Trustees' Rights of Indemnity, and Can Trustees Ask Beneficiaries to Sign an Indemnity? What You Need to Know

Trustee’s Right of Indemnity: Under general trust law, trustees have a right to indemnification for liabilities and expenses incurred in properly administering the trust under general trust law: Worrall v Harford (1802) 8 Ves 4, 8; 32 ER 250, 252 per L Eldon; Re the Exhall Coal Company (Limited); Re Bleckley (1866) 35 Beav 449; 55 ER 970 per Lord Romilly MR; and under s 81 of the Trusts Act 2019. Under s 81(3) the operation and enforcement of the indemnity in this section is governed by the rules of the common law and equity relating to trusts. The authorities show that the principal purpose of the right to indemnification is to ensure, as far as the trust assets permit, that the trustee is not required to bear liabilities which are not incurred for the trustee’s personal benefit. It is a right for the protection of the trustee: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [69]; In re The Exhall Coal Co Ltd (1866) 35 Beav 449, 453; 55 ER 970, 971-972; and Jennings v Mather [1901] 1 KB 1, 6-7. Typically, this indemnity comes from the trust fund itself: the trustee can reimburse themselves out of trust assets for proper costs or liabilities.

The need for the right of indemnity arises because, in English law, a trustee is personally liable for all debts and obligations incurred by it in the course of acting as a trustee. The trustee is in law the absolute owner of assets but, by virtue of what equity recognises as obligations undertaken by or imposed on the trustee in respect of the assets and enforceable in equity against the trustee, the trustee cannot treat those assets as its own but must deal with them in accordance with those obligations. Equity will enforce those obligations on the application of the persons to whom the obligations are owed, generally the beneficiaries: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [58].

Liabilities incurred by a trustee acting as such are enforceable at the suit of the creditor against the trustee personally, and judgments may be executed against the trustee’s personal assets. A judgment creditor may not, however, execute the judgment against assets held on trust, even if the judgment is in respect of a properly incurred “trust debt”, the reason being that the judgment is against the trustee personally in respect of a liability for which it is personally liable and such a judgment cannot be executed against assets held for others. The judgment creditor’s right of recourse to such assets is by way of subrogation to any unexercised right of the trustee to exoneration from the trust assets: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [59].

The right of indemnity arises by operation of law, in the sense that it is a right conferred by equity on all trustees: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [62]. In Worrall v Harford (1802) 8 Ves Jun 4, 8; 32 ER 250, 252 Lord Eldon LC said: “It is in the nature of the office of a trustee, whether expressed in the instrument or not, that the trust property shall reimburse him all the charges and expenses incurred in the execution of the trust. That is implied in every such deed.” In In re The Exhall Coal Co Ltd (1866) 35 Beav 449, 453; 55 ER 970, 971-972 (“Exhall Coal”), Lord Romilly MR said that the right of indemnity was “a right incidental to the character of trustee and inseparable from it”.

As a result, a trustee may retain the trust fund until they have been indemnified for present liabilities and for contingent or future liabilities: S and S Ltd v XYZ Ltd [2016] NZHC 26 applied in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [33]. 

 In S and S Ltd v XYZ Ltd [2016] NZHC 26 (footnotes and emphasis omitted), citing Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 , in which Brereton J in turn drew on Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153; and applied in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [33] , the relevant principles were summarised as follows:

(a)As against a third party, a trustee is personally liable for debts and liabilities incurred as a trustee;

(b)The trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee by recoupment of expenditure and exoneration of liability;

(c)The right of indemnity is secured by an equitable lien over the trust assets, which arises by operation of law, confers a proprietary interest by way of security in the trust assets and takes priority over the claims of beneficiaries;

(d)The lien extends to all the trust assets, except for those specifically excluded by the trust deed;

(e)As the lien is equitable, the trustee can enforce it only by judicial sale or appointment of a receiver, not by sale out of court;

(f)The right of indemnity accrues at the time the obligation is incurred; …

(h)If the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee — except in the case of a bona fide purchaser for value;

(i)A trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised.

As the Court of Appeal noted in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [39]:

These are general principles only, not specific rules. Their application may turn on the circumstances in which the indemnity is invoked. It is important to bear in mind that a trustee’s indemnity has different aspects: reimbursement, exoneration, retention and realisation. A trustee who incurs a liability may discharge it out of his own pocket and then reimburse himself from the trust fund. Alternatively, he may discharge the liability by paying directly from the trust fund, so as to exonerate himself. A trustee may retain the trust fund until he has been indemnified for present liabilities and for contingent or future liabilities. A trustee may realise trust assets to meet his expenses and liabilities.

In Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877, citing Palmer v Carey [1926] AC 703 (PC) at 706 –707, applied in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [34], the Privy Council recently considered the scope of trustee’s indemnities. Lord Richards JSC and Sir Nicholas Patten, for the majority of the Board, summarised the position as follows:

[109] The right of indemnity enjoyed by a trustee does not … impose any personal obligation on any party to make payment. The trustee’s right is to payment out of the trust fund. It is a right to have the fund applied in reimbursement of liabilities already paid by the trustee or in exoneration of liabilities which the trustee is required to pay, net in either case of any amounts for which the trustee is accountable. It is a right that the court will enforce by an order for payment out of the fund, in effect an order for specific performance.

[110] It is the consequence of that right to equitable enforcement of the indemnity out of the trust property that the trustee has a proprietary interest in the trust property. This is not security for the payment of a debt, as in the case of an unpaid vendor’s lien or a solicitor’s lien, because there is no debt payable by any party to the trustee. The trustee’s right, enforceable in equity, is no more and no less than the right to have the trust property applied in indemnifying the trustee against liabilities properly incurred. Where such a right exists for payment out of a fund, which the court will enforce, the fund is subject to an equitable charge in favour of the person entitled to payment and it will in equity create a proprietary interest in the fund in favour of that person. This is a longstanding equitable principle, summarised by the Privy Council in Palmer v Carey … where Lord Wrenbury … referred to the “familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance”.

Limitations on Trustees’ Rights of Indemnity: S 41 of the Trusts Act 2019 preserves this right of indemnity but also places limits on it, namely a trustee cannot be indemnified from trust property for liability arising from the trustee’s dishonesty, wilful misconduct, or gross negligence. S 40 complements s 41 by providing that a trust must not limit or exclude a trustee’s liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence. Any clause in a trust deed purporting to give such an indemnity or to exempt the trustee from liability for serious breach of trust is invalid as contrary to public policy (Trusts Act 2019, s 42). These provisions reflect the long-standing common law rule that there is an irreducible core of trustee obligation that cannot be contracted away.

