What are the responsibilities of a trustee?
We are frequently asked what the responsibilities of a trustee are, and sadly it is one that is very difficult answer adequately. We can provide some fairly generic advice but precise advice is often tailored to each case.
So what is a trustee? Trustees must look after whatever cash or property is held by them in trust and they must ensure that they balance the needs of the different classes of beneficiaries. Sadly, this is not desperately helpful advice and at the end of the day possibly the best way to achieve these objectives is to get professional advice from a suitably qualified specialist. In the era of Internet-based advice and the increasing popularity of “do it yourself law”, it is becoming more common to see trustees breaching their duties because of a misunderstanding or misguidance.
However, there have been several cases recently which show just how important it is to seek professional advice. Inevitably these case only touch on two specific trustee duties but they are probably two of the most important duties.
Do you pay tax on money received from a trust?
The first case relates to an estate, but the basic principles are completely valid for any Trustee type role. All people acting in the role of trustees are responsible for paying any tax that is due on trust property or as a result of any “Chargeable event “affecting the trust. In this case, an executor had a large inheritance tax bill that was payable on a property.
Tax law provides that where a property is unsold, inheritance tax can be paid by instalments. The executor was persuaded to transfer the property to the ultimate beneficiary who promised that he would pay the tax that was due. Unfortunately the beneficiary promptly hightailed it off to a jurisdiction where he was out of reach of the English Courts and failed to pay the tax. HM Revenue and Customs sued the executor for the tax. The executor had to find somewhere in the order of quarter of a million pounds to pay this tax.
Possibly two morals are attached to this story. First is make sure that you take advice from a specialist as to the extent of any liabilities attached to your role, and the second is that no trustee should ever part with funds until all liabilities are cleared, or some sort of security has been obtained for the liabilities.
Responsible management of a trust
The second case involves the trustees of a small pension fund worth about £2m. In this case, the trustees decided to invest substantially all of the pension fund in a rather complicated Swiss investment. This investment fund promised returns of 1% per month. The Trustees failed to get any form of advice from Solicitors, Accountants or Investment Advisers; clearly they thought they knew best! In addition to this, the trustees did not look at all at the costs associated with this investment.
Within a couple of years the Swiss investment fund had not only gone bust, but in the meantime had subjected the pension fund to charges which were equivalent to approximately 35% of the money originally invested. The pension trustees were sued for money that was lost and they became personally liable to reimburse the pension fund.
There are a number of lessons to be learned from this case. Firstly, any trustees who are investing or looking after money must remember to diversify their investment. Investing in one single fund is always high risk – it is the old problem of putting all your eggs in one basket. Secondly, trustees need to consider the costs of investment. Sadly these days there can be some very high costs hidden behind investments and those costs will sometimes wipe out any investment growth.
Why the Trustees decided to go ahead without any professional advice is not clear. Any professional adviser, be it a Lawyer advising trustees on their legal duties, or an Investment Adviser advising against the sort of investment policy undertaken by these trustees, they were clearly seeking to get an above-average return and were ignoring the fundamental principle that applies to almost all walks of life namely that “If it looks too good to be true then it probably it is too good to be true.”
Setting up a trust
The above cases are clear illustrations of the dangers of failing to understand the duties of a Trustee and trying to do something without getting specialist advice. Anybody who finds themselves in the position of being responsible for funds that are intended for somebody else, broadly speaking this covers most roles such as trustees or executors, should get proper advice. Professional advice does incur expenses for the trust, however often seeking professional advice in the first instance will save you money in the long run.
There are many more duties to being a Trustee in addition to the two examples above. However they are good illustrations of some of the duties and risks associated with being a Trustee.
At Herrington Carmichael we have a specialist private client team with many years of experience advising trustees, we can advise not only on the general principles of trustee responsibility, but we can also give advice on many issues including assessment policy. We are not however Investment Advisers and where specific investment advice required, we would always recommend you to a qualified Investment Adviser.
For further advice on acting as an executor or trustee or forming trusts please contact a member of our private client team.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
Award winning legal advice
We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2020 by Legal 500 and Alistair McArthur is ranked in Chambers 2020.