When creating a settlement, you can appoint either friends or family members as trustees or you can select a professional trustee such as Spratt Endicott. Naturally, becoming a trustee comes with responsibilities as well as potential liabilities.
A Trustee who causes loss to the trust will be liable to the beneficiaries for wasting the assets. It is not at all uncommon for private Trustees to make mistakes in an administration, especially if they are not professionally advised, and for the beneficiaries thereby to suffer loss.
An obvious example is where a Trustee misinterprets the trust and makes a payment to a beneficiary that is beyond what the beneficiary is entitled to, so that others suffer.
Occasionally, Trustees might misappropriate assets from the trust fund, and use them for their own purpose. Clearly, they will then be personally liable, without limit, for the loss suffered by the beneficiaries.
Trustees have a statutory duty to exercise care and skill in the administration of the trust. Professional trusted will be tested a little more rigorously than trustees that are friends and family,
Trustees who make contracts with third parties (for example a bank lending money to the trust), are directly liable to them under contract law. The Trustees can recoup the cost from the assets of the trust, where they entered the contract in the proper course of the administration. However, their liability is not limited to the extent of the assets of the trust. If the third party claims more than the value of the assets still held by the Trustees, the Trustee will be personally liable for the shortfall.
Trustees may also be liable for their acts or omissions in administering the trust. For example, a Trustee might libel a third party. Where it can be shown that the Trustee was acting in the reasonable management of the trust, he will be entitled to be indemnified (in other words financially covered) out of the assets of the trust.
However, even then, if the claim exceeds the value of those assets then the Trustee will be personally liable for the shortfall. Where the Trustee incurred the liability otherwise than in reasonable management of the trust fund, he will not be entitled to any such indemnity.
During the administration of the trust, the trustees are responsible for completing self-assessment tax returns and also for paying any assessed tax. Delays for any of the above can now lead to significant penalties, which may not be recoverable from the assets of the trust, as the payments were solely your responsibility. In addition, Trustees have a statutory responsibility to the Revenue to advise them of all circumstances which might lead to the payment of inheritance tax. Failure to account to the Revenue can lead to severe penalties. These fall on the Trustees personally and are not usually recoverable from the trust fund.
Trustees also have a liability to creditors of a bankrupt beneficiary if the beneficiary has been paid directly and they cannot recover the money. Our policy is to make bankruptcy searches against beneficiaries before making capital payments to them, and to make such searches annually in respect of income beneficiaries.
The extent of your liability does not really go beyond yourself – you are liable for your own acts and omissions not that of your co-trustees. However, a Trustee can be guilty of “wilful default” where the Trustee is reckless about the conduct of his Co-Trustee and allows him to cause loss without doing anything about it. The Trustee might thereby also fail in applying the statutory duty of care under the Trustee Act 2000.
It is common for the trust document itself to protect Trustees against their liability for loss to the trust fund, except to the extent that it is caused by the Trustee’s individual fraud or dishonesty. It is also common to absolve an individual Trustee from taking proceedings against his Co-Trustee, where that Co-Trustee has been guilty of a breach of trust.
The court does have the power to relieve the trustee of any liability if they breach their duty, but it is not wise to place reliance on this as there is no guarantee that this will happen.
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