When creating a will one of the first and most important questions you will be asked is ‘who do you wish to act as the executor and trustee of your Will?’ Paula discusses why it is important to appoint a person of utmost good faith, honesty and integrity to ensure the fulfilment of the trust.
When creating a will one of the first and most important questions you will be asked is ‘who do you wish to act as the executor and trustee of your Will?’ In most cases the role of an executor is well known, and the duties in respect of the administration of the estate will be the main concerns of the individual when choosing the correct person(s) or professional body for the job.
However, once the administration of the estate has been completed the executor role will cease and the same people appointed as executor will often take on a new role, as trustee of any trust arising under the terms of the will.
Trusts are often used as a means of protecting family wealth, holding property for a number of individuals, preserving assets for future generations and managing assets for those who cannot do so themselves, for example due to age or mental incapacity.
It is therefore prudent that this secondary role as trustee is not overlooked. All too often it is only once the reality sets in – that the interest of the beneficiaries of any trust arising under the terms of the will are placed solely in the hands of the trustees – that concerned questioning as to exactly what powers the trustees will have and, more importantly, who will ensure that the trustees will act in the best interests of the ultimate beneficiaries arise.
Fiduciary duties
Trustees owe a fiduciary duty to the beneficiaries of a trust. This is a duty of loyalty, honesty, integrity, good faith and transparency. They must not allow personal interests to conflict with those of the beneficiaries. This principle has been summarised by the courts and states that a trustee:
- may not benefit from his position save where this is authorised (e.g. where the trust instrument/document expressly permits it, the court ratifies it or the beneficiaries, all of full age and capacity, agree);
- is accountable for any profits made by him in his capacity as trustee; and
- should not normally purchase trust property. If he does so then the purchase is voidable at the option of the beneficiaries whether the transaction is fair and reasonable or not. This is known as the rule against ‘self-dealing’.
These duties arise initially from the general obligation as a fiduciary, and are applied by law. However, the full extent of a trustee’s duty will be governed by the terms of the trust instrument and principles of common law and statute. A trustee will therefore also have a general duty to ensure there is no conflict of interest between his own personal interests and that of the beneficiaries.
General duties
General duties are also imposed on those acting as trustees. These general duties should be taken into consideration when ensuring the correct person is chosen, but also by the appointed individual upon the acceptance of the position of trustee.
To comply with the terms of the trust
A trustee should ensure they are fully aware of the terms of the trust and that they comply strictly with directions and duties set out in the trust instrument (e.g. the will or trust deed). This is extremely important as trustees are under onerous duties of investment and can be made liable to account for losses resulting from negligence or unreasonableness.
To take control of the trust property
Any property under the terms of a trust must be vested (transferred to) in the trustees – the property will be placed under the control of the trustees giving them an immediate right to have control over decision making in relation to the property. This is to ensure that steps are taken to safeguard the trust property. All trust documentation should be kept secure and any debts owed to the trust should be pursued – even to the extent of taking court action or obtaining court approval for litigation, where proportionate to do so.
To act impartially between the beneficiaries
Trustees are under a general duty to act in the best interests of the beneficiaries. In exercising this duty they must not allow one beneficiary to suffer at the expense of a benefit to another, although they can, of course, choose to benefit one beneficiary in favour of another in certain types of trust, for instance in trusts where they are given absolute discretion as to whom to pay out.
To take reasonable care
The duty of care applicable to trustees is imposed by statute and common law, but effectively amounts to taking reasonable care. The standard of care and skill expected of a trustee varies according to whether they are unpaid or professional: the law recognises that more is expected of a professional trustee. A trust can also contain exclusion clauses, limiting the liability of professional and unpaid trustees alike. Careful consideration should be given to such clauses if they are included in your will trust.
Duty to keep accounts and to provide information
Trustees must keep clear and concise accounts of the trust and provide them to the beneficiaries on request. They may also be required to produce on request, information and documents relating to the trust when required by the beneficiaries.
Duty to consult
In general, trustees should consult the beneficiaries whenever possible and give effect to their wishes. In particular, in relation to land the trustees should so far as is practicable consult with the beneficiaries of full age (over 18 years).
Duty to act personally
The position of trustee is a personal one and should not normally be delegated. The person creating the trust – the ‘settlor’ or the testator if the trust is made by will – will usually choose the trustees due to their personal qualities or an agreement made during their lifetime with the appointed individuals. Therefore delegation of a trustee’s duty could result in persons other than those specifically appointed by the settlor/testator making decisions.
However, delegation is allowed provided that it is specifically provided for by the trust, if the beneficiaries authorise it or where statute provides for it and is reasonably necessary. Delegation will apply to most powers but will not stretch to the delegation of making dispositive decisions over the trust property, deciding whether payments are made out of trusts income or capital or the appointment of new trustees.
Investment
Trustees will also have a duty of investment. This duty allows the trustees to invest the trust funds to provide an income for the beneficiaries and to preserve the value of the capital. The beneficiaries must always be treated impartially ensuring that investments are made that do not favour one particular beneficiary over another.
In Nestle v National Westminster Bank [1993] 1 WLR 1260 the court emphasised:
- trustees should make regular reviews of the trust investments (normally at least once a year);
- in making any decision on investments the court can take into account the taxation position of the beneficiaries and their relative wealth;
- trustees should not change investments too frequently;
- the onus of proof is on a beneficiary who alleges that an investment is imprudent; and
- trustees can be judged on the basis of an investment as a whole rather than on a single investment in isolation.
Most trust instruments contain an express power of investment that allows trustees the power to invest trust property as if the property were their own, subject to the terms of the trust and statutory guidelines. They are bound to their duty of care and must act fairly between all the beneficiaries entitled under the terms of the trust.
A trustee’s statutory power to invest is found in s.3 Trustee Act 2000 and the criteria to which a trustee must adhere is found in s.4 Trustee Act 2000 and is known as the ‘standard investment criteria’.
Where trustees are uncertain of their powers or duty they must take legal advice before acting, and the advice must be from a person whom the trustee reasonably believes to be qualified to give specialist advice.
Duty to distribute
A trustee’s main responsibility is to ensure that the trust assets are distributed to the correct beneficiaries and in the correct amounts. Failure to discharge this duty correctly can result in personal liability for the trustees.
Conclusion
It is therefore prudent to ensure that you keep in mind the two limbs of the role when deciding who should act as executor and trustee of your will. When the ‘executor hat’ comes off, the ‘trustee hat’ will often replace it. It is therefore important to appoint a person or persons of the utmost good faith, honesty and integrity to ensure the fulfilment of the trust. However, it is reasonable to feel assured that there are both statutory and common law duties placed upon those acting as trustees, and that the duty to act in the best interests of the beneficiaries of the trust is paramount.
