Trustees must take appropriate care in the exercise of their functions. Failure to do so may result in a charge of breach of trust, for which the trustee may be liable.
What Is A Breach Of Trust?
Any act or omission by a trustee which violates the trustee’s fiduciary duties, or which is contrary to the terms of the trust instrument pursuant to which the trustee has been appointed, may constitute a breach of trust.
Action For Breach Of Trust
Any action for breach of trust is taken against the trustee directly. A finding of liability results in a judgment against the trustee in his or its own capacity and any loss occasioned to the trust by virtue of the breach must be made good by the trustee.
The trustee shall be obliged to restore the trust to the position it was in before the breach occurred. This may be achieved by returning such assets as have been lost to the trust. However, where this is not possible, the trustee must financially compensate the trust for the loss.
Even where a breach has not resulted in any loss to the trust, the trustee must nonetheless rectify the breach and is responsible for any and all costs associated with such rectification. Similarly, in circumstances where the breach has resulted in a profit to the trustee, this profit must be surrendered to the trust without delay.
Remedies Available To Beneficiaries
As outlined above, disgruntled beneficiaries may take an action directly against the trustee. However, it may be the case that the trustee is not financially capable of making restitution to the trust. As an alternative, the beneficiaries may take an ‘action in rem’. An action in rem involves the ‘tracing’ of misappropriated trust assets. The beneficiaries must be able to identify and follow the assets as they have moved from hand to hand. An order may be made for the recovery of those assets and their restoration to the trust. It should be noted that such an order shall not be made against a third party who was a bona fide purchaser, unaware of the existence of the trust or any rights the beneficiaries of that trust may have had over the assets acquired.
Avoiding Liability For Breach Of Trust
A trustee may avoid liability for breach of trust in certain circumstances, for example;
A beneficiary who consents to or affirms a breach of trust is precluded from subsequently taking an action against the trustee on foot of that breach;
The trust deed may contain ‘exculpatory’ provisions reducing or indeed eliminating trustee liability; and
The Statute of Limitations may prevent a beneficiary from taking an action due to the passage of time.
Advice for Trustees
It is clear that consequences for a trustee acting in breach of trust are significant. To avoid a breach of trust arising, care should be taken to carefully review, understand and comply with the terms of the trust instrument and the fiduciary duties imposed by law.