Guiding Trustees: Protecting Trustees From Loss And Liability

Chapter 2 – Beneficiary Exonerations and Consent

Introduction

Professional trustees are faced with a myriad of decisions on a daily basis – regulatory, compliance and financial accounting requirements impose a number of obligations on trustees with serious fines and penalties if they get it wrong. On top of this, trustees may be faced with unusual requests in relation to the underlying assets of the trust which could pose a degree of risk. For example, a trustee who is requested to invest in an alternative asset class will often call upon its advisor to assess the risk for the trustee and the chances of loss to the trust funds.

With this in mind, it is natural for the trustee to look to protect its position – in the first instance, it will invariably look to the protections afforded under the trust deed if there is loss. 

Prior to taking certain actions, it is relatively common for a trustee to request an indemnity from the beneficiaries, or request consent to actions the trustee is about to take. 

Can a trustee legally request an indemnity?

Most professional trustees will seek protection in the form of an indemnity from the beneficiaries of the trust. The rationale for asking for an indemnity is often two-fold; not only does this provide evidence that the beneficiary had actual knowledge of the trustee’s decision (the assumption being that a beneficiary who acknowledges the action is much less likely to claim against the action in the future, in the absence of fraud, wilful default or gross negligence on behalf of the trustee) but it also provides a trustee with comfort that they will be indemnified for loss as a result of the action they are taking.

The underlying principle of seeking an indemnity, however, is not as simple as it seems. Trustees are subject to a number of fiduciary duties, expressed in statute and case law depending on the governing law of the trust^[1]. At the heart of these duties is the concept that a trustee must not put themselves in a position where their personal interests conflict with their fiduciary duties. A request for an indemnity could be viewed as a self-interested action, on the basis that the trustee is putting its own interests ahead of the interests of the beneficiaries.

Because of this, exceptions exist which allow a trustee to request indemnities from a beneficiary - without such exceptions, the trust industry would very soon run its course.

One such exception is where the action is authorised by the terms of the trust deed applying to the trustee. As such, it is relatively common for trust deeds to provide trustees with a right of indemnity from the trust fund, both during the course of administration of the trust as well as on retirement. With this in mind, trustees are often heavily involved in negotiations when they are onboarding a new trust or taking over trusteeship.

Applicable statute and case law also needs to be considered, as that may limit the scope of a possible indemnity. Typically, the common law position that a trustee cannot and should not be indemnified for liabilities arising from its dishonesty and fraud prevails^[2]. Certain jurisdictions, such as New Zealand, have taken a step further and put this on a statutory footing: a trustee cannot be indemnified for liability arising from the trustee’s dishonesty, wilful misconduct or gross negligence^[3].

A second exception is the case of consent. A trustee may seek the consent of the beneficiaries in order to lessen the chances of the same beneficiaries challenging the action at a later date. A common method of obtaining consent is in writing, in the form of a deed, signed by the beneficiaries of the trust. Ensuring that the consent given is both valid and informed therefore becomes key. For instance, minor beneficiaries are not able to provide valid consent. Asking the guardians of any minor beneficiaries (who may themselves be beneficiaries) to provide consent may also not be sufficient.

Does the beneficiary understand what they are signing?  

As a result of the consent exception, it is relatively common in practice for trustees to include one or more beneficiaries as parties to a deed, confirming the action to be taken by the trustee. One example is a deed of distribution and indemnity, which may be used to validate distributions out of trust funds. 

Although it is usual to see beneficiaries included as parties to such a deed, a trustee should still seek to clarify if the beneficiary understands the terms of the indemnity they have been asked to give. There are various ways of confirming that a beneficiary truly understands the document they are signing. One common option is for the trustee to recommend that the beneficiary obtain separate legal advice on the document, and hold a copy of the legal advice on file. Trustees need to be aware that if payment for the advice comes out of trust funds, the advice would be viewed as part of the documentation for the trust and could theoretically be requested in an information disclosure request by other beneficiaries. 

If a beneficiary does not wish to retain their own lawyer, the trustee should consider obtaining a waiver from the beneficiary instead. Indemnity clauses in deeds are often lengthy and use complex language. As such, trustees should satisfy themselves that if a beneficiary has independently decided not to obtain advice, the language of the document they are asked to sign is clear and concise. Wording often can be included to confirm this waiver.

Payments to beneficiaries   

It is relatively common practice for trustees to also request an exoneration of liability prior to making distributions to beneficiaries. The validity of such an exoneration was one of the issues considered in the case of Sofer v SwissIndependent Trustees [2019] EWHC 2071 (Ch).

In Sofer, the English courts were asked to consider whether an exoneration of liability provided by a beneficiary in the context of loans from the trustee to the settlor (who was also a beneficiary) was valid. The beneficiaries of the trust included the settlor and his son, the Claimant. The trustee had made substantial loans over many years to the settlor, amounting to a large part of the available assets of the trust. No provision was made for security or interest. When the settlor died, his estate had insufficient assets to repay the loans, which were subsequently forgiven by the trustee. 

The Claimant attempted to recover these amounts. At issue was the exoneration clause in the trust deed, which provided that the trustee would not be liable for any loss or damage unless it was “..proved to have been caused by acts done or omissions made in personal conscious and fraudulent bad faith by the Trustee..”. The Claimant therefore had to prove this (which was held to amount to dishonest breach of trust) as the trustee sought to rely on the protection offered by the exoneration. 

In addition to the trust deed exoneration, there were separate deeds of indemnity signed by all of the parties (including the Claimant and the settlor) under which the Claimant had expressly agreed to the payments made by the trustees to the settlor. 

The High Court initially struck out the Claimant’s claim for dishonest breach of trust. The Claimant appealed and was successful in the Court of Appeal.  Given the discussion around the wording used in the exoneration clause, the decisions from both the High Court and Court of Appeal provide a number of takeaways for trustees to consider: 

• Trustees will often request that a beneficiary provide an exoneration, without further enquiry. A trustee should however consider whether the request could be said to be in the best interests of the beneficiaries, and take steps to document that this is in fact the case. It should also consider whether the action requested is an appropriate exercise of its power in the trust deed given the surrounding facts. 
• Trustees who are seeking to rely on an exoneration clause should take care to ensure that the language is clear and unambiguous. Ideally they should draw the beneficiaries’ attention to the exoneration clause. 
• Trustees should be mindful of not simply acting on the direction or instruction from a beneficiary, and should carefully consider and document all relevant facts and circumstances which justify their decision. 

This case serves as a useful example that care should be taken when drafting exonerations to ensure that the language is clear and concise, and generally as broad as possible. If the exoneration is not expressed in “plain language”, there is a risk that the party signing such a document could be viewed as not consenting to its terms. Trustees should therefore take care and act appropriately, especially if pressure is placed on the beneficiary to sign as a condition precedent to receiving a distribution. 

At Charles Russell Speechlys we are well versed in guiding trustees and beneficiaries through these issues. Please reach out to your usual contact for further information.  

[1] See Armitage v Nurse [1998] for a discussion on the irreducible core of duties of a trustee.  
[2] Again see Armitage v Nurse [1998] and Spread Trustee Company Limited v. Hutcheson and Others [2011]
[3] Trusts Act 2019 section 41.