Learning Outcomes
After reading this article, you will understand the fundamental duties imposed on trustees, including their fiduciary and statutory responsibilities, powers to manage trust assets, and the potential consequences of breach. You will be able to identify and apply key legal principles about trustees’ duties, investment decisions, delegation, liability, and the remedies available to beneficiaries, equipping you to address SQE2-style scenarios effectively.
SQE2 Syllabus
For SQE2, you are required to understand the rules and practical application of the law relating to trustees’ duties, powers, and liability. This article covers critical syllabus points for trusts law, particularly relevant for identifying and advising on risks and best practices in client scenarios.
- 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.
- What are the principal fiduciary duties all trustees owe to beneficiaries?
- Are trustees entitled to make a personal profit from acting as trustee? Explain.
- Can a trustee delegate all aspects of trust management to a third party? Under what conditions?
- What standard of care is expected from a professional trustee?
- 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.
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.
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, not only selected individuals.
- Must avoid conflicts of interest and cannot make a personal profit from their role (unless expressly authorised).
- Cannot purchase trust property for themselves or otherwise self-deal.
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.
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.
- When investing, trustees must have regard to the standard investment criteria: suitability and diversification (TA 2000, s 4).
Key Term: standard investment criteria
Trustees must consider both the suitability of investments and the need to diversify trust assets.
Trustees are also required to obtain proper advice before making or changing investments (TA 2000, s 5), unless unnecessary or inappropriate.
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), as well as powers to advance capital for beneficiaries’ benefit (TA 1925, s 32). These may be extended or limited by the trust instrument.
Delegation
Generally, trustees cannot delegate their core functions. Statutory exceptions permit delegation (especially for investment functions), subject to statutory controls and full compliance with the duty of care.
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.
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.
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.
Trustees are jointly and severally liable if they act together, but an honest and reasonable trustee may seek relief under TA 1925, s 61.
A trustee may be liable for:
- Unauthorised investment.
- Permitting co-trustees’ misappropriation by inattention or failure to act.
- Failing to distribute income or capital appropriately.
- Self-dealing or conflict of interest.
However, the court may relieve a trustee of liability if they acted honestly and reasonably and ought fairly to be excused.
Key Term: indemnity
A right to be repaid out of the trust fund for expenses or liabilities incurred in proper performance of duties.
Protection and Indemnity of Trustees
Trustees may protect themselves by:
- Insisting on all decisions being documented.
- Seeking professional advice where the trust instrument is ambiguous.
- 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.
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.
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.
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.
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.
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. Statutory and express powers, coupled with professional advice and documentation, form the shield for prudent trustees.
Key Point Checklist
This article has covered the following key knowledge points:
- Trustees owe core fiduciary duties: loyalty, good faith, compliance with instructions.
- The duty of care and skill applies to all trustees—professional trustees are held to a higher standard.
- Trustee powers derive from statute, the trust instrument, or residual jurisdiction, but must never be exceeded.
- Trustees acting outside their powers or duties are personally liable for breach of trust.
- Relief is possible where trustees acted honestly and reasonably and ought fairly to be excused.
- Beneficiaries can seek compensation or the restoration of trust assets for breach of trust.
Key Terms and Concepts
- fiduciary duty
- trust property
- duty of care
- standard investment criteria
- delegation
- breach of trust
- indemnity