Trustee duties and powers 

A trustee holds an office. The duties attach to the office, are owed to the beneficiaries, and are enforced by the court's inherent supervisory jurisdiction over trusts.

Keep two things apart from the start. The fiduciary obligations — no conflict, no profit — are proscriptive and are shared with agents, directors and partners. The duties in this article are the trustee's own, and many of them are positive: to invest, to account, to act impartially. A trustee is a fiduciary and more.

The core duties

To adhere to the terms of the trust. The first duty and the measure of every other. A trustee must know the terms, and a departure is a breach however well intended. Where the terms are unclear or circumstances unforeseen, the trustee may seek the court's directions — and doing so protects them.

To act personally and to act jointly. Trustees must exercise their own judgment. Delegation was historically prohibited; the trustee legislation of each jurisdiction now permits it within limits, with duties of care in selecting and supervising the delegate. Co-trustees must generally act unanimously, unless the instrument provides otherwise, and a trustee is not excused by leaving matters to a co-trustee.

To exercise care and skill. The general standard is that of an ordinary prudent person of business managing the affairs of another. A paid or professional trustee is held higher.

To invest. Australian trustee legislation adopts the prudent person standard in place of the old statutory lists of authorised investments. The trustee must have regard to specified matters, commonly including the purposes of the trust, the desirability of diversification, the risk of capital or income loss, the need for liquidity, the tax consequences, and the costs of the investment. Most jurisdictions require periodic review of investments, permit reliance on professional advice, and allow the court to offset a gain on one investment against a loss on another when assessing liability.

To act impartially between beneficiaries, including between those entitled to income and those entitled to capital, which shapes the investment strategy.

To keep accounts and to provide information. A trustee must keep proper accounts and produce them to beneficiaries on request. Disclosure of the trustee's reasons for exercising a discretion stands differently; see the beneficiaries' rights article.

To get in and preserve the trust property, and not to profit from the trust or allow a conflict — the fiduciary overlay.

Powers

Powers are what a trustee may do, as distinct from duties. They come from the instrument and from the trustee legislation, which supplies default powers of sale, leasing, insurance, maintenance and advancement, and a power to compromise claims. A power must be exercised in good faith, for the purpose for which it was conferred, and on real and genuine consideration; an exercise outside those limits may be set aside as a fraud on the power, which imports no dishonesty.

Breach of trust

A trustee in breach is liable to restore the trust fund or to pay equitable compensation. The liability is personal, and equity's own causation rules apply: the enquiry, confirmed in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484,¹ is commonly what the fund would have held had the duty been performed, assessed at judgment. Where the breach produced a profit, the trustee accounts for it, and a proprietary constructive trust may follow the property.

Trustees are liable for their own breaches, not vicariously for a co-trustee's, though passivity in the face of a known breach is itself a breach. Liability between co-trustees is generally joint and several with rights of contribution.

Defences and relief:

• Consent or acquiescence by a fully informed beneficiary of full age and capacity bars that beneficiary's claim.
• Exculpation clauses are effective to a point, and Australian instruments commonly contain them. They will not be construed to excuse dishonesty, and their reach into gross negligence is limited and contested; the drafting is construed strictly against the trustee.
• Statutory relief. The trustee legislation of each jurisdiction empowers the court to relieve a trustee wholly or partly from personal liability where they acted honestly and reasonably and ought fairly to be excused. Both limbs are required, and reasonableness does real work.
• Limitation statutes apply to most claims, but not to a claim in respect of a fraudulent breach or to recover trust property still in the trustee's hands.

Applying this in a problem question

1. Read the trust instrument first: it sets the duties and may modify the default position.
2. Identify the specific duty breached, and separate a want of care from a fiduciary conflict.
3. For investments, apply the statutory prudent person criteria rather than asking whether the investment lost money.
4. Quantify the liability by reference to what the fund would have held.
5. Work through consent, exculpation and statutory relief before concluding.

Where the authority sits

The trustee legislation of the relevant jurisdiction for investment, delegation, default powers and relief from liability, and case law for the content of the duties and the consequences of breach.