The right of indemnity gives rise to an equitable proprietary interest in the trust property generally: The right of indemnity gives rise to an equitable proprietary interest in the trust property generally: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [105], Hong v Kinnon [2025] NZCA 117 at [37], and Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360. This is not a charge or lien in the typical sense: Hong v Kinnon [2025] NZCA 117 at [37] applying the High Court of Australia in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth of Australia [2019] HCA 20; (2019) 268 CLR 524 at [83]. It is sometimes referred to as a “beneficial interest”: see the discussion in Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [143].

Such a proprietary interest does not defeat the equitable ownership by the Trust but co-exists with it: Hong v Kinnon [2025] NZCA 117 at [37].

Former Trustees’ Right of Indemnity from the Successor Trustees: A trustee’s right of indemnity, whatever its nature, is not lost when a trustee ceases to be a trustee. Whether or not it is a purely personal right, it remains enforceable by the former trustee and, in the case of a formal insolvency of the trustee or the death of an individual trustee, it remains enforceable for the benefit of the trustee’s estate: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [64] and [166], In re Suco Gold Pty Ltd (in liq) [1982] SASR 99, at [109], Coates v McInerney (1992) 6 ACSR 748, Dimos (trading as Leo Dimos & Associates v Dikeakos Nominees Pty Ltd [1996] FCA 590; (1997) 149 ALR 113, Rothmore Farms Pty Ltd (in provisional liquidation) v Belgravia Pty Ltd [1999] FCA 745; (1999) 2 ITELR 159, Southern Wine Corporation Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236 at [30], Glazier Holdings Pty Ltd (in liq) v Australian Men’s Health Pty Ltd (in liq) [2006] NSWSC 1240, Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246, Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344 at [21]; Pitard Consortium Pty Ltd v Les Denny Pty Ltd [2019] VSC 614 at [15], and Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26 at [44] and [83], Underhill & Hayton: Law of Trusts and Trustees, 19th ed, at para 81.1; Snell’s Equity, 34th ed, at para 44-004; Lewin on Trusts, 20th ed, at 17-057 and 17-058.

A successor trustee owes no fiduciary duty to a former trustee in respect of the former’s indemnity rights. The former trustee has a right of indemnity for liabilities incurred as trustee, which takes priority over beneficiaries’ interests. However, the new trustee is under no fiduciary obligation to preserve assets for the old trustee’s indemnity, so the old trustee’s only recourse is against the trust assets themselves: Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1 (High Court of Australia with a 4 to 3 majority). The outcome meant the former trustee’s claim against third parties (for knowing assistance in dissipation of trust assets) failed, since no duty was owed by the new trustee. The High Court advised that former trustees or trust creditors must rely on remedies like injunctions or court-ordered asset sales to enforce their indemnity, rather than any assumed duty by successor trustees.

Priority as between the proprietary interests of successive trustees: The proprietary interests of successive trustees in the trust assets are competing or equal. The interest of each trustee arises to protect the personal position of that trustee against the liabilities which it has incurred and for which it is liable. These are personal interests of each trustee and it is difficult to see that they can be regarded as not equal or competing, in the absence of special circumstances which would make it inequitable for an earlier appointed trustee to rely on its priority: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [177]. In the view of the majority of Lord Briggs (with whom Lord Reed, Lady Rose and Lady Arden (at [279]), agreed) considerations of justice, fairness, equity, and common sense strongly militate in favour of the recognition between trustees of a pari passu general rule for enforcement between them of their liens over an inadequate trust fund: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [277]. In the view of the minority Lord Richards and Sir Nicholas Patten (with whom Lord Stephens agreed) the interests of successive trustees rank as between themselves in the order of their creation, that being the date of appointment of each trustee: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [211].

Trust beneficiaries are not personally liable for the trust’s debts or the trustee’s liabilities: Neither the beneficiaries (except in the case of a trust or estate where all of the beneficiaries are of full legal capacity, and absolutely entitled to the trust property) nor any successor trustees are under any personal liability to indemnify a trustee. As a result, trust or estate beneficiaries are not normally personally liable for the trust’s or estate’s debts or the trustee’s liabilities: Williams v Balfour (1890), 18 SCR 472; Napev Construction Ltd v Lebedinsky (1984), 7 CLR 57 at para. 23 (Ont HCJ); Chevron Canada Resources v. Canada (Attorney General), 2022 ABCA 108 at [48]. In Chevron Canada Resources v. Canada (Attorney General), 2022 ABCA 108 the Alberta Court of Appeal considered a trial order that had made both the trustee (the federal government) and the beneficiaries of an Indian oil royalties trust (a statutory trust with fixed beneficial interests)(“First Nations bands”) liable to repay Chevron’s mistaken overpayment of royalties, with the bands to indemnify the trustee.  The Court of Appeal reversed that aspect, holding at [47] that a trustee acts as a principal, not as an agent of the beneficiaries, applying Trident Holdings Ltd v Danand Investments Ltd (1988), 64 OR (2d) 65 at pp. 73-75, 49 DLR (4th) 1 (CA), and L. Tucker et al, Lewin on Trusts, 20th ed (London: Sweet & Maxwell, 2020) at para. 24- 037.

The right of indemnity is a right to payment out of the trust assets, which is enforceable where the assets have vested in a new trustee by an application to the court to which the current trustee, as the legal owner of the trust assets, is a necessary party:  Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [63].

The rule in Hardoon v Belilios: The Privy Council decision in Hardoon v Belilios [1901] AC 119 is principally cited as the basis for beneficiaries being held liable to indemnify trustees. In that case, the Board was of the opinion that where the only beneficiary of a trust (referred to as a cestui que trust) is sui juris (that is, has full legal capacity to act on their own behalf), such a beneficiary is subject to an equitable personal obligation to indemnify the trustee, unless they can show some good reason why the trustee should bear them personally.

Lord Lindley stated at pages 123 to 124 (citations omitted):

The plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burden unless he can shew some good reason why his trustee should bear them himself. The obligation is equitable and not legal, and the legal decisions negativing it, unless there is some contract or custom imposing the obligation, are wholly irrelevant and beside the mark. Even where trust property is settled on tenants for life and children, the right of their trustee to be indemnified out of the whole trust estate against any liabilities arising out of any part of it is clear and indisputable; although, if that which was once one large trust estate has been converted by the trustees into several smaller distinct trust estates, the liabilities incidental to one of them cannot be thrown on the beneficial owners of the others. This was decided in Fraser v Murdoch, which was referred to in argument. But where the only cestui que trust is a person sui juris, the right of the trustee to indemnity by him against liabilities incurred by the trustee by his retention of the trust property has never been limited to the trust property; it extends further, and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify his trustee. This is no new principle, but is as old as trusts themselves.

