Trusts have become a popular tool for safeguarding family assets against claims such as professional liability, business debts and relationship property matters, just to name a few.
If you are the trustee of a family trust it is important to be fully aware of the responsibilities that come with this role. As the trust itself is not a separate legal entity, it is you as a trustee, along with your fellow trustees, who are the legal owners of any assets held by the trust for the benefit of the beneficiaries. Therefore, any decisions you make as a trustee about the trust assets must consider the needs and requirements of the beneficiaries. Going hand in hand with this responsibility are many legal duties that must be complied with. Under the Trustee Act 1956, a trustee must exercise the care, diligence and skill that a prudent person would in managing the affairs of others. Failure to exercise this duty of care could see legal action being brought against you by the beneficiaries.
Understand The Trust Deed
First and foremost, as a trustee you should read and understand the trust’s deed. Typically the trust deed will set out the objects of the trust, investment powers, borrowing powers, period of the trust, and who the settlor, beneficiaries, trustee and appointor (if applicable) are. To effectively manage the trust it is imperative to at least be aware of what is in the trust deed.
Just as assets are not held in the trust’s name, liabilities are not entered into under the name of the trust. For any obligations you enter into as a trustee you may be personally liable as well as jointly and severally liable for any trust debts. Independent trustees should seek to limit their liability where possible by having limitation of liability clauses inserted in documents they are required to sign as trustee.
Another key duty you have as a trustee is to have a good knowledge of the assets held by the trust and ensure they are being properly maintained and protected. You must not rely on your co-trustees to do this for you.
To administer a family trust properly, tax returns and financial statements should be prepared on an annual basis. In addition, approval of financial statements, beneficiaries’ distributions and all major transactions must be minuted. It is recommended that an accountant is employed to assist with these tasks.
A common practice at year end, when the financial statements are prepared, is to consider if distributions should be made to beneficiaries. Once minuted, distributions may be done via journal entries to beneficiaries’ current accounts. Care must be taken to administer balances owing to beneficiaries prudently. Any distributions unpaid to beneficiaries can be requested by the beneficiaries. These amounts may also be included in the matrimonial property of a beneficiary, once a beneficiary turns 20 years of age. Beneficiaries are also entitled to receive a copy of the financial statements each year.
The above touches on just a few of the responsibilities that trustees have in carrying out their fiduciary duty. However, the overriding message is clear – being a trustee is a personal obligation. It would not be wise for you to take up a trusteeship until you are fully aware of your duties and responsibilities and until you are prepared to be actively involved in the administration and management of the trust. The beneficiaries of the trust depend on you and in the long run you owe them a duty of care.