Trusts are generally poorly understood by members of the public (and many professionals) and so it is no surprise that few people actually understand what it means to be a trustee, and the obligations that this entails.

To start with, it is important to note that someone acts as a trustee when they hold an asset (money or property) on behalf of another person. The form of trust, and the level of discretion which the trustees have, can vary significantly, however this is the fundamental principle behind trusts/trustees. It is a role which carries fiduciary duties (much like a company director) and the accompanying personal liability which applies where assets are mishandled or steps taken which are not in the beneficiary’s best interests.

The Trustee Acts 1925 and 2000 set out the powers, responsibilities and duties of trustees. Some key ones to be aware of are:

1. To act only in accordance with the terms of the trust: Trustees cannot provide a benefit to anyone who is not a beneficiary, and even in this regard, only to the extent that the trust allows. For example, if a beneficiary has a right to income only, the trustee cannot give them funds out of capital.

2. To avoid conflicts of interest: this can become particularly difficult where family trusts are involved as trustees may often also be beneficiaries. Trustees need to show that they have fully considered all the beneficial interests and should not act where there is a conflict, or potential conflict, of interest between themselves and a beneficiary. Many trusts for families are now written with this in mind and build in a mechanism for conflicted trustees to continue to act or to seek consent for their actions. For example, trustees are not allowed to purchase trust assets, as there is a clear risk of conflict. It is however possible for beneficiaries to consent to a purchase of trust assets, in very specific circumstances. Where a trustee does not have the appropriate consent then the transaction is voidable, and the beneficiaries would be entitled to have it reversed.

3. To act impartially between beneficiaries: Trustees must consider the needs of all beneficiaries when making decisions. This can prove particularly difficult where there are beneficiaries with an interest in income (life tenants) and separate beneficiaries with an underlying right to capital. The trustees are required to invest assets to provide an income for the life tenant but need to be mindful of the risks attached to ensure that the underlying capital isn’t depleted. There is a separate obligation on trustees to take appropriate financial advice when considering investments, and this  can be used as a way of showing that their actions are appropriate and are not intended to disadvantage one beneficiary over another.

4. To keep appropriate accounts and records: This should take the form of trust accounts, which confirm the assets of the trust, income produced and any expenses incurred. This also assists trustees in completing the relevant tax forms to report any income, capital or inheritance tax liability incurred by the trust to HMRC and the beneficiary. Trustees should also keep minutes of their meetings, to evidence how decisions have been reached. This particularly important where there is any claims of mismanagement by trustees.

5. To provide information to beneficiaries as appropriate: Depending on the type of trust, beneficiaries will be entitled to certain information. In all cases beneficiaries are entitled to a copy of the trust deed and the trust accounts. This allows them to check that the trust is being correctly managed.

The key point for anyone acting as a trustee to note is that they are managing funds on behalf of another person. It is therefore possible for trustees to find themselves being held personally liable for any breach of trust that may occur. We therefore strongly advise anyone who is acting as a trustee to take professional advice on their duties and the terms of the trust, to ensure that the trust is correctly managed.

If you would like assistance with managing a trust then please contact Ashley Minott or Alex Stanier, on 01494 521301, both of whom are fully qualified members of the Society of Trust and Estate Practitioners.