Trustees: appointment, duties, powers, and liabilities - Breach of trust: personal liability and measure of liability

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Overview

Understanding the role of trustees is vital for passing the SQE1 FLK2 exam. This guide delves into the appointment, duties, powers, and liabilities of trustees, with a spotlight on breach of trust. By mastering these topics, aspiring legal professionals can tackle trustee-related exam questions with confidence.

Appointment of Trustees

Choosing trustees is a key step that establishes a trust's framework. Consider these aspects:

  1. Legal Requirements:

    • Age: Trustees must generally be 18 or older (Trustee Act 1925).
    • Mental capacity: They must understand and perform their duties.
    • Residency: Some trusts require UK residency for tax reasons.

  2. Methods of Appointment:

    • Named by the settlor in the trust document
    • Selected by existing trustees using their powers
    • Assigned by the court under s.41 of the Trustee Act 1925

  3. Statutory Powers of Appointment:

    • The Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) provides statutory authority for appointing new trustees, especially under Section 19.

Duties of Trustees

Trustees bear significant fiduciary duties, which are central to their responsibilities:

Principal Fiduciary Duties

  1. Duty of Loyalty: Trustees must put beneficiaries' interests first, avoiding conflicts.

  2. Duty of Prudence: They must manage assets with the care a prudent person would exercise.

  3. Duty to Act Impartially: They should balance beneficiaries' interests fairly.

  4. Duty to Follow Trust Terms: Trustees must adhere to the terms to ensure correct asset distribution.

  5. Duty to Account: Accurate record-keeping and sharing information with beneficiaries are required.

Statutory Duty of Care

The Trustee Act 2000 outlines a duty of care in s.1, mandating reasonable care and skill, taking into account any special knowledge or experience trustees have or profess.

Powers of Trustees

Trustee powers enable effective trust management, stemming from both the trust document and the law:

Express Powers

Granted by the settlor, these might include:

  1. Power to invest
  2. Power to allocate capital
  3. Power to appoint trustees
  4. Power to delegate tasks

Statutory Powers

The Trustee Act 2000 provides default powers, such as:

  1. General power of investment (s.3)
  2. Power to buy land (s.8)
  3. Power to hire agents (s.11)
  4. Power to insure assets (s.19)

Limitations on Powers

Trustees must operate within their fiduciary duties and trust terms. The rule in Saunders v Vautier (1841) allows beneficiaries with full legal capacity who are absolutely entitled to end the trust and claim assets.

Liabilities of Trustees

Trustees can face personal liability for breaches of trust or failing to meet their duties:

Types of Liability

  1. Personal Liability: Trustees are accountable for losses due to breaches.
  2. Proprietary Liability: Beneficiaries can trace and recover mismanaged trust assets.
  3. Accessory Liability: Third parties aiding breaches can also be liable.

Breach of Trust

A breach arises when trustees exceed their powers or neglect their duties:

Common Breaches

  1. Unauthorized investments
  2. Incorrect asset distribution
  3. Conflicts of interest
  4. Failure to protect trust property

Measure of Liability

Liability for breaches is generally the loss suffered by the trust, calculated through:

  1. Substitutive Performance: Restoring the trust to its rightful position.
  2. Reparative Performance: Compensating for losses to the trust.

Defences and Protections for Trustees

Trustees have several ways to limit their liability:

Statutory Protections

  1. Section 61 of the Trustee Act 1925: Courts may excuse trustees who acted honestly and reasonably.
  2. Section 62 of the Trustee Act 1925: Trustees can advertise for claims before asset distribution.

Trust Instrument Protections

  1. Exoneration Clauses: Limit liability, except for fraud or gross negligence (Armitage v Nurse [1998]).
  2. Indemnity Provisions: Allow trustees to be reimbursed from the trust fund for expenses incurred.

Judicial Protections

  1. Trustees can seek court directions under s.41 of the Trustee Act 1925.
  2. The court may relieve trustees of liability if they acted in good faith.

Conclusion

Understanding trusteeship is crucial for success in the SQE1 FLK2 exam. Focus on:

  1. Proper trustee appointment and legal compliance
  2. The importance of fiduciary duties
  3. Balancing express and statutory powers
  4. The impact of breaches and personal liability
  5. Defences available to trustees acting in good faith

By mastering these principles, candidates will be equipped to address complex trust law issues in exams and their legal careers.