The role of a trustee is an important role and can carry significant responsibilities. It can also be a rewarding experience. It is, therefore, important to have a good understanding of trustees’ duties and responsibilities.
Trust law can be complicated, so trustees should take professional advice regarding their own personal situations. Trustees should also refer to the individual trust deed or instrument to determine which parts of this guide may, or may not, apply to a particular situation.
Trust law was first developed in the Middle Ages (around 900 years ago) and has evolved considerably over the centuries. It is based on a combination of common law, case law and legal statutes.
This guide focuses on the duties of trustees of trusts governed by the law of England and Wales. The duties and responsibilities of trustees of trusts governed by the law of Scotland or Northern Ireland differ. Where appropriate, we have highlighted the differences.
The settlor (the person(s) who creates the trust) will, in many cases, also be the initial trustee. The settlor(s) will then usually appoint further trustees at outset, but should take care with these appointments. Professional people, such as solicitors or accountants, may be appointed as trustees, but it should be recognised that professional trustees are entitled to charge fees for any services that they perform for the trust, and this could affect the future investment returns to, and cashflow of, the trust, especially those trusts with smaller funds.
There is no requirement to appoint professionals as trustees, and anyone who is aged 18 or over, of sound mind and willing to act as a trustee may be appointed. The person(s) with the power to appoint trustees, known as the appointor (and normally the settlor(s) whilst he or she is alive), should bear in mind that trustees must act unanimously (unless the trust deed provides for otherwise) when making any decisions that affect the operation of the trust. Under the law of Scotland, trustees may act by a simple majority.
It is therefore important that trustees understand what the settlor’s wishes were when he or she established the trust.
In order that a trustee may perform his or her duties effectively, all trustees should ideally be resident in the same country, which would normally be the UK. If a trustee is not a UK resident, he or she should seek tax advice in his or her country of residence to determine whether acting as a trustee may have any adverse local tax implications.
There is generally no maximum to the number of trustees that may be appointed (unless the trust holds land, when the maximum number that can be registered as owners is four), but, for practical reasons and to simplify the administration of the trust, we would suggest that the number of trustees (including the settlor(s) if he and/ or she is to be a trustee) is restricted to four.
Further trustees may be appointed in the future. The trust deed will normally give details of who has the power to appoint further trustees, and also whether there is a power to remove trustees. If a trustee is unable to act (e.g. through moving abroad or because of other commitments), or becomes unwilling to act, then he or she should consider retiring as a trustee. In certain circumstances, the law gives the courts the power to appoint or remove trustees.
Under the law of England & Wales and law of Northern Ireland, trustees must act unanimously when taking decisions unless the trust deed provides for otherwise. This means that a trustee can effectively block decisions made by the other trustees that he or she does not agree with. Under the law of Scotland, the settlor’s wishes may effectively be overridden if the remaining trustees are able to act as a majority.
In certain situations, where trustees are unable to reach a decision, the dispute may need to be settled by the courts. This can lead to delay and expense.
The trust deed or instrument acts as a starting point to determine the specific trustees’ duties and responsibilities. To the extent the trustees’ duties are not specified in the trust deed, general trust law will apply. Under common law, beneficiaries of a trust have a basic right to have the trust duly administered in accordance with the provisions of the trust deed and the general law. Trustees must, therefore, act in the best interests of all beneficiaries and avoid any conflict.
Trustees’ duties also include:
- to act impartially between different beneficiaries and different classes of beneficiary, and therefore not to favour any one beneficiary above any other;
- to obtain advice on any matters that they may not be able to competently decide for themselves; and
- specific duties in connection with trust investments (see later).
If trustees fail to meet a required standard, they are in breach of trust and may be personally liable to make good any loss to the trust. Beneficiaries can take legal action against trustees to recover any loss. Professional trustees may also be liable for negligence.
As discussed earlier, under the law of England & Wales and the law of Northern Ireland, trustees are required to act unanimously when taking any decision that may change the operation of the trust, unless the trust deed provides for otherwise. Under the law of Scotland, trustees may act as a simple majority.
The Trustee Act 2000 applies from 1 February 2001 in England and Wales. This Act repealed many provisions contained in previous Acts including the Trustee Investments Act 1961 and the Trustee Act 1925. Similar provisions have since been enacted in Scotland and Northern Ireland where the Charities and Trustee Investment (Scotland) Act 2005 and the Trustee Act (Northern Ireland) 2001, respectively apply.
The Trustee Act 2000 contains two types of provision:
- default powers to trustees, which will apply unless specifically excluded in the trust deed; and
- new duties on trustees.
The Act may therefore be significant for trusts that do not adequately cover all of the powers of the trustees and for other trusts, such as those that may arise on intestacy.
