Retirement of Trustees
A trustee will usually retire voluntarily under the statutory powers contained in the Trustee Act 1925. However, it is possible that the retirement may come about because:
- all the beneficiaries (being of full age and capacity) require it,
- by the exercise of an express power contained in the trust deed; or
- by order of the Court
s.39(1) Trustee Act 1925 provides:
“Where a trustee is desirous of being discharged from the trust, and after his discharge there will be either a trust corporation or at least two persons* to act as trustees to perform the trust, then, if such trustee as aforesaid by deed declares that he is desirous of being discharged from the trust, and if his co-trustees and such other person, if, any, as is empowered to appoint trustees, by deed consent to the discharge of the trustee, and to the vesting in the co-trustees alone of the trust property, the trustee desirous of being discharged shall be deemed to have retired from the trust, and shall, by the deed, be discharged therefrom under this Act, without any new trustee being appointed in his place.”
Therefore under s.39 a trustee can retire voluntarily (if two people remain after his retirement) but must do so by Deed which is signed by all the relevant persons – i.e. the person who has power to appoint trustees and the continuing trustees as well as the retiring trustee.
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Before the amendment introduced by TLATA 1996* the requirement was for a trust corporation or two individuals to act after the retirement and so s.39 did not apply where the effect of a retirement would be to leave a corporate trustee and one individual or two corporate trustees not being trust corporations to act.
A retirement under s.39(1) may be set aside on the ground of undue influence by one of the parties to the retirement over another e.g. by a continuing trustee over the retiring trustee: Daniel v. Drew  EWCA Civ 507  WTLR 807
By the beneficiaries
Apart from s.19 TLATA 1996, beneficiaries cannot, even if they are all of full age and capacity and taken together absolutely entitled under the trust, in the absence of an express provision under the trust, require a trustee to retire, with or without a replacement trustee in his place, although they may bring the trust to an end (under the rule in Saunders v Vautier (1841) Cr & Ph 240) and thereby succeed in removing the trustee.
However, s.19 TLATA 1996 does enable the beneficiaries in certain circumstances, without terminating the trust, to require a trustee to retire:
“This section applies in the case of a trust where –
(a) there is no person nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust, and
(b) the beneficiaries under the trust are of full age and capacity and (taken together) are absolutely entitled to the property subject to the trust.”
This section will therefore apply where s.36 Trustee Act 1925 applies and there is no person nominated by the trust under s.36(1)(a) e.g. they are dead. It cannot apply if there is an express power and the person with it is choosing not to exercise it.
If the requirements of s.19(1) are met the beneficiaries may give directions concerning the retirement or appointment of trustees. Acting unanimously, beneficiaries may give directions which:
- involve the retirement of a trustee or trustees without any new trustee being appointed; or
- involve both the retirement of a trustee or trustees and the appointment of a new trustee or trustees; or
- involve the appointment of an additional trustee or trustees without any trustee retiring
Under express power
A trustee wishing to retire under an express power in the trust instrument authorising his retirement may do so. The sensible course of action is for the trustee or trustees who wish to retire to ensure that proper arrangements are in place for the succession to the trusteeship when they retire, normally by way of the exercise of the statutory power of appointment of new trustees.
By the Court
Retirement under ss. 36 or 39 Trustee Act 1925 may not be practicable, e.g. there would be an insufficient number of trustees remaining. In such a case the trustee who wants to retire may either commence proceedings for the administration of the trust or make an application for the appointment of new trustees by the Court under s.41 Trustee Act 1925. The advantage of applying for an administration order is that the Court can discharge a trustee without appointing a replacement whereas the Court may not discharge under s.41.
Drafting the Deed
One of the areas of contention when a trustee seeks to retire is the question of whether he should be discharged from his duties under the trust and indemnified against any breaches of trust.
For example, if a trustee is asked to retire at a time when there are outstanding costs to be met from the trust fund a trustee may well be reluctant to retire and not have his trust company’s fees met: Re Carafe Trust  8 ITELR 29 Jersey
A trustee has a right of indemnity out of the trust fund for administrative expenses and other liabilities properly incurred:
- A right of reimbursement
- A right of exoneration
- A right of retentions
- A right of realisation
When a trustee therefore retires or is removed the question is whether or not the lien is enough protection for the departing trustee or whether express indemnities need to be included in the Deed of Retirement.
Reimbursement & exoneration – are covered by s.31(1) Trustee Act 2000:
(a) is entitled to be reimbursed from the trust funds; or
(b) may pay out of the trust funds,
expenses properly incurred by him when acting on behalf of the trust.
Retention – is the right to keep back trust property to meet a liability even though the beneficiaries would otherwise be entitled to have it distributed – even where the trust has otherwise come to an end – X v A  1 All ER 490.
