Indemnities: Are They Worth the Paper They Are Written On?

Indemnities are both commonplace and controversial in the world of trusts and fiduciary services. On the one hand, they are designed to provide reassurance and protection to trustees acting in good faith. On the other, they are often questioned for their true enforceability and practical value, prompting the age-old scepticism: are they even worth the paper they’re written on?

Let’s take a closer look at the role of indemnities in trust relationships, including the key scenarios in which they arise, the legal standing of such undertakings, and the balance trustees must strike between prudence and overreliance.

While indemnities can be useful tools in mitigating risk, they are not bulletproof, and trustees should proceed with both caution and clarity.

Where Indemnities Arise in Trust Relationships

Indemnities appear in several common trust-related contexts, often at critical moments of decision-making or transition. Some of the most typical scenarios include:

• Distributions to Beneficiaries

Trustees may request an indemnity from a beneficiary before making a distribution, particularly if there is uncertainty around competing claims, tax liabilities, or future challenges to the distribution. The indemnity may be intended to protect the trustee from personal liability should the payment later be contested.

• Investment Decisions at the Request of Beneficiaries

If a beneficiary urges a trustee to invest in a particular asset, especially a high-risk or unconventional investment, a trustee may seek an indemnity as a condition for proceeding. This protects the trustee if the investment fails or if it could otherwise be seen as a breach of duty.

• Retirement and Appointment of Trustees

When a trustee retires or is replaced, they will typically require an indemnity from the incoming trustee and/or the beneficiaries. This protects the retiring trustee from liability for past actions that could arise after their tenure ends.

• Chain Indemnities in Trustee Succession

In long-standing trusts where there have been multiple retirements and appointments, a “chain” of indemnities may develop. Each trustee often relies on the next to maintain and respect the continuity of protections granted down the line. When distributions are made by a successor trustee, they may request that beneficiaries enter into covenants to uphold indemnity obligations, particularly when such distributions effectively discharge the trust from further liability.

The Legal Weight of Indemnities: Binding or Illusory?

An indemnity is, at its core, a contractual promise – one party agrees to compensate another for loss or liability arising from certain actions. In theory, they are enforceable under standard principles of contract law. However, several factors can undermine their practical value:

• Beneficiaries may lack legal capacity (e.g. minors or those under disability) to give a binding indemnity.
• The indemnity must be supported by consideration to be enforceable in many jurisdictions.
• Courts may refuse to uphold indemnities that attempt to exclude liability for gross negligence, fraud, or breaches of fiduciary duty.
• Even if enforceable, the indemnity is only useful if the indemnifier has the financial resources to pay when the time comes.

For example, an indemnity from a beneficiary who later becomes bankrupt or relocates to an uncooperative jurisdiction may be of limited value.

In short, indemnities are not useless but they are far from foolproof.

Trustees’ Duties Cannot Be Indemnified Away

Perhaps the most important principle for trustees to remember is an indemnity does not relieve a trustee from their fiduciary duties. Trustees must continue to:

• act prudently;
• avoid conflicts of interest;
• exercise independent judgment; and
• consider the interests of all beneficiaries.

An indemnity that seeks to circumvent these duties – especially one granted under pressure or without full transparency – is unlikely to protect a trustee in court.

Moreover, many trust deeds contain express provisions limiting indemnities to actions taken in good faith and without gross negligence. Trustees who act outside the scope of their duties cannot rely on indemnities to shield them from the consequences.

Chain Indemnities and Professional Ethics

In the context of retiring and incoming trustees, indemnities serve not only a protective function but also an ethical one. It is a matter of professional courtesy – and professional integrity – that chain indemnities are respected.

Why does it matter?

• A retiring trustee is entitled to rely on the assurances given by a successor trustee.
• Successor trustees should not accept the benefits of trust property without honouring the obligations tied to its administration history.
• Disregarding chain indemnities undermines confidence and trust within the fiduciary profession.

Example: A trustee retiring after 20 years of service receives a standard indemnity from the successor trustee. Years later, the successor is replaced again, and beneficiaries request large distributions. The new trustee may seek further indemnities from the beneficiaries as a condition of distribution, effectively ensuring the indemnity chain remains intact and the retired trustee is protected from retroactive claims.

Trust law in most common law jurisdictions supports a retiring trustee’s right to a reasonable indemnity. For example, in the UK and offshore jurisdictions such as Jersey, Guernsey, and the Isle of Man, trust legislation or case law supports the principle that a retiring trustee should not be exposed to lingering liabilities once they’ve transferred trust property and resigned in good faith.

For instance, the Isle of Man Trustee Act 2001 permits trustees to retain trust assets or require security unless and until indemnity terms are satisfactorily agreed, further reinforcing the legitimacy of this approach.

Practical Guidance for Trustees Seeking (or Giving) Indemnities

• Document the rationale – Trustees should always document why the indemnity is being requested, what risks it is intended to address, and the legal advice (if any) taken.
• Ensure informed consent – Beneficiaries should understand what they are signing. Ideally, they should be encouraged to take independent legal advice.
• Assess creditworthiness – An indemnity is only as good as the person giving it. If the indemnifier has limited assets or is unlikely to be traceable in the future, the indemnity may offer little real protection.
• Avoid overreliance – Indemnities should be seen as a last line of defence and not a substitute for sound trustee decision-making. Where uncertainty is high, trustees should consider applying to a court or seeking direction.
• Use Institutional Language – Well-drafted professional indemnity clauses, supported by the trust deed or other instruments, will carry more weight than informal undertakings.

Conclusion

Indemnities remain a practical tool in the trustee’s risk management kit but they are not a panacea. They cannot override legal duties, and they may not always be enforceable. Used properly, they can provide additional protection and clarity but used poorly, they may offer false comfort.

For trustees, understanding both the strengths and limitations of indemnities is key. They must be supported by professionalism, good judgment, and a commitment to ethical conduct, especially in the handover of trust administration.

Upholding the principles of chain indemnities is not just about risk, it’s about maintaining the integrity and collegiality of the fiduciary profession.

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How Can Sentient International Help?

While Sentient International does not provide legal drafting or legal advice, we frequently encounter indemnity-related issues in the natural course of trusteeship and directorship. We recognise the importance of ensuring such provisions are understood by all parties involved., particularly our clients and their advisers.

Our role is to act with diligence, fairness, and professionalism in managing transitions, distributions, and investments – always with an eye on ethical practice. We work closely with clients and legal counsel to ensure indemnities are appropriately addressed, well-structured, and treated with the seriousness they deserve. With our team’s experience and commitment to fiduciary integrity, we help preserve confidence and continuity in complex trust relationships.

For more information on our trust and fiduciary services or to discuss any specific requirements you might have, contact iom@sentientinternational.com or telephone +44 1624 616544.