The rule in Hardoon is relevant where the trust assets are insufficient to reimburse the trustee for a liability properly incurred in the administration of the trust. Lord Lindley recognised certain exceptions to this principle, namely where property was held on trust for tenants for life, or for infants, or in the case of “special trusts limiting the right to indemnity”, where there was no beneficiary who could be justly expected or required personally to indemnify the trustee: Hardoon v Belilios [1901] AC 118 at 127.

Hardoon v Belilios was not a case involving a trust or an estate. The appellant was the registered holder of shares in a company and held them on trust for the respondent, who was the sole beneficial owner of the shares. The shares were not fully paid up when the company went into liquidation. Calls were made on the trustee in respect of the shares in the winding-up of the company. The trustee’s liability to pay calls on the shares did not derive from any decision of the trustee but simply from holding the shares on trust for the respondent. After the trustee paid the calls made by the liquidator, he brought an action against the respondent beneficiary for indemnification.

At trial, the Chief Justice found on the evidence that Belilios had indeed been the actual owner of the shares since 30 June 1893, but he granted a non-suit on the ground that, absent any contract or request by Belilios, there was no legal obligation for Belilios to indemnify Hardoon. The Full Court of Hong Kong in 1899 affirmed that decision on appeal, agreeing that no privity of contract or trust relationship had been sufficiently established to make Belilios liable. Hardoon appealed to the Privy Council, which in 1901 reversed the Hong Kong courts’ decisions. Lord Lindley, delivering the Board’s judgment, held that the facts that the plaintiff had proved were sufficient to make out a case requiring an answer. Their order was that the appeal be allowed with costs, the non-suit be set aside, and the matter remitted to the Hong Kong courts for retrial.

Towards the end of his judgment, Lord Lindley twice mentioned that the defendant had created the trust for himself at [1901] AC at 126 and at 127. These two remarks might be seen as invoking a narrow principle that a beneficiary of a trust who is also the creator of the trust has a personal obligation to indemnify the trustee: Joseph C Campbell, The Undesirability of the Rule in Hardoon v Belilios,  Trust Law International, 34:3: 2020, pp 131-164. That narrow principle was already well established by 1901: Ex parte Chippendale (1853) 4 De G M & G 19, at 54, 43 ER 415 at 428; In Re National Financial Co (1868) LR 3 Ch 791 at 794, per Sir W Page Wood V-C at 795; Hemming v Maddock (1870) 10 Eq 47; James v May (1873) LR 6 HL 328; Jervis v Wolferstan (1874) LR 18 Eq 18 at 24 per Jessel MR; Hobbs v Wayet (1887) 36 Ch D 256 at 258; Jeffray v Webster (1895) 1 ALR 65 at 66 - 67; Toohey v McCulla (1890) NSWR (Eq) 264 at 268 – 9; Wynne v Tempest [1897] 1 Ch 110; and repeated after Hardoon in Matthews v Ruggles-Brise [1911] 1 Ch 194 at 202 – 3: Joseph C Campbell, The Undesirability of the Rule in Hardoon v Belilios,  Trust Law International, 34:3: 2020, pp 131-164. In Wynn v Tempest [1897] 1 Ch 110. Chitty J said at 113:” A right to indemnity may arise under an express or implied contract, or by reason of an obligation resulting from the relation of the parties. Such an obligation arises in equity from the relation of the parties where two trustees are liable for a breach of trust and one has applied the trust fund to his own use: in that case the trustee who has so misapplied the fund is liable to indemnify his co-trustee; so where a man has requested another to hold as trustee for him shares upon which there is a liability for calls or the like, the trustee is entitled to an indemnity, not merely out of the trust property, but by the cestui que trust personally. I give these two cases merely by way of illustration.”

The narrow principle that a beneficiary of a trust who is also the creator of the trust has a personal obligation to indemnify the trustee would have been adequate to decide the case:  Joseph C Campbell, The Undesirability of the Rule in Hardoon v Belilios,  Trust Law International, 34:3: 2020, pp 131-164. However, the thrust of Lord Lindley’s judgment is that he is propounding the broad rule quoted above.

As the New South Wales Law Commission concluded in Report 104, Laws relating to beneficiaries of trusts, May 2018: “As the Mr Campbell’s [Hon J Campbell QC] submission convincingly demonstrates that the cases that Lord Lindley considered do not justify the rule that he drew from them, and that it has long been recognised that Lord Lindley’s rule was a novelty: It was laid down clearly for the first time in Hardoon v Belilios that the right of a trustee to be personally indemnified by his cestui que trust, where the cestui que trust was an absolute beneficial owner, rested on a general principle of equity as much as his right to indemnity out of the trust funds. In most of the earlier cases in which the personal right to indemnity had been enforced the cestui que trust was also creator of the trust, and the right to indemnity could therefore be and often was based on a contract implied from the request to undertake the duties of trustee: D Browne, Ashburner's Principles of Equity (2nd ed, Butterworths, 1933) 161, referring, as examples, to Balsh v Hyham (1728) 2 P Wms 453; 24 ER 810; German Mining Co; ex parte Chippendale (1853) 4 De G M & G 19; 43 ER 415, Jervis v Wolferstan (1874) LR 18 Eq 18; and Wynne v Tempest [1897] 1 Ch 110.”

For a comprehensive and insightful discussion of the authorities relied on by Lord Lindley see Joseph C Campbell, The Undesirability of the Rule in Hardoon v Belilios,  Trust Law International, 34:3: 2020, pp 131-164. See also R A Hughes, ‘The Right of a Trustee to a Personal Indemnity from Beneficiaries” (1990) 64 Australian Law Journal 567, 570-571.

