Trustees taking on liabilities of the trust
Posted: 24 February 2026
When someone acts as a trustee of a family trust, they often take on liabilities associated with the trust. Those liabilities generally include obligations to the trust’s lender (such as a bank) or other creditors.
Can they be held personally responsible?
While that does not usually cause issues for the trustee, there can be cases where a trustee is left personally responsible for a trust debt that they are not then able to recover from the trust. It’s a daunting prospect for both professional and non-professional trustees.
How trustees contract
It is a common misconception that when signing documents in your capacity as a trustee, your risk is limited to the assets of the trust. Unfortunately, this is not the case. A contract that is enforceable against a trustee can be enforced against the trustees (or any one of them) personally.
The reason is that a trust is not a separate legal entity or ‘person’ in the same way as a company or incorporated society. The trust itself cannot enter into a contract or be registered on a property title; only the individual trustees’ names can be listed.
It is important, therefore, for trustees to seek advice on the form of any contract that they are entering into in their capacity as a trustee. In some situations, however, clauses can be negotiated that limit the obligations of non-beneficiary trustees to the assets of the trust at the time in question (whatever those may be). This is an important protection for non-beneficiary trustees. These clauses will not usually be extended to include trustees who are also beneficiaries.
It is also important for the trustee to have a clear understanding of the trust’s assets and whether the trust is in a position to meet its obligations under the terms of the contract being entered into by the trustees. Taking on a loan that the trust would be unable to service, for example, would not be a wise decision for a trustee to make.
How can trustees recover their losses?
Often, however, the fact that individual trustees are liable to the trust’s creditors does not cause individual trustees significant issues. Trustees have a general right of indemnity from the trust funds; if they must pay a debt on behalf of the trust, the trust’s funds must be used to reimburse the trustee.
What happens if the trust has no assets
In a recent decision of the High Court of Australia,[1] a former trustee found himself in the unenviable position of being found liable to a creditor of the trust for payment of more than A$3 million that he was unable to then recover from the trust.
A creditor of the trust had begun court proceedings against the former trustee in 2006 relating to unpaid sums on a share purchase.
In February 2007, the former trustee resigned as a trustee of the trust and was replaced by a trustee company, whose director was the brother of the Default Beneficary and Appointor of the trust.
Nine years later (and after a series of court proceedings in the meantime between the creditor and the trustees and others), the court entered judgment against the former trustee in favour of the creditor for A$3.4 million.
In the ordinary course, the former trustee would have then demanded that sum from the trust by way of indemnity. However, the trust did not have sufficient assets to provide indemnity. The court found that the current trustees had deliberately depleted the trust’s assets to avoid any potential liability to either the creditor or the former trustee.
The current trustees of the (perhaps aptly named) Sly Fox Family Trust were found to have dishonestly and fraudulently stripped assets out of the trust by transferring its assets to various family members and companies controlled by family members of the Default Beneficiary and Appointor.
In the court proceedings that followed, it was unsuccessfully argued that the current trustees owed an obligation to the former trustee to ensure that the trust retained sufficient assets to meet any financial obligations that it might owe to the former trustee under the right of indemnity. The court, however, did not agree that the current trustees owed such an obligation to the former trustee.
Two appeals followed; the decisions of both the Court of Appeal of the Supreme Court of New South Wales and the High Court (which is effectively the Australian equivalent of our Supreme Court) were split. In the Court of Appeal the judges were split 2/1, and they were split 3/2 in the High Court. This had significant repercussions for both the creditor of the trust and the former trustee, neither of whom were successful.
What can trustees do?
Trusteeships come with risks. When taking on obligations to third parties, trustees must carefully consider the financial position of the trust, and any risks associated with the people involved.
They should also consider the terms of the contracts they are entering into and whether any clauses can/should be included to limit their liability as non-beneficiary trustees.
Indemnities are only as valuable as the assets of the trust at the time. Therefore, trustees should not rely on indemnities alone if there are other options available to limit their risk.
[1] Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1
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