Trustees: appointment, duties, powers, and liabilities - Delegation of trustee duties and powers

Learning Outcomes

This article outlines the principles governing the delegation of duties and powers by trustees. You will learn about the general rule requiring trustees to act personally, the specific statutory exceptions that permit delegation, the duty of care trustees must exercise when delegating, and their potential liability for the actions of their agents, nominees, or custodians. This knowledge is essential for applying the relevant legal principles to SQE1 assessment questions concerning trust administration.

SQE1 Syllabus

For SQE1, a comprehensive understanding of trustee powers and duties is required, including the specific rules relating to delegation. You should be prepared to apply these principles in practical scenarios, identifying when delegation is permitted and the consequences if delegation rules are breached.

As you revise this topic, focus on:

  • The general principle that trustees must act personally and cannot delegate their decision-making functions.
  • The statutory exceptions allowing delegation under the Trustee Act 1925 (s 25) and the Trustee Act 2000 (ss 11–27).
  • The distinction between delegable administrative functions and non-delegable dispositive or fiduciary discretions.
  • The duty of care trustees owe when selecting, appointing, and supervising agents, nominees, and custodians.
  • The extent of a trustee's liability for the acts or defaults of their delegates.

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. Which statutory provision allows an individual trustee to delegate their functions by power of attorney for a maximum period?
    1. Trustee Act 2000, s 11
    2. Trustee Act 1925, s 25
    3. Trustee Act 2000, s 15
    4. Trustee Act 1925, s 36
  2. Under the Trustee Act 2000, which of the following functions can trustees NOT delegate to an agent?
    1. Collecting rent from trust property.
    2. Deciding whether to distribute trust income or capital.
    3. Instructing a solicitor regarding trust administration.
    4. Managing trust investments based on an agreed policy.
  3. When trustees delegate functions under the Trustee Act 2000, what is the extent of their liability for the agent's actions?
    1. They are strictly liable for all acts and defaults of the agent.
    2. They are liable only if the agent acted fraudulently.
    3. They are liable only if they breached their duty of care in selecting or supervising the agent.
    4. They are never liable for the agent's actions.

Introduction

Trusteeship involves significant responsibilities and requires personal attention from those appointed. The fundamental principle is that a trustee, having been chosen for their judgment and integrity, cannot delegate their office or duties to others. This rule reflects the personal nature of the trust relationship and the reliance placed upon the trustee by the settlor and beneficiaries. However, practical administration often necessitates assistance. Consequently, both statute and, occasionally, the trust instrument provide exceptions allowing trustees to delegate certain functions under specific conditions, while still retaining overall responsibility for the trust's administration.

The General Rule: Trustees Must Act Personally

The role of a trustee is one of personal trust and confidence. Trustees are expected to exercise their own judgment and discretion in managing the trust affairs. They cannot, as a general rule, delegate their decision-making powers or the execution of the trust to others. This principle is often summarised by the maxim delegatus non potest delegare (a delegate cannot delegate). If a trustee improperly delegates their duties and a loss occurs as a result, they may be personally liable for breach of trust.

Statutory Powers of Delegation

Modern trust administration acknowledges that trustees cannot reasonably be expected to carry out every task themselves. Statute provides specific exceptions to the general rule against delegation.

Delegation by Power of Attorney (Trustee Act 1925, s 25)

Section 25 of the Trustee Act 1925 allows an individual trustee (but not a trust corporation) to delegate any of their trusts, powers, and discretions to any person (including a co-trustee or a trust corporation) by power of attorney.

Key features of this power:

  • Duration: The delegation cannot exceed 12 months.
  • Notice: Written notice must be given to all co-trustees and any person with the power to appoint new trustees within seven days of granting the power of attorney.
  • Liability: The delegating trustee remains liable for all acts or defaults of the attorney as if they were their own acts or defaults. This imposes a high level of responsibility on the delegating trustee.

This power is useful for temporary absences, such as holidays or short-term illness, but the trustee retains full responsibility for the attorney's actions.

Collective Delegation (Trustee Act 2000)

The Trustee Act 2000 provides trustees (acting collectively) with wider powers to delegate certain functions to agents, nominees, and custodians. This allows trustees to employ professionals for tasks requiring specialised skills.

Key Term: Delegation The act by which a trustee authorises another person to exercise some or all of the trustee's functions.

Delegation to Agents (TA 2000, s 11)

Section 11 allows trustees to authorise any person to act as their agent to exercise any of their "delegable functions".

Key Term: Agent A person authorised by the trustees to exercise certain functions on their behalf.

Delegable functions are defined as any function except:

  • Any function relating to whether or how the assets of the trust should be distributed (e.g., deciding which beneficiaries receive payments under a discretionary trust).
  • Any power to decide whether fees or costs should be paid out of income or capital.
  • Any power to appoint a new trustee.
  • Any power conferred by any other enactment or the trust instrument which permits the trustee to delegate any of their functions or to appoint a person to act as a nominee or custodian.

Essentially, core dispositive discretions and the power to appoint trustees cannot be delegated to agents under this section. Administrative and management functions, however, generally can be.

Appointment of Nominees and Custodians (TA 2000, ss 16-20)

Trustees also have powers to appoint nominees and custodians:

Key Term: Nominee A person appointed by the trustees in whose name trust property (other than land or bearer securities) is registered, but who acts on the direction of the trustees.

