Trustee Duties and Powers

Trusts > Trustee Duties and Powers

Candidates often lose marks because they confuse the trustees' mandatory duties with their permissive powers, and they fail to apply the statutory duty of care from the Trustee Act 2000, which governs most trustee conduct.

What Is Trustee Duties and Powers in SQE1?

A trustee's role is defined by law and by the trust deed. Duties are mandatory obligations that trustees must perform; failure constitutes breach of trust. Powers are discretionary authorities that trustees may exercise at their discretion (though they must exercise them honestly and for the proper purpose). The Trustee Act 2000 imposes a statutory duty of care on trustees in respect of most functions. Understanding these distinctions is essential: a trustee who fails to invest prudently breaches the duty to invest; a trustee who fails to consider whether to use discretionary powers breaches the duty to exercise discretion.

The creation and constitution of trusts establish the trustee's basic role; understanding trustee duties determines what the trustee must and must not do with the property.

This topic connects closely to appointment and removal of trustees and is a key part of the Trusts syllabus for SQE1.

Key Principles for SQE1

• Duty of Care (Trustee Act 2000, s.1): Trustees must exercise the care and skill that a reasonable person would exercise when dealing with their own affairs. This is assessed objectively, but the standard is adjusted upward if the trustee possesses specialized knowledge (e.g., a professional trustee must act with professional standard). The duty of care applies to all trustee functions: investment, delegation, accounting, and management decisions.

• Duty to Know the Trust Terms: Trustees must acquire knowledge of the trust deed and the beneficial interests. This is a foundational duty; trustees cannot properly discharge other duties without understanding the scope of the trust. Trustee obligations vary according to the trust terms; a discretionary trustee has different obligations than a fixed trustee.

• Duty of Honesty and Impartiality: Trustees must act honestly in the interests of all beneficiaries. They must be impartial, treating fixed beneficiaries fairly and, in discretionary trusts, not favoring one beneficiary over another without proper cause. A trustee cannot benefit themselves at the expense of the trust or the beneficiaries. They must avoid conflicts of interest.

• Duty to Invest Prudently: Trustees have power to invest the trust fund. When exercising this power, they must act with the duty of care and must have regard to the suitability of the investment to the trust and to the need for diversification. The trustee must review investments periodically to ensure they remain suitable. In modern law (Trustee Act 2000, s.4), trustees may invest in any investment that a prudent investor might invest, subject to any restrictions in the trust deed.

• Duty to Provide Accounts: Trustees must keep accounts of the trust property and its transactions and must provide beneficiaries with regular accounts showing receipts, payments, and the current state of the trust fund. These must be accurate and must be provided within a reasonable time.

• Power of Delegation: Trustees may delegate certain functions to agents (e.g., investment managers, lawyers). However, the Trustee Act 2000, s.11 imposes conditions: the trustee must be satisfied that the agent is fit for the role, must give adequate instructions, and must monitor the agent's performance. The trustee remains liable if the agent fails. Trustees cannot delegate the decision-making function itself (the trustee cannot delegate the exercise of discretion).

• Discretionary Duties: In a discretionary trust, the trustee has power to decide whom to benefit and in what proportions. However, this is not an unfettered power. The trustee must consider whether to exercise the discretion (and have regard to all beneficiaries), but is not obliged to benefit any particular beneficiary. The trustee must act honestly and must not exercise the discretion capriciously or for an improper purpose.

Exam tip

A frequent mistake is treating a power (e.g., the power to invest or the discretion to distribute) as imposing no duty on the trustee. In fact, trustees must consider whether to exercise powers and must do so honestly and with the duty of care. The question is not whether a trustee has exercised a power, but whether the trustee has breached the duty to consider exercising it.

How This Appears in SQE1 Questions

A scenario might be: "Trustees are holding shares in a company that is now in financial distress. The trust deed gives the trustees discretion to sell. Trustees are reluctant to crystallize losses and decide to hold on. Has the trustee breached duty?" The answer requires understanding that the trustee has a duty to consider whether to exercise discretion and to review investments periodically, and that a refusal based on a reluctance to realize losses may breach the duty to invest prudently.

This is a classic SQE1 trap.

Common Mistakes Students Make

• Confusing the power to invest (which trustees have) with the duty to invest prudently (which they must comply with when exercising the power)
• Assuming trustees are in breach merely because they have not exercised a discretion; breach requires a failure to consider the discretion or to act honestly
• Overlooking the monitoring requirement imposed on trustees who delegate functions; the trustee cannot contract out of liability if the agent fails
• Treating the statutory duty of care (Trustee Act 2000, s.1) as applying only to investment, when it applies to most trustee functions
• Misidentifying what "impartiality" means; it does not require equal distribution, but rather that the trustee not favor one beneficiary over another without justified reason

Quick Summary

• Trustees have mandatory duties and discretionary powers; failure to perform duties breaches trust, but failure to exercise powers (if exercised honestly) does not.
• The duty of care requires trustees to act with the care and skill a reasonable person would exercise in their own affairs; the standard is adjusted upward for professional trustees.
• Trustees must know the trust terms, act honestly and impartially, invest prudently, and provide accounts to beneficiaries.
• Trustees may delegate certain functions but must ensure the agent is fit, must give adequate instructions, and must monitor performance.
• In discretionary trusts, the trustee's duty is to consider whether to exercise discretion and to do so honestly; the trustee is not obliged to benefit any particular beneficiary.

Want to test this now? Try a few SQE1-style questions below before moving on.

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Related Topics

• SQE1 Trusts: Complete Guide
• Appointment and Removal of Trustees
• Breach of Trust and Remedies
• Beneficiaries' Rights

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