This does not usually mean the trustees can keep control of the whole fund but such reasonable amount to cover the worst case scenario based on realistic assumptions not creative accounting!
Realisation means that if there is insufficient cash in hand to meet liabilities the trustees can realise trust property to meet them or reimburse himself. He does not have to wait.
Clearly therefore the usefulness of the lien in a particular case will depend on how much control the trustee has about his departure. He will be in control usually if he cannot be replaced unless he wishes to go – s.36 Trustee Act 1925; but if he is forced out by court order or by exercise of an express power or the beneficiaries under TLATA 1996 then to what extent does the right of indemnity apply to him? There is mostly Australian authority to say that the right does survive the loss of trusteeship.
A trustee’s right of indemnity is a beneficial interest in the trust fund so it cannot simply cease on being removed as trustee. In fact it may well be a breach of trust by any new or continuing trustees for them to distribute trust assets without taking account of the outgoing trustee’s lien. Whilst the outgoing trustee will have had to vest title to the trust assets in the new or continuing trustees and thereby lose his right of retention he should be able to require the other trustees to honour the other rights contained in the lien.
Despite the trustee’s lien, as night follows day, a departing trustee will require an indemnity from the continuing or new trustees before handing over any of the trust assets because the liability for all claims against the trust are joint & several and personal.
A right of indemnity goes further than giving a departing trustee a lien over the trust assets since this is so often in practice dependent upon the ability of that person to exercise legal control. The rights of indemnity will give him a proprietary equitable charge over or equitable interests in the trust assets, which has priority over the interests of the beneficiaries.
Any indemnities given are enforceable as a matter of contract between the parties to it but obviously the parties to the covenant will need to be satisfied that the new trustees are acting within their authority in entering into any such covenant otherwise they will not be enforceable against the trust assets.
As long as any express covenant merely permits the outgoing trustee to reimbursement or exoneration under the general law (as above) then this should be uncontroversial. Equally there are few trustees who need to have an unlimited in time or value indemnity – N.B. contaminated land would be an exception since the trustee’s personal liability as registered owner of the land is to clean it up under Part IIA of the Environmental Protection Act 1990.
Human nature being what it is outgoing trustees may be tempted to ask for unlimited indemnities and a new trustee should seek to place value limits on any indemnity. This creates a potential risk from the retiring trustee’s perspective so negotiation takes place upon such issues as:
- Having an overall cap on liability expressed as a value and not merely by reference to the value of the trust fund
- A warranty that the new trustee will not permit the trust’s value to fall below a certain level
- A chain of indemnity – both on beneficiaries and trustees
- Time limits – such as statutory limitation periods in contract (6 years); tax (usually 6 years from the end of the tax year to which they relate); whether there are any minor beneficiaries who could bring a claim on achieving a majority.
STEP’s ‘A Practical Guide to the Transfer of Trusteeships’ (2007) includes some useful precedents for Deeds of Appointment, Retirement and Indemnity.
It will therefore be apparent that a normal concern for a retiring trustee is that he is adequately protected against matters such as tax liabilities, the due dates for payment of which may well be after the proposed retirement date. If the trustee’s retirement is voluntary, then presumably he will be advised not to retire until his interests have been properly protected. In this regard the trustee should seek independent advice.
However, given that a trustee could be replaced or removed by order of the court under s.41 of the Trustee Act 1925, or removed at the direction of certain beneficiaries under s.19 of the TLATA 1996 it is not always possible for the trustee to control what happens on his retirement.
Section 19(3)(b) of the TLATA 1996 does permit a trustee to remain in office until ‘reasonable arrangements’ have been made for his protection. Otherwise, the court might have to give directions as to what might represent adequate or reasonable protection as part of its order.
- The retiring trustee might be well advised to retain control over sufficient assets in the trust to cover the likely risks; or
- The trust assets might be transferred to the replacement trustees with an express indemnity covenant from the new trustee to the retiring trustee; or
- The retiring trustee could take a legal or equitable charge over specific trust assets.
A trust administrator is recommended to consider the following before dealing with the retirement of a trustee:
- Check the trust records for any potential liabilities which will affect the retiring trustee’s position.
- Check the trust instrument to see what, if any, exoneration clauses are present which would protect the retiring trustee and would provide a reason for resisting any request by the retiring trustee for a new indemnity from a replacement trustee.
- Consider what conflicting advice the continuing trustees and any new trustee will need to respond to requests for instructions upon the wording of any indemnity requested by the retiring trustee. The retiring trustee may seek a wide and non-specific indemnity such as covering all liabilities that he is forced to discharge, whereas the continuing trustees and the replacement trustee should try and limit the retiring trustee’s protection to no more than the trust assets at the time when any claim is made by the retiring trustee.
© Gill Steel, LawSkills Ltd March 2010