Together with their fiduciary duties, trustees owe duties of skill and care in the administration of trusts, both at common law and, in certain circumstances, under the Trustee Act 2000. This affects both professional and lay trustees. Understanding such duties and obligations is essential to acting successfully as a trustee and avoiding criticism.
The common law
A trustee may sufficiently discharge their duty if, when managing trust affairs, ‘they take all those precautions that an ordinary prudent man of business would take in managing similar affairs of their own’ (Speight v Gaunt (1883) 9 App Cas 1 HL).
The benchmark is not what an ordinary prudent man of business would do if they had only themselves to consider, but what they would do if they had a moral obligation to provide for others (Re Whiteley (1886) 33 Ch D 347 at 355).
This test is objective and therefore the standard of care cannot be reduced by referring to subjective factors. The standard of care however may increase in the case of trust corporations and other professional trustees acting.
The statutory duty of care
The standard of care imposed by section 1(1) of the Trustee Act 2000 requires a trustee to exercise such care and skill as is reasonable in the circumstances.
Emphasis is placed on:
- Any special knowledge or experience that a trustee has or holds themselves out as having.
- If acting as a trustee during a business or profession, then to any special knowledge or experience that it is reasonable to expect of a person acting during that kind of business or profession.
The statutory duty of care requires all the circumstances to be considered in every case.
When do the common law and statutory duties of care apply?
The Trustee Act 2000 applies to anything done after 01 February 2001 in relation to any trust whenever created, subject to special restrictions for certain trusts, such as pension scheme trustees.
The statutory duty of care applies to the functions set out in Schedule 1 of the Trustee Act 2000. This means that the common law duty of care shall apply in all cases where the relevant act or omission occurred prior to 01 February 2001, and in any case where Schedule 1 does not specifically provide.
In brief, Schedule 1 applies the statutory duty of care to areas such as:
- The exercise of powers of investment;
- The insurance of property;
- Entering into arrangements with nominees, custodians and agents;
- Dealing with reversionary interests; and
- Valuing trust assets.
What are the consequences for a trustee of breaching a duty of care?
When a trustee is in breach of trust generally (i.e. failing to comply with the terms of the trust or the fiduciary duty of loyalty) the trustee has a personal liability to reconstitute the trust fund. This involves making specific restitution where possible, or by paying equitable compensation for all losses that would not have occurred ‘but for’ the breach of trust.
For a breach of the common law or statutory duty of care and skill, the trustee's liability is different in two ways:
- Although they are liable to pay compensation, the common law rules on causation, remoteness of damages, and the measure of damages apply. The reason for this is that although this is a breach of duty committed by a fiduciary, this is not a breach of fiduciary duty.
- Although a trustee is primarily liable to pay compensation to the trust fund itself, they may also owe a duty of skill and care to individual beneficiaries.
How our Private Wealth team can assist
Our Private Wealth team regularly advises trustees on their duties of skill and care. Some examples are included below:
- Advising trustees on fulfilling the testator/settlor’s wishes;
- Advising trustees of a will trust on the best trust structure to suit the trust’s beneficiaries, and whether to use their general powers of appointment to make adjustments;
- Advising trustees on whether to use their express powers of resettlement to resettle funds from a discretionary will trust onto the terms of a vulnerable beneficiary trust for a vulnerable beneficiary;
- Advising trustees of a bereaved minors trust on using their statutory powers of advancement;
- Advising trustees on the drafting of the trust deed, identifying issues and advising on how these may be rectified; and
- Advising settlors on their choice of trustees. Your choice of trustees is important to mitigate the risk of conflict. Appointing professional trustee(s) will result in professional fees for the trust but can provide valuable impartiality.
