Who can be a trustee

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Frank established a trust with the intention to provide for his teenage children. He named three potential trustees, each with varying backgrounds and qualifications. One is his 17-year-old niece who is eager to learn about trust administration but is not yet of legal age to enter into binding obligations. Another is a longtime friend who is an undischarged bankrupt but possesses some financial expertise. The final nominee is a professional investment consultant, recognized for both reliability and proven experience in managing trust assets.


Which statement best addresses their eligibility under trust law?

Introduction

In trust law, a trustee is a person or corporation appointed to hold and manage trust property for the benefit of the beneficiaries. Trustees assume legal ownership of the trust assets and are required to administer them in accordance with the terms of the trust deed and applicable statutory provisions, such as the Trustee Act 1925. Fundamental principles governing trustees include strict commitment to fiduciary duties, exercising reasonable care and skill, and acting in the best interests of the beneficiaries. Understanding the criteria for becoming a trustee, along with their duties, powers, and potential liabilities, is essential for ensuring proper trust administration and compliance with legal obligations.

Who Can Be a Trustee?

A trustee can be an individual or a trust corporation. Eligibility to serve as a trustee is determined by both legal capacity and the absence of disqualifying factors.

Eligibility Criteria

  • Individuals: An individual must be of full legal capacity, meaning they are over 18 years of age and of sound mind. They must be capable of holding and dealing with the trust property as required by the trust deed and the law.

  • Trust Corporations: These are corporations authorized to act as trustees, often professional entities focusing on trust management, providing competence and continuity.

Disqualifications

Certain individuals are excluded from serving as trustees to protect the integrity of the trust:

  • Minors: Persons under 18 cannot be trustees due to their lack of legal capacity.

  • Undischarged Bankrupts: Individuals who are undischarged bankrupts are disqualified from acting as trustees to prevent conflicts of interest and financial mismanagement.

  • Persons Lacking Mental Capacity: Those who lack the mental capacity to manage their own affairs are ineligible.

Suitability Considerations

When appointing a trustee, it is important to consider factors such as:

  • Financial Stability: A trustee should have the financial skills to manage trust assets responsibly.

  • Experience and Background: Relevant knowledge or experience in managing assets can be beneficial for the effective administration of the trust.

  • Integrity and Reliability: Trustees must be trustworthy and act honestly, as they owe fiduciary duties to the beneficiaries.

For example, appointing an individual with a background in finance or law may improve the administration of a complex trust.

Appointment of Trustees

The process of appointing trustees is typically outlined in the trust instrument, but statutory provisions provide guidance where the trust deed is silent.

Initial Appointment

  • By the Settlor: The settlor, upon creating the trust, appoints the initial trustees as specified in the trust deed.

  • Specified Qualifications: The trust deed may stipulate qualifications or criteria that trustees must meet.

Subsequent Appointments

  • Trust Instrument Provisions: The trust deed may provide mechanisms for appointing new trustees to fill vacancies arising from death, retirement, or removal of existing trustees.

  • Statutory Provisions: Under the Trustee Act 1925, if the trust deed does not provide appointment procedures, the existing trustees (or the personal representatives of the last surviving trustee) have the power to appoint new trustees.

For instance, in a family trust, the trust deed may allow for the appointment of additional trustees by the existing trustees to accommodate changes over time.

Duties of Trustees

Trustees are bound by fiduciary duties and must perform their roles with utmost care and loyalty to the beneficiaries.

Core Fiduciary Duties

  1. Duty of Care: Trustees must exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or professional status they possess (Section 1, Trustee Act 2000).

  2. Duty to Act in Good Faith: Trustees must act honestly and with integrity, placing the interests of the beneficiaries above their own.

  3. Duty to Follow the Terms of the Trust: Trustees are obliged to administer the trust according to the trust deed and relevant laws.

  4. Duty of Impartiality: Trustees must act impartially between beneficiaries, balancing their interests fairly.

  5. Duty to Invest Prudently: Trustees are required to invest trust assets in a manner that balances risk and return appropriately, as per statutory guidelines.

