September 10 2014

Importance of an ‘Independent’ Trustee

Reduces risk.

The law requires all trustees to act independently and impartially. The term ‘independent trustee’ is used to describe a trustee who does not benefit from the assets of the trust. Often the settlors of a trust (the people who established the trust) will also be trustees and beneficiaries. But it can also be worthwhile having another trustee to help ensure the trust is run correctly and does the job it was set up to do.

Although there’s no requirement at law for a trust to have an independent trustee, an independent trustee can play a vital role in demonstrating the trust is a genuine trust and make sure trust administration is properly carried out and decisions are recorded. Without an independent trustee, the purpose of the establishment of the trust can be defeated and the trust can be open to attack from various parties, such as creditors.

An independent trustee should have professional expertise and skills that will assist the other trustees with decision making and administering the trust. A lawyer, accountant or other professional can have valuable knowledge and experience to avoid risks and help with managing the trust assets and ensuring the trust is properly administered.

A trust which is poorly run and managed can lead to arguments that the trust assets are being treated by the settlors as their own property. This leaves the trust open to attack. Ensuring that the trust is properly run can help shield the trust assets from external claims.

Avoid a ‘sham’ trust

Without an independent third party, a trust is at risk of being a ‘sham’. This may mean, for example, that:

A claim can be made by a former spouse or partner that the assets are relationship property rather than trust assets because the trust is a sham and therefore does not exist, or
A claim can be made by creditors that the assets belong to you and therefore must be used to pay off your liabilities.

If the settlors are the only trustees, there’s the risk that the settlors are seen as treating the trust assets as their own personal property and that, in effect, the trust doesn’t exist. The protective value of the trust is then lost and the trust assets are open to claims by the settlors’ personal creditors.

Brings impartiality

The independent trustee can play an important role in ensuring that all of the beneficiaries of the trust are treated impartially and fairly. This is of particular importance in family situations where competing interests and family tensions can place trustees under strain. An independent trustee should be able to bring a robust and detached perspective to decision-making and support the other trustees in making the right decisions.

Another advantage of having an independent or third trustee is that the record keeping of the trust can be improved. Most professional trustees will insist that major decisions are recorded in writing and that, where necessary, legal, financial or accounting advice is obtained.

It’s important, however, that the independent trustee carries out his or her duties carefully and conscientiously. Trusteeship is not a passive role. All trustees must take part in important decisions and should be actively involved in the trust administration. If problems arise with the trust, it’s never an answer to say a trustee was ‘passive’ or included simply for the sake of appearances.

So, while there will be fees associated with having a professional trustee, the right independent trustee can be an ‘insurance policy’ against attacks on the trust by disgruntled family members or outside parties and can help ensure that the purposes for establishing the trust are not defeated.