Trustee Liability and Breach of Trust
You are the trustee of the Smith Family Trust. The trust deed requires the trustee to invest only in assets authorised by the deed, which include government bonds, bank deposits, and blue-chip shares. In 2020, you invested $500,000 of trust funds in a speculative technology startup at the suggestion of the settlor's son, who is a beneficiary. The investment was not authorised by the deed. The startup has now failed, and the trust has lost the entire $500,000. The beneficiaries are the settlor's widow and two children. The widow relies on the trust for income. The son who suggested the investment is a beneficiary but has no current entitlement to income. The trust's other assets are worth $1.5 million. The beneficiaries are considering suing you for breach of trust.
1. Explain whether you have breached your duty as trustee and what the consequences might be.
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Yes, you have breached your duty as trustee. The trust deed restricted investments to government bonds, bank deposits, and blue-chip shares. By investing in a speculative technology startup, you acted outside the authorised investments, which is a breach of the trust deed. Additionally, you failed to act prudently by investing in a high-risk asset without proper consideration of the trust's investment objectives and the beneficiaries' interests. The consequences of a breach of trust can include: (1) personal liability to restore the trust fund to the position it would have been in but for the breach; (2) liability for any loss suffered; (3) possible removal as trustee; (4) criminal liability if the breach was dishonest (not indicated here). You may have a defence if you acted honestly and reasonably and ought fairly to be excused, but given the clear restriction in the deed, this is unlikely. The beneficiaries can sue you for the $500,000 loss. You should consider whether the son who suggested the investment should be held liable for any loss, but as trustee, you are primarily responsible. You should seek legal advice immediately.
2. What steps should you take now to mitigate the situation?
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You should: (1) immediately inform all beneficiaries of the breach and the loss; (2) seek legal advice on your liability and potential defences; (3) consider whether to make good the loss from your own funds to avoid litigation; (4) review the trust's remaining investments to ensure they comply with the deed; (5) consider resigning as trustee if you are unable to continue effectively; (6) document all actions taken. You should also consider whether the son who suggested the investment should be asked to contribute to the loss, although he has no legal obligation unless he was a party to the breach. You should communicate openly with the beneficiaries and try to resolve the matter without litigation if possible. If litigation is threatened, you should notify your professional indemnity insurer.