A trustee has responsibility for managing the trust assets and owes fiduciary duties to the beneficiaries. A trustee is personally liable for any breach of his or her fiduciary duty. But what about the breach of a co-trustee? Is he or she liable for those actions or inactions?
When could a trustee be liable for the wrongdoing of a co-trustee?
The general position is that one trustee is not liable for the acts or defaults of his/her co-trustee “except in cases of wilful default”. Unfortunately there is no clear answer as to what the courts will class as “wilful default”, although some of the following are examples of instances, in which a trustee may be held liable for a co-trustee’s wrongdoing:
- Where one trustee gives a co-trustee absolute and sole control of the trust property and does nothing to take control himself/herself. However, leaving one trustee with long term control of the trust is a breach of trust and puts the innocent trustee in a vulnerable position and open to liability for any breaches by the co-trustee.
- Where a trustee has knowledge of a co-trustee’s breach of trust and conceals it. An example of this is where one trustee manages a business asset of a trust at a loss and the co-trustee conceals this from the beneficiaries. In such a case the concealment is a breach and the courts will not help a trustee who helps conceal his co-trustee’s breach.
- Where a trustee is aware of a co-trustee’s planned breach of trust and does not act to prevent it. Being passive is not a defence and will leave the innocent trustee open to liability for the breach by the co-trustee.
How can trustees avoid wrongdoings?
Being a trustee is a significant commitment. If you are a trustee you should ensure that you do not act in breach of your duties, or leave yourself open to liability for the actions of your co-trustee. There are some simple practical steps that you can take to minimise your risk as a co-trustee:
- Do not be a passive trustee. Take an active role in the management of the trust property with your co-trustee
- Know what your co-trustee is doing. Ask questions if something is not clear or if you have concerns
- Make sure that both you and your co-trustee are generally complying with the trust deed.
If you consider that there has been a wrongdoing by your co-trustee, you should consider the following action:
- Investigate the wrongdoing
- If part of the trust fund has been lost, take steps to recover the fund or make sure that it is reconstituted
- Seek directions from the court as to what steps you should take in relation to the wrongdoing
- Apply for an injunction to prevent the wrongdoing by your co-trustee.
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