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

Learning Outcomes

This article explains who can act as a trustee and how new trustees are appointed or removed under statute and by the court; the main fiduciary and statutory duties imposed on trustees, including the duty to act jointly and personally, the duty of care when investing, and the duty to act impartially; statutory investment powers and criteria and the distinction between valid delegation to agents and impermissible abdication of responsibility; what amounts to breach of trust, why trustee liability is generally strict, how liability is measured, and how losses are allocated between multiple trustees; and key protections and defences, including exemption clauses, statutory relief, beneficiary consent, and limitation.

SQE1 Syllabus

For SQE1, you are required to understand the appointment, duties, powers, and liabilities of trustees, and the consequences of breach of trust, with a focus on the following syllabus points:

• The appointment, removal, and retirement of trustees
• The statutory and fiduciary duties of trustees
• The powers of trustees under statute and trust instruments
• The consequences of breach of trust, including personal liability and the measure of liability
• The main statutory protections and defences for trustees

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. Who may appoint a new trustee if a trustee retires and no one is nominated in the trust instrument?
   1. The settlor
   2. The beneficiaries
   3. The remaining trustees
   4. The court
2. Which of the following is a core fiduciary duty of a trustee?
   1. Duty to act in the trustee’s own interest
   2. Duty to act impartially between beneficiaries
   3. Duty to delegate all decisions
   4. Duty to avoid keeping records
3. If a trustee invests trust funds in an unauthorised asset and the trust suffers a loss, what is the usual remedy?
   1. The trustee is not liable
   2. The trustee must restore the loss to the trust fund
   3. The trustee is only liable if they acted dishonestly
   4. The trustee is automatically removed

4. True or false: A trustee can always rely on an exemption clause in the trust instrument to avoid liability for fraud.

Introduction

Trustees are central to the operation of trusts. They are appointed to hold and manage trust property for the benefit of others and are subject to strict legal duties. This article explains how trustees are appointed and removed, the main duties and powers they hold, and the consequences if they breach those duties. You will also learn about the personal liability of trustees for breach of trust, how liability is measured, and the main statutory protections available.

APPOINTMENT OF TRUSTEES

Trustees are usually appointed by the settlor in the trust instrument. If a trustee retires, dies, or is otherwise unable to act, a new trustee may be appointed by the person nominated in the trust instrument, or if none, by the continuing trustees or the court.

Key Term: trustee
A person who holds legal title to trust property and is responsible for managing it for the benefit of the beneficiaries.

Key Term: settlor
The person who creates the trust and transfers property to the trustees.

Key Term: beneficiary
The person or persons entitled to benefit from the trust property.

The minimum number of trustees depends on the type of trust property. For trusts of land, at least two trustees (or a trust corporation) are required so that purchasers can obtain a valid receipt and overreaching can occur when capital money is paid. For trusts of personalty, a sole trustee is permitted, but more than one is common for practical reasons.

Trustees must be adults with mental capacity. A bankrupt or a person convicted of dishonesty may be disqualified from acting as a trustee, especially for charitable or pension trusts.

Trustees may retire by deed, provided at least two trustees (or a trust corporation) remain. The court may remove or appoint trustees if it is expedient and cannot otherwise be done.

Statutory routes frequently used in practice include:

• Appointment of new trustees where a trustee has died, retired, refused to act, become unfit or incapable, remained outside the UK for more than 12 months, or is a minor. The appointor is the person nominated in the trust instrument or, if none, the continuing trustees; appointment should be in writing and is commonly by deed so that trust property vests automatically in the new and continuing trustees (subject to assets requiring separate registration).
• Court appointment where it is expedient and impracticable or difficult to appoint without the court’s assistance.
• Direction by beneficiaries who are all of full age and capacity and, taken together, absolutely entitled to the trust property; in such a case they may require the retirement of a trustee and the appointment of a replacement, subject to conditions including maintaining at least two trustees or a trust corporation.

