The standard position for a trustee is that they may be personally liable to the trust's beneficiaries in the event that the trust's funds devalue (subject to any exoneration provisions in the trust deed). If the trustees have insufficient funds to meet their liabilities, they may also be sued directly by creditors of the trust, unless the trustees have limited their liability in contracts with third parties to the value of the assets comprised in the trust fund.

Trust protections are also important here as trustees only have a right of indemnity from the trust fund in respect of claims against them to the extent that they have acted in accordance with their trustee duties, including their overriding duty to act responsibly and in the best interests of the beneficiaries. A third party claimant can only claim against the trust assets (by way of right of subrogation) if the claim is one in relation to which the trustee could have properly sought redress from the trust assets.

So what should trustees pay particular attention to?

  • Firstly whether the trust deed contains any exoneration, exemption or exclusion clauses, and what these clauses specify and permit. These clauses cannot be changed at this stage to offer more protection, but a full knowledge and understanding of their terms is important in the current climate. Such clauses commonly exonerate trustees for loss caused otherwise than by fraud or wilful default, but, in the case of a professional trustee, will often not exclude negligence.
  • Check for trustee indemnity insurance policies and review the policy terms and excess amount. In our experience, it is unfortunately quite unusual for trustees to have indemnity insurance cover, and usually more likely if the trustee is a professional in their ‘day job'.

Review the contractual terms and relationship with your investment manager. The standard position is that if trustees have complied with their duty of care in appointing the fund manager, they will not be liable for the manager's acts. However, the arrangement must be kept under review and if appropriate the trustees should consider whether they need to make a change. It is important to maintain a dialogue and check that the investment manager is doing everything they should be to mitigate losses to the portfolio.

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.