Jersey: Trustee's Indemnities On Distribution - More Than Reasonable Security

Last Updated: 21 October 2015
Article by David Dorgan


When a trustee resigns, retires or is removed from office it is under a statutory obligation by Article 34 of the Trusts (Jersey) Law 1984 (as amended) (the Trusts Law) to surrender the trust property and upon doing so is released from liability to any beneficiary, trustee or person interested under the trust except for liability arising from any breach of trust to which it was a party or in respect of actions to recover trust property in its possession or its proceeds. But what is the position where a trustee parts with part of the trust fund but remains a trustee of the remainder?


Because trusts do not have separate legal personality a trustee remains personally liable for third party contractual, tortious or taxation liabilities incurred or arising from its office as trustee. Whilst in office a trustee has possession or control of the trust property and can therefore directly discharge properly incurred liabilities from it, but after leaving office the trustee no longer possesses or controls the trust property yet remains personally liable. The greatest fear of a retired trustee is of being assessed for an unforeseen tax liability arising from its trusteeship and then finding that it is not possible to have that liability discharged out of the trust fund.

Due to the onerous nature of trusteeship, professional trustees expect not only to be remunerated but also protected in respect of any personal liability whilst in office and thereafter. These concerns were only partly dealt with by Article 34(2) of the Trusts Law under which "... A trustee who resigns, retires or is removed may require to be provided with reasonable security for liabilities whether existing, future, contingent or otherwise before surrendering trust property". However Article 34(2) is silent upon whether a trustee, who distributes or transfers trust property to beneficiaries or other trustees but remains as trustee of the remainder, can require to be provided with reasonable security for third party liabilities.

Under English case law Lord Roskill in Roome v Edwards [1981] said "Persons, whether professional men or not, who accept appointment as trustees ... are clearly at risk ... and have only themselves to blame if they accept the obligations of trustees without ensuring that they are sufficiently and effectively protected whether by their beneficiaries or otherwise for fiscal or other liabilities which fall on them personally...".

Trustees have to protect themselves in respect of third party liabilities arising from their trusteeship and cannot expect any assistance or sympathy from the court if they do not do so. Consequently the practice has developed of including a contractual indemnity within an instrument of appointment and retirement of trustees under which a retiring trustee preserves its right to claim against the trust property to discharge liabilities arising from its trusteeship notwithstanding transferring possession and control of it to its successor as otherwise it would have to meet them personally.


As the term reasonable security was left undefined by both statute and subsequent judicial interpretation, a retiring trustee invariably insists on the maximum protection permitted by the Trusts Law, namely for all liabilities except for breach of trust to which it was party and in respect of actions against it to recover trust property or the proceeds of it. Almost without exception the indemnity required is for the full value of the trust fund and unlimited in time, which is claimed to be "reasonable security" on the basis that a retiring trustee should be in no worse position in respect of protection against personal liability for third party liabilities arising from its trusteeship than if it had remained as trustee.

However the practice has gone a stage further by seeking to attach that right to trust property after distribution to beneficiaries and it is this which causes the greatest problems - and often the greatest expense - on a change of trusteeship. This was initially achieved by the retiring trustee insisting on a provision in the instrument of appointment of retirement under which the new trustee undertook that it would not make any distribution to a beneficiary unless it first procured from that beneficiary an indemnity limited to the value of the distribution.

Some qualification has developed to enable distributions to be made up to a certain amount or a certain percentage of the trust fund without any indemnity being required from the beneficiary because beneficiaries were not always willing to give indemnities and/or because the cost of putting the indemnity in place was disproportionate to the amount being distributed.

There then developed a school of thought that an incoming trustee should not fetter its discretion by agreeing on its appointment to make its ability to distribute to beneficiaries conditional upon them giving indemnities. Consequently the practice developed of providing in the instrument of retirement and appointment that the trustee did not have to procure an indemnity from the beneficiary as a condition of being able to make the distribution, but that if the trustee did not do so then it remained liable to the extent of the distribution. In the latter case the distributing trustee was placing itself in a potentially dangerous position because it was maintaining an indemnity to its predecessor to the extent of the value of assets which it no longer had possession or control of.

At first the requirement was for the indemnity to be given to the trustee making the distribution, but this resulted in chains of indemnities through successive trustees and the need to take them into account on every change of trusteeship, so the practice developed of requiring the indemnity to be given direct to the original or retired trustee, thus circumventing the distributing trustee and thereby avoiding creating a chain of indemnities. However, in practice, the problem was that a former trustee, to whom the beneficiary of a proposed distribution is willing to provide an indemnity, refused to accept or be party to it without legal advice, refused to seek that advice unless it is indemnified for the cost of it, and neither the distributing trustee or the beneficiary of the proposed distribution was willing to do so because they consider it unnecessary.


The principal reason why the indemnities commonly go far beyond what may actual amount to "reasonable security" is because there is invariably no risk assessment made by the retiring or distributing trustee of what third party liabilities there may be in terms of nature, amount or time. It may well be the case that it has no risk of third party liability at all, but the trustee nevertheless insists on an unlimited indemnity because it has not worked out that there is no risk. Even where there is some potential liability, the absence of any limit or qualification to the extent of the indemnity will in most cases very probably lead to a trustee receiving a degree of security which is much more than anyone might consider "reasonable" - for example, security over a trust fund of £10 million for an indefinite period when the worst case on a full risk assessment is that there will be a tax liability of no more than £50,000 and which will become prescribed after six years.