The legal estate in land will typically be vested in no more than four trustees to facilitate conveyancing. When land is sold, payment of capital money to two trustees or a trust corporation gives a valid receipt and overreaches the beneficiaries’ interests.

Worked Example 1.1

A trust instrument appoints Alice, Ben, and Carla as trustees. Ben wishes to retire, but the trust instrument is silent on appointment of new trustees. Who may appoint a replacement?

Answer:
The continuing trustees (Alice and Carla) may appoint a replacement trustee by deed, provided at least two trustees remain after the appointment.

Worked Example 1.2

A discretionary trust has two trustees. One trustee moved abroad two years ago and has taken no part in the administration. The trust instrument contains no appointment clause. The adult beneficiaries, who taken together are absolutely entitled, wish to replace the absent trustee. What are their options?

Answer:
The remaining trustee may appoint a replacement under the statutory power to replace a trustee who “remains outside the UK for more than 12 months.” Alternatively, the adult beneficiaries, being absolutely entitled, may serve a written direction requiring the retirement of the absent trustee and the appointment of a new trustee, provided conditions for such a direction are satisfied (including that at least two trustees or a trust corporation remain).

DUTIES OF TRUSTEES

Trustees owe strict fiduciary and statutory duties. These duties are designed to protect the interests of the beneficiaries and ensure proper management of the trust.

Key Term: fiduciary duty
A duty to act in good faith, for the benefit of others, and to avoid conflicts of interest or personal profit from the position.

Key Term: duty of care
The obligation to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or experience.

The main duties of trustees include:

• Acting in accordance with the trust instrument and the law
• Acting impartially between beneficiaries
• Avoiding conflicts of interest and not profiting from the trust (unless authorised)
• Investing trust property prudently and in accordance with statutory powers
• Keeping proper accounts and providing information to beneficiaries

Trustees must act personally and cannot generally delegate their powers, except as permitted by statute or the trust instrument. Co-trustees should act jointly unless an express provision allows majority decision-making. A trustee should actively participate, supervise co-trustees, and scrutinise advice; trustees remain responsible for decisions even when advice is obtained.

When starting office, a trustee should familiarise themselves with the trust terms and assets, obtain control of trust property, review past administration for breaches, and take steps to rectify any discovered breaches. The duty to act impartially means trustees should strike a fair balance between income and capital beneficiaries (for example in investment strategy), without necessarily treating them identically.

Key Term: measure of liability
The amount the trustee must pay to restore the trust fund to the position it would have been in but for the breach.

Worked Example 1.3

A trustee is also a beneficiary of the trust. Can they purchase trust property from the trust?

Answer:
No, this is prohibited by the self-dealing rule. Any such transaction is voidable at the instance of the beneficiaries, even if the trustee pays full value.

Worked Example 1.4

A trustee wants to buy a beneficiary’s remainder interest for a lump sum. Is this permissible?

Answer:
This engages the “fair-dealing” rule. A trustee may purchase a beneficiary’s equitable interest if they act honestly, make full disclosure, and pay a fair price. If these safeguards are absent, the transaction can be set aside at the beneficiary’s option.

POWERS OF TRUSTEES

Trustees have powers conferred by the trust instrument and by statute. These powers enable them to manage the trust effectively.

Key Term: power of investment
The authority to invest trust property as if the trustee were the absolute owner, subject to the standard investment criteria and duty of care.

Key Term: power of advancement
The power to pay or apply capital for the advancement or benefit of a beneficiary before their interest vests.

Key Term: power of maintenance
The power to apply income for the maintenance, education, or benefit of a minor beneficiary.

Statutory powers include:

• The general power of investment (Trustee Act 2000, s 3)
• The power to acquire land in the UK (Trustee Act 2000, s 8)
• The power to delegate certain functions to agents (Trustee Act 2000, ss 11–15)
• The power to insure trust property (Trustee Act 1925, s 19)
• The power to advance capital and apply income for beneficiaries (Trustee Act 1925, ss 31–32)

Trustees must review investments regularly, seek proper advice where appropriate, and act impartially between beneficiaries. When investing, trustees must consider suitability and diversification and are expected to take “proper advice” unless unnecessary or inappropriate in the circumstances. Professional trustees will be held to the higher standard their role implies. Delegation to investment managers is permitted but must be accompanied by a written policy statement and subject to ongoing monitoring; trustees cannot delegate dispositive decisions and remain responsible for oversight.

