Standard of Care and Preservation of Trust Property (Sections 15, 16 and 18)

How careful must a trustee be? Section 15 answers with the prudent person standard: a trustee must deal with the trust property as carefully as a man of ordinary prudence would deal with his own, and if he does, he is not liable for loss. Sections 16 and 18 apply the same idea to trusts for successive beneficiaries, requiring the trustee to convert wasting or reversionary property and to prevent waste by a beneficiary in possession. This note explains all three.

1. The Prudent Person Standard (Section 15)

Section 15, Indian Trusts Act, 1882 (care required from trustee)

A trustee is bound to deal with the trust property as carefully as a man of ordinary prudence would deal with such property if it were his own; and, in the absence of a contract to the contrary, a trustee so dealing is not responsible for the loss, destruction or deterioration of the trust property.

The section does two things. It sets the standard: the care a man of ordinary prudence would take with his own property of the same kind. And it gives protection: a trustee who meets that standard is not liable for loss, destruction or deterioration, unless he has contracted to bear a higher responsibility. A trustee is not an insurer of the trust property.

Features of the standard

Objective: the test is the ordinary prudent person, not the particular trustee. A careless trustee cannot excuse himself by showing that he is equally careless with his own affairs.
Contextual: prudence is judged by reference to "such property", so the care required for a portfolio of shares differs from that for a house or a business.
Judged at the time: the question is whether the decision was prudent when it was taken, not whether it turned out well. Loss alone does not prove breach.
Can be raised by contract: the words "in the absence of a contract to the contrary" allow the instrument or an agreement to impose a stricter standard. Courts expect more of professional and paid trustees, who hold themselves out as having special skill.

2. The Illustrations to Section 15

The section carries an unusually full set of illustrations, which show where the line between prudence and negligence falls.

Situation	Result
Trustee remits trust money by bills of exchange that appear good, which are later dishonoured	Not liable: a prudent man would have done the same
Trustee deposits rents with a banker in good credit, who later fails without warning	Not liable
Trustee, in good faith, releases or compounds a debt due to the trust	Not liable for resulting loss, where the decision was a reasonable one
Trustee sells property by auction without proper advertisement, so that bidders are few	Liable for the loss caused by lack of competition
Trustee fails to receive the full purchase money on a sale	Liable for the loss caused by want of diligence
Trustee neglects to pay premiums on a policy forming part of the trust property, and the policy lapses	Liable
Trustees with power to lend to a firm continue after the firm's composition changes	Must consider whether the change makes the security unsafe
Trustee leaves the whole management to a co-trustee, who misapplies the property	Liable for the loss, for failing in his own duty of care

Two themes run through the illustrations. A trustee is protected where he acts as a reasonable businessman would, even if events go against him. He is liable where he fails in diligence: careless sales, failure to collect money due, failure to pay premiums, and passive reliance on a co-trustee. The last point connects with Sections 26 and 48 on co-trustees (Topic 18).

3. Prudence in Practice

Investment: prudence governs the choice and review of investments within the range permitted by Section 20 and the instrument, including diversification and periodic review (Topic 16).
Use of agents: a trustee may employ agents where a prudent person would (Section 47 allows delegation in the regular course of business), but must choose and supervise them with care.
Records and insurance: keeping proper records, insuring property against ordinary risks, paying taxes and renewing registrations are basic aspects of prudence.
Litigation: a prudent trustee weighs the cost and prospects of litigation before suing or defending (Section 13), and may seek the court's opinion (Section 34).

4. Converting Wasting and Reversionary Property (Section 16)

Section 16 (conversion of perishable property)

Where the trust is created for the benefit of several persons in succession, and the trust property is of a wasting nature or a future or reversionary interest, the trustee is bound, unless an intention to the contrary may be inferred from the instrument of trust, to convert the property into property of a permanent and immediately profitable character.

The section protects the balance between successive beneficiaries, typically a life tenant and a remainderman. Two kinds of property upset that balance:

Property of a wasting nature: a short leasehold, a mine, or machinery, which produces high income now but is worth little or nothing later. Left unconverted, it favours the life tenant at the remainderman's expense.
Future or reversionary interests: a right that will produce nothing until a future event. Left unconverted, it gives the life tenant no income and favours the remainderman.

The trustee must convert such property into property of a permanent and immediately profitable character, so that the income goes to the life tenant and the capital is preserved for those who come after. The duty yields to the instrument: where it shows that the author intended the property to be enjoyed in specie (in its existing form), the trustee should not sell. The illustrations contrast a bequest of leasehold houses on trust for successive beneficiaries, which must be converted, with one showing an intention that the houses be enjoyed as they are, which must not.

5. Preventing Waste (Section 18)

Section 18 (trustee to prevent waste)

Where the trust is created for the benefit of several persons in succession and one of them is in possession of the trust property, if he commits, or threatens to commit, any act which is destructive or permanently injurious thereto, the trustee is bound to take measures to prevent such act.

A beneficiary in possession, usually a life tenant living in a trust house or farming trust land, may be tempted to exploit the property for short term gain: cutting timber, removing fixtures, quarrying, or letting buildings fall into ruin. Section 18 obliges the trustee to step in, by warning, negotiating, or seeking an injunction, to protect the interests of later beneficiaries. The duty applies to acts that are destructive or permanently injurious; ordinary use and fair wear and tear are not waste.

⚠ Key point

A trustee must deal with the trust property as carefully as a man of ordinary prudence would deal with his own property of that kind; if he does, he is not liable for loss unless he contracted otherwise (Section 15). He is protected for reasonable decisions that turn out badly, but liable for want of diligence, such as poorly advertised sales, uncollected money, lapsed policies and passive reliance on a co-trustee. For successive beneficiaries, he must convert wasting or reversionary property into permanent, immediately profitable property unless the instrument shows otherwise (Section 16), and must prevent waste by a beneficiary in possession (Section 18).

6. Related Topics and Provisions

Impartiality (Topic 15): Section 17 and the balance between beneficiaries
Investment of trust money (Topic 16): Sections 20 and 40
Breach of trust and liability (Topic 17): Section 23
Co-trustees (Topic 18): liability for a co-trustee's default