The new duties on trustees apply not only to new trusts, but also to existing trusts. Certain duties, such as the requirement for a statutory duty of care by trustees, may be specifically excluded for new trusts in the trust deed. Other duties cannot be excluded. These include the duty of trustees to take investment advice when making or retaining investments and the duty to adopt the standard investment criteria. This means that trustees must have regard to the need for diversification and suitability of investments to the trust. This applies to all trusts.
Trustees’ investment powers
The Trustee Act 2000 introduced new investment powers that replaced the restricted provisions that applied previously under the Trustee Investments Act 1961. In particular, the Trustee Act 2000 conferred a general power for the trustees to invest in any asset as if they were the absolute owners of the assets of the trust. This power applies to all trusts where trustees have do not have wide express powers to invest and may be restricted by provisions in the trust deed. It is therefore important that trustees familiarise themselves with the trust deed before taking any investment decisions so as to ensure that, for example, a proposed investment is not specifically excluded by a provision in the trust deed.
- The trustees have a duty to ensure that all investments are suitable for the objectives of the trust. The trustees must take account of the size of the trust fund, the features of the selected investment(s), its tax treatment, the size of the investment and its risk profile and ensure that the mix between income and capital growth of the investments held matches the trust’s objectives. Where appropriate, the trustees must also have regard for diversification of the investments held.
- Trustees must regularly review the investments held.
- Trustees must obtain and consider professional investment advice when making or reviewing investments. Such investment advice should usually be obtained in writing. Before taking any investment decision, trustees have a duty to obtain and consider proper investment advice. If the trustees believe that it is inappropriate or unnecessary to obtain advice, then the need to obtain advice does not apply.
Examples of such circumstances could include small trust funds, where the cost of advice would represent a significant proportion of the overall trust funds, or situations where one of the trustees may be suitably qualified and can provide the advice to the trust at a reasonable cost.
Trustees should also be aware of the need to decide how to deal with any income, such as interest, rent or dividends, arising to the trust. If such income is not distributed to beneficiaries, it may be accumulated for a maximum period of 21 years under the law of England and Wales.
General and statutory duties of care
Trustees have always been subject to certain general duties of care. These include:
- the duty to exercise their powers in the best interest of the beneficiaries;
- to invest trust funds;
- not to profit from their office as trustees (unless acting in a professional capacity when fees may be charged for work performed for the trust if authorised in the trust deed);
- not to cause loss to the trust;
- to act impartially between all beneficiaries; and
- to treat all classes of beneficiary fairly.
Section 1 of the Trustee Act 2000 imposes a single statutory duty of care which applies when the trustees carry out certain functions including:
- exercising their powers of investment;
- exercising powers of delegation or powers to employ nominees or custodians; and
- exercising the power to insure trust property.
When this statutory duty of care applies, a trustee must exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee may hold and, if acting in a professional capacity, having regard to such specialist knowledge and experience as would be expected to be held by a person acting in that capacity. This means that a trustee who is, for example, a financial professional, such as a professional investment adviser, would be expected to adopt a higher standard of care in investing trust assets than, say, a schoolteacher.
A trustee should, however, always consider the need to seek specialist advice in relation to his or her duties as a trustee. When seeking specialist advice, a trustee should ensure that the person providing the advice is suitably qualified to provide this advice. Once received, the trustees are not bound to follow the advice, although it would, perhaps, be unusual if they did not.
Other statutory duties and powers
Other statutory duties and powers are imposed or granted as appropriate by the Trustee Act 1925 and Trustee Act 2000. These include:
- the power to use all, or part, of the income of the trust for the maintenance, benefit or education of a minor beneficiary;
- the power to advance capital;
- the power to delegate certain powers and responsibilities. These include the appointment of nominees and custodians to hold investments, as well as the appointment of external asset managers, such as discretionary investment managers; and
- the power to insure assets of the trust and to pay insurance premiums out of the capital and income of the trust.
Other responsibilities under common law
In addition to trustees’ duties and responsibilities imposed by law, trustees are also subject to common law responsibilities. These include:
- that trustees take account of the settlor’s wishes. These may be provided by the settlor in a letter of expression of wishes, and although not binding on the trustees, such a document should be used as guidance;
- to ensure fairness between beneficiaries so that one class of beneficiary does not benefit unduly at the expense of other classes. The needs of both present and future beneficiaries should be considered;
- not to hold significant amounts of cash within the trust, unless a beneficiary will have need of such cash in the near future. Cash (even if held on deposit) is not generally regarded as an investment, and the trustees must be mindful of their duty to
- to invest the trust’s assets; and
- to take account of tax implications and administration costs when choosing different types of investments.
Trusts, taxation and tax reporting
When a trust is established, the trustees are likely to need to register the trust on HM Revenue and Customs’ Trust Registration Service (TRS), unless the trust is an excluded trust. It is the duty of the trustees to register a trust, although they can appoint an agent to register it on their behalf. Trustees can register a trust themselves here.
Trusts must be registered within 90 days of their creation (or by 1 September 2022, if later). If a trust has incurred a tax liability (or will incur a tax liability in the current tax year), it must be registered on the TRS, even if it was previously an excluded trust.
HMRC has the power to levy fines and penalties on trustees who fail to register a trust.
Trustees are also responsible to ensure that:
- they notify HMRC of any tax due, within 6 months of the end of a tax year, if they have not received a tax return for the year;
- they keep records of any income and capital gains arising to the trust;
- they complete and return any tax return that may be issued;
- they pay any tax due on income or capital gains arising to the trust;
- they supply certificates or vouchers to beneficiaries detailing how much income the beneficiary may have received from the trust, and how much tax the trustees may have deducted on the beneficiary’s behalf;
- they account for any inheritance tax that may become due, as and when it becomes payable by the trust; and
- they maintain the trust’s details on the Trust Register via the TRS. Any relevant changes must be notified within 90 days of the change. If the trust has incurred a tax liability in any tax year, the trustees are also required to confirm the trust’s details as correct.
The trustees may appoint a professional adviser to deal with the trust’s tax affairs but the trustees remain responsible for ensuring that all tax obligations are carried out satisfactorily.
When registering a trust on the TRS, the trustees need to nominate one trustee to act as the ‘lead trustee’ to act as the principal contact with HMRC on behalf of all of the trustees.
All trustees of a trust are jointly liable for any tax due, and HMRC can recover any unpaid tax, interest or penalties from any trustee if any amounts due are not paid. All trustees therefore have a responsibility to ensure that each trustee performs his or her duties properly.
Following the introduction of the Trustee Act 2000, trustees now have discretion to pay taxes out of capital and/ or income of the trust, although the trustees should still take account of the general duty to treat all classes of beneficiaries fairly. This could apply where, for example, a beneficiary may be entitled to income arising to the trust (a life tenant) and another class of beneficiaries may be entitled to capital (the remaindermen).
Any tax paid by a trustee from personal funds may be reimbursed from trust funds. Trustees should ensure that sufficient monies are retained in the trust to meet the tax liability before any distributions are made from the trust to beneficiaries, to avoid having to meet liabilities from their own pocket. This may be especially relevant if a trust is being wound up.
The taxation of trusts is a complex area and depends on the type of trust and the various transactions that may take place. Trustees should seek relevant professional advice in connection with the tax status of a particular trust.
Appointment of trustees
The statutory power to appoint additional trustees vests in the trustees although the trust deed may grant it to the settlor(s) of the trust during his or her lifetime and then the surviving trustees. Reference should be made to the trust deed to determine the exact powers. The trust deed may also give the settlor(s) and/ or appointor(s) the power to remove trustees (there is no statutory powers to remove a trustee except through the courts) and apply conditions around when a trustee may retire (e.g. it may require a period of notice or that a trustee cannot retire if the sole remaining trustee would be the trust’s settlor and/or his or her spouse or registered civil partner).
More recent trusts may also give the trustees the power to remove and replace a trustee who has become mentally incapacitated, subject to conditions contained in the trust deed.
Death of the last surviving trustee
In the event of the death of a sole surviving trustee, the trust will continue to exist and the deceased’s legal personal representatives (i.e. the executors or administrators) assume the role of trustees when the grant of probate or letters of administration, as appropriate, are issued. They may then decide to continue to act as trustees or to appoint new trustees and retire.
The situation in Scotland is different in that the executors of the deceased trustee must obtain a separate confirmation (the equivalent of probate) of the trust’s assets.
The death of a sole surviving trustee may lead to additional expense to the trust and possible delays in distributing trust assets to beneficiaries. It is therefore advisable to ensure that, wherever possible, at least two trustees are appointed.
It is not appropriate for a sole trustee, who is also a beneficiary, to distribute trust assets to himself or herself, due to the conflict of interest that arise. For this reason, the trust deed should include a provision stating that before any distribution is made from the trust to a beneficiary who is also a trustee, a further trustee, who cannot benefit directly or indirectly from the proposed appointment, should be appointed.
This guide, by its nature, is a brief guide to trustees’ duties and responsibilities. It is not intended to be a definitive guide and trustees should be aware of the need to seek specialist advice in relation to their individual situations, where necessary.
The information contained in this guide is based on our understanding of taxation, legislation and HM Revenue & Customs’ practice as at 1 October 2021, all of which may change without notice.