Trustees have the responsibility of managing and administering a trust in the best interests of the beneficiaries, in accordance with the terms of the trust deed. With that comes the power to manage the trust assets as if they are the owner of those assets. Naturally, this power brings with it an exposure to liability, as trustees can enter into contracts with third parties, make investment decisions, enter into leases, mortgage the assets and so on.

There may come a time when a trustee resigns from their role, whether due to personal reasons, financial concerns, or other circumstances. Resigning from a trustee position can be a complex process, especially when it comes to protecting oneself from potential liabilities that may arise after stepping down.

This article aims to provide guidance to trustees on how they can safeguard themselves against ongoing liabilities and secure protection for any actions taken during their time as a trustee, ensuring a smooth and responsible transition out of the role.

What is trustee liability?

Trustees have significant legal and fiduciary responsibilities. They are accountable for the proper management of the trust’s assets and must act in the best interests of the beneficiaries. Trustees can face personal liability to beneficiaries if they fail to meet these obligations. Trustees can also face claims from creditors.

In addition, section 81 of the Trusts Act 2019 confirms that a trustee is personally liable for an expense or a liability incurred by the trustee when acting as a trustee.

The trust deed or the contracting document may exclude or limit trustee liability, but in the absence of this, a trustee is personally liable. A trustee usually has recourse to an indemnity from trust assets for their liability, provided the liability is not due to dishonesty, wilful misconduct or gross negligence. However, the indemnity can only cover the trustee to the extent of the trust assets.  

The scope of liability after resignation

While trustees may hope that their liability ends upon resignation, the reality is that liability can extend beyond their departure from the role if not properly addressed. A trustee can still be held liable for actions taken during their tenure, even after stepping down, if they did not properly discharge their responsibilities or if issues arise in the trust’s administration post-resignation. If a trustee fails to obtain a formal release or indemnity from the beneficiaries, they may remain vulnerable to future claims.

It is crucial for trustees to take steps to limit their liability at the time of resignation, to ensure that they are not personally responsible for issues that arise later.

The resignation process

Resigning as a trustee involves several steps outlined in the Trusts Act 2019 and in the trust deed. If the trust deed permits, a trustee can resign through a formal deed of retirement, with the approval of the remaining trustees. If the remaining trustees do not agree, a trustee can apply to the court for permission to resign. The minimum number of trustees specified by the trust deed must always be complied with; a trustee's retirement is invalid if it results in an insufficient number of trustees.

Protecting against ongoing liability

At the point of retirement, the retiring trustee must follow several steps to protect against ongoing liability:

• Check the trust deed to ensure compliance with the notice requirements for retirement and with the minimum number of trustees required.
• If the trustees own land:
  • Title will need to be transferred from the retiring trustee to the remaining and/or new trustee(s). Trustee names are recorded on titles, not the name of the trust itself, so this must be updated.
  • If there are any mortgages or personal guarantees for trustees, the lender will need to formally release the retiring trustee from the obligations. Lenders often require new documents to be completed by the remaining and/or new trustee(s). The retiring trustee should ensure that the lender fully releases the retiring trustee from future obligations.
  • The local council should be notified, to avoid future personal liability for property rates.

• Any shares owned by the trustees will need to be transferred to the remaining and/or new trustee(s). Companies Office records will need to be updated.
• If trust funds are invested, any fund managers will need to be notified and investment mandates considered.
• If there are any personal guarantees for trustees on any leased property, the landlord will need to formally release the retiring trustee. Again, new documentation may be required.
• Bank or other financial institution authorities will need to be updated.
• If the trust is GST-registered, the IRD must receive written notice of the retirement. If not, the retiring trustee may still be liable for future tax.
• The trust's beneficiaries should be advised of the change in trustee.

While the above steps may look like a straightforward checklist, trustees can face issues. For example, a landlord may refuse to release the trustee from their personal guarantee. In such a case, the retiring trustee should seek an indemnity from the remaining or new trustee(s) for any future liability.

Obtaining security for past liabilities

We suggest that a retiring trustee seeks protection from future claims arising from their time in office. If the retiring trustee does not already have trustees' liability insurance, the retiring trustee could negotiate an indemnity agreement with the remaining trustees or the beneficiaries of the trust, which could cover any past acts of the trustee. In some cases, a trustee may seek a formal discharge from the court to limit liability for actions taken during their tenure.

It is worth noting that recent case law in Australia has cast doubt on whether a new trustee owes a fiduciary duty to a former trustee in respect of the former trustee's indemnity out of the trust assets. Without this fiduciary duty, former trustees are vulnerable to their right of indemnity being compromised by actions of the new trustees.

Conclusion

Retiring as a trustee is a complex process which requires careful navigation to ensure an effective retirement and complete transfer of all trust assets and liabilities. If there are any outstanding legal or financial matters at the time of resignation, we would recommend addressing these before resigning to avoid issues arising later.

It is imperative that this is all formally documented and all potential areas for liability are addressed. Relying on verbal agreements with co-trustees and beneficiaries can be risky. Proper planning and communication can allow a trustee to step down with peace of mind, knowing that they are protected from future liability. Retiring trustees may then wish to monitor the future progress of trust assets in case they need to step in and protect their right of indemnity.

We suggest that trustees consult with a lawyer during a resignation process, whether as a retiring, remaining or new trustee. Reach out to our team of specialists for personalised advice.

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