Before acting as a trustee, a trustee should be aware of the legal responsibilities that are imposed on them. The following is an overview, and not an exhaustive description, of those responsibilities.
What is a trust?
When making a gift, control of the subject matter of the gift is lost once it has been given away. This could be a problem if any beneficiary of the gift were, for example, not yet an adult, to divorce, die, be made bankrupt, or receive means-tested benefits. One solution to this problem is to set up a trust – whether during lifetime or in the event of death (that is, by a Will) – for the chosen beneficiaries, and transfer the assets to be given away (the trust fund) to the trustees. Whether a trust is set up during lifetime or in a Will, it will be in writing and so throughout this guide the term 'trust document' is used.
What is the role of the trustee?
The trustees are the custodians of the trust fund and must deal with it for the beneficiaries in accordance with the trust document. Trustees must act unanimously. The beneficiaries are those who benefit from the trust fund – possibly in different ways – and are either specifically named or defined as a group such as “my children and remoter issue”.
Different types of trust include:
- A bare trust: the beneficiaries are specified and cannot be changed, and each beneficiary can demand their share of the trust fund once they are an adult.
- An interest in possession trust or life interest trust: the beneficiary (known as the life tenant) has no right to the trust capital, but instead has an immediate right to the trust income (after tax and expenses) as it arises, or to occupy any trust property (whether or not it produces income). On the death of the life tenant, the trust capital passes to other beneficiaries (known as the remaindermen). The trustees may have a “power of appointment”, which means they can, if they wish, pass part or all of the trust capital to any of the beneficiaries (whether the life tenant, the remaindermen, or otherwise).
- A discretionary trust: there will generally be a widely defined group of beneficiaries, and no beneficiary has a right to income or capital from the trust fund. Instead, as the name suggests, the trustees have the discretion to decide how much income or capital (if any) to pay to each of the beneficiaries. Whilst the trustees may have been given guidance on how to exercise their discretion, in the form of a Letter of Wishes, the ultimate decision on how (or even whether or not) to exercise their discretion rests with the trustees.
What general responsibilities do trustees have?
On being appointed, each trustee needs to:
- Understand the terms of the trust; and
- Review the trust – unless it is a new trust – to ensure that no breaches of trust have been committed in the past.
Each trustee then needs to:
- Comply with the terms of the trust document; and
- Comply with all laws relating to trust administration, and in particular the Statutory Duty of Care imposed by the Trustee Act 2000 which provides that a trustee must act with such care and skill as is reasonable taking account of any special knowledge or experience they have.
The beneficiaries can take legal action against the trustees for any actions which are not authorised by the trust document or trust law. Trustees may have to make good any loss incurred by the trust from their personal funds.
Unless the trust document provides otherwise, some general responsibilities for trustees are:
- not to make a personal profit from the trust or have their personal interests conflict with those of the trust;
- to seek professional advice on matters in which they are not competent; and
- consider the interests of all the beneficiaries and not a particular beneficiary or class of beneficiaries.
What specific responsibilities do trustees have?
Duty to seek investment advice: Whilst trustees have the power to invest the trust fund – in cash, investments or property – as if they were the outright owner, they must exercise this authority responsibly. Trustees therefore have a duty to seek proper advice before using their power of investment, and in reviewing the investments periodically, unless they conclude it is unnecessary to do so. For example:
- The trust fund may be small and the cost of any advice may outweigh the benefit;
- A trustee may be qualified to give investment advice; or
- The trust fund may be represented by a property in which a beneficiary lives, and so investment is not an option.
Proper advice is from someone who is reasonably believed by the trustees to be qualified to give it by their ability in and practical experience of matters relating to the proposed investment. The Law Society views only independent financial advice to be proper advice.
Duty to prepare accounts: Trustees are accountable to the beneficiaries, and so have a duty to keep records of their decisions and actions, and prepare Trust Accounts.
Duty not to put trust property at risk: Trustees have duties to insure trust property, investigate the condition of the property on an ongoing basis, and ensure that the title and any other documents relating to the property are in order.
Duty to litigate: Trustees must attempt to recover any debts due to the trust, and if necessary instigate legal proceedings. Trustees also have a duty to defend any action brought against them in their capacity as trustees. Trustees who participate in litigation need to consider seeking protection against personal liability from adverse cost orders.
Trustees and tax: Trustees have a duty to declare any income or gains to HM Revenue & Customs, and pay any tax. The taxes that apply to trusts include Inheritance Tax (IHT), Capital Gains Tax (CGT) and income tax.
An IHT charge can arise:
- When assets are given to the trust (the entry charge).
- On every ten year anniversary of the creation of the trust (the anniversary charge).
- When capital is distributed (the exit charge).
A CGT charge can arise on capital gains made on a disposal of chargeable assets. A disposal may be:
- An actual disposal, for example when trustees sell or transfer an asset.
- A deemed disposal, for example when a beneficiary becomes absolutely entitled to an asset.
An income tax charge can arise on income arising from trust assets, such as dividends, interest and rent.
Special rules apply to trusts which have business or agricultural property, or are for disabled beneficiaries, or were set up before 22 March 2006.
Can trustees be paid for acting in this role?
Only a professional trustee can be paid for services provided to or on behalf of a trust. For any other trustee, the role must be undertaken without payment. Any trustee can recover reasonable out-of-pocket expenses from the trust fund.
Trustees are personally liable for their actions (and defaults) as trustees, but generally will be entitled to be indemnified from the trust fund. The trust document may contain a clause which seeks to limit or exclude the trustees’ liability. In the absence of such a clause, trustees may wish to consider insuring against any liability arising from acting as a trustee.
Trustees cannot delegate the ability to decide when and how the trust fund should be distributed, but can delegate certain other functions, subject to the following safeguards:
- the delegation must last for no more than 12 months;
- notice must be given to the co-trustee(s); and
- a trustee is liable for the acts or defaults of the attorney.
Trustees may delegate their powers of investment and management to a managing agent, subject to a written Investment Policy Statement which must be followed.
If a trustee is regularly or permanently unable to act, retiring as a trustee would be preferable to appointing an attorney.
Retirement of a trustee
Whilst a trust can generally last for up to 125 years, it will typically end much sooner, but inevitably there will be situations where a trustee needs to retire. Retiring trustees need to be protected from personal liability for future breaches of trust. New trustees need to be protected from personal liability for previous breaches of trust.