Trustee Duties Explained

Understanding Trustee Obligations and Duties

If you’ve been appointed as a trustee for a Self-Managed Superannuation Fund (SMSF), a testamentary trust, or family discretionary trust, it is essential to understand the significant responsibilities that come with this role. Trustees play a vital role in ensuring that the trust’s purpose is fulfilled while adhering to their fiduciary duties.

What Is a Trustee and Why Do We Need Them?

A trustee is an individual or entity appointed to manage and administer a trust in accordance with its terms and the law. Trusts are established for a variety of purposes, such as managing and protecting assets for beneficiaries or planning for future financial security. Trustees are responsible for ensuring the trust operates as intended, with the beneficiaries’ best interests at the forefront.

Whether it’s an SMSF designed to provide retirement benefits, a testamentary trust to safeguard a deceased estate, or another form of trust such as a family discretionary trust, trustees are critical in upholding the integrity of the trust structure.

Who can be a Trustee?

The eligibility requirements for being a trustee depends on the type of trust and governing laws. In general:

4. Individuals:
   1. Must be over 18 years of age;
   2. Must have the capacity to understand and carry out their duties; and
   3. Should not be bankrupt or insolvent.
5. Corporate Trustees:
   1. A company can act as a trustee, provided its directors meet the legal requirements. This structure is often used for SMSFs, family discretionary trusts and unit trusts.
6. Specific Restrictions:
   1. Some trusts, such as SMSFs prohibit individuals with criminal convictions or those who have been disqualified by the Australian Taxation Office (ATO) from acting as trustees.
   2. Testamentary trusts may specify certain individuals as trustees, often family members or close associates of the deceased.
7. Skills and suitability:
   1. While there are no legal requirements for professional qualifications, a trustee should have the skills and knowledge to fulfill their responsibilities effectively.

If you have been asked to take on the role of trustee, it is essential to carefully consider whether you have the time, knowledge and resources to carry out the duties properly, and consider obtaining professional guidance.

What Are the Obligations and Duties of a Trustee?

Trustees are bound by fiduciary duties (see below), which require them to act with loyalty, care, and good faith toward the beneficiaries. Key obligations include:

1. Acting in Accordance with the Trust Deed
   The trust deed is the governing document for the trust. Trustees must understand and follow its terms.
2. Acting in the Best Interests of Beneficiaries
   Trustees must always prioritise the interests of beneficiaries over their own.
3. Avoiding Conflicts of Interest
   Any decision-making must be free from personal gain or conflicting interests.
4. Keeping Accurate Records
   Trustees are required to maintain detailed records of all transactions and decisions.
5. Complying with Legal and Regulatory Requirements
   This includes understanding relevant laws such as the Superannuation Industry (Supervision) Act 1993 for SMSFs or the Trustee Act 1925 (NSW) for other trusts.

What Constitutes a Breach of Trustee Duties?

A breach occurs when a trustee fails to fulfil their obligations, either intentionally or inadvertently. Examples of breaches include:

• Misusing trust assets: using trust funds for personal gain, unauthorised expenses or purposes not permitted under the trust deed.
• Failing to follow the terms of the trust deed: Deviating from the instructions or terms outlined in the trust deed, such as making distributions to unintended beneficiaries or investing in prohibited assets.
• Conflicts of interest: Engaging in activities where the trustee’s personal interests’ conflict with their duties to the trust, such as purchasing trust property for themselves without proper authorisation.
• Failing to act in good faith: Acting dishonestly or in a way that undermines the trust’s purpose or the beneficiary’s/beneficiaries’ interest/s.

The consequences of breaching trustee duties can be severe and include:

• Personal liability: Trustees may be personally liable for any losses incurred by the trust as a result of their actions or omissions. They could be required to repay misused funds or restore the trust to its original position.
• Legal Action: Beneficiaries or co-trustees may initiate legal proceedings against the trustee for compensation or removal from their role.
• Criminal Penalties: In cases of fraud or deliberate misconduct, trustees may face criminal charges resulting in fines or imprisonment.

