A trustee’s right to be indemnified

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Aintree Group Legal’s Series on Trusts – Part 6

As part of Aintree Group Legal’s ongoing series on Family Trusts, this week we look at a trustee’s right to indemnity out of trust assets.

Let’s imagine a trading trust has liabilities of $2 million, but only assets of $1 million. The trustee just so happens to have other assets which it owns in its own right (and not as trustee of the trust) and which are sufficient to make up the shortfall.

Can the trust’s creditors get access to those other assets?

Trustees are Personally Liable

As a starting point, trustees are personally liable for trust debts incurred while acting as trustee. This position is generally modified by legislation, the general law and the trust deed, which provide that trustees are to be indemnified out of trust assets for debts incurred on behalf of the trust.

There are important limitations to that position. Trustees will only be indemnified to the extent that the liabilities were properly incurred. Trust expenses incurred without due care and diligence or for an improper purpose will likely not be indemnified out of trust assets.

A Trustee’s indemnity is “Property of the Company”

This indemnity out of trust assets raises interesting questions in the context of an insolvency.

Let’s go back to our hypothetical trust.

Assume that the trustee is a company and that a receiver or liquidator has been appointed. The trustee’s right to indemnity counts as ‘property of the company’ for insolvency law purposes and the assets of the trust can be realised and applied to priority creditors in accordance with statutory priority regimes. In other words, the assets of the trust can be used to discharge the liabilities of the trustee.

Liabilities not properly incurred

But where a trustee has incurred expenses improperly – whether inadvertently or by breach of trust – they will likely not be entitled to the benefit of the indemnity and will instead be personally liable for those amounts.

For a corporate trustee that acts in no other capacity, this may be of little significance (putting directors’ duties aside). But for a corporate trustee that holds other assets in a separate capacity, or for individual trustees personally, creditors may have access to assets held in that company or person’s name.

In conclusion…

Although this issue largely turns on whether a trustee has acted improperly, it is still likely that a corporate trustee acting in no other capacity once again provides superior asset protection benefits to alternative structures.

Aintree Group Legal will be happy to discuss your family trust and succession needs. Contact us today.

For more on our series, read our last three blogs below: