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12 November 2020
Prospective trustees may well be the Hamlets of the modern age, faced with a moral and legal dilemma: to be or not to be a trustee?
In India, over the past decade, there has been a renaissance of private trusts which act as holding entities for private family wealth or provide employee benefits. More recently, their use has extended to business and investment vehicles. Many of these trusts hold immense wealth for the ultimate benefit of family members, employees or investors. As a result, enormous confidence and responsibility is reposed on the trustees, who are the custodians of this wealth. Naturally, this responsibility is accompanied by a host of legal duties, of which potential trustees should be mindful.
The primary responsibility of a trustee is to act on the settlor's directions, for the benefit of the beneficiaries. To this end, some of the dos and don'ts which trustees should bear in mind are as follows.
Do follow settlor's directions
The settlor's directions are usually contained in the trust deed, signed by the settlor. A trustee must generally follow these directions; if they wish to depart from them, they must obtain the consent of all beneficiaries or the court. That said, a trustee may disregard any direction of the settlor if complying with it would be impracticable or illegal or would undermine the beneficiaries' interests.
Do act in good faith
Acting in good faith implies not only that a trustee must act honestly, but also that they must act with the due care and attention expected of a person of ordinary prudence. In other words, they must exercise appropriate diligence while performing acts as a trustee. An example of this would be when a trustee is selling shares of a private company – prudence demands that they appoint a competent and experienced valuer to ascertain the fair value of the shares and transact at the best available price for the shares.
Do act impartially
Where there is more than one beneficiary, the trustee should avoid unjustly favouring some at the cost of others. That is not to say that trustees have no discretionary power (in a discretionary trust), but such power must be exercised in good faith and reasonably. For instance, the complete exclusion of any beneficiary from distributions may result in such beneficiary challenging the distributions. In their defence, the trustee may establish – including through written records demonstrating the decision-making process – that the exercise of their discretionary power was for cogent reasons and done in good faith.
Do deal with trust property prudently and carefully
A trustee must deal with trust property as carefully as if it were their own. For example, if the trust property comprises artwork, the trustee should undertake suitable care of the artwork by insuring it and placing it in a secure vault when not displayed.
Do avoid conflict of interest or private gain
A trustee should not use or deal with the trust property for their own profit or for any other purpose unconnected with the trust. To avoid any allegation of personal gain, the trustee should also ensure that the trust's assets and finances are kept distinct from their personal assets and finances, and that dealings with the trust are performed on an arm's-length basis.
Don't delegate excessively
A trustee must perform trusteeship functions personally (and not through a delegate) because the settlor has placed faith in the trustee personally. Thus, unless the trust deed allows it, delegation by a trustee of their functions to a third person is prohibited except in cases of necessity or if the delegation is in the regular course of business (eg, the delegation of an administrative matter). The restriction on delegation does not preclude a trustee from:
If beneficiaries believe that a trustee has failed to fulfil any of the above duties, they may sue the trustee for a breach of trust. If the breach of trust is proven, the trustee's liability to make good any loss is personal and unlimited (ie, recourse may be had to their own personal assets (and not the trust assets)).
Therefore, trusteeship could become a 'crown of thorns' if adequate care is not adopted. Before assuming this mantle of trusteeship, prospective trustees should:
Those who wish to establish trusts but are not in a position to do the above groundwork or prefer not to take on this responsibility could consider alternatives such as setting up a private trustee company or engaging professional trustees. These options may be less cost effective, but they offer greater protection from personal liability.
For further information on this topic please contact Radhika Gaggar or Shaishavi Kadakia at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email (email@example.com or firstname.lastname@example.org). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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