ADVISER ALERT | Clients of Diminished Capacity – Working with Trustees as clients

Key issues when working with Tr

What’s the Problem?

Irrespective of whether a Trustee is a company or a natural person, the Trustee never has all the powers of a natural person.

Trustees are restricted to the powers given to them by the Court, the Settlor of the Trust through the relevant Trust Instrument or by operation of Law.

So, taking for example a Trustee’s power of investment. Unless otherwise changed by the Trust Deed, this is limited by the Trust Instrument and the Prudent Person investment criteria set out in the Trustee Act operating in each State and Territory.

Any investment strategy needs to take into account such limitations because investments made outside the permitted powers of a Trustee are invalid.

In that case, a Trustee will lose its access to its indemnity against Trust assets, attract personal liability to beneficiaries and open a potential negligence action against any advisers on whose advice the trustee relied to implement the transaction outside their power.

 How do you avoid this risk?

  1. Make sure both the adviser and client understand the normative restrictions under which the Trustee’s power of investment operates (and within which the Trustee must operate).
  1. Read the Deed or Instrument governing the operation of the Trust (it may be a will).
  1. If in doubt, get specialist advice about what limits there are on a Trustee’s power to undertake a particular act and educate the client as needed.
  1. As necessary, and if available, use beneficiary consent to exonerate trustees who might otherwise be acting beyond their power. A Trustee can also seek guidance from the Court to make sure a Trustee’s course of action is within the actual power of the Trustee, thus valid and defensible by the Trustee and within its scope of indemnity against the property of the trust.
  1. Take steps to make sure your client understands when acting in a Trustee role, they are not acting in a personal capacity and must act in accordance with the powers given to them by others.

Remember!

A Trustee should normally keep sufficient records to explain its administration of the trust and why such administration – from time to time and act to act – lies within its power.

An investment strategy for a Trustee client must not be created without reference to the scope of power the Trustee holds that enables implementation of that strategy.

TEP Members of the Society of Trust and Estate Practitioners (STEP) have special expertise in dealing with these issues.

The TEP members of STEP practicing at Nexus Law Group are:

Michael Perkins

Jayne Humphreys

Please let us know how we can help you, your clients and their connections.