Trusts Reform Series: Part 2
This article is part 2 in our five-part series addressing the issues you may be facing with the introduction of the Trusts Act 2019 (Act).
Part 1 (available here) examined the new information retention and disclosure regime. Below, we offer some tips – particularly for trustees – on complying with the duties and obligations imposed by the Act.
Trustee duties: mandatory and default duties
Trustees are subject to various duties. Currently, these are mostly found in the common law but some are found in statute, for example, the investment provisions in the Trustee Act 1956. The Act codifies these duties into a concise list and collates them into two categories: mandatory duties and default duties. The guiding principle for trustees when performing these duties is to have regard to the context and objectives of the trust.1
The 5 mandatory duties
As their name suggests, mandatory duties must be performed by a trustee and may not be modified or excluded by the trust deed. A trustee must:
- know the terms of the trust (s 23);
- act in accordance with the terms of the trust (s 24);
- act honestly and in good faith (s 25);
- act for the benefit of beneficiaries or to further the permitted purpose of the trust (s 26); and
- exercise powers for a proper purpose (s 27).
These duties are uncontroversial, but are somewhat wider than the duty identified by Lord Millet in the seminal case Armitage v Nurse as going to the "irreducible core" of the relationship between trustee and beneficiary, being the duty of the trustee to "perform the trusts honestly and in good faith for the benefit of the beneficiaries". The New Zealand Law Commission considered these additional duties were "as vital to the existence of a trust as the obligation of honesty and good faith" and were "necessarily implied by the trust relationship". We agree with that assessment.
The 10 default duties
Default duties must be performed by a trustee but may be modified or excluded in accordance with the Act. A trustee must:
- when administering the trust, exercise the care and skill that is reasonable in the circumstances having regard to any special knowledge or experience that a trustee has or holds out as having (noting that a higher standard of care can apply to professional trustees and trustees who have special knowledge or experience) (s 29);
- invest trust property prudently (s 30);
- not exercise their powers, directly or indirectly, for their own benefit (s 31);
- consider, actively and regularly, whether to exercise their powers (s 32);
- not bind or commit themselves to a future exercise or non-exercise of a discretion (s 33);
- avoid a conflict between the interests of the trustee and the interests of the beneficiaries (s 34);
- act impartially in relation to all beneficiaries (s 35);
- not profit from their trusteeship (s 36);
- act for no reward (s 37); and
- act unanimously if there is more than one trustee (s 38).
The Act preserves the current position, which allow these duties to be modified or excluded by the trust deed. Common duties modified or excluded include, for example, the duty not to profit from trusteeship and the duty to invest prudently.
Trust practitioners will have their own important role to play in this context. Advisers on the creation of a trust who recommend that a settlor should modify or exclude one or more default duties must take "reasonable steps" to ensure that the settlor is aware of the meaning and effect of any proposed modification or exclusion. Failure to do so will not invalidate the modification or exclusion, but may open the adviser up to claims (the nature of which remains unclear).
Exemption from liability and indemnity clauses
It is common for modern trust deeds to include provisions that limit or exclude trustee liability, and to include broad trustee indemnities. The Act restricts the circumstances where this will be possible, in a (slightly) more restrictive fashion to the existing common law. Under the Act the terms of a trust must not limit or exclude a trustee's liability, nor indemnify a trustee, for a breach of trust arising from the trustee's own:
(b) wilful misconduct; or
(c) gross negligence.
The inclusion of gross negligence has been (and still is) controversial. This is because it represents a material departure from the common law, which allowed a trust deed to exclude a trustee's liability for gross negligence. The concept of "gross negligence" is also not well known to the common law, albeit guidance is provided in s 44 of the Act. On balance, however, its inclusion introduces a considerable degree of uncertainty in the law.
Like the requirement for modifying or excluding default duties, advisers must take "reasonable steps" to ensure that the settlor is aware of the meaning and effect of liability and indemnity clauses. Failure to do so will not invalidate the clause except where the adviser who has failed to comply with this requirement becomes a trustee of the trust.
Checklist for trustees
While the Act largely replicates the common law in respect of duties, exemptions, and indemnities (apart from the specific features identified above), trustees should nevertheless take this opportunity to:
- review your trust deeds, in particular the liability exclusion and indemnity clauses, and assess what changes ought to be made (if any) in order to comply with the Act when it comes into force early next year;
- become fully cognisant of your mandatory and default duties under the Act and consider what default duties to modify or exclude (if any) given the particular circumstances of your trust relationship; and
- consider whether you still wish to be a trustee of the trust that will no longer exclude or indemnify you from liability for breach of trust arising out of gross negligence (to the extent your trust deed currently does so).
Please reach out to one of our experts listed below if you would like to discuss any of the upcoming changes to the Act.
Find all articles that have been published in our Trust Series here.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.