Nonetheless, as Mr Campbell also recognised, the rule must be regarded as established in Australian law: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.8].  In Australia, the rule was adopted in 1946 by two of the three High Court judges who decided Trautwein v Richardson [1946] Argus Law Reports 129 (at 131 per Latham CJ, 134 per Dixon J).  The rule in Hardoon was applied in Australia in: Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440; J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd [1985] VR 891; McLean v Burns Philp Trustee Co Pty Ltd [1985] 2 NSWLR 623; Rosanove v O’Rourke [1988] 1 Qd R 171; Causley v Countryside (No 3) Pty Ltd v Bayside Brunswick Pty Ltd ( Supreme Court of New South Wales, 20 April 1994, unreported); Balkin v Peck (1998) 43 NSWLR 706 at 712 per Mason P (Priestly JA and Sheppard AJA agreeing); Rosanove v O’Rourke [1998] 1 Qd R 171; Chief Commissioner of State Revenue v CCM Holdings Trust Pty Ltd [2014] NSWCA 42 at [72] per Gleeson JA; Wieland v Texxcon Pty Ltd [2014] VSCA 199 at [95], and has been applied to trusts with multiple beneficiaries: Balkin v Peck (1998) 43 NSWLR 706; Hughes (n 50) Furthermore, the New South Wales Court of Appeal has held that the liability of a beneficiary to indemnify the trustee extends to liabilities incurred before the person even became a beneficiary: Causley v Countryside (No 3) Pty Ltd (NSWCA, 2 September 1996, unreported).

The rule in Hardoon v Belilios has been followed in several jurisdictions including New Zealand.

In the United States beneficiaries are not liable to indemnify trustees unless they have agreed to do so, or the beneficiary has been overpaid by mistake when a trust liability was still outstanding: Balkin v Peck (1998) 43 NSWLR 706, 714; Nuncio D’Angelo, Commercial Trusts (Lexis Nexis Butterworths Australia 2014, [4.156] – [4.160]; A H Oosterhoff, Indemnification of Trustees: the rule in Hardoon v Belilios 4 Est & Tr Q (1978) 180, 180.

The application of the rule in Hardoon v Belilios is uncertain and circumscribed: “The rule does not apply to all trusts. It seems not to apply where the beneficiaries are not sui juris. It does not apply where it would be inconsistent with the nature of the trust, as in the case of a club (or presumably other voluntary nonprofit association). It could not extend to “purpose” trusts, nor does it appear capable of application to discretionary trusts. However, the extent of the exceptions to its application is wholly unclear. This leaves the law – and investors - uncertain”: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.29].  Although the rule in Hardoon v Belilios dealt with a single beneficiary, it should apply “where there is more than one beneficiary and all of them are sui juris and entitled to the same interest as absolute owners between them”: H A J Ford, “Trading Trusts and Creditors’ Rights” (1981) 13 Melbourne University Law Review 1, 7.12. The aspects of the operation of the rule in Hardoon v Belilios rule that remain unclear are discussed in J C Campbell, The Undesirability of the Rule in Hardoon v Belilios (2020) 34 Trust Law International 131.

Courts have, in some instances, declined to apply the rule in Hardoon v Belilios. For example, the Privy Council itself, in the later case of Wise v Perpetual Trustee Co Ltd [1903] AC 139 reached a different conclusion. The case involved the trustees of a club claiming an indemnity from members of the club for unpaid rent. The Privy Council found against the trustee, on the ground that the rule in Hardoon “by no means applies to all trusts, and it cannot be applied to cases in which the nature of the transaction excludes it”: Wise v Perpetual Trustee Co Ltd [1903] AC 139, 149. “[T]he nature of the transaction” appears to be a reference, in that case, to the essential nature of club membership, as distinct from the presence of multiple beneficiaries: Wise v Perpetual Trustee Co Ltd [1903] AC 139, 149, 150.

The law has recognised the following situations in which a trustee could be entitled to indemnity from a beneficiary if there was a relationship of trustee and beneficiary, plus some additional element:  

Before Hardoon v Belilios:

1.       Where the trustee had accepted the office of trustee at the request of the beneficiary: Balsh v Hyham (1728) 2 P Wms 453; 24 ER 810; ex parte Chippendale (1853) 4 De G M & G 19, 54 43 ER 415, 428; In Re National Financial Co (1868) LR 3 Ch 791, 794, per Sir W Page Wood V-C at 795; Hemming v Maddock (1870) 10 Eq 47; James v May (1873) LR 6 HL 328; Jervis v Wolferstan (1874) LR 18 Eq 18, 24 per Jessel MR; Hobbs v Wayet (1887) 36 Ch D 256, 258; Toohey v McCulla (1890) NSWR (Eq) 264, 268 – 9; Jeffray v Webster (1895) 1 ALR 65, 66 - 67; Wynne v Tempest [1897] 1 Ch 110; and Matthews v Ruggles-Brise [1911] 1 Ch 194, 202 - 3.

2.       Where the beneficiary requested the trustee to undertake some particular liability, or enter into some particular transaction, the beneficiary could have a personal obligation to indemnify the trustee concerning that particular liability or transaction, though not concerning any other liability to which the trustee might become subject: Balsh v Hyham (1728) 2 P Wms 453; 24 ER 810 where a beneficiary requested the trustee to borrow money on the security of the trust property and pay the loan proceeds to the beneficiary; and Hobbs v Wayet (1887) 36 Ch D 256, 258.

3.       When a beneficiary of a trust requested a trustee to enter a particular transaction or undertake a particular liability which was not a breach of trust, and the trust property had later been divided so that separate trust property that was held for that beneficiary could be identified, that separate trust property could be resorted to to meet a liability that the trustee suffered as a result of undertaking the liability or entering the transaction: Fraser v Murdoch (1881) 6 App Cas 855.

4.       If a beneficiary requested the trustee to enter a transaction that was a breach of trust, sometimes the trustee could reimburse himself for any resulting liability from amounts that would otherwise be payable to that beneficiary: Trafford v Boehm (1746) 3 Atk 440, 26 ER 1054; Woodyatt v Gresley (1836) 8 Sim 180; 59 ER 72.

5.       If the beneficiary has misled the trustee into making a distribution that the trustee would not otherwise have made and that is a breach of trust: Fyler v Fyler (1841) 3 Beav 550, 49 ER 216; Kellaway v Johnson (1842) 5 Beav 319; 49 ER 691; and Eaves v Hickson (1861) 30 Beav 136, 54 ER 840.

After Hardoon v Belilios:

1.       Where a sole sui juris beneficiary requested the trustee to undertake the role, the trustee was liable to indemnify the trustee for any liabilities that the trustee might incur as a consequence of being the trustee, or if there were several beneficiaries, all sui juris and between them absolutely entitled, who had all requested the trustee to undertake the role: Matthews v Ruggles-Brise [1911] 1 Ch 194, 202.