Case Law Examples

  • Keech v Sandford (1726): This case established the strict duty of loyalty, where a trustee must not profit from their position. The trustee was held liable for renewing a lease in their own name after it expired in the trust.

  • Boardman v Phipps (1967): The court held that trustees must not place themselves in a position where their personal interests conflict with their duties to the trust, even if the trust benefits from their actions.

Practical Application

If a trustee is considering investing trust funds, they must conduct thorough research and consider the suitability of the investment, ensuring it aligns with the trust's objectives and the beneficiaries' interests.

Powers of Trustees

Trustees are granted certain powers to enable them to manage the trust effectively, which may be defined in the trust deed or conferred by statute.

Common Powers

  • Power of Investment: Under the Trustee Act 2000, trustees have a general power of investment, allowing them to make any kind of investment that they could make if they were absolutely entitled to the assets.

  • Power to Delegate: Trustees can delegate certain functions, such as investment management, to agents or professionals, but they must comply with statutory requirements and ensure proper supervision.

  • Power to Appoint: Trustees may have the power to appoint additional or replacement trustees, subject to the provisions of the trust deed and statutory regulations.

Limitations and Restrictions

  • Trust Instrument Limitations: The trust deed may impose specific restrictions on the trustees' powers, which must be followed.

  • Statutory Obligations: Trustees must comply with statutory duties, such as those outlined in the Trustee Act 2000 regarding the need to obtain and consider proper advice when making investments.

  • Fiduciary Constraints: Trustees must always exercise their powers in the best interests of the beneficiaries and avoid conflicts of interest.

For example, if a trustee wishes to invest in a relative's business, they must ensure that this does not breach their duty to avoid conflicts and that the investment is in the beneficiaries' best interests.

Liabilities of Trustees

Trustees may be held personally liable for breaches of trust, which highlights the importance of understanding and fulfilling their duties diligently.

Breach of Trust

A breach of trust occurs when a trustee fails to comply with the terms of the trust or their fiduciary duties.

  • Examples of Breach:

    • Misappropriation of trust assets.

    • Failure to invest trust funds appropriately.

    • Unauthorized delegation of duties.

Consequences of Breach

  • Personal Liability: Trustees may be required to restore the trust to the position it would have been in had the breach not occurred, including compensating for any losses.

  • Removal from Trusteeship: Courts have the power to remove trustees who have breached their duties.

  • Reputational Damage: Breaches can harm a trustee's professional and personal reputation.

Defenses and Protections

  • Trustee Act 1925, Section 61: Courts may relieve trustees from liability if they have acted honestly and reasonably and ought fairly to be excused.

  • Indemnity Clauses: The trust deed may contain clauses that indemnify trustees against certain liabilities, although these cannot protect against fraud or willful misconduct.

  • Professional Advice: Obtaining and acting upon appropriate professional advice can demonstrate that a trustee has exercised reasonable care.

Case Example

Consider the scenario where a trustee signs blank cheques, which are then used by a co-trustee to misappropriate funds. The trustee who signed the blank cheques may be held liable for breach of duty due to negligence in supervising trust transactions, as highlighted in Re Bell's Indenture [1980].

Conclusion

Acting as a trustee involves a complex interplay of statutory obligations, fiduciary duties, and practical considerations. Trustees must possess the legal capacity to act, follow strictly to the terms of the trust, and fulfill their duties with diligence and integrity. The Trustee Acts of 1925 and 2000, along with established case law, provide a framework that defines the extent of trustees' powers and the boundaries of their responsibilities. Trustees are authorized to make significant decisions regarding the management and investment of trust assets but must consistently act in the best interests of the beneficiaries and avoid conflicts of interest. Breaches of trust can lead to serious liabilities, including personal financial responsibility for losses incurred. Therefore, a thorough understanding of the legal requirements and prudent administration is essential for anyone acting in this capacity.

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