Trusts are commonly used for asset protection purposes, to maintain family wealth for generations to come. In setting up a Trust, one of the most important decisions the Settlor (the person establishing the Trust) will make is in relation to the appointment of Trustees.
Serious consideration should be given to this element of the Trust from the outset, particularly given the wide ranging powers of Trustees - albeit they must always act in the best interests of the Trust and for the beneficiaries.
What is involved in managing a Trust?
Managing a Trust can be complex, and the Trustees must balance the interests of all beneficiaries whilst ensuring the Trust funds are appropriately invested having taken appropriate advice. They must ensure the Trust funds are invested in a way that is suitably diverse so as to minimise any risk of loss, as well as maintaining accurate records of all decisions taken. They must also make sure the Trust pays the appropriate amount of tax, be it Income Tax, Capital Gains Tax or Inheritance Tax.
Given the onerous nature of the role, many Settlors will appoint professional Trustees such as a lawyer or accountant. This adds a degree of impartiality to the Trust, not to mention the experience and skills the professional Trustee will be able to offer. It is important to remember, however, that professional Trustees may charge a fee to act in this capacity.
It is, however, still commonplace for Settlors to appoint friends or family members as lay Trustees, as they trust these individuals to carry out their wishes and to know what decisions they would make in a way that a professional Trustee may not.
The decision to appoint a friend or family member to act as a Trustee should be made with care, however, as should the decision by that friend or family member to accept such an appointment. This is because lay Trustees face personal and unlimited liability if they act wrongfully or negligently, or mismanage the Trust in any way – even if this is accidental.
What happens if a Trustee is in breach of their duties?
This can be best illustrated with reference to the case of Brudenell-Bruce v Moore  EWHC 3679 (Ch) which concerned a lay Trustee, Mr Moore, who was accused of acting in breach of Trust. This was on the basis that:
- his actions, together with those of his co-Trustees (who were professional advisers), had resulted in a loss of rental income to the Trust as they had failed to properly rent out the Trust properties; and
- he had improperly received significant remuneration, in the region of £117,000, for acting as a Trustee.
In relation to the first point, the court held that the Trustees had acted in breach of Trust by failing to rent out the properties within the Trust and were accordingly ordered to personally pay to the Trust the lost rental income.
With regards to Mr Moore's remuneration, despite arguing that the extent of the work involved in his role as Trustee justified the amount he received, the court held that he had to reimburse the Trust in full as he had not carried out any exceptional duties. The court recognised that Mr Moore had carried out an extensive amount of work but held that this was no more than would ordinarily be expected of a Trustee.
It is easy to see how a lay person may accept the position of Trustee without fully understanding what will be required of them, as the role can undoubtedly be an onerous one. Nevertheless, they can find themselves personally liable for wrongful or negligent action which results in a loss to the Trust and by extension, to the beneficiaries.
The exposure is unlimited and Settlors are therefore advised to keep this in mind when selecting their Trustees as they may not appreciate just what they are asking of them - and anyone who is asked to act in this capacity should exercise extreme caution before accepting!
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Should you have any questions regarding the appointment of trustees, our Private Client specialists would be happy to help.