2.       If there has been a distribution of trust property to the beneficiary, and the trustee then comes has a liability which it cannot discharge from the property it retains: Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439, 441; and Balkin v Peck (1998) 43 NSWLR 706.

3.       If after a judgment had been given against a trustee concerning a liability incurred in its role as trustee, the beneficiaries who controlled the trustee arranged for the trustee to transfer all the trust’s assets to themselves, they were considered as constructive trustees of the assets received to the extent necessary to satisfy the trustee’s liability: Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439, 444. In that case English real estate was to be held on trust for the settlor’s sister for life, then for the settlor’s three daughters. When the life tenant died, the trustees sold the real estate and distributed the net proceeds to the three daughters. They did not realise that the death of the life tenant had triggered an obligation to pay an English capital transfer tax. The trustees recovered the capital transfer tax from the three daughters.

Is it possible to exclude the Trustees’ Rights of Indemnity Against the Beneficiaries? The Board in Hardoon v Belilios recognised that such exclusions would likely be effective: Hardoon v Belilios [1901] AC 118, 127

It is quite unnecessary to consider in this case the difficulties which would arise if these shares were held by the plaintiff ... upon special trusts limiting the right to indemnity. In those cases there is no beneficiary who can be justly expected or required personally to indemnify the trustee against the whole of the burdens incident to his legal ownership; and the trustee accepts the trust knowing that under such circumstances and in the absence of special contract his right to indemnity cannot extend beyond the trust estate, i.e., beyond the respective interests of his cestuis que trustent. In this case their Lordships have only to deal with a person sui juris beneficially entitled to shares which he cannot disclaim. The obligation of such a person to indemnify his trustee against calls upon them appears to their Lordships indisputable in a court of equity unless, of course, there is some contract or other circumstance which excludes such obligation. Here there is none.

In Australia it appears to be current practice in public unit trusts to include in the trust documents provisions limiting the liability of beneficiaries: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.15]. Such a provision was considered in McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623. Justice Young observed that “…[i]t is also clear that by the appropriate clause in a trust deed or contract, a person may limit his liability to a specific fund”, and that the “effect of a clause such as [the limitation clause in this case] operates so as to deny the trustee rights against the beneficiary”: McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623, 640.

The Hon T F Bathurst AC, Chief Justice of New South Wales, in his 2021 Harold Ford Memorial Lecture, Commercial Trusts and the Liability of Beneficiaries: Are Commercial Trusts a Satisfactory Vehicle to be Used in Modern Day Commerce? 5 October 2021, Melbourne University Law Review at [44] to [46] expressed the opinion, that was while it is possible to exclude the trustee’s right to personal indemnity against the beneficiaries by express provision in commercial trust deeds, this is far from ideal for three reasons:

44.   First, trust deeds, like any legal document, may be poorly drafted. ….

45.   Secondly, the uncertainty surrounding the effectiveness of express limitation of liability clauses is compounded by the existence of a broadly framed public policy exception.  [Referring to Young J in McLean v Burns Philp].

46.   Finally, trust deeds that limit or exclude the trustee’s right to personal indemnity against the beneficiaries can pose significant problems for creditors who may be reluctant to conduct business with a trust if their ability to recover debt is limited…

When public unit trusts include in the trust documents provisions limiting the liability of beneficiaries, it is common in the Product Disclosure Statement to disclose the limitation of liability with a condition stating that the courts have not yet definitively determined the efficacy of this claim: Harold AJ Ford and Ian Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in P D Finn (ed), Equity and Commercial Relationships (The Law Book Company Limited, 1987) 48, 150.

The creditor’s right of subrogation is wholly derivative on the right of indemnity of the trustee: J D Heydon and M J Leeming, Jacobs’ Law of Trusts (LexisNexis Butterworths, 8th ed, 2016) [21.12]. Consequently, if the trustee’s right of indemnity from the beneficiaries personally is excluded, then there is no right to which the creditor can be subrogated: See Re German Mining Co; Ex parte Chippendale (1853) 43 ER 415 at 427; Wise v Perpetual Trustee Co Ltd [1903] AC 139; McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 at 640-641.

However, the greater threat to beneficiaries may be posed by the trustee’s creditors, who may seek to rely on a right of subrogation, to stand in the trustee’s shoes and recover from a beneficiary: Ahmed Terzic, ‘Subrogation to the Trustee’s Personal Right of Indemnity’ (2017) 91 Australian Law Journal 736, 748.

Should the rule in Hardoon v Belilios  be abolished in New Zealand?

New Zealand’s Position: In New Zealand, section 81 of the Trusts Act 2019, dealing with the trustee’s liability for expenses and liabilities incurred, and the trustee’s right to indemnity, does not change the common law position.

New South Wales: In November 2019, s 100A was inserted into the Trustee Act 1925 (NSW). The section states that “the rule of equity known as the rule in Hardoon v Belilios is abolished” and also provides that this “does not prevent a trustee … from recovering any amount that a beneficiary under the trust is liable to pay for a right, interest or other entitlement” and that it “does not affect any liability that a beneficiary under a trust may have in a capacity other than as a beneficiary”.

A number of other jurisdictions have adopted provisions that address the liability of investors in publicly offered investment vehicles structured as trusts: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.24] referring to N D’Angelo, Commercial Trusts (LexisNexis, 2014) [3.91]. Such provisions have been enacted or proposed in parts of the US, in some Canadian provinces, and in Singapore: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.24] referring to Kentucky Revised Statutes §386A.3-040; Code of the District of Columbia §29-1203.04; Delaware Code § 3803; Income Trust Liability Act SBC 2006 (British Columbia) s 2; Income Trust Liability Act, SS 2006, c I-2.02 (Saskatchewan); Income Trusts Liability Act, SA 2004, c I1.5 (Alberta); Trust Beneficiaries’ Liability Act 2004 (Ontario) s 1; Business Trusts Act 2004 (Singapore) s 32..34. The effect of the Canadian and Singapore provisions appears to be to limit the liability of investors in their equivalents of Australian public unit trusts, in the same way as for shareholders in companies. In the United States provisions, the protection from liability is offered in the context of the trust vehicles having status as separate legal entities, referred to as “statutory trusts”: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.24].

The reasons that New South Wales introduced that provision is detailed in New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.28] to [2.31].  The New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 concluded at [2.37]: “In our view, the rule in Hardoon v Belilios works greater hardship on beneficiaries than it confers benefit on trustees or creditors. Abolishing it would relieve hardship to beneficiaries without material injustice to trustees or creditors.”

