Trustees: stop, look and distribute- Part III

• Blog

This is the third in a five part mini-series about the duties and risks of being a trustee. You can read part one here, and part two here.

In this third instalment, Angelo Micciche explains about trustee protection and important safeguards.

What protection does a trustee have, and what steps should they take before making a distribution?

There are a number of protections that, when properly advised, a trustee shall already have in place as well as those that already exist. Notwithstanding these protections, there are certain practical steps that can be taken to strengthen the trustee’s position before a distribution of trust assets is made. The main steps are listed below, in descending order of desirability and likely effectiveness.

1. Retention – The assets may be retained for a reasonable period to pay for known but as yet not quantified liabilities, such as tax or professional fees. The potential tax consequences of retaining trust assets for a retiring trustee should be investigated before deciding upon the retention of assets: estimating and agreeing such or any other liabilities with HMRC before they occur is a sensible measure
2. An application to the court for directions – This may be required to cover the trustee’s position with regard to what may be retained, and for how long, without being at risk of being in breach of the trust. Before making distributions, trustees must not only consider present claims of policyholders as creditors against the estate, but also future, contingent claims that have not yet crystallised, such as the insidious health effects of asbestos. An insurance scheme may be in place, but what if that were to fail? In these circumstances do the trustees retain a significant portion of the assets or delay making the distribution? If they did so they could be in breach against the beneficiaries. On the other hand, if all of the trust assets were distributed, future creditors could claim that the trustees are personally liable for choosing beneficiaries over claims from creditors. Such personal liability is strict, even if the trustee is not told about it by the creditor nor aware of it when making a distribution. Seeking direction from the court as to whether or not to make a full distribution or to retain a certain sum, provides complete protection from personal liabilities.
3. Legal charge – A trustee can take a legal charge over former trust property. This is rarely done in practice, but can allow the trustee to ‘keep a foot in the door’ when a liability is anticipated but does not readily crystallise
4. Express covenant of indemnity – This may be entered into with new or continuing trustees, if the retiring trustee is transferring his title to new trustees. This covenant can be included within a deed of appointment and retirement. It can also be made between the trustee and the beneficiaries. Such indemnities would have contractual force, and may be enforceable in other jurisdictions. It is sensible for the trustee to insert a clause that limits personal liability to the trust assets in their possession, or a release to exclude all personal liability. This would include liability in contract and tort (to which a beneficiary may be unlikely to agree in practice) to exclude liability after they have parted with the assets, or even after they have retired as a trustee
5. Right of indemnity – Trustees have a right of indemnity in the general law as long as their actions are made in good faith and within the scope of their powers
6. Insurance – A professional trustee may have indemnity insurance or policies against specific risks, such as future tax charges, or to cover the subsequent discovery of a missing beneficiary. The premium can usually be charged to the estate, but specific provision in the trust document must be made if the policy is to cover breaches of trust.

Look out for part four to find out about necessary considerations regarding beneficiaries.

If you need advice about the management of trusts or taxation, contacts GA’s wills, trusts and probate team on 01752 203500.

If you need advice regarding the removal of a trustee, or to make a claim against one, please contact me directly via angelo.micciche@GAsolicitors.com or call 01752 203500.

Angelo Micciche, solicitor, contentious probate