Loans to beneficiaries are often made without proper consideration as to whether the powers being exercised will affect the preservation of trust assets or how these will affect any benefits to beneficiaries.

Recording a payment to a beneficiary as a loan does not conclusively make it so, and such a misrepresentation could put the trustees in breach of their duties as a trustee.

Under the Trusts Act 2019, trustees have a mandatory duty to act honestly and in good faith (s 25). They also have the following default duties that apply unless the Trust Deed in question modifies or excludes:

1. a general duty of care (s 29);
2. a duty to avoid a conflict between the interests of the trustee and the interests of the beneficiaries (s 34); and
3. a duty not to make a profit from the trusteeship of a trust (s 36).

The above duties mentioned are not the complete list of mandatory and default duties under the Act but are the ones that could be considered relevant to this situation.

If a trustee does not exercise their powers properly or they breach the above mentioned duties, a trustee is not entitled to be indemnified out of the trust’s assets. A trustee could also find themselves liable to beneficiaries.

Factors to consider include:

If a loan is made where the prospects of it being repaid is low, there is no security, no interest being charged and no clear repayment date, the loan could easily be characterised as a distribution instead.

At the very least trustees should consider the insertion of a Marshall Clause into the terms of the loan to offer some form of asset protection.

The trustees should also ensure that detailed Trust Minutes/Resolutions be completed contemporaneously with any such loan document outlining the considerations the trustees have taken before entering into the loan.

A comprehensive paper trail will significantly improve the trustees’ position in the face of potential future allegations of dishonesty and/or breach of trustee duties.