The Hardoon rule reflects the old equitable idea that one who enjoys the benefit of trust property should also bear its burdens, preventing a beneficiary from unjustly profiting at a trustee’s expense. However, the continuing scope and appropriateness of the Hardoon rule are debatable in contemporary trust law. Its application is uncertain and circumscribed: “The rule does not apply to all trusts. It seems not to apply where the beneficiaries are not sui juris. It does not apply where it would be inconsistent with the nature of the trust, as in the case of a club (or presumably other voluntary nonprofit association). It could not extend to “purpose” trusts, nor does it appear capable of application to discretionary trusts. However, the extent of the exceptions to its application is wholly unclear. This leaves the law – and investors - uncertain”: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.29].

As the New South Wales Law Commission observed, “at least in most situations, it is likely that beneficiaries, if they turn their minds to the question at all, assume that their liability is limited to the amount (if any) that they invest (or agree to invest) in the venture, and that at least as beneficiaries they have no further liability. The use of trusts is widespread. One example is their use by superannuation funds when they invest in major infrastructure projects. There would be a widespread loss of confidence in such structures if liability for such projects were to fall elsewhere than intended or expected”: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.31]. On the other hand, as Justice McGarvie explained in JW Broomhead (Vic) Pty Ltd (in liquidation) v JW Broomhead Pty Ltd [1985] VR 891, 936 the rationale of the rule is the principle of benefit and burden: that the beneficiary who gets the benefit of the trust should bear its burdens unless it can show some good reason why the trustee should bear the burdens itself.

Even so, modern practice shows a trend away from the rule: many trust deeds now expressly exclude any personal indemnity by beneficiaries. This contractual workaround is aimed at conferring beneficiaries a limited liability status akin to corporate shareholders. Yet uncertainty persists because case law (such as McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 at 640-641) suggests an exclusion clause might be ineffective in equity if it would be unconscionable to let a beneficiary avoid a trust’s debts after enjoying the benefits. Moreover, it is not clear that a provision in the trust instrument can effectively limit the liability of investors for all purposes, since it could be argued that the trustee was acting as agent for the beneficiaries (who would therefore be liable on that basis), or that creditors are nevertheless entitled to sue beneficiaries directly: New South Wales Law Commission Report 104, Laws relating to beneficiaries of trusts, May 2018 at [2.30].

For these reasons, the role of the Hardoon rule today is uncertain and contested. While it provides a theoretical recourse for trustees, its narrow and unclear scope and the potential for harsh results have led to widespread debate and precautionary measures in drafting trust instruments. The issue remains whether this traditional rule strikes an appropriate balance in modern trust contexts or whether it imposes undue risk on beneficiaries given the availability of other protections (like the trustee’s right to indemnify itself from trust assets). The lack of clear boundaries around beneficiary liability has prompted calls for clarification by legislation to ensure all parties understand their exposure.

Discretionary Trusts and Beneficiaries’ Rights

In a discretionary trust, beneficiaries do not have fixed entitlements to the trust property – only a mere expectation or hope that the trustee may exercise its discretion in their favour. A discretionary beneficiary has the right to be considered by the trustees and to be treated fairly, but cannot compel distributions. The trustee typically holds broad dispositive powers to decide if, when, and how much to distribute to any given beneficiary. With this breadth of power comes the duty to exercise it in accordance with the trust’s terms and the interests of the beneficiaries. New Zealand’s Trusts Act 2019 reinforced that trustees must act honestly and in good faith in what they perceive to be the beneficiaries’ interests. In practical terms, a trustee must consider each discretionary beneficiary when making distribution decisions and must not arbitrarily exclude or penalise one without proper reason.

It is important to note that because a discretionary beneficiary has no guaranteed entitlement, a trustee is not obliged to distribute to them at all. The beneficiary’s “right” is essentially to be considered, and the trustee’s decision must be made in good faith and for proper purposes. If a trustee unreasonably refuses to distribute (for example, based on irrelevant considerations), the beneficiary may have recourse to the courts (as discussed below), but they cannot simply demand a share of the trust assets. This context is crucial: the trustee’s leverage in a discretionary trust is that withholding distributions might be within their lawful discretion, but that discretion must still be exercised consistently with fiduciary standards.

The Imposition of Conditions on Distributions – General Principles: Trustees do have some latitude to impose conditions when distributing trust funds, but such conditions must align with the trust’s purpose and the beneficiaries’ welfare. For example, s 65(1) of the Trusts Act 2019 explicitly contemplates that a trustee exercising a power to apply trust money for a beneficiary’s benefit “may impose one or more conditions” on that payment. This is typically relevant when trustees advance funds for a beneficiary’s education, maintenance or other needs – they might require, say, receipts or an undertaking that the money be used for a specified purpose (school fees, medical costs, etc.). Such conditions are meant to ensure the distribution is used in furtherance of the beneficiary’s welfare.

Requiring a Deed of Indemnity: Requiring a deed of indemnity from the beneficiary is a very different kind of condition. An indemnity essentially means the beneficiary agrees to reimburse or hold the trustee harmless for certain liabilities or losses. This chiefly protects the trustee’s interests (or the trust’s remaining assets) rather than the beneficiaries. The fundamental principle of a trust is that it is created for the benefit of the beneficiaries, and most trust instruments do not expressly empower trustees to demand personal indemnities from beneficiaries as a precondition to paying them.

In short, imposing an indemnity requirement is not a typical incident of discretionary distributions and, if not authorised by the trust deed, it sits uneasily with the trustee’s duty to exercise powers for the beneficiaries’ benefit. The trustee must be cautious that such a condition could be seen as an attempt to shield themselves rather than to further the trust’s purpose.

In the case of estates if a potential applicant who is of full legal capacity gives the administrator in writing or by acknowledgement in any document either a consent to a proposed distribution or advice that the potential applicant does not intend to make any application that would affect the proposed distribution, the administrator is protected in respect of a claim made by that person: Administration Act 1969, s 47(3). It is therefore appropriate for trustees to seek an acknowledgement from beneficiaries that they consent to a proposed distribution or that they do not intend to make any application that would affect the proposed distribution, and an indemnity from them if they do make any application that would affect the proposed distribution.

