Liability of Beneficiaries of Trusts

True or False?

In light of section 100A of the Trustee Act 1925 (NSW), beneficiaries no longer have a personal obligation to indemnify a trustee.

Prior to 22 November 2019, a beneficiary who had full legal capacity to act on one’s own behalf and is absolutely entitled to the income and capital of the trust was personally liable to indemnify the trustee. This legal principle arose from a case in 1901 called Hardoon v. Belilios. It has generally been accepted that this rule did not extend to discretionary trusts.

On 22 November 2019, Section 100A of the Trustee Act 1025 (NSW) (the “Act”) abolished the rule in Hardoon v Belilios [1901].

On the surface this may lead people to believe that a beneficiary who meets the required criteria is no longer personally liable to indemnify a trustee.

Dig a little deeper and you will find this will not always be the case. So, the answer is False.

Some situations that s.100A of the Act may not cover include:

  1. Agency – A trustee acting as agent for the beneficiary
  2. Vicarious Liability – A trustee is an employee of the beneficiary and the trustee is acting in his or her scope of employment
  3. Constructive Trustee – A corporate trustee makes a bad decision resulting in litigation, and the directors of the corporate trustee transfer the assets of the trust to themselves
  4. Quasi-contractual – A trustee makes a payment to the beneficiary and it is a legal “mistake”, the trustee may be able to call upon the beneficiary to repay the trustee
  5. If the beneficiary makes a request of the trustee that causes a breach of trust, the beneficiary may still be personally liable for the damages suffered by the breach of trust (s. 86 of the Act still applies)
  6. Tracing assets that have been distributed to a beneficiary by the trustee is a proprietary right of the trustee and is not abolished by s.100A of the Act

Does this NSW legislation apply to your trust deed?

Does your trust deed state which law governs the Trust Deed? If not, then it will be the law with which the trust has its closest and most real connection. Even if your trust deed specifies the proper law as another state, it does not mean that the law of that state applies and the law of NSW does not.

In deciding what law applies to the trust, the following considerations are particularly relevant:

  1. the place of administration of the trust
  2. the place where the assets of the trust are situated
  3. the place of business or residence of the trustees
  4. the objects or purposes of the trust and the places where they are to be fulfilled.

The key takeaway is that s.100A of the Act does away with the uncertainties that arose from Hardoon but it does not have the effect that a beneficiary of a trust will never be personally liable.

Author: Claire Shulver

Contact our Trusts and Asset Protection team today at enquiries@antunes.com.au or phone us today on 02 9964 0499 to arrange a video conference.

The articles on this website comprise legal general information and not legal advice. The general information presented here must not be relied upon without legal advice being sought. In the event that you wish to obtain legal advice on the contents of this general information you may do so by contacting our office or your existing solicitor.