A trust is a fiduciary relationship between the trustee and beneficiary over trust property. And that relationship is defined by rights and duties – or to be more precise by the duties of trustees.
Duties of Trustees
There is no free lunch in life. Except when you are the beneficiary of a discretionary trust. In that case there is no give, just take. There are no obligations and only rights. And the reverse side of a beneficiary’s right is a trustee’s duty.
Above is our interview with Paul Mackenroth of Cleary Hoare in Brisbane. Paul will walk you through the duties of trustees. Here are our notes from that interview.
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Adhere to the Terms of the Trust Deed
This is the most important duty of all. Also called First Duty. You can modify most other rules, but not this one.
“You can change the terms of the trust. But you can’t change the duty to follow the terms of the trust.”
But there are exceptions. Saunders v Vautier is an example where an exception applied. And court orders might also override this rule.
Act Impartially Between Beneficiaries
This is an issue when you have successive trust interests, like a life tenant and remainder. Two competing interests and the trustee is caught in the middle. How to allocate expenses? How much to spend on maintenance? Capital v income?
But what does this mean for a discretionary trust? Is it even possible to act impartially? There is the Edge’s Case as an example. Acting impartially in a discretionary trust just means that the trustee must follow the trust terms and its purpose, consider relevant matters and discard irrelevant matters.
Not to Fetter Discretion
This rule has been around for over a century, going way back to the English courts of equity. It is the duty of the trustee not to fetter their discretion. To fetter means to restrain.
Trustees are not bind themselves to make a decision at some time in the future. In the 1902 decision of Re King the court held that the “trustees ought, as far as possible, to keep their discretion open and unfettered.”
If the trustee enters into a legally binding agreement that forces them to act in a particular way or if the trustee, that has discretionary power, decides how it will exercise its power in the future, then such a decision will in all probability constitute a breach of their duty to act in an unfettered way.
It is then open to a party, normally a beneficiary of the trust, to challenge the trustee’s action. Previous court cases have involved executors (trustees) of an estate, testamentary trusts and discretionary trusts.
Duty to Account
This involves the provision of information as well as for property like accounting records. In a fixed trust beneficiaries have a “proprietary interest” and hence a right to account.
But in a discretionary trust there is no proprietary interest and hence no right to account – Gartside’s Case. There is no right to disclosure. However, it might be an important part of a “balancing exercise” (Schmidt’s Case) arising out of the First Duty and the Court’s right (duty) of supervision.
Duty Not to Delegate
The trustee must discharge “trusts” personally unless the deed provides otherwise.
Duty Not to Profit
The most famous illustration of this duty is the Murdoch case. Rupert was a trustee for trusts set up by Sir Keith. Dame Elisabeth was a life tenant (income) and Rupert was the remainderman. Rupert as trustee invested in News Group of which Rupert was CEO. Dame Elisabeth derived more income than otherwise
Dame Elisabeth sued trustees for breach of trust and argued that the investment favoured capital growth over dividend. It settled for $85m.
Another duty is the duty to take reasonable care. It prohibits loans to trustees and mixing trust funds unless authorised by trust deed.
There are more duties but these are the main ones.
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.
Last Updated on 22 August 2019