There are over 25,000 charities registered with Charities Services in New Zealand. Most of these organisations operate as charitable trusts. Whatever their size, charitable trusts are dependent upon the energy and commitment of their trustees.
The purpose of this article is to outline some of the issues you need to think about if you are asked to become a trustee of a charitable trust. As a minimum, you need to consider:
- the legal duties you will take on as a trustee;
- your investment obligations;
- how the trust is governed;
- your potential liabilities as a trustee; and
- whether the purpose of the trust is worthy of your time and effort.
The legal duties of trustees
Trustees of all trusts (including charitable trusts) are subject to a wide range of legal duties. These duties are created by the trust deed which govern the trust and by the general law relating to trusts. These duties continue for any trustee until they resign, although in certain circumstances, they can continue even after resignation.
The primary duties of a trustee are to:
- comply with the terms of the trust deed that created the trust;
- act honestly and loyally; and
- act in the best interests of the trust.
If you are considering becoming a trustee of a charitable trust, you should begin by familiarising yourself with the terms of the trust’s deed. The deed will set out your powers and obligations as a trustee. If the terms of the deed are not clear to you, you should discuss the terms with the existing trustees and obtain legal advice from your lawyer.
When reviewing the trust’s deed you should particularly focus on:
- what the purpose of the trust is;
- what powers you will have as trustee;
- how the deed deals with the remuneration and expenses you can be paid;
- whether there are any limitations on the trust’s activities (limitations to a geographical area, for example); and
- what the procedures are for administration of the trust (for example, how frequent are the trustees’ meetings?).
As well as strictly following the requirements of the trust deed, you will also need to:
- treat the trust’s potential beneficiaries impartially;
- ensure proper accounts are kept;
- exercise care, skill and prudence when carrying out your duties as a trustee;
- actively advance the charitable purposes of the trust (this means that you must act in a way you honestly believe will advance, and not harm, the trust’s charitable purposes);
- take reasonable steps to ensure that you have the skills and knowledge required to guide and monitor the management of the trust;
- exercise your powers yourself (you will not be able to delegate your duties to third parties unless specifically permitted to do so by the trust deed); and
- ensure that any payments by the trust are made to the correct beneficiary (if a beneficiary is overpaid, it is possible that you will be personally liable to account to the trust for the overpayment).
As a trustee you will need to be actively involved with the trust. This means that you should not simply rubber-stamp the decisions of the other trustees or accept, without question, the recommendations of professional advisers. Although it will sometimes be prudent to seek the opinion of professionals such as valuers, investment advisers, accountants or lawyers, you (and the other trustees) will ultimately be responsible for all trust decisions.
In addition to these general obligations, trustees also have some specific obligations relating to the investment of trust funds.
Your investment obligations
Until 1988 the law specified a range of investments trustees could invest in. This list could be adjusted in the trust deed but, in general terms, if the trustees of a trust invested in the legally specified investments, they could not face personal liability for any loss arising from those investments.
Since 1988, trustees have been able to invest trust funds anywhere they choose. However, there is a price to pay for this investment freedom; trustees can face personal liability for any investment losses if they fail to invest prudently. To act ‘prudently’ means to ‘exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others’ (section 13B of the Trustee Act 1956). Furthermore, trustees who are in the business of acting as a trustee (accountants, lawyers and others who regularly act in that capacity) need to exercise a higher degree of care, diligence and skill than other trustees.
The Trustee Act sets out the sorts of issues you will need to consider when exercising powers of investment. These include (but are not limited to):
- the desirability of diversifying trust investments;
- the risk of capital loss or depreciation;
- the likely income return;
- the effect of the proposed investment in relation to the tax liability of the trust; and
- the likelihood of inflation affecting the value of the proposed investment or other trust property.
The importance of making prudent investment decision highlights the need for charitable trusts to have robust governance frameworks.
How is the trust governed?
