Introduction
A breach of trust occurs when a trustee fails to perform a duty imposed on them or exceeds a power given to them. Breaches of trust often arise from a misunderstanding of the trust instrument (trust deed), an informal decision, poor record-keeping, or a failure to take advice.
In a family trust context, trustees often make decisions informally. That informality can create problems if a beneficiary later asks what power the trustees used, what information they considered, or why they treated one beneficiary differently from another.
Start with the Trusts Act, then check the trust deed
The starting point for analysing a possible breach of trust is the Trusts Act 2019 (Act). The Act sets out the core duties that apply to trustees, including the mandatory duties that cannot be excluded and the default duties that apply unless the trust instrument modifies or excludes them.
The trust deed remains critical. It tells trustees what powers they have, who the beneficiaries are, how decisions must be made, and whether any default duties have been modified. The trust deed must be read in light of the Act and the general law of trusts.
A trustee may comply with a procedural requirement in the trust deed but still commit a breach of trust if the trustee acts for an improper purpose, fails to consider relevant matters, acts despite a conflict, or does not properly inform themselves before making the decision.
Be careful with distributions
Distributions are one of the most common areas where breach of trust issues arise. Problems often occur because trustees:
1. fail to check or understand the terms of the trust instrument;
2. fail to identify whether a payment is income or capital;
3. make decisions without properly recording them;
4. overlook tax consequences, especially where a beneficiary lives overseas; or
5. treat previous family discussions as trustee decisions.
These issues can have real consequences. Mischaracterising income and capital may create tax problems. Paying the wrong person may amount to an unauthorised distribution. Failing to record the decision may make it difficult to prove that the trustees exercised the power properly.
Trustees should record the decision and what information they considered. The record does not need to be lengthy, but it should show that the trustees turned their minds to the right issues.
Can trustees undo a decision?
Sometimes trustees realise, after making a decision, that it has caused or may cause an adverse result. For example, they may have treated a distribution as income when it should have been capital or made a decision without appreciating a tax consequence.
Whether trustees can undo the decision depends on the circumstances. Trustees should not assume that they can reverse a decision simply because it later appears unwise or inconvenient. If a decision has already taken effect, or if reversing it would affect beneficiaries or third parties, the trustees may need Court assistance.
The Court may set aside a decision in some circumstances, particularly where trustees acted outside their powers, exercised a power for an improper purpose, failed to properly inform themselves, considered irrelevant matters, or failed to consider relevant matters. However, not every flawed decision will justify Court intervention. The Court’s focus will generally be on the lawfulness of the decision-making process, not the outcome.
Trustee liability
Trustees are personally liable for a breach of trust. Liability is also joint and several. A passive trustee may therefore be exposed to full liability for the actions of a co-trustee.
The remedy for a breach of trust is compensatory, not punitive. The aim is to restore the trust fund to the position it would have been in but for the breach.
However, not every mistake will lead to personal liability. Some breaches are technical and cause no loss. However, even a technical breach can damage trustee relationships, trigger beneficiary concerns, or lead to an application to remove a trustee.
The law recognises that even the most diligent trustee may inadvertently fall into breach. To prevent the role of trustee from becoming unduly onerous, the Act gives trustees limited avenues to seek relief from liability. For example, the Court may relieve a trustee from personal liability if the trustee acted honestly and reasonably and ought fairly to be excused.
Trustee protections have limits
Most modern trust instruments contain trustee indemnities and exclusion of liability clauses. These clauses can help trustees manage risk, but they do not provide complete protection. Under the Act, trustees cannot rely on exclusion or indemnity provisions for breaches involving dishonesty, wilful misconduct, or gross negligence.
Corporate trustees and trustee insurance may also help manage risk, but neither removes the need for proper decision-making. Directors of a corporate trustee may still have duties, and insurance policies typically contain exclusions for certain conduct.
Further information
Jackson Russell’s Private Client & Trusts team provides tailored advice to settlors, trustees and beneficiaries. We can assist with reviewing trust administration processes and advising on actual for potential breaches of trust.
