The quick guide to the duties, powers, and liabilities of being a trustee

So, you’ve just been appointed as a trustee – congratulations.  It’s just like being a director of a corporation right?  Not quite.  While similar, a trust isn’t a separate legal entity like a corporation is which means that when entering into contracts it is going to be you as trustee that is bound to perform the contractual obligations and not a separate entity (as is the case in a director and corporation situation where the director signs to bind a separate legal entity, the company as opposed to himself/herself).

There are also certain situations where a Trustee can become liable for the debts owing by the Trust.  If you are interested in reading more about this, please refer to our earlier article “Why a Corporate Trustee is always a good idea”: https://www.jhklegal.com.au/why-a-corporate-trustee-is-always-a-good-idea/.

What is a trust then?

A “trust” is the legal relationship formed between one or more person(s) or an entity (here you, the Trustee) and another person(s) (the beneficiaries) for you to hold and deal with certain property (the Trust Property) at all times for the benefit of the beneficiaries (the trust obligation) and in accordance with certain duties (generally set out in the document establishing the relationship of trust (known as the Trust Deed)).

What are your responsibilities?

In acting as Trustee, your primary responsibility is to act in accordance with the Trust Deed.  In addition to the Trust Deed (or where there is none) there are several responsibilities placed on trustees by common law (court decided law) and legislation (government made law) (Trustee’s Duties).

1. Duty to preserve trust property: you must act in a manner to preserve and safeguard the Trust Property against loss – this extends to both the income and capital held in trust for the beneficiaries.

2. Duty to exercise reasonable care: in managing the affairs of the trust, you must perform the Trustee’s Duties with the reasonable care and skill that an ordinary business person would expend in managing similar affairs of their own.

3. Duty not to make a profit out of the trust: acting as trustee means you are not entitled to make any profit out of the relationship of trust between you and the beneficiaries and, if you do so, you must account for such profit to the Trust.

4. Duty to keep accounts: you must keep proper, up-to date and accurate accounts and make them available to a beneficiary on request.

5. Duty to provide information to beneficiaries: you are required to provide all information to the beneficiaries as it relates to their interest in the trust. On-going performance of this duty is essential to allow beneficiaries to ensure that you are properly administering the Trust.

6. Duty to act in person: unless the Trust Deed provides otherwise, you are personally responsible for exercising the duties of trustee (though you are permitted to consult with others to exercise those duties, such as the beneficiaries and accountants). Trust Deeds usually contain provisions allowing a trustee to retain accountants and lawyers to perform specific tasks.

Where this is the case, the Trustee must strictly comply with the scope of these provisions and not delegate any additional tasks to these external consultants.

7. Duty to act impartially: you must act impartially between beneficiaries and not favour the interests of one beneficiary more than another.

Where you are appointed as a director of a corporate trustee, remember that in addition to ensuring that the corporation acts in accordance with its Trustee’s Duties, as a director you are subject to director’s duties under the Corporations Act 2001 (Cth).  Where you fail to perform your duties, a beneficiary is entitled to apply to the Court for an order compelling you to perform.  Generally speaking, you will only be compelled where it is shown that you are refusing to perform your duties and that such refusal is not in good faith.

In order to administer the Trust Property, you are provided with the power to do all acts necessary to preserve the Trust Property.  The scope of this power is outlined in the Trust Deed, but we provide below an explanation of some of the key powers generally found in Trust Deeds:

1. Power to sell Trust Property: unless the piece of property to be sold is a depreciating asset, you are not able to sell Trust Property unless the power is specifically provided for in the Trust Deed. If the Trust Deed is silent and you wish to sell all or part of the Trust Property then an application must be made to the Court seeking an order allowing the sale to occur (or the consent of all beneficiaries obtained).

2. Power to mortgage or lease Trust Property: this power is distinct from the power of sale. The power of sale does not provide you with an automatic right to mortgage the Property. The Trust Deed must provide this power to you and the mortgage power must only be exercised in good faith for the benefit of advancing the Trust Property.  In terms of leasing, the power is construed in accordance with the Trust Deed or, where the Trust Deed is silent, operates pursuant to legislation in each State/Territory (with different rules applying as to the terms of the lease).

3. Power to insure Trust Property: you have the power to insure Trust Property against loss and/or damage with this power extending to insuring the Trust Property against any risk that a prudent person would insure such property against if it were their own. In some States and Territories, legislation prevents insuring property for more than its value (or liability).  Insurance Premiums can be paid from the income of the Trust.

4. Power to repair or improve Trust Property: the scope of this power is generally construed having regard to the terms of the Trust Deed. Where the Trust Deed is silent, you are able to ensure that the Trust Property remains in good repair and order.  This power is essential for you being able to comply your duty to preserve the Trust Property.

5. Power to carry on a business utilising Trust Property: in Queensland and Western Australia there is a limited legislative power to carry on a business where the Trust Deed is silent. Otherwise, the business must be conducted strictly in accordance with the terms of the Trust Deed.

6. Power to compromise: provided you are acting in good faith in doing so, you are entitled to compromise or settle claims against the Trust Property.

Where you breach your Trustee Duties or fail to administer the Trust Property in accordance with the terms of the Trust Deed you become liable to account to the Trust for any loss caused by your failure to perform your duties (and to put the Trust Property back into the same position it was in).

You may be able to defend against a claim for breach of your Trustee Duties if you can show that you acted honestly and reasonably at all times in exercising the Trustee’s Duties.

As you can appreciate, the above is just a summary of what is a very broad area of law and is not intended to be a substitute for legal advice.

Before agreeing to be a trustee we recommend that you obtain advice about the scope of your duties and powers under the Trust Deed and legislation applying in your State/Territory.

ASSOCIATE

BELINDA PINNOW