Breach of Trust: Tracing Trust Money

The Meaning of Breach of Trust

A breach of trust occurs when a trustee uses a power improperly or fails to perform a duty owed under the trust. The trust deed defines the authorised purposes and powers. Applicable legislation and equitable duties also govern the trustee’s conduct.

Consider these fictional examples:

• A trustee lends trust money to a company they own without the authority needed for that conflicted transaction.
• Trust receipts go into the trustee’s personal bank account and fund private spending.
• A trustee buys investments that the deed expressly prohibits.
• The trustee fails to keep records explaining payments made for beneficiaries.

A loss-making investment is not automatically a breach. Identify the duty and the act or omission that breached it. Dishonesty is also unnecessary for many breaches, although fraud affects some remedies and limitation rules.

Family trust disputes need a defined allegation before a breach claim can be assessed. A beneficiary’s disagreement with a decision permitted by the deed does not establish a breach. Separate the questions and collect the documents that answer each one.

Core Trustee Duties

Trustees must administer the trust under its terms and for its beneficiaries or authorised purposes. The duties relevant to a disputed transfer include the following:

• Follow the trust deed and stay within the trustee’s powers.
• Act in the beneficiaries’ interests, subject to the trust’s terms, and treat competing beneficiaries impartially.
• Avoid unauthorised conflicts between personal interests and trustee duties, including unauthorised personal profits.
• Keep trust property separate from personal property and distinguish the property of different trusts.
• Keep accounts and records that explain receipts, payments and the administration of trust property.

For example, Queensland’s Trusts Act 2025 expressly addresses good faith and beneficiary interests in section 63. Sections 64 and 65 require accounts and provide beneficiary inspection rights. The current Queensland Act also preserves the wider role of equitable duties.

The trustee fiduciary duty of loyalty includes the no-conflict and unauthorised-profit rules. Those rules address divided loyalty and personal gain. Wider trustee duties also govern administration, investment and accounting under the deed and applicable law. A failure to keep accounts can breach those wider duties without establishing a disloyal profit.

When examining a transfer, put the deed beside the ledger entry. Record the recipient, the stated purpose and the authority relied on. A payment labelled “loan” needs evidence of its terms and the trustee’s power to make it.

Tracing Trust Money Through Bank Accounts

Tracing identifies the value of trust property as it moves into other accounts or substitute assets. Following identifies the same property as it changes hands. The resulting evidence supports a claim to the property identified.

Where a trustee mixes their own money with trust money, the presumption in Re Hallett’s Estate treats the trustee as spending their own money first. That presumption protects beneficiaries. Under Re Oatway, a trustee cannot use it to keep a purchased asset while arguing that the trust money disappeared in later spending.

The lowest intermediate balance rule limits a claim against the remaining account balance. Once that balance falls below the trust contribution, later unrelated personal deposits do not automatically replace the spent trust value. If the balance reaches zero, the original value cannot remain in that account. A trace into an asset already purchased is a separate question.

In Re French Caledonia Travel [2003] NSWSC 1008, Campbell J examined account depletion and the lowest intermediate balance rule at paragraphs 187 and 192. The judgment explains why later contributions can require different treatment from money already depleted. The Australian judgment also considers Re Hallett and Re Oatway.

The following daily ledger is fictional. All amounts are Australian dollars. Assume one trust, a personal account with $5,000 already in it and an identifiable car purchase. Apply the own-money-first presumption for this illustration.

On day 2, the car purchase uses $5,000 of personal money and $3,000 of trust money under the stated assumption. The $7,000 left in the account is trust value. The debt payment then reduces that balance to $2,000. The subsequent personal deposit increases the bank balance to $12,000, but the original trust value remaining there stays at $2,000.

The illustration identifies $3,000 in the car’s purchase price and $2,000 remaining in the account under its stated allocation. Paying an existing unsecured credit-card debt ordinarily leaves no substitute asset to claim. The $5,000 debt payment can still support a personal claim against the trustee.

Clayton’s case, Devaynes v Noble (1816) 1 Mer 572, supplies a first-in, first-out presumption for appropriation in a running account. It can apply where payments lack a contrary appropriation. It is not an automatic rule for sharing a deficient trust fund among innocent beneficiaries. In Re French Caledonia Travel, the NSW court rejected its application to that distribution and permitted proportionate sharing on the facts.