Analysis: Indemnity Requirement vs. Trustee’s Duties

Fiduciary Duty and Proper Motive: A core fiduciary duty is that the trustee must not use their position for personal advantage or to avoid accountability. Conditioning distributions on the beneficiary signing an indemnity (especially a broad indemnity) raises a red flag: the trustee appears to be securing a personal benefit – protection from liability – in exchange for doing what the trust requires them to consider doing (making distributions). This can be viewed as a conflict between the trustee’s duty to act solely for the beneficiaries’ benefit and their personal interest in avoiding risk if the default duty to avoid conflict of interest in s 34 of the Trusts Act 2019 is not negated in the trust deed. New Zealand courts have held that trustees must exercise discretionary powers for the purposes for which they were conferred, and not for ulterior motives. A decision motivated primarily by the trustee’s desire to avoid future responsibility (rather than by the merits of the beneficiary’s need or entitlement under the trust) may be judged an improper exercise of discretion. Indeed, the Trusts Act 2019 provides a mechanism for reviewing trustee decisions: under s 126, a beneficiary can apply to the High Court to review any “act, omission, or decision” of a trustee on the ground that it was not or is not reasonably open to the trustee in the circumstance in the circumstances. If a discretionary beneficiary were denied distributions unless they sign an indemnity, they could invoke s 126 and argue that this condition is unreasonable or outside the scope of the trustee’s proper discretion. The trustee would then have to prove to the court that their decision to insist on an indemnity was “reasonably open to the trustee in the circumstances” – a difficult burden if the trustee’s primary justification is self-protection rather than some benefit to the trust or beneficiaries.

Impartiality and Unfair Discrimination: If the indemnity condition is not applied evenhandedly, it could breach the default duty of impartiality in s 35 of the Trusts Act 2019, if that is not negated in the trust deed. For instance, suppose a trustee only requires one beneficiary to provide indemnities (perhaps because that beneficiary is seen as troublesome or likely to sue) but not others. The trustee would need a justifiable reason related to the trust’s welfare to differentiate in this way – otherwise, it looks like the trustee is penalising or “unfairly partial” against that beneficiary. Even if the condition is applied to all beneficiaries, one might question whether refusing to distribute to any beneficiary without an indemnity is consistent with the trustee’s obligation to consider distributions in good faith. The process by which the trustee reaches such a decision must be sound, considering relevant factors like the beneficiary’s needs and the trust’s financial position, and not dictated solely by the trustee’s personal risk aversion.

Can a Trust Deed require beneficiaries to provide an indemnity? In practice, it is unusual for trust deeds to include clauses requiring a beneficiary to indemnify the trustee as a condition of receiving a benefit. Such a provision would favour the trustee and is not typical of the intent of the settlor. Without explicit authority in the deed, a trustee imposing this requirement risks acting outside their powers.

Trustees cannot rely on general indemnity clauses to cover liabilities not unambiguously authorised by the trust deed or will: First National Trustco (UK) Ltd v. McQuitty [2020] EWCA Civ 107 (England & Wales Court of Appeal) applying Arnold v Britton [2015] AC 1619 (which reinforced the principle of adhering to the plain and ordinary meaning of contract terms unless ambiguity arises) and Wood v Capita Insurance Services Limited [2017] AC 1173 (which affirmed that the objective meaning of contractual language must be ascertained before considering broader contexts). The trustee (FNTC) sought to invoke an indemnity clause (clause 14) to compel the beneficiaries/settlors to cover a large Spanish tax liability that arose from the trust’s timeshare operations. The High Court had rejected the claim, and the Court of Appeal agreed, strictly construing the deed. It held that clause 14, by its clear terms, only indemnified the trustee for liabilities directly incurred in performing its trustee duties. The Spanish tax was a third-party liability of a subsidiary company, not a direct trust expense, and thus fell outside the indemnity’s scope.

Professional Responsibility Example: A 2022 New Zealand disciplinary decision underscores how such conduct is viewed in practice. In 2022, a lawyer-trustee in New Zealand, who was winding up a family trust, demanded that the beneficiaries sign a very broad indemnity in favour of the trustees as a condition of resigning as a trustee. The Law Society Standards Committee found this to be inappropriate, noting it appeared the indemnity was sought “in an attempt to avoid liability” for issues in the trust’s administration: lawsociety.org.nz. The practitioner was found to have breached professional standards. This illustrates that requiring beneficiaries to indemnify the trustee, especially in an open-ended way, is seen as inconsistent with the trustee’s duty and an improper attempt to evade accountability: lawsociety.org.nz. While this was a professional discipline context, the underlying principle is that trustees should not be leveraging the distribution process to protect themselves from the consequences of poor administration.

Consistency with the Trusts Act 2019: New Zealand’s modern trust law framework emphasises trustee accountability and beneficiary rights. Trustees are required to keep beneficiaries informed of basic trust information and to act transparently. Furthermore, the law invalidates attempts to contract out of liability for breaches of trust involving dishonesty, willful misconduct or gross negligence. If a deed of indemnity were presented to a beneficiary, it could be seen as an attempt to have the beneficiary waive claims even for serious wrongdoing, which would be contrary to public policy and the Act. New Zealand’s Trusts Act explicitly aligns with this principle (s 41). Thus, any indemnity a beneficiary signs cannot lawfully excuse the trustee from liability for bad faith or gross negligence. In short, a blanket deed of indemnity demanded by the trustee should not be used as a substitute for proper trust administration.

Comparative Insight: Although New Zealand law does not have an express statutory prohibition against conditioning distributions on an indemnity, some other jurisdictions do.

For example, California’s Probate Code §16004.5 was enacted to prevent trustees from demanding that beneficiaries sign a liability release in exchange for receiving a distribution. If a beneficiary is entitled to a distribution under the trust instrument, the trustee there “cannot force [the beneficiary] to sign a release before receiving [the] distribution”. Instead, the trustee may hold back a reasonable reserve for any potential liabilities or seek court approval of their accounts but may not hold the trust funds “hostage” to coerce a release.

While this California rule isn’t binding in New Zealand, it is reflective of general trust law values: beneficiaries should receive what they are due without being required to waive rights, except to the extent a court or the trust instrument permits it. New Zealand courts, similarly, would be likely to take a dim view of a trustee who refuses to pay a beneficiary without an indemnity if the beneficiary is otherwise legitimately entitled to consideration for a distribution. The Trusts Act 2019 allows beneficiaries to apply to the court if trustee decisions are unreasonable. Demanding indemnities can be seen as an improper use of trustee powers and, therefore, unreasonable. Case law and professional standards discourage this practice.

