The role of a trustee

Trusts have long been used to help manage and direct private wealth; the first recorded use of them in England dates back to the 12th century. Family members or friends may be asked to act as trustees of a trust, and their natural inclination to help may be hindered by a lack of knowledge and an understandable fear of the unknown. So, what is a trust and what does becoming a trustee entail?

The following mainly applies to trusts that are governed by the law of England and Wales.

What are trusts?

A trust is a legally constituted arrangement, governed by the trust instrument (a written document that outlines the terms of a trust, usually a deed) where one person (although there can be more) known as the settlor transfers an asset or assets to other people – the trustees – who become the legal owners of the assets and are legally bound to manage and use them in the best interests of the beneficiaries ie the beneficial owners of the assets.

Some or all of the parties may be the same people, eg the settlor may also be a trustee, or a trustee may be a beneficiary. There are normally at least two trustees unless a trust corporation is appointed.

What are a trustee’s responsibilities?

A trustee is responsible for managing the trust’s assets for the benefit of the beneficiaries.

There are various duties, responsibilities, and powers trustees hold; some will be contained in the trust instrument, while others are arise from statute.

A trustee’s duties and powers are fiduciary in nature, meaning that they must always act exclusively in the best interests of the trust and its beneficiaries, and not for their own benefit or the benefit of any other third party.

Prior to accepting trusteeship, a potential trustee must ensure that:

• There’s no conflict of interest between their own personal circumstances and the personal circumstances of the beneficiaries,
• They have read and understood the trust deed and any other relevant documentation,
• They understand the nature of the beneficiaries’ interests and know enough about their personal circumstances to allow them to correctly manage the trust,
• There are no outstanding breaches of trust by any existing trustees, and
• They understand the extent of the trust property.

The general duties of a trustee are to:

1. Observe and act under the terms of the trust in accordance with the trust instrument.
2. Usually provide an income for the beneficiaries and preserve the capital value of the trust.
3. Take control of the trust property and take steps to safeguard it.
4. Take reasonable care. Trustees must act reasonably in all matters relating to the trust. What is considered reasonable varies according to whether a trustee is unpaid or a professional trustee.
5. Keep and provide clear and accurate accounts of the trust.
6. Be actively involved in all decision-making.
7. Act personally. The duty of a trustee is a personal one and should not normally be delegated. There are statutory powers that enable trustees to delegate administrative functions, but this excludes:

• Any function relating to whether or in what way any assets of the trust should be distributed,
• Any power to decide whether any fees or other payment due should be made out of trust income or capital, and
• Any power to appoint a person to be a trustee of the trust.

Trustee powers

A trustee’s exact powers will be set out in the trust instrument, but statute provides certain general powers, including investment, dealing with land, delegation to agents, nominees, or custodians, and distributing or lending the trust fund to beneficiaries.

A trustee may be given wide discretion over who may benefit and when, or this may be more rigidly dictated by the trust instrument. Either way, they must weigh up the needs of the various beneficiaries before making discretionary distributions.

Corporate trustees

As well as individuals, companies can be the trustees of trusts. The trustees of a trust may be all individuals, all companies, or a mixture of individuals and companies.

There are two types of company that can be a trustee: trustee companies and trust corporations.

A trustee company is simply a company set up for the purpose of acting as trustee. Typically, trustee companies have no assets and are limited by guarantee (the directors being the guarantors).

A trust corporation must meet various additional requirements, the most significant of which is having paid up share capital of at least £100,000. The main advantage of a trust corporation over a trust company is that it can act as a sole trustee. It can also act as an executor, which a trust company cannot.

Many professional firms, including ours, have their own in-house corporate trustees, which can be appointed as a trustee of a client’s trust, often instead of appointing the partner advising. Alternatively, some families may prefer to set up their own private corporate trustee(s). Typically, the individuals that would otherwise be the trustees in their individual capacities will be the directors of the corporate trustee.

Unless a trust corporation with the requisite £100,000 is being set up, usually two trust companies will be created, since a sole trustee, including a trust company, cannot give valid receipt for the disposal of land. Some trust deeds may also specify a minimum number of trustees, or that a minimum number of trustees are required to do something specific, such as advance capital.

Advantages of corporate trustees

Companies are immortal. An individual ceases to be a trustee on their death, so in extreme cases this can leave the trust without a trustee altogether, which can be expensive to resolve.

If an individual trustee loses mental capacity, this can also be expensive to resolve, whereas with a corporate trustee, another director will simply step in. The director who had lost capacity would ultimately need removing, but in the meantime the corporate trustee can carry on acting as trustee via the other directors. Professional corporate trustees are likely to have many directors, so there will always be someone to step into the breach.

Having multiple directors can also make it easier to get documentation signed if someone is uncontactable. Also, when a trustee retires/is appointed, rather than having to change every Land Registry title, bank and investment account, only the companies’ directors at Companies House need changing.

As the directors of a corporate trust owe a fiduciary duty to the company, not to the trust’s beneficiaries, this reduces the direct personal liability of the individual who would otherwise be a trustee. This can be appealing to a friend or family member who may be concerned about acting as a trustee in their personal capacity.

However, there are additional set-up and running costs for trustee companies, as accounts and confirmation statements will need filing with Companies House. Anyone considering setting up a private corporate trustee should weigh these up against the benefits.

What makes a good trustee?

Trustees are usually relevant professionals, family members, close family friends, or a combination of the above. They should always operate with integrity, honesty, loyalty, good faith, and impartiality.

A good trustee will be able to navigate and anticipate any difficulties when dealing with different beneficiaries’ wants and needs, as well as manage the assets of the trust so that they increase in value and can benefit the beneficiaries for many years to come.

If you’d like more information on the process of appointing a trustee and how they could work for you and your family, please get in touch with Will Leonard.