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 assets (equitable);
  • any clause limiting the trustees' liability to the trust assets (contractual).

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 duties:

  • To actively participate in trust matters;
  • To act unanimously (unless the trust deed provides otherwise); 
  • To understand and comply with the terms of the trust deed;
  • To invest and manage trust assets with care, diligence and skill;
  • 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 beneficiaries.

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. 



Written by Brooke Courtney at 11:00





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