binding trust decisions - Franklin Law

Are your trust decisions binding? Avoiding risks and ensuring good decision-making

Do you conduct trust transactions informally? If so there are risks. Informality includes asking a trustee (usually an independent trustee) to sign documents or financial statements after the other trustees have made decisions or approved the content. The risk is whether transactions have bound the trust (or just the original signing trustees) and whether loss arising as a result is something which the trustees individually must bear.

A fundamental rule of trusteeship is that trustees must perform duties personally and be active. There is no such thing as a passive trustee. Trustees must act jointly where there is more than one trustee, unless there are exemptions such as trust deeds which specifically allow decision making by a majority of trustees. The usual rule is that trustees must act jointly in reaching a decision. A majority of trustees cannot bind a minority. The power to bind the trust must be a decision of all trustees failing which it is has no effect.

A trustee cannot delegate duties unless authorised by the trust deed, a Court or statute. The trustees must make decisions by consenting to a course of action at the time rather than retrospectively. The correct process is that a trustee may consent after deliberation as to a decision as to the giving or withholding of consent. The decision may be made at a meeting or by telephone. If it is a telephone meeting the parties taking part must be clear as to what the outcome of the telephone meeting is. A proposal in writing may be circulated for the assent of each trustee. Whether that is sufficient will depend on facts such as the time gap between assents and whether circumstances have changed prior to all assents being available.

If trustees merely follow a settlor’s requirements and execute documents without a complete understanding of what is involved, or merely because the settlor has indicated they should, that does not constitute a consent by the trustees which binds the trust. The trustees must exercise independent judgement, consider the issue to be decided, reflect upon it, and make the decision clear to the other trustees.

Can a trustee give retrospective consent? Retrospective consent can be given but that does not constitute one trustee retrospectively assenting to what has already been done by others, but all trustees ratifying what is previously been done by some of them. Ratification does not need to be by formal resolution but trustees wishing to rely on retrospective consent or subsequent ratification must be able to demonstrate, if challenged, that there was full awareness of the relevant facts and a new decision by all trustees to ratify what had previously been done.

Does a trustee by signing financial statements impliedly consent to the decisions made as recorded in the financial statements? The Courts have held that the mere signing of the financial statements does not of itself indicate knowledge and consent. There needs to be an understanding of the agreement or actions behind the financial statements for signing of financial statements to constitute consent.

In summary, the cases continue to emphasise the need for all trustees to be involved in decision making and for decision making to occur by acquiescence of all trustees at or about the time the trust is to become bound, not belatedly and separately following a decision by some trustees.