Duties of express trustees

Mandatory duties of trustees

Know the terms of the trust (s 23)  Act in Accordance the Terms of the Trust (s 24) Act honestly and in good faith (s 25) Hold and deal with trust property and otherwise act for the benefit of the beneficiaries in accordance with the terms of the trust (s 26) Exercise their powers for a proper purpose (s 27)

What are mandatory duties and their sources?

Cannot be excluded for the trust. (s 22)

• No duties no trust (Armitage v Nurse)

Sources of trustee duties: 

• Trust deed

• The Trusts Act 2019 -> complemented by the the rules of equity and the CL

Know the terms of the trust (s 23)

• thoroughly acquainted with the terms of the trust. This includes all documents, papers and deeds relating to, or affecting, the trust property which comes into the trustee's possession and control

• Need to know above to see if you are in a conflict of interest

• If previous trustees breached the trust, new trustee must take steps to make it right. No inquiries by new trustee = will be liable for loss that may result even if they weren’t the ones who breached it.

Act in Accordance the Terms of the Trust (s 24) + exceptions

Trustee is to adhere strictly to the terms of the trust Trustees can only pay trust money to beneficiaries (Lee v Torrey) Trustees personally liable for breach (Lee v Torrey) Exceptions: All beneficiaries are adult and sound mind can direct the trustees to deviate from the terms (Saunders v Vautier) Instructions in deed impossible to carry out. Court can sanction deviation from terms Where it is necessary for proper administration of trust property (s 130)

Act honestly and in good faith (s 25)

“the duty of trustees to perform the trust honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts” (Armitage v Nurse)

An act which falls short of good faith is done in bad faith (Lee v Torrey)

Hold and deal with trust property and otherwise act for the benefit of the beneficiaries in accordance with the terms of the trust (s 26)

‘Trustee’s Duty of Loyalty’ ‘must act in the beneficiaries interests, not in the interests of some other person.’ (Holland v Jonkers) Must consider nature and range of beneficiaries of the trust Unborn beneficiaries, values of the settlor/beneficiaries. Shouldn't make decisions that act against their religious or deep social belief

Exercise their powers for a proper purpose (s 27)

A trustee must exercise the trustee's powers for a proper purpose. Must only use their powers for the purposes for which they are conferred and must not use them to achieve some collateral or improper objective.  -> Historically this was known as 'fraud on power' Can't use powers to run contrary to the terms of the trust.

some info about Default Duties that may be contracted out of. 

Are the default duties modified by the Trust deed? Must be performed by the trustee unless modified or excluded in accordance with s 5(4) and (5). - s 28.  Contracted out of or excluded from the trust deed.  If the trust deed is silent assumption is they apply.  Creates ‘sub-duties’ which relate to duties of prudent management.  Trustee is under duty to actively invest trust funds.

Default duties

Duties of prudent management

General powers of trustee ss 56, 58, 59, 60

General duty of care (s 29)

Duty to invest prudently (s 30)

Duty of impartiality (s 35) - duty of obedience to the trust instrument

Overarching duty of loyalty  - Fiduciary duties

• Duty to avoid conflict of interest (s 34)

• Duty not to profit (s 36)

• Duty to act for no reward (s 37)

idea behind duties of prudent management

Don’t cause loss to the trust; 

Ways trustees may cause loss to the trust; 

• The trustees might not invest at all, so that inflation eats away at the value of the asset

• Trustees might make an unauthorised investment that turns out to lose money

• Though investment was authorized, it was made at a bad time or was a bad choice = money lost

• Trustees might leave money in a particular investment for too long - so that what was once a goods investment turns out to be bad. (Re Mulligan)

General powers of trustee ss 56, 58, 59, 60

Trustee has all powers necessary to manage + carry out the trust property including all powers of an absolite owner of the property (s 56 a + b) Trustee may invest trust property in any property ( s 58) Trustee may consider the following matters when exercising power to invest (s 59);  objectives or permitted purpose of the trust desirability of diversifying trust investments nature of existing trust investments and other trust property;  the need to maintain the real value of the capital or income of the trust risk of capital loss or depreciatin;  potential for capital appreciation; likley income return; the length of term of the proposed investment; probable duration of the trust; the marketability of the proposed investment during, and on expiry of, the term of the proposed investment the aggreate value of the trust property the effect of the proposed investment in relation to the tax liability of the trust; the likelihood of inflation affecting the value of the proposed investment or other trust property; the trustees overall investment strategy.  Power to determine whether return on investment is income or capital (for the purposes of distribution, completing a financial statement etc.) (s 60)

General duty of care (s 29)

• When administering a trust, a trustee must exercise the care and skill that is reasonable in the circumstances having regard to - 

• a) any special knowledge or experience that the trustee has or that the trustee holds out as having; and 

• b) acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. 

Holds people who are trained (lawyer, accountant, professional trust company) to a higher standard than a lay person

Duty to invest prudently (s 30)

Exercise the care and skill that a prudent person of business would exercise in managing the affairs of others Again regarding special knowledge and profession + knowledge that comes from that.

