Being alert to trustee liability

While trustees are the guardians or caretakers of the trust assets being held or utilised for the benefit of the beneficiaries of a trust they must act with the necessary skill, prudence and diligence of an accountable trustee.  However, trust deeds typically contain a limitation of liability and indemnity clause limiting the liability of trustees to the assets of the trust.  A common misconception held by many trustees is the extent of protection this indemnification provides as a trustee is not indemnified outright for all their actions.  

The Trusts Act 2019 provides a restriction on trustee exemption and liability clauses. Trust deeds must not limit or exclude a trustee’s liability or indemnify them for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence. The purpose of this is to ensure beneficiaries have the ability to hold trustees personally accountable for certain misconduct. If the trust deed indemnifies or limits the liability of trustees to this extent, it cannot be relied upon to defend a trustee against a claim by a beneficiary.

Trustees must therefore take a higher level of care in administering the trust to ensure they meet their obligations under both the Act and the trust deed in order to minimise any risk of personal liability for beneficiary claims. However it is not open season on trustees.  The trust deed may limit a trustee’s liability other than for dishonesty, wilful misconduct, or gross negligence. If the trust deed does not currently do this then it may be possible to include it by way of variation. 

However, trustees need to be aware these provisions only apply to claims by beneficiaries.  These clauses do not offer the trustees protection against claims from third parties. As Lally v Edgecumb provided, personal liability of trustees is not automatically limited within third-party agreements, simply because the party is identified as a trustee in the relevant documentation. Therefore trustees must ensure their liability is expressly limited in third parties agreements. For example, if the trust’s assets are given as security against trust borrowings and the trustees provide a guarantee for that security, the guarantee will not be automatically limited to the assets of the trust and may be joint and several, meaning all or just one trustee could be pursued for all or any part of the debt. Care should also be taken when retiring a trustee if such guarantees have been provided by the trustee, as they will still be liable for such borrowings unless there is an express provision to the contrary within the guarantee.

Trustees must be careful when managing the affairs of the trust to avoid any unnecessary risk exposure.  They should carefully review the trust deed’s indemnity and liability clauses along with the detail of any third party agreements i.e. bank loans and guarantees.

These are just some of the things a trustee needs to be aware of. If you are unsure about your own situation, the terms of the trust deed or the implications of any agreements or contracts you have in place, give us a call and we can have a chat.

Issue 124 October 2021