Build the ledger in transaction order, including transfers between supplied accounts. Preserve intraday order where available because a closing daily balance can hide an earlier depletion. Match an asset purchase with its invoice or settlement record. A flow-of-funds diagram can then show each transfer alongside its source, while asset tracing covers the wider account and asset investigation.

FinTrace saves lawyers and forensic accountants hours of statement conversion and review by consolidating large PDF bundles into a searchable ledger. Its analysis follows transfers and clearly flags suspicious transactions, with every finding linked to the source PDF filename and page. The written report brings the relevant findings together at a fraction of the cost of manual statement analysis. Forensic accountants can use that work directly and spend more time on interpretation and their wider investigation.

Remedies and Limitation Periods

Beneficiaries can seek equitable compensation for loss, an account of the trustee’s profits or proprietary relief over traced property. The remedy depends on the breach and the property or gain established.

Equitable compensation addresses loss caused by the breach. An account of profits requires the trustee to surrender gains attributable to the breach, even where the beneficiary cannot show an equivalent loss. A proprietary claim asserts an interest in identified property and can support a claim to its sale proceeds. Coordinate the remedies to avoid recovering the same value twice.

Foskett v McKeown [2001] 1 AC 102 concerns trust money used to pay part of the premiums for a life policy. The House of Lords allowed a proportionate share of the policy proceeds. Its tracing analysis distinguishes identifying substitute property from the claim and remedy that follow. Where trust money funds part of an asset purchase, the beneficiary can seek a proportionate beneficial share or an available lien securing repayment. Foskett’s reported reasoning explains that distinction.

In the fictional car example, the $3,000 contribution is three-eighths of the $8,000 purchase price. Under that allocation, a proportionate ownership claim follows the same share of the car’s value. A lien instead secures repayment of the trust contribution. A different allocation under Re Oatway can change the amount claimed against the car. The available claim depends on the legal and factual basis established for the purchase.

For a family-trust dispute, match the relief sought to the question that needs determination.

An entitlement or deed-construction dispute can require a declaration without proving a compensable breach. In NSW, section 63 of the Trustee Act 1925 permits a trustee to seek judicial advice about administration or interpretation. Substantial disputes about competing rights can require proceedings with the affected parties joined. The NSW Supreme Court’s judicial-advice guidance explains that procedural distinction.

Before selecting a forum or remedy, identify the governing deed and jurisdiction, all affected parties and the valid trustee appointments. Assemble variations, appointment records and the transaction evidence. Trustee replacement has a separate appointment or court procedure. Whether a spouse controls a family trust for matrimonial purposes is also a distinct question from proving a breach.

Limitation rules differ between states. In NSW, section 48 of the Limitation Act 1969 ordinarily provides six years from accrual for a breach-of-trust claim. Another applicable period can expire later. Section 47 provides a twelve-year discovery period for specified claims, including fraudulent breaches and recovery of traceable trust property. The later applicable period governs.

The NSW Judicial Commission’s limitations guide summarises these rules.

Victoria has a different rule. Section 21(1)(a) of the Limitation of Actions Act 1958 excludes the Act’s limitation periods for beneficiary actions concerning fraudulent breaches to which the trustee was party or privy. Section 21(1)(b) also covers specified recovery claims against the trustee. Victoria’s current limitation legislation sets out those exceptions. A fraudulent breach therefore does not mean the same time rule applies Australia-wide.

Record the accrual and discovery evidence separately from the tracing schedule. Claims against recipients require their own analysis, addressed in the guide to knowing receipt.

Relief for Honest Trustees

A court can relieve a trustee wholly or partly from personal liability where the statutory requirements for excusing the breach are met. Acting honestly is one requirement. The trustee must also have acted reasonably and ought fairly to be excused, including for failing to obtain court directions.

The relevant provisions include section 85 of the Trustee Act 1925 in NSW and section 67 of the Trustee Act 1958 in Victoria. Victoria’s authorised Act states the cumulative requirements. NSW’s section 85 gives the Supreme Court the corresponding power.

Queensland’s Trusts Act 2025 replaces the Trusts Act 1973. The current relief power is section 155, replacing the former section 76. Section 278 applies section 155 to breaches committed before or after the new Act’s commencement. The Queensland provisions therefore also matter when examining older transactions.

For an application or response, assemble the deed, the advice obtained and the trustee’s decision records. Link each disputed payment to its bank evidence and the explanation given for it. Those records let the court assess reasonableness alongside the breach and its financial consequences.