The fundamental principle of a trust is that it is set up for the benefit of the beneficiaries and thus it is contemplated from the outset that the trust fund will be paid out to the beneficiaries. The vast majority of powers to pay or appoint income or capital to beneficiaries do not contain any provision which expressly entitles trustees to make distributions conditional upon the beneficiary providing an indemnity for the amount of the distribution, and the indemnity is for the benefit of the trustee, not the beneficiary. On that basis it could be argued that trustees should not be entitled to require a beneficiary to provide an indemnity.

However the courts have accepted that as a matter of principle it is in the best interests of beneficiaries to have trusts properly managed by those who have the requisite skill and knowledge to do so and have applied that principle to vary trusts to enable trustees to be paid to secure their services. As stated above, due to the onerous nature of trusteeship, professional trustees expect not only to be remunerated but also protected in respect of any personal liability whilst in office and thereafter. It can therefore also be argued that if a party is not adequately protected against personal liability for third party claims arising from its trusteeship it will not take on the trusteeship in the first place, and thus that by virtue of the principle which applies for remuneration, it is in the best interests of beneficiaries for trustees to be protected.


It is not surprising to learn that these indemnities, even with de minimis provisions, are subject to continuing criticism by trustees and beneficiaries alike. From a successor trustee's perspective it is easy for a busy trust administrator to overlook the existence of a covenant given on that trustee's appointment, resulting in neglect of the trustee's obligation to procure a direct indemnity from the recipient of a distribution. In such cases the administration of any distribution may become very complicated, costly and time-consuming, particularly if there are regular capital payments which are not within any de minimis provisions that may exist.

From a beneficiary's perspective, it may seem unreasonable that a benefit is made subject to exposure to potential personal liability, contrary to the beneficiary's understanding of the purpose of the trust because he or she did not expect any condition or restriction on their freedom to apply the benefit as they see fit. For both trustee and beneficiaries the process of negotiating indemnities leads to higher costs of administration which depletes the trust property intended for other purposes and also often causes unnecessary delays to distributions and to the transfer of effective management of the trust to new trustees. So is there a solution to this problem?


Amendment No. 5 to the Trusts Law was anticipated to introduce two possible options to improve the situation:

(i) to create an equitable lien which attaches to the trust property for the benefit of the trustee for the time being and all former trustees; and

(ii) to permit a former trustee to vicariously benefit from a contractual indemnity that it is not a party to (i.e. removing the need for a former trustee to be party to a subsequent transaction in order to benefit from any indemnity given by a beneficiary on a distribution of trust property); and

The equitable lien was not introduced into law and, because Jersey law does not possess the developed principle and judicial authority to support it, the introduction of an equitable lien has remained absent from Jersey law until 2015 (see our article on this matter - A Jersey Trustee's Equitable Right to the Trust Property Lien).

It has been confirmed under English Law (and also in Australian High Court and Federal Court decisions) that a trustee's equitable lien confers a charge upon the trust property until claims are satisfied and that it exists independently of possession and control of it. This means that it will take priority over the interests of the beneficiaries and survive the trustee's loss of office and dispossession of trust property, but will not avail against a bona fide purchaser for value without notice. Practically speaking, this means that if a third party liability arises against it a former trustee's equitable lien will not only attach to or charge all property comprised in the trust fund from time to time but will also continue to attach to trust property after distribution to a beneficiary.

From a trustee's point of view an equitable lien might well be worthless if either:

a) the present trustee, or the beneficiary to whom trust property has been distributed, no longer has any traceable trust property because it has been dissipated; or

b) the trust property is in or has been moved to a jurisdiction which does not recognise equity or trusts; or

c) because title to trust property has been passed to a bona fide purchaser for value without notice.

As the equitable lien has those risks for a trustee, and also does not solve the problem of a beneficiary wishing to receive a distribution unconditionally and unencumbered, it can be argued that it will not provide "reasonable security" and that the current industry standard of a contractual chain of indemnities should be maintained.

However, vicarious benefit was introduced into law and, in some ways, is preferable to an equitable lien: it maintains a contractual relationship of some description, which is potentially more protection for a trustee and, therefore, more likely to be acceptable as "reasonable security". Furthermore, because contract law is recognised in civil law countries, and because the beneficiary remains contractually liable, the vicarious benefit avoids the issue of a bona fide purchaser for value without notice. However it still does not achieve a position whereby the trustee is protected and the beneficiary of a distribution receives trust property unconditionally, so again it is only a partial solution to the problem.


The options introduced into law do not resolve the issue of limitation of time or amount (which needs to be agreed at the start of a chain indemnity) and, therefore, may result in a trustee being in a better position than if it had remained as trustee. This lack of limitation may also result in conditions being imposed on beneficiaries on distributions to them which are in fact unnecessary, a situation which cannot be in the best interests of the beneficiaries and which is, therefore, likely to be offensive to the "reasonable" part of "reasonable security".

Another option is for trustees to rely solely upon their professional indemnity insurance, but in doing so the potential insurance exposure, particularly without any other recourse of protection, is likely to make insurance premiums astronomically high or simply unavailable.

Whilst the introduction of vicarious benefit and an equitable lien has or will improve the situation, I do not believe we will see the end of contractual indemnities any time soon. Neither option fully resolves the position where a beneficiary receives trust property unconditionally and fully protects the trustee, albeit there might be circumstances where these options will do so. Consequently, there seems to be no immediately obvious solution to the problem at hand.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions