1. Trustee Liability
Many people forget that a trust is not a legal entity in its own
right like a company - the trustees are the legal entity/owners of
the trust property for the benefit of the beneficiaries.
As such, trustees are personally liable for all
liabilities incurred for the trust, including debts to third
parties. This personal liability is subject to:
- the right of the trustees to be indemnified from the trust
- any clause limiting the trustees' liability to the trust assets
The trustees' limitation of liability and right to indemnity are
often confused. It is important to be aware of the distinction.
In a standard "Mr & Mrs" trust with an independent trustee,
Mr & Mrs will be trustees and beneficiaries so it is the
liability of the independent trustee (who has no beneficial
interest) that is the key focus for liability purposes.
2. Trustee Duties
The key to limiting trustee liability is to ensure the trust is
administered properly. All trustees must be aware of their
- To actively participate in trust matters;
- To act unanimously (unless the trust deed provides
- To understand and comply with the terms of the trust deed;
- To invest and manage trust assets with care, diligence and
- To keep proper records;
- To act in the best interests of the beneficiaries;
- To remain impartial between beneficiaries;
- To benefit the beneficiaries;
- Not to profit personally from their position;
- Not to delegate their powers.
Both the right of indemnity and limitation of liability clauses
discussed below are restricted to where the trustees have acted
properly, so complying with the above duties is essential.
3. Right of Indemnity
Because trustees deal with trust property for the benefit of the
beneficiaries rather than themselves, it is the beneficiaries who
incur the liabilities of performing the trust. In simple terms,
this means the trustees have the right to be reimbursed out of the
trust assets for trust expenses and liabilities related to the
trust. This reduces the amount in the trust available to the
In saying that, the liabilities must be properly incurred to be
covered by the right of indemnity. If a trustee has acted
improperly in incurring the liabilities, the entitlement to
indemnity from the trust assets is lost.
4. Limitation of Liability Clauses
In addition to right of indemnity, many trust deeds these days
also include a clause limiting the trustee's liability to the
assets of the trust. It is important to note this limitation
applies between the trustees and the beneficiaries, not other
external parties (ie: banks, agents, contractors etc).
If trustees enter in to a contract with a third party, the
trustees must ensure that the terms of that contract limit their
liability. Many contracts, such as agreement for sale and purchase
and bank documents, have a "standard" limitation of liability which
applies to independent trustees, but you need to insure the wording
of the clause is appropriate.
Where liability is intended to be limited it is prudent to
ensure that the liability is limited "to the assets of the trust as
they stand from time to time". That way if the assets have been
diminished at the time of a claim, the trustee is liable only to
the extent of the trust's assets at the time a claim is made,
rather than at the time of the contract was signed.
Note that simply adding a limitation clause to a contract in not
enough - you need to ensure all the other parties to the contract
have acknowledged it.
If you are a trustee of a trust and worried about risk, you
should seek legal advice. If you have not been actively involved
with the trust administration and decision making, you might want
to reconsider your position as a trustee.