Trustees: appointment, duties, powers, and liabilities - Trustees' general duties and duty of care

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Overview

Understanding the legal framework for trustees is essential for success in the SQE1 FLK2 exam. Trustees manage and oversee trust assets, with key responsibilities in appointments, duties, powers, and liabilities. This article thoroughly covers these elements, focusing on trustees' general duties and the duty of care. By examining statutory provisions, case law, and practical applications, candidates will develop a strong understanding of trust administration, equipping them with the skills needed for exams and future legal practice.

Appointment of Trustees

Appointing trustees is an important step in setting up and maintaining a trust. The process usually involves:

  1. Settlor Appointment: The common method where the settlor designates trustees in the trust document.
  2. Power of Appointment: Existing trustees or others may appoint new trustees under powers in the trust deed or by statute.
  3. Court Appointment: In cases of deadlock or misconduct, the court can appoint trustees.

The Trustee Act 1925 provides a legal framework for appointments. Section 36(1) outlines when new trustees can be appointed, such as when a trustee dies, wishes to be discharged, is incapacitated, or is absent from the UK for more than a year.

Key criteria for appointing a trustee include:

  1. Mental Capacity: Trustees must understand and perform their duties.
  2. Legal Capacity: Individuals under 18 cannot be trustees of land.
  3. Conflicts of Interest: Trustees should be free from conflicts affecting impartiality.
  4. Skill and Knowledge: Though not strictly required, trustees should have the expertise to manage the trust effectively.

Duties and Powers of Trustees

Trustees hold a position of trust and confidence within trust law, with responsibilities designed to protect beneficiaries' interests.

Fiduciary Duties

  1. Duty of Loyalty: Trustees must act in the beneficiaries' best interests, avoiding conflicts and personal gain.
  2. Duty to Act in Good Faith: Trustees must be honest and align decisions with beneficiaries' interests and trust terms.
  3. Duty of Impartiality: Trustees must balance competing interests fairly among beneficiaries.
  4. Duty to Account: Trustees need to maintain records and inform beneficiaries about trust administration.
  5. Duty to Inform: Keeping beneficiaries updated on relevant trust matters is necessary.
  6. Duty to Follow Trust Terms: Trustees must comply with the settlor's instructions.

Powers of Trustees

Trustee powers come from:

  1. Trust Instrument: The settlor may grant specific powers in the trust deed.
  2. Statute: The Trustee Act 1925 and 2000 provide default powers.
  3. Court Order: Courts may grant additional powers when required.

Key statutory powers include:

  1. Investment Power: Trustees have broad investment powers, subject to limitations in the trust document.
  2. Delegation Power: Trustees may delegate functions to agents.
  3. Advancement Power: Trustees may advance part of a beneficiary's prospective share of capital.

Trustees must exercise their powers in good faith and with due care.

Duty of Care

The Trustee Act 2000 sets a legal standard for trustees: the duty of care, requiring them to act with the same diligence and skill as a prudent businessperson.

Key aspects include:

  1. Informed Decision-Making: Trustees must research and gather information before deciding.
  2. Investment Prudence: Trustees must balance risk and return.
  3. Delegation Oversight: Trustees must oversee delegated functions.

The care standard considers:

  1. Subjective Elements: The trustee's specific skills and experience.
  2. Professional Trustees: Held to a higher standard corresponding to their expertise.
  3. Voluntary Trustees: Courts may assess their actions with some leniency.

Liabilities of Trustees

Trustees might face personal liability for breaches, making it vital to understand potential liabilities and protections.

Types of breach include:

  1. Exceeding Powers: Overstepping authority from the trust instrument or law.
  2. Fiduciary Breach: Failing to meet core obligations.
  3. Care Breach: Not meeting required care standards in administration.

Consequences may include:

  1. Restoration: Compensating the trust for losses.
  2. Account for Profits: Surrendering personal gain from a breach.
  3. Removal: Courts may remove trustees for serious cases.

Protections include:

  1. Exclusion Clauses: Provisions limiting liability, excluding fraud or wrongdoing.
  2. Statutory Protection:
    • Section 61: Courts may relieve honest and reasonable trustees of liability.
    • Section 62: Protection if trust property is distributed without knowledge of affecting events.
  3. Equitable Indemnity: Indemnity from co-trustees in cases of fraud or undue influence.
  4. Contribution Rights: Allocation of responsibility among trustees based on fault.

Examples and Applications

  1. Charitable Trust for Environmental Projects: Trustees must use funds for environmental purposes, selecting effective investment opportunities that align with the trust's goals.

  2. Art Trust Management: Trustees should consult experts on acquisitions, balancing risk with cultural and financial goals, applying the duty of care by seeking advice.

  3. Educational Trust with Diverse Beneficiaries: Trustees must fairly consider requests for educational funds, balancing equality and the trust's educational purpose.

Conclusion

Understanding trustees' appointments, duties, powers, and liabilities is essential for SQE1 FLK2 exam success. Important points include:

  1. Proper trustee appointments and qualification.
  2. Fiduciary duties, including loyalty and accountability.
  3. The duty of care with regard to various trustee activities.
  4. Proper exercise of trustees' powers.
  5. Potential liabilities and available protections.
  6. Practical application of these principles in trust scenarios.

By mastering these concepts, candidates will be well-prepared to handle complex trust issues in exams and professional contexts.