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Breach of Trust

Also known as: Trust Violation, Breach of Fiduciary Duty

Definition

Breach of trust occurs when a trustee fails to comply with the trust's terms or their legal duties, making them personally liable to compensate beneficiaries for any losses caused.

Understanding breach of trust is crucial for beneficiaries protecting their inheritance and trustees avoiding devastating personal liability.

What Does Breach of Trust Mean?

Breach of trust occurs through action (doing something prohibited) or inaction (failing to do something required). Under English and Welsh law, trustees breach their obligations in three ways: violating trust deed terms, breaching fiduciary duties (the obligation to act with undivided loyalty in beneficiaries' best interests), or failing to meet their statutory duty of care under Section 1 of the Trustee Act 2000. Courts assess breach using an objective "reasonable trustee" test. Trustees face joint and several liability—each can be held personally responsible for the full loss.

Common breaches include unauthorised investments, distributing money to wrong beneficiaries, conflicts of interest, negligent management, and failing to keep proper accounts. Professional trustees are held to higher standards than lay trustees. For example, Michael, trustee of his late father's £400,000 estate trust, invested £150,000 in a friend's start-up without consulting beneficiaries or seeking legal advice. The trust deed permitted only UK government bonds, blue-chip shares, and residential property. When the start-up failed, Michael became personally liable to restore the entire £150,000—his good intentions were irrelevant because he lacked authority.

Breach carries severe personal financial consequences. Beneficiaries can pursue compensation, account of profits, injunctions, removal, and tracing to recover misappropriated property. Several defences exist but the bar is high. Under Section 61 of the Trustee Act 1925, courts may excuse breach if the trustee "acted honestly and reasonably, and ought fairly to be excused." Beneficiary consent provides a defence only if the beneficiary had full capacity and consented in writing. Exemption clauses may limit liability for honest mistakes but cannot protect against dishonesty or fraud. The limitation period is 6 years under the Limitation Act 1980, but there is no time limit for fraud or trustee misappropriation.

Common Questions

"What happens if a trustee commits a breach of trust?" When a trustee commits a breach of trust, they become personally liable to restore the trust fund to the position it would have been in had the breach not occurred. Beneficiaries can take legal action to seek compensation, remove the trustee, or recover misappropriated trust property. In serious cases involving fraud or dishonesty, there is no time limit for claims.

"Can a trustee be excused for a breach of trust?" Yes, under Section 61 of the Trustee Act 1925, a court may relieve a trustee wholly or partly from personal liability if they acted honestly and reasonably, and ought fairly to be excused for the breach. Additionally, if a beneficiary of full age and capacity consented to the breach in writing without undue influence, this may provide a defence.

"How long do beneficiaries have to claim for breach of trust?" Generally, beneficiaries have 6 years from the date of the breach to bring a claim under the Limitation Act 1980. However, there is no time limit for claims involving fraud, concealment, or when a trustee has misappropriated trust property for their own benefit. The equitable doctrine of laches may also prevent claims if there has been unreasonable delay.

Common Misconceptions

Myth: Trustees have complete freedom to manage trust assets however they see fit.

Reality: Trustees must strictly comply with trust deed terms and legal duties. Every decision must be made in beneficiaries' best interests, within the scope of powers granted, and with reasonable care. Even well-intentioned decisions outside these boundaries constitute breach with personal liability.

Myth: If a trustee made a mistake years ago but beneficiaries didn't complain, it's too late now.

Reality: While the limitation period is 6 years, there is no time limit for fraud, concealment, or trustee misappropriation. The 6-year period runs from when the beneficiary discovered or should have discovered the breach, not when it occurred.

  • Trustee: The person who can commit breach of trust and who bears personal liability when legal duties are violated.
  • Fiduciary Duty: One category of breach involves violating fiduciary duties—the obligation to act with undivided loyalty.
  • Trust: The legal structure within which breach occurs, created by a trust deed setting out terms trustees must follow.
  • Beneficiary: The persons with legal standing to bring breach of trust claims and whose interests trustees must prioritise.
  • Removal of Trustee: One remedy available when trustees commit serious or repeated breaches.

Need Help with Your Will?

If you're creating a trust in your will, choosing the right trustees protects your beneficiaries from breach. Understanding trustee responsibilities helps you select individuals or professionals who can fulfill these serious legal obligations.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.