Priority of trustees’ indemnity inter se: pari passu or first in time priority?

Abstract

Given that a trust is not a legal person, it cannot incur liabilities in its own name. Trustees incur liabilities on behalf of the trust. They are not agents but are personally liable without limit. In return the trustee enjoys an indemnity from trust assets. A trustee is entitled to pay expenses properly incurred out of the trust estate (a right of exoneration) or, if the trustee pays it in the first instance from the trustee’s own pocket, to be reimbursed out of the trust estate. To secure its right of indemnity, the trustee has an equitable lien on the trust assets which takes priority over the rights of the beneficiaries. Its creditors are subrogated to the trustee’s right of indemnity. The creditor will therefore be able to enforce against the trust assets to the extent that the trustee would have been able to do so. Thus, if the trustee has lost its right of indemnity because of a breach of trust, the creditor would have no right to satisfy the creditor’s claim out of the trust assets.