Pro Legal

More compliance for Trusts

In my last article, I summarised some of the key changes to Trust Law arising from the Trusts Act 2019, which comes into force on 30 January 2021. One of the key changes.

The Act aims to make trusts more accessible and to strengthen the ability of beneficiaries to hold trustees to account. In doing this, the Act increases compliance requirements for trustees, which will likely increase the costs to operate and maintain a trust, and increases risks associated with being a trustee of a trust.

Requirement to keep core trust documents

As mentioned in my previous article, Trustees are required to keep core trust documents necessary for the administration of the trust.

Keeping the core trust documents together is clearly prudent and sensible, however at present the documents may not all be held together (e.g. some with trustees and some with advisers, lawyers and accountants). It is permissible for one trustee to hold most of the documents but each trustee must hold the trust deed and any variation of those terms. Where one trustee is to hold most of the documents, they will need to be held in a manner to allow the other trustees to access them easily.

Disclosure of information to beneficiaries

The Act creates a presumption that a trustee must make ‘basic trust information’ available to every beneficiary and ‘trust information’ available to beneficiaries who request it.

Before any information is provided the trustees must consider a range of factors and may choose to withhold the information if the trustees “reasonably consider” that the information should not be disclosed.

In either scenario (disclosure of information or non- disclosure) there will be ongoing requirements to update information previously provided and to review a decision to withhold disclosure of the information.

Review of Trustee decisions

A beneficiary will be able to apply to the court to review “the act, omission or decision” of a trustee “on the ground that the act, omission, or decision was not or is not reasonably open to the trustee in the circumstances.”

We will have to wait to see how this will work in practice, however we may see beneficiaries challenging trustee decisions more frequently particularly in circumstances that could be considered “contentious”.

What I suspect may occur is that trustees will seek professional advice more frequently for decisions for which they would not have previously done so. By way of an example, a trustee may now seek advice from a financial adviser on how to invest funds from the sale of property rather than placing the funds with the trust’s bank as they have done previously – where a court is considering whether a trustee is liable for a breach of the duty “to invest prudently to the applicable standard” the court can consider if the “trust investments have been diversified, so far as is appropriate to the circumstances of the trust” and whether “the investment was made in accordance with any investment strategy”.

Exemption and Liability Clauses

Following on from the increased compliance, is the inability for a trust deed (both new and existing) under the new Act to limit a trustee’s liability for breach of trust arising from dishonesty, willful misconduct or gross negligence (rather than ‘ordinary’ negligence), and does not allow a trustee to be indemnified out of trust property for such breaches. This means that trustees can no longer rely on broad indemnity clauses that purport to protect them against gross negligence.

You may consider that this is fair and reasonable, however when determining if a trustee has been grossly negligent, the Courts will consider:

The circumstances, nature and seriousness of the breach;

The trustee’s knowledge and intention relating to the breach;

The trustee’s knowledge and skills and whether the trustee has been paid;

The purpose for which the trustee was appointed;

The type of trust, including the degree to which the trust is part of a commercial arrangement, the assets held by the trust, how the assets are used, and how the trust operates.

While the threshold for gross negligence has been set very high, these changes may result in a trustee’s exposure to liability increasing which some trustees may not wish to carry.

Where professional persons, such as lawyers and accountants, are still happy to act as trustees, we will expect that they will become more involved in the day-to-day affairs of the trust.

We hope that the above gives an idea of how working with trusts may change and importantly how it could mean that the increase in the time and cost of administering some trusts, will result in some trusts no longer being cost-effective.