Conditions on Distributions – General Principles

Trustees may impose conditions on distributions, such as requiring receipts or purpose restrictions. However, requiring a deed of indemnity is not typically authorised by trust deeds. Such a condition primarily benefits the trustee and could breach fiduciary duties if not properly justified.

Conditions or Limitations on Imposing Indemnities

When could an indemnity be justified? There are scenarios where asking a beneficiary for an indemnity is not inherently unreasonable. The key is that it must be for the protection of the trust or the equitable interests of all beneficiaries, rather than simply to insulate the trustee from the consequences of their own errors. One common instance is upon the final distribution and winding up of a trust or estate. If a trustee is distributing all remaining trust assets to beneficiaries, the trustee loses the buffer of the trust fund to meet any lingering liabilities. It’s relatively common for trustees at that point to seek a limited indemnity from the beneficiaries for any unforeseen liabilities (e.g. a last-minute creditor or tax claim) that arise after the trust is wound up. All adult beneficiaries can collectively agree to such indemnity to protect a departing trustee. In New Zealand, all beneficiaries (being competent adults) can even consent to excuse a past breach of trust or indemnify the trustee for it, which will bind them (this is reflected in s 142 of the Trusts Act 2019, and previously in case law allowing beneficiaries’ informed consent to absolve a breach).

Another situation is when making an interim distribution in the face of potential third-party claims. For example, suppose a trustee wants to advance a large sum to a beneficiary now, but the trust has an ongoing tax audit or a pending lawsuit that could result in a liability. The trustee might reasonably hesitate to distribute too much and leave the trust unable to pay a debt. In such a case, one approach is to retain a reserve in the trust to cover the risk. Another approach could be distributing the funds, but with a narrow indemnity: the beneficiary agrees to refund the money or cover the liability if the risk materialises. In some jurisdictions, this is explicitly permitted. For instance, California law acknowledges that “a Trustee may require [a beneficiary] to indemnify them against a claim by a third-party that may reasonably arise as a result of the distribution.” An example given is a trustee distributing funds before finalising tax returns, coupled with an indemnity in case the tax authority later pursues the trustee for taxes. The rationale is that this indemnity protects the trust (and indirectly all beneficiaries) against a specific risk, enabling the beneficiary to receive their funds sooner than they otherwise would.

By analogy, a New Zealand trustee could argue that a limited indemnity for a clearly identified contingent liability is consistent with prudent administration. Such indemnity is effectively a condition aimed at preserving trust solvency or fairness among beneficiaries, rather than absolving the trustee of general responsibility. Even then, the trustee should ensure the beneficiary fully understands the need for the indemnity and ideally seek their genuinely voluntary agreement, rather than present it as extortion. The indemnity’s scope should be no broader than necessary (e.g. limited to X liability and to the amount distributed). If a beneficiary refused a reasonable indemnity in such a scenario, a trustee could alternatively apply to the court for directions or simply refrain from making the distribution until the risk is resolved. This underscores that while indemnities can be tools in a trustee’s toolkit, they must be used sparingly and for legitimate purposes, not as a routine prerequisite for every distribution.

Any Condition must be Consistent with Fiduciary Duties: Any condition attached to a distribution must itself be consistent with the trustee’s duties. This means the trustee should only impose an indemnity requirement if it is genuinely in the interests of the trust/beneficiaries to do so – for example, to protect the trust fund for the beneficiaries as a whole – and not to cover the trustee’s personal mistakes or eliminate the trustee’s exposure to legitimate beneficiary claims. If a trustee has concerns about personal liability, the proper course is often to be transparent: provide beneficiaries with accounts or information and, if needed, seek a release through informed consent or get court approval of the trustee’s conduct rather than unilaterally conditioning distributions. The Trusts Act 2019 encourages active beneficiary involvement and court oversight in contentious matters, which is a more balanced approach than a trustee dictating terms to beneficiaries.

It should also be noted that any indemnity or release obtained from a beneficiary could be set aside if the trustee failed to disclose material facts or exerted undue pressure. Equity requires that a beneficiary’s consent to absolve a trustee is fully informed. If a trustee were, hypothetically, demanding an indemnity to mask their own prior breach of trust, that indemnity would not hold up if the breach later comes to light; the beneficiary could argue it was not a truly informed or willing agreement (and as mentioned, it cannot waive liability for fraud or dishonesty in any event).

In summary, the trustee’s ability to impose an indemnity requirement is highly constrained. It is not outright “illegal” in every instance (since a beneficiary could voluntarily agree to indemnify, or a trust deed could permit it), but it is certainly not a standard or presumptive right of the trustee in ongoing discretionary distributions. The default position in New Zealand law is that discretionary beneficiaries are entitled to be considered for distributions without having to underwrite the trustee’s liabilities. Any deviation from that norm must be justified by compelling reasons and handled in a way that respects the trustees fiduciary obligations.

Conclusion

In New Zealand, trustees must take care when considering whether to require a discretionary beneficiary to sign a deed of indemnity before receiving a distribution. There is no statutory or common law authority that entitles a trustee to impose such a requirement unless it is expressly provided for in the trust deed or justified by specific circumstances.

Routine or blanket indemnity requirements are inconsistent with trustees’ core duties under the Trusts Act 2019, including the duties of loyalty, to act for a proper purpose, and to act in the best interests of beneficiaries. A trustee who insists on an indemnity as a condition of distribution—particularly where there is no clear risk to the trust fund—risks acting unreasonably and exposing themselves to challenge.

Before seeking an indemnity, trustees should carefully consider:

• Is there a genuine and identifiable risk to the trust assets that the indemnity is intended to address?

• Is the indemnity narrowly framed to deal with that specific risk (e.g. an early distribution before tax liabilities are finalised)?

• Is the beneficiary fully informed and acting voluntarily?

Trustees should avoid using indemnities as a means of insulating themselves from liability or deterring beneficiaries from seeking what they may fairly be entitled to.

Where a trustee is concerned about risk, there are other appropriate mechanisms available, including:

• Retaining sufficient reserves in the trust,

• Seeking court directions under s 137 of the Act,

• Obtaining liability insurance, or

• Securing informed written consent from beneficiaries based on full disclosure.

If a trustee unreasonably conditions a distribution on an indemnity, a beneficiary may apply under s 126 of the Trusts Act 2019 to have that decision reviewed and set aside. The courts will expect the trustee to demonstrate that their decision was reasonable in all of the circumstances and consistent with their fiduciary obligations.