Trustees’ Duties

By | September 24, 2012

Today and the Law Commission’s recommendations for the future

It’s well known that the Law Commission is reviewing New Zealand’s trust law. One set of proposals concerns the duties of trustees. This article looks at what trustees’ duties are today and gives a brief rundown on the Commission’s seven options for the future.

A trustee’s duties have been set out in Armitage v Nurse(See Footnote 3): ‘To act honestly and in good faith for the benefit of the beneficiaries’.

Unless there is a trustee who is obliged to act honestly and in what the trustee believes to be the best interests of the beneficiaries there will be no trust. Andrew Butler(See Footnote 4) sets out a list of duties which has become known as the ‘Butler list’ of default duties:

  • To make acquaintance with the trust’s terms
  • To adhere to the trust’s terms
  • To maintain impartiality between beneficiaries
  • To act in the beneficiaries’ best interests
  • Not to profit from trusteeship
  • To act gratuitously
  • To invest
  • Not to delegate
  • To be active
  • To act unanimously
  • To pay correct beneficiaries, and
  • To keep proper accounts and give information as required.

Most of these duties can be modified to some extent by the trust deed. The trust deed cannot, however, override all trustee duties.

The Commission is proposing to set out a list of these duties in future trust legislation, but probably with more modern wording.

Looking ahead

The Law Commission has to decide whether the minimum standard set out in Armitage v Nurse is sufficiently high and to what extent trust deeds should exclude, or restrict, a trustee’s liability if they fail to carry out properly the duties imposed on the trustee by law or by the trust deed.

The Law Commission is considering seven options.

Option 1: Status quo – no regulation of exemption clauses

Overseas trends and the Commission’s own view is it may not be satisfactory to leave matters as they are.

The balance appears to be too much in favour of the settlor and trustee, and a greater measure of

accountability to beneficiaries is needed.

Option 2: No prohibition but a beneficiary can apply to the court for relief

This option would leave any exclusion clause in an instrument to take effect according to its terms, but a beneficiary would have the right to apply to the court to exclude its operation.

There is the issue of the cost of applying to the court and possible uncertainty.

Option 3: No prohibition but duty of paid trustee to inform settlor

The Law Commission for England and Wales recommended against changes to the law but, where a clause in a trust deed exonerates a paid trustee for liability for negligence, that trustee must take steps to inform the settlor of the meaning and effect of the provision.

Option 4: Partial prohibition: trustee excused if they exercise reasonable skill and care

This option would be to prohibit clauses where they absolve trustees who are individuals from liability for acts or omissions in bad faith, or without reasonable skill and care.

As long as a trustee acts in good faith, and with reasonable skill and care, the trustees will not be subject to liability.

The likelihood of trustees having to go to court (at great expense) to absolve themselves of liability is likely to be a very unattractive option and will discourage individuals from becoming trustees.

The Commission believes professional trustees should be treated differently. See Option 6.

Footnote 3 = Armitage v Nurse: [1998] Ch 241

Footnote 4 = Butler, A S (Ed), Equity and Trusts in New Zealand, 2nd ed, Brookers 2009

Option 5: Requirement for reasonableness

A trustee could only take advantage of an exemption clause that was reasonable.

Until the legislation is tested by the courts uncertainty is created for trustees and beneficiaries, and may lead to litigation to determine its scope and operation.

The Commission is interested in this option.

Option 6: Dual standard

Lay trustees would continue to be able to rely on exemption clauses that limited their liability for all conduct short of dishonesty.

Professional trustees would not be able to rely on exemption clauses to the extent they absolve them for failure to exercise reasonable skill and care.

The Commission is interested in this option.

Option 7: Total prohibition

It would be possible to prohibit all exclusion clauses in trust deeds for both individual and professional trustees. The Commission does not favour this option.

Life as a trustee is never going to be straightforward or without risk. If you have any concerns about your role as trustee, please be in touch with us.

DISCLAIMER: This article is true and accurate to the best of our and the author(s)’ knowledge. It should not be a substitute for legal advice. No liability is assumed by us or the author(s) or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are the views of the author(s) individually and do not necessarily reflect the view of this firm. This article may not be reproduced without prior approval from us and the editor.

Copyright, NZ LAW Limited. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650.

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