The risks of becoming a trustee

Do your homework before becoming a trustee


As Freddy enjoyed his favourite morning tea of pikelets with jam and cream, his neighbour Bill arrived and asked Freddy to be a trustee of a new charitable trust that Bill and some of the other local farmers are setting up.

Bill is very excited about the trust because its purpose is to help underprivileged young people from the city attend agricultural training courses and get work on farms.

“I would love to be involved Bill, but I need to know more about what is required of a trustee” said Freddy.  Pebbles, Freddy’s lawyer daughter, arrived and overheard the conversation.  “Dad, that’s a wonderful idea, but it is important that you understand the risks for trustees” said Pebbles.

“The trustees are responsible to ensure that the trust complies with its constitution and the law.  This means that the trustees must be well informed about the constitution of the trust and its activities (including financial information).”

“You need to get some governance training and be willing to be pro-active to require financial and other information to be presented to the Board in a way that is understandable by non-specialists,” said Pebbles. 

“It is the trustee’s job to govern the trust and to understand the risks that the trust faces.  As a trustee, you will make decisions for the benefit of the beneficiaries of the trust.  Where a decision involves complex legal or financial matters you need to seek professional advice to help you assess the risks associated with the decision.”

“Trustees are accountable for their actions.  Trustees must be honest and they have a duty to be diligent and prudent and to take the same care that an ordinary person would take if they were making an investment for the benefit of others.  As a trustee, you can’t delegate to someone else to make decisions for you, not even the other trustees.”

“Trustees must be impartial and even-handed about how they use the trust’s resources and balance the needs for current and future beneficiaries. 

“Trustees must act in the best interest of the beneficiaries of the trust, and this is so even if the trust’s interests conflict with their own personal interests.  If a trustee has a personal interest in a decision (for example, if a trustee wanted to contract with the trust to give work to beneficiaries), then that trustee needs to disclose that interest to the Board and if the conflict is substantial, the conflicted trustee needs to be removed from that decision altogether” said Pebbles. 

“Gee Pebbles” said Freddy, “being a trustee is not just about wanting to encourage young people to learn about farming.  I need to think about this a bit more before I commit to Bill’s idea.”   

“You’re absolutely right there” said Pebbles.  “Bill’s idea is wonderful but if you are going to be trustees, you both need to think very carefully about it and maybe get some governance training.  You also need to make sure the trust has Directors’ and Officers’ insurance.  This will protect you from some of the risks of being a trustee” said Pebbles. 

“Thanks Pebbles, I need to be careful to not let my passion for the purpose of the trust blind me from the risks of being a trustee,” said Freddy. 

The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document. 

If you would like more information on any of the topics in this document, please contact your usual Auld Brewer Mazengarb & McEwen adviser. 

 

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Marie Callander