Insight
The recent Court of Session decision of McCormack v McKinnon [2023] CSOH 70 highlights the importance of informed consideration when appointing trustees. Appointment creates a relationship of trust whereby trustees undertake positive duties to manage the trust’s estate with the utmost good faith. However, conscious or careless omissions risk breaching these duties. This can result in trustees becoming personally liable for any real or projective losses. Therefore, making the initial decision of who to appoint is only a snapshot of the careful thought required by the trustor.
In this case, the pursuer’s grandparents created respective trusts to hold assets for the pursuer. He was to be the sole beneficiary upon his 25th birthday. The first defender, the pursuer’s father, was appointed as one of the trustees. The first defender used the trust funds for his own personal gain. Two concurrent actions were brought together seeking evidence of accounting and all payments rightfully due to the pursuer. The court explored if the first defender breached his duties as a trustee.
A trust must be managed with the same degree of diligence that an ordinary man would exercise in the management of his own affairs (Raes v Meek [1889]). As such, proper accounts must be maintained (Ross v Ross (1896)) and failure to do so will amount to gross negligence (Wilson v Guthrie and others (1894)).
Voting dynamics are also an important foresight for preventing conflicts of interest. Indeed, the number of trustees appointed can affect how decisions are reached. Voting must be unanimous if there are two trustees. (Wolfe v Richardson (1927)). If three or more: decisions are agreed by simple majority. A trustee’s personal or business interests cannot conflict with their fiduciary duties owed to the trust (Aberdeen Railway Co v Blaikie Bros (1854)).
Trustees also have a duty to make appropriate investments. Regard must be had to the diversification of the trust’s portfolio to minimise risk. Trustees should seek independent legal advice before making any investments (Trusts (Scotland) Act 1921, s4A). Failure to invest suitably can leave the trustee personally liable for the return of investment lost (Melville v Noble’s Trustees (1896)). Calculations for projective yield if properly invested can also be applied retrospectively from the date at which investment ought to have been made.
The fiduciary duties breached by the first defender resulted in personal liability totalling at least £726,000. To calculate the potential loss over the 12 years of mismanagement, Lord Pentland began with the trust’s balance plus its interest prior to the misappropriation. This figure was then used to project what it would have accrued but for the breaches. Therefore, knowing the extent of the powers vested in trustees is essential for all parties. For trustors to make prudent appointments, anticipate potential conflicts and protect their intentions. For trustees to recognise that these duties cannot be wilfully ignored, and for beneficiaries to know that their rights are ultimately protected in law.