Advancement and maintenance powers reflect modern reforms. For trusts created on or after 1 October 2014:

• Capital may be advanced up to the beneficiary’s presumptive share, subject to protection of any prior life interests and bringing the advance into account if absolute entitlement later arises.
• Income may be applied for minors as trustees think fit; accumulated income is payable when the beneficiary reaches 18 (unless varied in the instrument).

Worked Example 1.5

A trust fund is held for two children until they reach 25. The trustees wish to advance half the fund to one child at age 20 to pay university fees. Is this permitted?

Answer:
Yes, under the power of advancement, trustees may advance up to the beneficiary’s presumptive share (for trusts created after 1 October 2014), provided the trust instrument does not exclude this power and any prior life interest holder consents if required. The advance is brought into account when absolute entitlement arises.

Worked Example 1.6

Trustees engage an investment manager and sign a one-page letter authorising the manager to “handle investments as they see fit.” No policy statement is agreed and no reviews take place. The investments later underperform. What issues arise?

Answer:
Delegation requires compliance with statutory conditions. Trustees should agree a written policy statement guiding the manager’s functions, select a suitable agent with due care, and keep the delegation under review. Failing to do so may breach the duty of care and statutory delegation requirements, exposing trustees to liability for losses attributable to those failures.

BREACH OF TRUST: PERSONAL LIABILITY AND MEASURE OF LIABILITY

A breach of trust occurs when a trustee fails to comply with their duties or exceeds their powers, causing loss to the trust or unauthorised gain.

Key Term: breach of trust
Any act or omission by a trustee that is contrary to the duties imposed by the trust or the law.

Key Term: personal liability
The obligation of a trustee to compensate the trust from their own assets for loss caused by a breach of trust.

Key Term: measure of liability
The amount the trustee must pay to restore the trust fund to the position it would have been in but for the breach.

Trustees are personally liable for loss caused by their breach, regardless of intention or good faith. Liability is strict: the trustee’s state of mind is generally irrelevant. The measure of liability is usually the amount required to restore the trust fund to its pre-breach position. Where an unauthorised profit is made, trustees must account for that profit.

Two ways of quantifying the obligation are often described:

• Falsification of the account (typical for unauthorised transactions): the transaction is treated as having been the trustee’s own, and the trustee must restore the trust fund to the amount dissipated.
• Surcharge of the account (typical for negligent administration): the trustee must make good the difference between what the trust actually received and what it would have received had proper care been taken.

Investment decisions are assessed against statutory duties and the standard of care. Even where advice was taken, trustees may be liable if they failed to consider suitability and diversification, failed to take proper advice when required, or failed to review investments.

If more than one trustee is in breach, liability is joint and several: beneficiaries may recover the whole loss from any one of them. A trustee may then seek contribution or indemnity from co-trustees in appropriate circumstances (e.g., greater responsibility, fraud by a co-trustee, or controlling influence by a professional co-trustee). Retirement does not absolve liability for breaches committed while in office, and a trustee who retires to facilitate a breach may be liable for consequent losses.

Worked Example 1.7

Trustees invest trust funds in unauthorised shares, which fall in value by £50,000. What is the measure of liability?

Answer:
The trustees must restore the £50,000 loss to the trust fund from their own assets.

Worked Example 1.8

Three trustees hold a trust with a deed prohibiting investment in land. Two trustees purchase land using trust capital, believing it will appreciate quickly; the third trustee passively signs documents without enquiry. The land falls in value by £100,000. Who is liable?

Answer:
All three trustees are liable. Trustees must act jointly and personally and have a duty to supervise co-trustees. The passive trustee’s failure to enquire and intervene amounts to a breach by omission. Liability is joint and several, so beneficiaries can recover the full loss from any one trustee; contributions between trustees may then be determined according to responsibility.

