Home » ADVISER ALERT | Clients of diminished capacity – when Trustees are clients

ADVISER ALERT | Clients of diminished capacity – when Trustees are clients

Posted by Marcus McCarthy | 05 April 2018 | Corporate & Commercial

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.

Related Articles

1 Minute Read

read more

“What’s really left for lawyers to do?” | Artificial Intelligence in Legal Practice Summit

14 August 2018 | Corporate & Commercial |

Exploring how technology has impacted the legal workforce and the need to find new ways to upskill and manage the changing …

2 Minutes Read

read more

Simplifying construction contract language

12 June 2018 | Construction & Infrastructure |

Construction law has its own language and each contract is like a dialect of that language.
If you don’t communicate using the …

1 Minute Read

read more

The state of the debt fund market

01 May 2018 | Banking & Finance |

I have met recently with a number of debt fund providers, niche property lenders and market participants.
These are some of my …

OUR AWARDS