How to Prevent a Breach

To avoid or minimise the risk of breaching your trustee duties:

1. Understand the Trust Deed: Familiarise yourself with the trust’s terms and ensure all actions align with its provisions.
2. Act Prudently: Exercise care and diligence in managing trust assets. For example, seek professional advice before making significant investment decisions.
3. Maintain Accurate Records: Keep detailed records of transactions, decisions and communications to demonstrate compliance with your obligations.
4. Avoid Conflicts of Interest: Disclose any potential conflicts and, where necessary, seek independent advice or court approval before proceeding.
5. Seek Professional Advice: If you are uncertain about your duties or a specific situation, consult with legal or financial professionals experienced in trusts.

Why This Matters

You don’t need to be a professional to find yourself appointed as a trustee. Whether for a family member’s estate or as part of an SMSF, many people are entrusted with this significant responsibility. Understanding and adhering to your duties is not only a legal requirement but also a way to safeguard the trust’s purpose and beneficiaries.

Need Guidance?

If you’ve been appointed as a trustee and are unsure whether you should accept the role or want to better understand your obligations, we’re here to help.

Contact us today to ensure you’re well-informed and prepared to fulfil your responsibilities with confidence.

FAQ:

• What is a Trust, and why is it created? A trust is a legal arrangement where a trustee manages assets on behalf of beneficiaries. Trusts are often created for purposes such as estate planning, protecting family wealth, or managing superannuation funds.

• Can I be appointed as a trustee if I am also a beneficiary? Yes, in many cases a beneficiary can also act as a trustee, but there are important considerations. As a trustee, you are required to act in the best interests of all beneficiaries, not just yourself. This can lead to potential conflicts of interest, particularly if there are multiple beneficiaries. Some trust deeds prohibit a beneficiary from acting as trustee, so it is essential to review the terms of the trust. Additionally, certain types of trusts, such as SMSFs, have specific rules governing this arrangement. Always seek legal advice if you are both beneficiary and a trustee to ensure you can manage the dual role appropriately.

• Can there be more than one trustee? Yes, many trusts appoint multiple trustees to share responsibilities and provide checks and balances. However, co-trustees must work collaboratively, and all decisions must align with the trust deed and legal requirements.

• What are Fiduciary Duties? Fiduciary duties are the legal and ethical obligations of trustees to act in the best interests of the beneficiaries of the trust. They underpin the trustee-beneficiary relationship, ensuring trustees are held to a high standard of accountability and trustworthiness. These duties require the trustees to:

1. Act with Loyalty: Always prioritise the beneficiaries’ interests above their own or anyone else’s;
2. Act with Care: Manage the trust assets diligently and prudently, as if they were their own; and
3. Act in Good Faith: Make Decisions honestly and with the intention of fulfilling the trust’s purpose.

• Can I decline an appointment as trustee? Yes. If you feel unable or unwilling to take on the responsibilities, you can decline the appointment. It is crucial to seek legal advice before making this decision to fully understand the implications.

• What should I do if I no longer want to be a trustee? If you wish to step down as a trustee, you can resign but this process must comply with the terms of the trust deed and relevant laws. Often, a replacement trustee must be appointed before your resignation is effective. Seek legal advice to ensure a smooth transition.

• What is the difference between a trustee and an executor? A trustee manages the trust and its assets according to the terms of the trust deed, often for an extended period of time. An executor, on the other hand, is responsible for administering a deceased person’s estate, (this may include establishing a trust if specified in the will). The executor’s role generally ends once the estate is fully distributed.

• Can trustees get paid? Yes, trustees may be entitled to reasonable renumeration for their services. This depends on the terms of the trust deed or applicable laws. If the trust deed does not specify payment, trustees can apply to the court for remuneration. However, trustees must not take payment without proper authorisation.

• Are there any tax implications for trustees? Yes, trustees have specific tax obligations such as lodging trust tax returns and distributing income to beneficiaries in accordance with the trust deed. Failing to comply with tax laws can results in penalties. It is essential to seek professional advice on these matters.

DISCLAIMER

This article reflects the current law at the time of publication. It is intended for informational purposes only and does not constitute legal advice. The actual decisions in each case are summarised for general understanding. For specific legal guidance in relation to your situation, please consult with a qualified legal professional.