Many trustees appointed under wills by the testator are lay trustees, not fully appreciating what the role involves. Here, Leanne Millhouse and Audrey Serrano of law firm Kennedys provide an introduction to the fiduciary duties of a trustee.

What is a fiduciary duty?

The relationship between trustees and beneficiaries is known as a fiduciary relationship, and has at its core an obligation of loyalty, trust and confidence, with no conflict and no profit rules on the part of the trustee. There is also a general duty of good faith (to act openly and honestly).

The beneficiary is entitled to the trustee’s single-minded loyalty. The overarching theme is that trustees are not permitted to use their positions for their own private advantage and are required to act unselfishly in what they perceive to be the best interests of the beneficiaries.

The obligation to exercise reasonable care and skill, whether under the common law or statute, is not a fiduciary duty, but a separate and additional duty for the trustees.

The fiduciary duty continues for as long as the relationship continues. So, as long as the trustee remains a trustee, they owe the duties.

How does one comply with the fiduciary duties?

Trustees must ensure they abide with the following basic rules:

• Only act in the interests of the beneficiaries as a whole.
• To not put themselves in a position where their personal interest conflicts, or where there is a real possibility of conflict, with their fiduciary duties, or the beneficiaries interests.
• To not adversely affect the beneficiaries’ interests.
• To subordinate any personal interests they have to that of the beneficiaries.
• To not favour one beneficiary (or class of beneficiaries) over another.
• To not, without authority, make a profit from the use (whether directly or indirectly) of property subject to the trust. If they do, they must account for that profit to the trust. The beneficiary does not have to show any bad faith on the part of the trustee.
• To not make a profit from their role (as distinct from authorised remuneration under the trust document or as agreed with the beneficiaries).

Can trustees be paid for their role?

If trustees are seeking remuneration for their work, they must ensure that this falls within the remit of the trust instrument, or is agreed by the beneficiaries.

How can I exclude or limit my fiduciary duty?

The following are commonly used to in an attempt to mitigate exposure to personal liability for breach of duty:

• The use of exclusion clauses and duty-defining provisions: a well drafted clause should set out the scope and content of the fiduciary duty, and may seek to limit or exclude this duty. The court may uphold such a clause if it is clear, unambiguous and reasonable, but each case is very much determined on its own facts
• Disclosure and consent: the beneficiaries may, up to a point, agree to relax, or forego, the requirement to fulfil fiduciary duties. If a beneficiary is to do this, their consent must be fully informed. The burden of proof is on the trustee
• The court can approve a transaction that would otherwise have been a breach of fiduciary duty.

We also recommend that trustees enquire about appropriate insurance cover in the event of any claim. A specialist broker will be able to assist you.

What happens if one is in breach of their fiduciary duties?

Trustees can leave themselves open to the following actions:

• A claim for damages.
• Order to account for any profits the trustee has made.
• Rescission – The decision made by the trustee may be overturned and set aside.
• Injunction to either prevent the trustee from taking a course of action, or requiring the trustee to take a course of action.
• Removal as a trustee.

A complex area of law

Fiduciary duties are a complex area of law, with several leading cases setting out the scope of the duties. However, each case is very much determined on its own facts.

We recommend that a trustee always seeks legal advice on any issues they are not familiar with, or where there is discord between the beneficiaries as a whole or a class of beneficiaries.

First published on the Kennedys website.

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