Trustees may appoint agents (including investment managers), nominees, and custodians. They must set out an investment policy statement for asset management functions, keep the agent’s performance under review, and take reasonable steps to ensure compliance with that policy.
• Appointment terms must include reporting and supervision arrangements; periodic review is required.
• Trustees remain liable if they fail to comply with the duty of care in selecting, instructing, or supervising agents.

Key Term: delegation
Authorised transfer or appointment of another person to carry out certain trustee functions, allowed only as specified by law or trust instrument.

Limitation and Scope of Trustee Powers

Trustees can do only what is expressly or impliedly permitted. Where the trust instrument is silent, statutory powers are implied, but if there is a conflict, the trust instrument prevails.

Express limitations (for instance, requiring consultation with beneficiaries or limiting certain investments) must be followed. Breach can result in liability even if the trustees thought they were acting for the best. Trustees must act for proper purposes; powers cannot be exercised capriciously or to advance non‑trust objectives.

Liability for Breach of Duty or Power

Where a trustee commits a breach of trust, they are normally personally liable to restore the trust fund or compensate beneficiaries for loss. Liability is joint and several where trustees act together; beneficiaries can recover the full loss from any one or more trustees in breach.

Key Term: breach of trust
Any act or omission by a trustee contrary to their duties, causing loss to the trust or a personal profit for the trustee.

Common breaches include:

• Unauthorised investment or failure to apply the standard investment criteria or obtain proper advice.
• Permitting co‑trustees’ misappropriation by inattention or failure to act.
• Failing to distribute income or capital appropriately.
• Self‑dealing, conflict of interest, or unauthorised profit (trustees must account for profits).

Measure of liability:

• The court orders reconstitution of the fund or compensation equal to the loss caused. Losses cannot be netted off against gains on other investments unless the trust instrument permits.
• Interest may be awarded (simple or compound). An account of profits is ordered for unauthorised profits and some fiduciary breaches.

Relief may be available where trustees acted honestly and reasonably and ought fairly to be excused (TA 1925, s 61). Exemption clauses in trust instruments may exclude liability for negligence, but never for fraud or dishonesty. Professional trustees must ensure settlors understand any exclusion clauses intended to limit liability.

Beneficiary involvement can affect liability. If an adult beneficiary instigated or consented to the breach with full knowledge, they cannot complain of that breach; the court may impound that beneficiary’s interest to indemnify the trustee.

Key Term: indemnity
A right to be repaid out of the trust fund for expenses or liabilities incurred in proper performance of duties.

Where one trustee is sued, they may seek an equitable indemnity or contribution from co‑trustees proportionate to responsibility for the loss (Civil Liability (Contribution) Act 1978). A trustee who committed fraud or exercised a controlling influence may bear a greater share.

Protection and Indemnity of Trustees

Trustees may protect themselves by:

• Insisting on decisions being recorded with reasons and advice obtained.
• Seeking professional advice where the trust instrument is ambiguous, complex, or involves tax‑sensitive steps.
• Securing indemnities where allowed, or court directions in difficult situations.
• Relying on exoneration (exclusion) clauses in the trust instrument—though these do not protect against fraud or deliberate wrongdoing.
• Advertising for unknown claimants, and delaying distribution to protect against claims under the Inheritance (Provision for Family and Dependants) Act 1975 (as relevant to PRs/trustees administering estates).
• Ensuring policy statements and supervision when delegating asset management.

Key Term: limitation period
The period within which a beneficiary must bring a personal claim for breach of trust—generally six years (Limitation Act 1980, s 21), subject to exceptions for fraud, actions to recover trust property or its proceeds from a trustee, and where the beneficiary is under a disability or a remainder interest has not yet fallen into possession.

If a trustee acts outside their authority and third parties are involved, personal liability may extend to those third parties unless they acted in good faith without notice (bona fide purchaser for value without notice). Equity also imposes liability on third parties who receive trust property in unconscionable circumstances or assist in dishonest breaches.

Third‑party liability: knowing receipt and dishonest assistance

• Knowing receipt: a recipient who receives trust property in circumstances making it unconscionable to retain it (actual or constructive knowledge of breach) is personally liable to account and may face proprietary claims.
• Dishonest assistance: one who assists a trustee’s breach dishonestly is personally liable; this does not require receipt of property. The test for dishonesty is objective: whether the conduct falls short of the standards of honest people in the circumstances.

Worked Example 1.1

A trust instrument allows investment in “real property and blue-chip securities.” The trustees (a solicitor and two family members) invest half the fund in speculative cryptocurrency, which rapidly loses nearly all its value. The trust instrument is silent on the standard of care. Two beneficiaries are minors.

Question: Who is liable and what is the likely outcome?

Answer:
All trustees are jointly and severally liable for the loss, as the investment exceeded the powers set by the trust instrument and failed to meet the statutory duty of care under TA 2000, ss 1, 3, and 4. The professional trustee is judged to a higher skill standard. No relief is likely.

Worked Example 1.2

A trustee relies on a co-trustee to pay out trust income but does not supervise the process. The co-trustee misappropriates funds. The innocent trustee acted honestly and immediately notified beneficiaries.

