Guide on Trust Funds – Part 5
The trustee is the legal owner of the trust property, although not the beneficial owner, and is responsible for managing the trust fund. Being the legal owner, all of the transactions of the trust are carried out in the name of the trustee. The trustee signs all documents for and on behalf of the trust, i.e., in its capacity as trustee of the trust.
As a trust is not a separate legal entity, the trustee bears the duties and responsibilities in relation to the trust. As such, the trustee is personally liable to creditors and accountable to beneficiaries.
The trustee can limit their personal liability by making it clear that any contract or promise is supported by the trust’s assets only and not by the trustee’s own personal assets.
The trustee’s overriding duty is to obey the terms of the trust deed. The trustee also has a duty to act in the best interests of the beneficiaries. There are many other duties imposed on the trustee by law. In summary, these are:
- Trustees must carry out the terms of the trust;
- Trustees must act in good faith;
- Trustees must preserve the trust assets;
- Trustees must exercise reasonable care in the administration of the trust;
- Trustees must not benefit from their position as trustee;
- Trustees must not put themselves in a position of conflict of compromise;
Trustees must keep proper accounts and records.
In addition to a trustee’s duties, which the trustee must carry out, the trustee also has the choice to use “powers”. Powers under many trust deeds include the power to buy assets, dispose of them at any time, mortgage assets for the purposes of undertaking borrowings, and so on.
Who should be the Trustee?
As the trustee is personally liable for the debts and transactions they undertake on behalf of the trust, best practice is to use a company as trustee, for the following reasons:
- It is easier to effect changes of control;
- A company never dies – this saves the expense of transferring assets to new trustees on the death or retirement of the existing trustees; and
- The company should ideally have no significant assets of its own (if its only role is to act as corporate trustee) which could be exposed to the creditors of the trust.
Although there are circumstances in which the corporate trustee can be personally liable, a corporate trustee still generally offers greater protection than an individual being the trustee.
Therefore, it is recommended that, where possible, a company should be the trustee.
It is generally preferable to have separate trustees for the following reasons:
- it avoids the need to prove which assets belong to which trust.; and
there is a risk that a creditor could get access to the assets of all trusts for which the trustee acts, i.e., creditors of one trust may access assets of the others.