The trustees of a charitable trust are ultimately responsible for how the trust is governed. Governance involves responsibility for:
- human resource issues;
- developing strategy and policy;
- budgeting and planning;
- ensuring that the trust complies with its legal obligations; and
- monitoring and supervising the trust’s management.
How the trustees perform these responsibilities will depend upon the qualities and strengths of the individual trustees and the nature of the trust itself. The following factors can also be relevant:
- whether the trust has managers responsible for implementing the decisions of the trustees;
- the number and role of ‘independent trustees’ who do not deal directly with management;
- the existence and nature of any committee structures;
- the delegation policies adopted by the trustees; and
- how meetings are conducted (teleconferences, face to face meetings etc).
The key point is that the trustees need to monitor, review, debate, question and listen to advice from management and develop from that information an appropriate strategy to meet the trust’s objectives. This includes an obligation for trustees to identify problem areas.
The chairperson has a particularly significant role in trust governance. The chair is responsible for:
- maintaining a positive relationship with the management staff;
- developing the culture and values of the trustees as a whole;
- maintaining the competence of the other trustees; and
- resolving any dysfunction arising amongst the trustees.
Charitable trusts should also have a policy in place to ensure that conflicts do not arise between the duties of any trustee and their personal interests. Conflict of interest policies should include:
- maintaining a register of the personal interests trustees have which could conflict with the interests of the trust (to help ensure that all such interests are disclosed at all times); and
- ensuring that if any conflict of interest does arise, the conflicted trustee is not involved with any decision relating to the relevant matter.
Well organised governance helps to ensure that the trust is run efficiently and that the trust and its trustees comply with their legal obligations. Appropriate governance also has an impact on the potential personal liability of the trustees.
Your personal liability as a trustee
Generally, if you are a trustee of a trust you will be personally liable for the trust’s obligations. This means that you will be personally liable to satisfy the trust’s contractual obligations and other legal obligations such as tax payments. These obligations can be significant. If you accept appointment as a trustee of a charitable trust you therefore need to take steps to limit your personal liability. Some of the options available to you are:
- The trust could seek registration under the Charitable Trusts Act 1957. Registration as a charitable trust under this Act creates an incorporated trust board. The incorporated trust board then becomes liable for the obligations of the trust rather than the individual trustees themselves. This protects the trustees from personal liability in a way similar to the protection from personal liability available to directors of companies. Registration under the Charitable Trusts Act 1957 is different from registration under the Charities Act 2005 with Charities Services.
- You need to ensure that your right of indemnity from the trust assets has not been excluded by the trust deed. A right of indemnity allows you to use trust assets to meet the obligations you incur on the trust’s behalf.
- You need to ensure that you do not incur obligations on the trust’s behalf that cannot be satisfied from the trust’s assets. If you do, you may be personally liable to satisfy those liabilities.
- You should obtain insurance to cover any liabilities you incur in your capacity as a trustee. If authorised by the trust deed, the trust may be able to pay the premiums for this insurance for you.
Although you can limit your personal liability you cannot exclude it completely. If you breach your obligations as a trustee or commit fraud you may still face personal liability. You therefore need to take active steps to ensure that you meet your obligations as a trustee.
Is the purpose of the trust worthy of your time and effort?
It can be gratifying to be asked to act as a trustee of a charitable trust. However, before you accept such an offer it is worthwhile to consider not only the details of what will be required of you as a trustee, but also the nature of the trust itself. Are you interested in or passionate about the goals and activities of the trust? Do the purposes of the trust align with your own goals, talents and interests?
Becoming a trustee is a significant commitment, generally undertaken for little or no financial reward. Before accepting an offer of trusteeship, take time to consider whether the purpose of the trust is worthy of your time and effort.
There are a wide range of reasons for becoming a trustee of a charitable trust: you may want to give something back to your community or you may want to promote a cause that is important to you. Whatever your reason, it is important that you understand the legal implications of becoming a trustee before you accept appointment. This article provides a general overview of those obligations. If you have any specific questions about becoming a trustee of a charitable trust you are involved with, seek detailed advice from your lawyer.