Duty of impartiality (s 35) - duty of obedience to the trust instrument

1. A trustee must act impartially in relation to the beneficiaries and must not be unfairly partial to one group of beneficiaries to the detriment of the others (life vs final beneficiaries)

2. Not required to treat the beneficiaries equally  (but all beneficiaries must be treated in accordance with the terms of the trust).

Cannot give everything to only one beneficiary, must be even handed (Re Mulligan)

Cannot be unfair/impartial to beneficiaries - Cannot consistently favour a beneficiary(Re Mulligan)

Duty to avoid conflict of interest (s 34)

Avoid conflict of interest between trustee and beneficiaries (Re Mulligan, Re Thomson) Duty not to act in situations where there is a conflict of interest (Re Thomson) Not to make profit at expense of the trust (Re Thomson) Trustee must not put him/herself in a position where personal interest conflicts with duty to the trust’s beneficiaries -  better to resign (Patchett v Williams) Even the mere possibility of conflict between his interest and his duty in principle is a breach, even if it is in the mutual benefit (Phipps v Boardman; Thomson v Allen) Exception: unless authorised by deed or Court allows, e.g. buying trust property (s 133) Even if the trust allows the sale of the property, it must get the highest value of the property possible that the trustee’s could possibly obtain.  (Patchett v Williams)

Duty not to profit (s 36)

• Fiduciary position not entitled to make a profit (Bray v Ford, Boardman v Phipps)

Duty not to put themselves in a conflict of interest by profiting (Boardman v Phipps)

Duty to act for no reward (s 37)

• Used to not be able to be paid -> stems from no profit rule. Unless there is a charging clause in the trust deed.

• Exceptions:

  1. Duty can be altered by the trust deed. [charging clause, particularly commercial trusts]

  2. The beneficiaries (sound mind and over age) may agree to remuneration -> even slightest undue pressure won’t uphold it.

  3. Trusts Act 2019, s 139:  Court may order payment of remuneration to trustee [very expensive]

Trustees are fobidden from self-dealing e.g. can’t purchase trust asset’s (Pratchett v WIlliams)

Re Mulligan (Deceased) [1998]

Facts/Issue

Ratio

Trustees basically didn't diversify the investments for different types of interest, basically got it so the income of the trust was preferred over the capital interest. Capital interest depreciated and now claim is bought. Money was placed in fixed investments, generating good income for the life tenant, but didn’t grow capital for the final beneficiaries [it actually reduced because of inflation]. Widow stopped other trustees from contacting the ultimate beneficiaries. Issue: Did the trustees favour the life tenant over the other beneficiaries by failing to diversify the trust?

Judge said they should have diversified investment portfolio. It was ok to take into account close relationship of widower and widow and her to get more compared to the more remote relationship of the nieces and nephews but they had not acted impartially as they consistently favored the interest of the widow over the final beneficiaries.

Lee v Torrey

Settlor settled trust for the benefit of herself and 1 son (Matthew) Other son, Brennan = not a beneficiary because she had fallen out with him.  Trustees paid $21,000 to brennan to prevent him from constesting his mother’s will. ‘Sold’ a car held in trust to a friend without collecting payment and transferred nearly hald the trust money to themselves despite not being beneificaries of the trust.

Breached terms of the trust successfully sued by Matthew.  Breach terms by distributing property to non-beneficiaries, not pursuing the friend for payment of the car and by misappropriating funds for their own benefit.

Patchett v Williams

Two trustees Patchett and L Trust property was a farm, leased to Patchett Settlor expressed a wish that P would eventually be able to buy the farm at a price set by a valuer 3 valuations offered to buy land in middle value Issue: Could a trustee purchase trust property? (application to sell under s 133)

Trustee must seek best price reasonably obtainable, using care and diligence of ordinary people BUT s 133 application must show sale is in the interests of the beneficiaries = full value

Bray v Ford

N/A	‘It is an inflexible rule of a Court of Equity that a person in a fiduciary position… is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and his duty is in conflict.’

Thomson v Allen

Yacht agent (testator), had Mr Allen working in a close relationship with him Appoints his daughter and Mr Allen as Trustees Mr Allen sets up a competing business Issue: Can a trustee compete?

Trustees cannot compete - cannot be allowed to enter into an arrangement which has or can have a personal interest that conflicts with the interests that the trustee is bound to protect

Phipps v Boardman

Boardman and Tom Phipps (one of beneficiaries) used information about the company which they used to buy majority shareholding in the company for themselves. Company performance improved due to B and TP’s work John Phipps (other beneficiary) claimed breach, sought account of profits from B and TP Issue: Breach of fiduciary duty even though 2/3 of trustees consented, and beneficiaries benefitted?

Account of net profits available as of right - not a penalty, merely equitable enforcement of trustee’s existing duty, so no dishonesty or bad faith required Possible conflict = breach mere possibility of a conflict is a breach Fiduciary Duty is very strict = Breach, even if you are acting honestly and in good faith