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

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Overview

The role of trustees is central to trust law, an important area of study for the SQE1 FLK2 exam. Trustees bear a significant responsibility to manage assets for the benefit of others. This article examines trusteeship, covering appointment processes, fiduciary duties, powers, liabilities, and the complex practice of delegating responsibilities. By combining theoretical concepts with practical examples, this resource seeks to equip aspiring legal professionals with the knowledge needed to succeed in this key area of law.

Appointment and Roles of Trustees

Trustees are typically appointed through the trust instrument or the settlor's will. As fiduciaries, trustees must uphold the highest standard of care and loyalty towards beneficiaries, a principle highlighted in the landmark case of Keech v Sandford (1726). This case demonstrates the absolute nature of a trustee's obligation to prioritize beneficiaries' interests above their own, even when non-harmful opportunities for personal gain arise.

Key considerations in trustee appointment include:

  1. Legal capacity to manage property and make decisions
  2. Compliance with the number of trustees specified in the trust instrument
  3. Possession of the necessary skills and knowledge for effective trust management

Duties and Powers

Fiduciary Duties

  1. Duty of Loyalty: Trustees must act solely in the best interests of beneficiaries, avoiding conflicts of interest and personal gain.

  2. Duty of Care: Codified in Section 1 of the Trustee Act 2000, trustees must exercise reasonable care and skill, with higher expectations for professional trustees.

  3. Duty to Act Impartially: Trustees must balance the interests of different beneficiaries fairly, as established in Nestle v National Westminster Bank plc [1993].

  4. Duty to Account: Trustees must maintain clear records of trust transactions and provide information to beneficiaries upon request.

Statutory Powers

The Trustee Act 2000 grants trustees several important powers:

  1. Power of Investment (Section 3): Trustees possess broad discretion to make investments as if they owned the trust assets outright, subject to standard investment criteria.

  2. Power to Acquire Land (Section 8): Trustees may purchase freehold or leasehold land for various purposes, including investment.

  3. Power to Delegate (Section 11): Trustees may delegate certain functions to agents, under specific conditions and limitations.

Example: A trust established for multiple generations requires trustees to balance current income needs with long-term growth. Trustees might invest 60% in blue-chip stocks for growth and 40% in government bonds for income, illustrating the application of the duty of care and impartiality.

Delegation of Duties and Powers

The Trustee Act 2000 provides a framework for delegation:

  1. Collective Delegation (Section 11): Trustees may collectively delegate any function to an agent, including discretionary investment or management functions.

  2. Individual Delegation (Section 25): An individual trustee may delegate their trusteeship for up to 12 months through a power of attorney.

Limitations on Delegation

  1. Non-delegable Functions: Essential functions, such as distributing trust assets to beneficiaries, cannot be delegated.

  2. Duty of Care in Delegation (Section 22): Trustees must exercise care in selecting agents, setting terms of appointment, and monitoring performance.

  3. Liability for Agents: Trustees remain ultimately accountable for their agents' actions and may be liable for losses due to inadequate selection or supervision.

The case of Boardman v Phipps [1967] highlights the strict approach courts take to trustees' fiduciary duties, even in delegation situations.

Example: Trustees of a trust holding significant commercial property delegate management to a professional firm. They conduct thorough due diligence, set clear terms of reference, establish a quarterly review process, and retain authority on major issues, demonstrating proper delegation within the statutory framework.

Liabilities of Trustees

Trustees face potential personal liability for breaches of trust, including:

  1. Acting beyond powers granted by the trust instrument or law
  2. Breaching fiduciary duties through conflicts of interest or self-dealing
  3. Investment failures from imprudent decisions
  4. Improper delegation or inadequate supervision of agents

Defenses and Protections

  1. Statutory Protection: Section 61 of the Trustee Act 1925 allows courts to relieve trustees of liability if they acted honestly and reasonably.

  2. Exoneration Clauses: Trust instruments may include liability-limiting clauses, subject to statutory restrictions and judicial interpretation.

  3. Court Approval: Trustees can seek court approval for significant decisions, providing protection against future claims.

Example: If trust losses occur due to a market downturn, trustees can mitigate liability by demonstrating:

  • Adherence to a documented investment strategy aligned with trust objectives
  • Regular portfolio review and rebalancing
  • Consideration of professional advice for major decisions
  • Transparent communication with beneficiaries about investment decisions and market conditions

Conclusion

Understanding trusteeship principles is essential for SQE1 FLK2 exam success and future legal practice. Key areas include:

  • The fiduciary nature of the trustee role
  • Statutory framework governing trustee actions
  • Complexity of delegation and its limitations
  • Strategies for mitigating trustee liability

By comprehending these interrelationships and applying them to practical scenarios, candidates will be well-prepared to tackle the challenges of trust law in both examinations and professional contexts.