The Modern Trustee and what the Trusts Act expects from you

The concept of a Trust has roots that stretch back as far as the Roman Empire. While the structure and law underpinning a Trust has changed dramatically over the intervening millennia, core concepts remain the same. Assets are gifted to Trustees to hold and manage for the benefit of beneficiaries.

A clue to the responsibilities associated with a trust lies in its very name. A trust exists because someone, (known as the Settlor) has entrusted property or assets to one or more others (the Trustees) to look after those assets on behalf of others (beneficiaries). That trust and confidence which is bestowed on Trustees comes with significant responsibilities and obligations.

Importantly, those obligations apply regardless of whether the trustees are also the settlors or beneficiaries of the trust. Once assets have been transferred to a trust, they no longer belong to the settlor personally. Instead, they are governed by the terms of the Trust Deed and the requirements of the Trusts Act 2019 (Act). If the Settlor receives any benefit from those assets, it can only be because that person is a beneficiary of the trust, entitled to be considered by the trustees.

Role of the trustee
The role of the Trustee is one of stewardship, or guardianship. As a Trustee you have all of the responsibility, the obligation of looking after and managing the assets of the trust, but you have no personal right to benefit from them. If you are also a beneficiary of the trust, then you have to view those roles as two very individual roles – much like an actor taking on two roles in a play. As a beneficiary, your right to benefit from those assets is restricted by the provisions in the trust deed – usually only a right to be considered by the trustees, who may decide who benefits.

The role is an active one, and this is reinforced by the Act. Trustees are expected to be positively engaged in trust matters, to maintain oversight of the trust and its assets, keep informed about trust assets and the circumstances of the trust’s beneficiaries, and importantly, to participate in and exercise their own independent judgement.

Understanding the terms of the trust, its purposes, and the law it operates under is essential. Without this understanding, trustees will not be able to govern trusts effectively, increasing the risk of poor decision-making, disputes between beneficiaries and breaches of trustee duties.

Trustee decisions start with the terms set out in the Trust Deed (and any variations to that deed). This is the source of a trustee’s power, together with the provisions of the Act. Before making any decision, the trustee must first check both sources to see whether they have the power to carry out that decision.

Trustee duties
Like any stewardship or guardianship role, Trustees are expected to act in accordance with certain duties. There are two types of duties – Mandatory and Default. Mandatory duties sit at the cores of every trusteeship. Unlike other duties and obligations, mandatory duties cannot be modified or excluded by the terms of the trust deed. The starting point for understanding your mandatory duties include ensuring you have a fundamental understanding of the trust. This includes understanding:

1. The terms of the Trust, 

2. Who the beneficiaries are; 

3. What the purposes of the Trust are; 

4. What powers you have as a Trustee; and 

5. What limitations you have when managing and administering the Trust. 

Trustees cannot administer a trust they do not understand. Once you have this understanding, the remaining mandatory duties are to act honestly and in good faith, act in accordance with the trust deed, act for the benefit of the beneficiaries, and exercise powers for a proper purpose.

Record keeping requirements
Record keeping is essential for a Trust. It is a requirement of good governance.

The Act places significant emphasis on the retention of records throughout the life of the trust, and each Trustee must have access to those records, even if they only hold a copy of the originals. Trustees must also ensure that any incoming trustee is provided a copy or otherwise given access to those documents. Under current legislation, a trust may last for anywhere up to 125 years, which makes proper record keeping essential.

Section 45 of the Act specifies the documents to be retained, which includes the original trust deed and any variations (including changes in trustees and/or changes in beneficiaries), records of any decisions made by the trustees, any contracts which may have been entered into, any accounting or financial records for the trust, and any other material which is relevant to the administration of the Trust.

From a practical perspective, records provide evidence that trustees have fulfilled their obligations. With increasing scrutiny from beneficiaries, maintaining proper trust records is essential. Any new decision should be properly recorded – what the decision is, and why it is being made. Those records become essential in the event of a challenge – and challenges can arise many years after the fact. Having proper documentation evidencing proper management and decision making can help protect trustees.