Worked Example 1.9

A trust allows capped advances to children. After reaching the cap, trustees refuse further payments to the settlor’s family and retire, arranging replacements who agree to make additional payments in breach. Loss to a remainderman follows. Are the retired trustees liable?

Answer:
Yes. A trustee who retires in order to facilitate a breach may remain liable for the resulting loss alongside the new trustees. Retirement cannot be used to evade liability where it is part of a scheme to procure a breach.

DEFENCES AND PROTECTIONS FOR TRUSTEES

Trustees may be protected from liability in certain circumstances.

Key Term: exemption clause
A clause in the trust instrument that limits or excludes trustee liability for certain breaches, except for fraud or dishonesty.

Key Term: statutory relief
The court’s power to relieve a trustee from liability if they acted honestly and reasonably and ought fairly to be excused (Trustee Act 1925, s 61).

Key Term: limitation period
The statutory time limit within which a claim must be brought; actions for breach of trust are generally subject to six years, with important exceptions.

Exemption clauses can protect trustees against negligence and even gross negligence, but cannot exclude liability for dishonest conduct or fraud. Professional trustees who recommend inclusion of wide exemption clauses must ensure the settlor understands their meaning and effect.

Statutory relief under Trustee Act 1925, s 61 is discretionary. The court considers whether the trustee acted honestly and reasonably and whether, in all the circumstances, they ought fairly to be excused. Relief is less likely where trustees are professional or the breach stems from failure to seek appropriate advice or supervision.

Consent of beneficiaries can bar a claim by those beneficiaries if consent was fully informed, freely given, and the beneficiary had capacity. Consent by one beneficiary does not waive rights of non-consenting beneficiaries. Where a beneficiary instigates or consents to a breach, the court may impound that beneficiary’s interest by way of indemnity for trustees or other beneficiaries.

Claims may be time-barred under the Limitation Act 1980. Generally:

• Actions for breach of trust must be brought within six years from accrual of the right of action. For successive interests, time for a remainderman usually runs from the end of the prior life interest when the remainder comes into possession.
• No limitation applies where the action is to recover trust property or its proceeds from a trustee, or where the trustee is party or privy to fraud.
• Where there is concealment or mistake, time runs from discovery (or from when discovery could reasonably have been made).
• Equitable remedies (such as injunctions and specific performance) are discretionary; the doctrine of laches may bar relief where a claimant has delayed unjustly, even within a statutory period.

Trustee indemnity insurance can provide practical protection against non-dishonest breaches, funded from trust assets where permitted by the trust instrument and in beneficiaries’ interests.

Worked Example 1.10

Trustees invested in breach of an express prohibition seven years ago. The life tenant, aware of the breach, took no action and has now died. The remainderman (now aged 24) brings a claim. Is it time-barred?

Answer:
For the remainderman, time typically runs from when their interest comes into possession—on the life tenant’s death. The remainderman’s claim is not barred merely because the breach occurred more than six years ago; they have six years from accrual of their own cause of action. The life tenant’s claim may have been time-barred, but that does not affect the remainderman.

Exam Warning

Exemption clauses cannot exclude liability for fraud or dishonesty. Trustees remain liable for deliberate wrongdoing even if the trust instrument purports to exclude liability.

SUMMARY TABLE: BREACH OF TRUST AND LIABILITY

Key Point Checklist

This article has covered the following key knowledge points:

• The appointment, retirement, and removal of trustees, including statutory powers
• The main fiduciary and statutory duties of trustees
• The principal powers of trustees under statute and trust instruments
• The consequences of breach of trust, including strict personal liability and the measure of liability
• The main statutory and trust instrument protections available to trustees

Key Terms and Concepts

• trustee
• settlor
• beneficiary
• fiduciary duty
• duty of care
• power of investment
• power of advancement
• power of maintenance
• breach of trust
• personal liability
• measure of liability
• exemption clause
• statutory relief
• limitation period