Deadlocked on decisions: when trustees can't agree

A trust is built on the assumption that the trustees will act together. The trust deed gives them powers, but the law expects those powers to be exercised collectively and for the benefit of the beneficiaries. When trustees cannot agree, the trust can quickly become difficult to administer and, in some cases, expensive to resolve.

This situation is more common than people realise, particularly in family trusts where the trustees are also family members and often beneficiaries themselves.

The Unanimity Rule

As a starting point, trustees must act unanimously.

That principle is longstanding in trust law and is reflected in the way trustee powers operate under the Trusts Act 2019. A trustee cannot simply make a decision independently unless the trust deed expressly allows it. The trustees must consider the issue together and reach a common decision.

The reason for the rule is straightforward. Trustees hold legal ownership of trust property together and are collectively responsible for how it is managed. Each trustee is expected to participate in decisions and bring their independent judgement to the process.

In practice this means:

• decisions about distributions must be agreed by all trustees

• decisions about selling or purchasing trust property (and the purchase price) must be agreed by all trustees

• decisions about investments, lending, or borrowing must be agreed by all trustees.

If one trustee disagrees, the decision usually cannot proceed.

When the Trust Deed Allows Majority Decisions

Some trust deeds attempt to solve the problem by allowing majority decision making.

At first glance this seems practical. If three trustees are appointed, two can outvote the third and the trust can continue operating.

However, majority clauses can create their own problems.

Even where a trust deed permits decisions by majority, each trustee still owes the same fiduciary duties to the beneficiaries. A trustee who disagrees with a proposed decision cannot simply ignore it and assume the majority will take responsibility.

A dissenting trustee faces a difficult position:

• they remain a trustee

• they remain responsible for the decision

• they may still be personally liable if the decision breaches trust duties.

In other words, majority voting does not remove a trustee’s obligations. If the majority decision is problematic, all trustees may still be exposed.

Conflict When a Trustee Is Also a Beneficiary

Many family trusts include beneficiary trustees. In most cases this works well. A beneficiary trustee often understands the family context and can contribute useful judgement.

The difficulty arises when a trustee must decide something that directly affects their own interests.

Examples include:

• a decision to distribute income or capital to one beneficiary rather than another

• a decision affecting occupation of trust property

• a decision about whether to advance funds to one branch of the family.

Trustees are required to avoid conflicts between their personal interests and their duties as trustees. Where a conflict exists, the trustee must manage it carefully and often should not participate in the decision.

If a trustee insists on influencing a decision that benefits them personally, the other trustees may find it impossible to reach agreement.

This is one of the most common reasons for trustee deadlock.

The Risk of Breaching Duties to Beneficiaries

Trustees do not manage a trust for themselves. They act for the beneficiaries as a whole.

The Trusts Act 2019 places several core duties on trustees, including duties to:

• act in accordance with the terms of the trust

• act honestly and in good faith

• act for the benefit of the beneficiaries

• not self-benefit

• avoid a conflict of interest

• exercise powers for a proper purpose.

If trustees become entrenched in a dispute with each other, those duties can easily be overlooked.

For example:

• refusing to approve necessary maintenance on a trust property because of a disagreement with another trustee

• blocking distributions for reasons unrelated to the beneficiaries’ interests

• delaying decisions indefinitely while the trustees argue.

Where trustee conflict causes loss to the trust, beneficiaries may have grounds to challenge the trustees’ conduct.

Personal Liability of Trustees

A point that is sometimes misunderstood is that trustees are personally liable for breaches of trust.

Although trustees manage trust property, their duties attach to them personally. If their decisions cause loss to the trust, the trustees may be required to compensate the trust from their own resources.

This can arise where trustees:

• act outside their powers

• make decisions in breach of their duties

• fail to act when action was required.

Trustees may sometimes be indemnified from trust assets, but that protection is not absolute. If the trustee’s conduct amounts to a breach of trust, the indemnity may not apply.

Legal Costs in Trustee Disputes

Trustee disputes often lead to legal costs.

Trustees sometimes assume those costs will be paid from the trust fund. That can be true where the costs are incurred properly in administering the trust or seeking guidance from the Court.

However, where the dispute arises from a trustee’s conduct or breach of duty, the Court may order that trustee to bear the costs personally.

In serious cases trustees can be ordered to:

• repay trust losses

• reimburse the trust for legal costs

• pay the costs of other parties involved in the dispute.

This is another reason trustee conflict needs to be addressed early rather than allowed to escalate.

What Happens When Trustees Are Deadlocked

When trustees cannot reach agreement, several outcomes are possible:

1. One (or all) trustee(s) resigns

This is often the simplest solution if the disagreement is ongoing.

2. A new trustee is appointed

Sometimes bringing in an independent trustee can help resolve the situation.

3. The Court becomes involved

The High Court has the power to:

• remove a trustee

• appoint a replacement trustee

• give directions about administration of the trust.

Court involvement is usually a last resort because it can be costly and time-consuming.

The Practical Reality

Trust structures work best when trustees can act together and make decisions calmly and objectively. When that cooperation breaks down, the trust can become difficult to manage and the trustees themselves may face personal exposure.

Many family trusts were established years ago without much thought being given to how disagreements might be resolved. As families change and assets become more valuable, those governance issues become more visible.

Reviewing trustee arrangements and decision-making provisions before conflict arises is often far easier than trying to repair the situation once trustees have stopped working together.