Key Term: Custodian A person appointed by the trustees to undertake the safe custody of some or all of the assets of the trust or the documents of title relating to such assets.

These appointments allow for efficient management, particularly of investments, but require careful selection and supervision by the trustees.

Special Rules for Asset Management (TA 2000, s 15)

When delegating asset management functions (which include investment decisions, acquisition of property, and managing/disposing of property), trustees must comply with additional requirements under section 15:

  • Policy Statement: The delegation agreement must be in writing (or evidenced in writing) and must include a written policy statement prepared by the trustees giving guidance on how the functions should be exercised in the best interests of the trust.
  • Agreement Compliance: The agreement must include a term requiring the agent to comply with the policy statement.

This ensures that investment managers or other asset managers operate within clear parameters set by the trustees.

Worked Example 1.1

The trustees of the Sharma Family Trust wish to delegate the management of the trust's share portfolio (£500,000 value) to an investment management firm. They provide the firm with verbal instructions regarding the investment objectives. The firm subsequently makes investments that result in a significant loss. Are the trustees potentially liable?

Answer: Yes, the trustees are potentially liable. While delegating investment functions is permitted under the Trustee Act 2000, section 15 requires the agreement to be in writing (or evidenced in writing) and must include a written policy statement giving guidance. Failure to provide a written policy statement is a breach of the trustees' duties regarding delegation. This breach may lead to liability if it caused or contributed to the loss (e.g., if the agent acted outside the verbal instructions which should have been formalised in the policy).

Duty of Care in Delegation

When delegating functions, appointing nominees or custodians, trustees must comply with the statutory duty of care under section 1 of the Trustee Act 2000.

Key Term: Duty of Care The duty of a trustee, under section 1 of the Trustee Act 2000, to exercise such care and skill as is reasonable in the circumstances, having regard in particular to any special knowledge or experience they have or hold themselves out as having, and, if acting professionally, to the knowledge or experience reasonably expected of such a professional.

This duty applies specifically to:

  • The selection of the agent, nominee, or custodian.
  • Determining the terms of the appointment.
  • Preparing the policy statement for asset management delegation (TA 2000, s 15).
  • Keeping the arrangements under review (TA 2000, s 22).

Reviewing Delegation Arrangements (TA 2000, s 22)

Trustees are not permitted to simply delegate and forget. Section 22 imposes a duty on trustees to keep under review the arrangements under which the agent, nominee, or custodian acts and how those arrangements are being put into effect. If circumstances make it appropriate, trustees must consider whether to revise or replace the arrangements and, if necessary, intervene.

Worked Example 1.2

Trustees appoint an agent to collect rent from trust properties. They select the agent carefully and provide clear written instructions. However, they do not check the agent's performance for two years. During this time, the agent fails to collect significant amounts of rent and eventually becomes insolvent. Can the beneficiaries hold the trustees liable for the lost rent?

Answer: Yes, potentially. Although the trustees may have complied with their duty of care in selecting the agent and setting the terms, they likely breached their duty under section 22 of the Trustee Act 2000 to keep the arrangements under review. A failure to monitor the agent's performance for two years could be considered unreasonable. If this lack of review allowed the losses to occur or escalate, the trustees could be liable for the loss caused by their breach.

Liability for Agents, Nominees, and Custodians (TA 2000, s 23)

Section 23 of the Trustee Act 2000 provides a significant protection for trustees regarding the actions of their delegates. A trustee is not liable for any act or default of an agent, nominee, or custodian unless the trustee failed to comply with their duty of care under section 1 when:

  • Entering into the arrangements for the appointment; or
  • Keeping the arrangements under review (as required by section 22).

This means that if trustees exercise the required duty of care in selecting, appointing (including setting terms and preparing any required policy statement), and reviewing their delegates, they will generally not be liable for losses caused solely by the delegate's own act or default. However, if the trustees breach their own duties in the delegation process, and that breach causes loss, they remain liable.

Exam Warning

Do not confuse the liability rule under the Trustee Act 2000 (s 23) for agents, nominees and custodians (liability only if trustee breaches duty of care in appointment/review) with the liability rule under the Trustee Act 1925 (s 25) for attorneys (trustee remains liable for all acts/defaults of the attorney). These are distinct statutory provisions with different consequences.

Key Point Checklist

This article has covered the following key knowledge points:

  • Trustees generally must act personally and cannot delegate their office or duties.
  • Statutory exceptions permit delegation under specific circumstances.
  • Trustee Act 1925, s 25 allows individual trustees to delegate by power of attorney for up to 12 months, but the trustee remains liable for the attorney's acts.
  • Trustee Act 2000 allows collective delegation of certain functions to agents, nominees, and custodians.
  • Core dispositive functions (like distribution decisions) and trustee appointments cannot be delegated to agents under TA 2000, s 11.
  • Delegation of asset management requires a written agreement incorporating a policy statement (TA 2000, s 15).
  • Trustees owe a statutory duty of care (TA 2000, s 1) when selecting, appointing, and reviewing delegates.
  • Trustees are generally not liable for a delegate's defaults unless they have breached their own duty of care in the appointment or review process (TA 2000, s 23).

Key Terms and Concepts

  • Delegation
  • Agent
  • Nominee
  • Custodian
  • Duty of Care
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