Decision-making obligations
Decisions are the heart of managing a trust. Whether considering what assets to acquire, how to invest them, whether they should be used for the benefit of one beneficiary or another, there are three fundamental questions to consider to start with:

1. Does the trust deed give the power to the trustees to make this decision? 

2. Which beneficiaries will benefit from the decision? 

3. Will the decision adversely affect any other beneficiaries? 
   

While beneficiaries must be considered, they do not necessarily have to be treated equally. Most trust deeds give the trustees broad discretion to favour one beneficiary above another. This provides flexibility and freedom for the trustees to adjust according to the needs and circumstances of the beneficiaries at any time. The critical point is that the trustees should properly consider the interests of all beneficiaries when they are making that decision, even if the decision is not intended to affect the other beneficiaries.

Delegation and supervision
Generally speaking, Trustees must make decisions personally, and they cannot simply hand their responsibilities to another person. However, there are some instances where trustees may delegate certain functions to suitably qualified or experienced people, to look after certain functions, provided the trustees continue to have oversight and supervision of those functions.

Examples of delegation can be engagement of property managers, investment advisers and accountants. Trustees may delegate a particular task that those professionals may carry out on a day-to-day basis within an agreed job scope. But deciding the scope of the task, receiving and reviewing reports from those professionals, and making a determination on the appropriate course of action remains the responsibility of the trustees. That supervising and high-level decision making cannot be delegated, but instead, should be actively managed. The overall responsibility of those actions remains with the trustees.

Why "sleeping trustees" create risk
A “sleeping trustee” is a trustee who has accepted the role, but takes very little active involvement in administering the trust. The sleeping trustee will generally sign documents without question, take little interest in the trust, and may fail to attend to the trust’s matters altogether.

This imposes significant risk both to that sleeping trustee and to the trust itself.

Trustees cannot avoid their responsibility. One of the key requirements of a trustee is to actively consider the exercise (or non-exercise) of the powers of the trust. Trustees who fail to participate can still be liable for any poor outcomes arising from decisions they took no part in. they can also be in breach of their underlying responsibility and duty to the trust.

The risks to the trust of a sleeping trustee can include decisions being made without risks being appropriately reviewed and tested, assumptions by the remaining trustees may go unchecked, and conflicts of interest may be overlooked. There may also be alternatives which the sleeping trustee could otherwise have put forward which get missed due to the sleeping trustee not taking part in the decision making process. This can be of significant risk to the Trust overall.

If you have a sleeping trustee of your trust, it is important to address this, by ensuring that all trustees are actively involved in any decisions, by holding regular annual meetings of the trust (noting that active trusts may require more frequent meetings of the trustees), and ensuring that all trustees adhere to their duties and obligations of the trust. If a sleeping trustee is not willing to engage, then the best option is to have that trustee replaced.

Consequences of poor governance
Poor trustee governance can have significant consequences on a trust. It can give rise to disputes, confusion, family conflict, and expose trustees to personal liability. It can place the trust itself at risk.

Good governance is not about creating unnecessary paperwork or administration. Rather, its purpose it to ensure that trustees understand their role, actively take part in decision-making, maintain appropriate records, and remain focussed on the overall interests of beneficiaries.

The Trusts Act 2019 provides clear expectations that trustees will be engaged and accountable in their management of the trust.

Trusteeship is not an honorary title. It bears the mantle of duty, obligation and responsibility and requires ongoing attention. Trustees may meet their obligations by understanding the trust, its beneficiaries, exercising independent judgment, keeping proper records and working actively with all other trustees to make relevant and appropriate decisions, all of which help to safeguard the trust throughout its lifetime.

Got questions? Get in touch with our experienced Elevated Trust Management team today to find out how you can make sure your trust is truly fit for purpose.