Answer:
The passive trustee may still be liable unless it is proven they acted honestly and reasonably and should fairly be excused (TA 1925, s 61). If vigilance was reasonable under circumstances, the court may relieve liability.

Worked Example 1.3

A trust for X for life, remainder to Y, holds a mixed portfolio. The trustees propose an ethical policy excluding all oil and gas stocks. The policy reduces income materially but is expected to improve long‑term capital growth.

Answer:
Trustees must act even‑handedly. Without express authority or consent of all adult beneficiaries, adopting an ethical policy that sacrifices income significantly may breach the duty to the life tenant. If the policy can be shown to be as financially sound overall (income and capital considered) as alternatives, and the trustees obtained proper advice and complied with TA 2000, ss 4–5, it may be permissible. Otherwise, trustees risk liability for loss of income to X.

Worked Example 1.4

A trustee diverts £100,000 of trust money to cover a relative’s debts. The creditor, informed of the source, accepts payment.

Answer:
The creditor is a knowing recipient (actual knowledge that funds were misapplied). Equity imposes personal liability to account for the value received. The beneficiaries may claim a proprietary remedy if the funds can be traced or a personal claim against the recipient, who cannot retain the benefit.

Worked Example 1.5

Trustees advanced £30,000 to A from a fund where A’s presumptive share is £100,000. A later attains absolute entitlement; the fund is then worth £220,000.

Answer:
Advancement must be brought into account. A’s share is calculated on the augmented fund (£30,000 advanced + £220,000 = £250,000; half if two equal beneficiaries, or the relevant fraction), and the earlier advancement is deducted from the sum then payable to A. If there is a prior life interest, consent rules under s 32 must be observed.

Worked Example 1.6

A life interest trust invested in land contrary to an express prohibition seven years ago. The life tenant did not sue. The remainderman’s interest fell into possession three years ago and now wishes to claim.

Answer:
The six‑year limitation period for a personal claim runs against the remainderman from the date their interest falls into possession (on the life tenant’s death). The claim is in time. There is no limitation against a trustee party to fraud, nor for actions to recover trust property or its proceeds from a trustee.

Exam Warning

Where a trust instrument contains a clause excluding liability for negligence, this will not protect against liability for fraud, wilful default, or where the trustee personally benefitted from the breach. Never assume an exoneration clause excuses all liability.

Additional delegation caution: trustees who appoint investment managers must provide and monitor a written policy statement (TA 2000, s 15) and review performance. Failing to do so can itself be a breach of trust.

Revision Tip

In problem questions: identify whether a trustee’s action was permitted by the trust instrument or statutory power. If in doubt, advise that a cautious trustee should seek court directions rather than risk breach.

When assessing investments, write up a short policy noting objectives, risk tolerance, suitability and diversification, referencing TA 2000, ss 4–5, and record advice received. This is often decisive in avoiding liability or securing s 61 relief.

Summary

Trustees are held to strict standards of loyalty, care, and obedience to the trust instrument. Any profit, self‑dealing, or unauthorised conduct may result in liability and an obligation to restore the trust fund. Investment powers under TA 2000 are wide but bounded by suitability, diversification, and advice requirements; trustees must also act even‑handedly between income and capital interests. Maintenance and advancement powers under TA 1925 are useful tools but must be exercised within statutory and express limits. Delegation of asset management is permitted if properly documented and supervised; trustees remain responsible for policy, monitoring, and review. Remedies for breach include reconstitution, compensation, interest and account of profits; defences include exclusion clauses (never for fraud), beneficiary consent, and TA 1925, s 61 relief. Personal claims are subject to a six‑year limitation period with important exceptions. Third parties may be liable for knowing receipt or dishonest assistance. Clear records, advice, and cautious use of powers are the hallmarks of prudent trusteeship.

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees owe core fiduciary duties: loyalty, good faith, compliance with instructions, and no‑profit/conflict rules.
• The duty of care and skill applies to all trustees—professional trustees are held to a higher standard; passive trustees remain liable.
• Trustee powers derive from statute, the trust instrument, or residual jurisdiction, but must never be exceeded or used for improper purposes.
• Investment powers require suitability, diversification, ongoing review and proper advice (TA 2000, ss 3–5); act even‑handedly between beneficiaries.
• Powers of maintenance and advancement (TA 1925, ss 31–32, as amended) are flexible but limited by prior interests and “bring into account” rules.
• Delegation of asset management functions is permitted with policy statements, monitoring and review; trustees remain responsible for supervision.
• Trustees acting outside their powers or duties are personally liable for breach of trust; liability is joint and several.
• Relief is possible where trustees acted honestly and reasonably and ought fairly to be excused (TA 1925, s 61); exemption clauses cannot cover fraud.
• Beneficiaries can seek compensation or restoration of trust assets for breach of trust; third parties may be liable for knowing receipt or dishonest assistance.
• Personal claims generally carry a six‑year limitation period, with exceptions for fraud, actions to recover trust property or its proceeds from a trustee, disability, and remainder interests.

Key Terms and Concepts

• fiduciary duty
• trust property
• duty of care
• standard investment criteria
• delegation
• breach of trust
• indemnity
• limitation period