Bird on a wire: cost penalties for unresponsive trustees

The recent case of In the Matter of the Y Trust is a useful and cautionary reminder to a trustee to make sure that it acts expeditiously and transparently in the discharge of ?its duties.

The case involved a discretionary ?trust governed by the laws of Jersey. It ?was settled in 1990 and the beneficiaries were the eldest son, the youngest son ?and the remoter issue of the settlor, namely the two sons and the daughter (and her own daughter) of the youngest son (the children).

Decision time

At the first hearing, the court was asked, inter alia, to give its blessing to the trustee’s decision to distribute the trust fund to the beneficiaries in December 2009 (the December decision).

In the build up to the December decision, the trustee engaged in discussions with all of the beneficiaries in varying degrees of detail. In February 2009, the trustee entered into detailed discussions with the eldest son and his advisers. In those discussions, the trustee discussed, with some degree of certainty, distributing the trust fund between the eldest son and the youngest son as it stood at the date of the settlor’s death. The trustee made clear that this would require it to give credit for the £1.9m that had been paid to the youngest son since the settlor’s death.

After this meeting, the trustee engaged in further discussions with the other beneficiaries. Those discussions showed that the trustee was contemplating distributing the trust funds in a variety ?of different ways.

The trustee’s deliberations culminated in the December decision which, subject to court approval, decided that the trustee would distribute £1.9m to the eldest son, £500,000 to the youngest son’s daughter (so that she and her daughter could purchase a home) and the balance of £1m would be distributed to a new trust created for the benefit ?of the children excluding the youngest ?son’s daughter.

The eldest son was dissatisfied ?with the December decision because he had not been consulted about the trustee’s new proposals for the distribution of the trust fund. He also claimed that the trustee had failed to communicate with him and that he ?had a legitimate expectation to be consulted given the detailed level of discussion with which the trustee had previously engaged in with him and ?his advisers.

The eldest son further claimed that the trustee had also been improperly influenced by the youngest son in the making of the December decision and he threatened to bring an application to the Royal Court. The trustee beat the eldest son to the punch and issued an application to seek approval of the proposed implementation of the December decision.

The court considered the actions ?of the trustee in not consulting the eldest son before making the decision and stated that the trustee “took the serious risk that, had he been consulted, he may have provided [the trustee] with information that would or might have led it to act otherwise than it did”.

Cost price

However, the court did not make a finding that, had the trustee consulted the eldest son before the decision was made, such consultation would have presented information to the trustee which would have led it to reach a different decision as to the distribution.

Further, the court made the following observation in relation to the rights of a beneficiary of a discretionary trust: “The focus is not upon the expectation of the beneficiary but upon the information available to the person who the settlor has appointed as decision maker. There is no authority for the importation in to trust law of a right to be heard or consulted. Such rights would potentially render trusts unworkable.”

The court gave its blessing to the December decision but was critical of the trustee’s “high handed” treatment of the eldest son.

The second hearing dealt with the costs of the first hearing, which totalled a staggering £492,550. As a result of the significant costs that had been incurred, the trustee could not make all of the payments outlined in the December decision. The positions of the various parties were as follows.

The trustee’s position. The trustee made three alternative submissions, beginning with the most preferable:

• all the costs of the hearing should be paid from the eldest son’s distribution;

• the costs of the trustee and the children should be paid one third from the children’s distribution and two thirds the eldest son’s distribution, with the eldest son paying his own costs; or

• all the costs should be paid by the eldest son and the children in proportion to their relative interests.

The eldest son’s position. The eldest son claimed that as the trustee had acted unreasonably it should be deprived of its costs in whole or in part. Otherwise he accepted that he could pay a portion of his costs from his distribution.

The youngest son’s position. The youngest son, although not entitled to a distribution, sought a nominal fee of £20,000 for the time and expense of telephone calls he had made in dealing with issues raised as part of the first hearing and made the following submissions:

• the costs should be split equally between the trustee personally, the eldest son personally and the eldest son’s legal advisers personally; or

• the costs should be paid one third by the eldest son and two thirds by the trustee personally.

The children’s position. The children felt that the costs of the trustee and the children should be paid from the eldest son’s distribution.

Additional fees

The court stated that as the first hearing was an administrative action brought by the trustee for the sanction of the December decision, the costs of all parties would normally be made from the trust fund: “As a matter of general principle a trustee is entitled to an indemnity out of the trust fund in respect of costs and expenses properly incurred by him in connection with the performance of his duties and exercise of his powers and discretions as a trustee but a trustee can be denied an indemnity for its costs if it is found to have acted unreasonably.”

The eldest son was critical of the trustee’s lack of communication in relation to the December decision and submitted that it was for this very reason that the first hearing was necessary.

The trustee claimed that, as the December decision had been sanctioned by the court, this vindicated the trustee’s actions in raising the matter with the court and it was the eldest son’s conduct before, during and after the first hearing which resulted in the incurrence of additional fees. The trustee claimed that the lack of communication with the eldest son resulted from his refusal to communicate and such consultation would not have affected the December decision.

Counsel for the trustee concluded that to deprive the trustee of its costs would be unprecedented and “send shock waves throughout the trust industry”.

The children’s position was expressed as being caught in the middle of a dispute between the eldest son and the trustee and they should not suffer any loss.

The court remained concerned at the trustee’s reticence to communicate with the eldest son and, owing to the negative impact that a costs order of this size would have upon the trust fund, felt that the trustee should bear some of the responsibility for their incurrence and found a “causative link between the lack of consultation and the level of costs incurred”. Therefore, the court ordered that the trustee could only recoup half of its costs from the trust fund.

This judgment highlights the court’s unwavering attitude to professional conduct in the proper administration of a trust. Constant communication with beneficiaries as to any proposed action to be taken in the distribution of trust assets is fundamental; regardless of whether the proposed action is something a particular beneficiary finds less than palatable, they must be informed. A taciturn trustee may find itself liable for legal costs.

Top tips for trustees