Questions to ask before becoming a trustee

Taking on a new trusteeship can feel like a daunting responsibility. It is a job which can be fulfilling and rewarding, but there are some key areas of risk and liability that is sensible to consider before agreeing to act.

The trust fund

It is essential to understand the trust’s assets and liabilities. Recent cases have placed an increased focus on the concept of checking that a trust is “solvent”. Although arguably trusts cannot be solvent or insolvent, this does highlight the idea of doing enough due diligence before taking on a trusteeship. You should be confident that the trust assets are not over-leveraged and that the trust fund can meet liabilities as they fall due (including upcoming tax charges or expenditure required on trust property) and that there are funding plans in place to meet all upcoming liabilities.

Liability as a trustee

Trustees are personally liable for all decisions they take in that capacity, and their liability is not automatically limited to the value of the trust fund. Typically, the trust deed will limit trustees’ liability in some way and these clauses should be checked, as well as any existing trustee insurance. To mitigate the risk of personal liability, many trustees who are professionals will prefer to use their firm’s trust corporation rather than acting personally: this is increasingly becoming a standard approach.

Retired trustee

Trustees remain personally liable for events during their trusteeship, even after they have retired. For this reason, retiring trustees often ask for an indemnity from their successors. This means that if any liabilities come to light after they have retired, their successors assume the burden of meeting them and are able to use the trust fund to do so. Where trusts have been in place for many years there can be a long chain of indemnities and it is important to check that this has been carried forward correctly in previous deeds of retirement and appointment.

Trustee charging

Trustees do not have an automatic right to charge for acting as trustees, although they can recover their expenses. Many trusts allow trustees who are professionals or trust corporations to charge, and unless expressly forbidden by the trust instrument, there is also a statutory power to charge where acting in that capacity. However, if there is no express charging clause, lay trustees cannot charge without the permission of all the beneficiaries. It is important to check the position at the outset as unauthorised payments to trustees may be a breach of trust.

Litigation

When a dispute arises (eg a dispute with a tenant or another third party), trustees are not automatically entitled to recover their litigation costs from the trust fund. If a trustee acts unreasonably in bringing or defending proceedings, they may be held personally liable for the costs of the litigation if they are ultimately unsuccessful. Trustees in this position can apply to the court for a Beddoe order to protect against this risk.  

Major decisions

Trustees are often concerned about being criticised for making a significant decision. For especially "momentous decisions", such as bringing the trust to an end or exercising their discretion for the benefit of one person only, the trustees can manage their liability by asking the court to “bless” the decision by making a Public Trustee v Cooper application. This can be especially useful if some beneficiaries disagree with the decision.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2023