Trusts are widely used in New Zealand to hold property and manage family wealth. However, a common misunderstanding is that trustees are protected from personal liability simply because they act in that role. In reality, trustees can be held personally accountable – including to the beneficiaries of the trust.
A simple example helps illustrate how this can arise.
WHAT HAPPENED?
The following example is illustrative, but reflects situations commonly seen in practice.
John and Mary were trustees of a family trust that owned a commercial property. When their long-standing tenant sought a new lease, the trustees agreed to renew it.
Wanting to maintain a stable relationship, John and Mary accepted the tenant’s proposed rent without obtaining an independent market valuation or seeking advice. The rent agreed was below current market levels, but they considered this a reasonable trade-off for retaining the tenant.
Over time, the lower rental return began to affect the overall value of the property. When the trust later decided to sell, the property achieved $1.2 million, whereas comparable properties with market-level rents were selling for around $1.5 million.
The difference – approximately $300,000 – was attributed largely to the below-market lease.
Beneficiaries of the trust challenged the trustees’ decision, arguing that John and Mary had failed to properly consider their duties and had not taken reasonable steps to protect the value of the trust assets.
THE LEGAL POSITION
Trustees owe duties to beneficiaries, including to:
- Act in good faith and for proper purposes;
- Exercise reasonable care and skill; and
- Preserve and protect the value of trust assets.
These duties extend not only to current beneficiaries, but also to future or contingent beneficiaries.
In this scenario, the issue was not dishonesty or bad faith. Rather, it was whether the trustees had acted as reasonable and prudent trustees would in the circumstances.
Failing to obtain a market valuation or professional advice before entering into a significant commercial arrangement was seen as a serious omission.
THE CONSEQUENCES
Where trustees breach their duties, the court may require them to personally compensate the trust for the loss suffered.
In a situation like this, that could mean John and Mary being required to contribute some or all of the $300,000 shortfall – effectively restoring the trust to the position it would have been in had proper steps been taken.
Importantly, the fact that the decision was made with good intentions does not prevent liability from arising.
A COMMON RISK AREA
This type of risk often arises where trusts hold investment properties or business assets, and trustees:
- Enter into leases or commercial arrangements without proper advice;
- Fail to test decisions against market benchmarks; or
- Prioritise convenience or relationships over objective decision-making.
PRACTICAL LESSONS
For trustees, the key points are:
- Treat trust decisions as commercial decisions, particularly where significant assets are involved;
- Obtain independent advice or valuations where appropriate;
- Document the reasoning behind decisions; and
- Act in the interests of all beneficiaries, including future ones.
THE LEARNINGS
Trusteeship carries real responsibility. While trusts remain a valuable tool for managing assets, they do not remove personal risk.
As this example shows, even well-intentioned decisions can have significant consequences. Where trustees fail to take reasonable steps, they may be required to personally make good the loss – sometimes in substantial amounts.