Private client focus | Building trust: the challenges of trust administration

We would all like certainty that the money we save can be used to give us a comfortable life while ultimately providing benefits to our loved ones both in our lifetime and on '¨our death.

It is a simple aspiration but fraught with considerations outside of our immediate control: the state of the worldwide banking system, increased life expectancy, social welfare reforms, the impact of second marriages on the family dynamic, where to invest if retiring abroad, the balance between the reassurance of keeping absolute control over our investments versus the potential tax advantages of passing wealth to the next generation.

The use of trusts to hold our money is '¨an increasingly popular tool to achieve a good management structure, to preserve wealth and to ensure our long term wishes are fulfilled.

As we all know a trust is a mechanism where the ownership of someone's property (be it a house, cash or shares in a business) is transferred during lifetime or on death through a will to a trustee (or a group of trustees) to hold for the benefit of another person (or a group of people). As the trustees control the property, a trust can often offer an element of protection from a range of risk factors that straightforward gifts simply fail to do (i.e. bankruptcy, divorce and so on).

However, all too often it seems that trusts suffer from several misconceptions as to who can use them. They are not '¨just a structure for the oligarchs of this world nor are they only set up for the benefit of children too young to manage their own finances.

The right type of trust can offer a practical, cost effective solution in a variety of situations benefitting a range of clients from business owners to those with personal savings or investments.

While in many situations the use of a trust can be hugely beneficial, who the client appoints as trustee is vitally important as they need to be sure the appointed individuals understand the client's aims and importantly are able to work together to ensure the smooth and cost effective administration of the trust.

The aim of this article is to highlight the importance to clients of being very careful who they appoint as trustees.

Onerous role

Clients must be made aware that the administration of a trust is not necessarily straightforward and the role of trustee is onerous. There may be some issues encountered during the lifetime of the '¨trust that require careful consideration by the trustees and so those trustees need to be comfortable considering those issues and taking suitable steps to deal '¨with them.

Of vital importance is the ability for trustees to be able to work together; appointing warring siblings may not be a sensible move.

Because trusts, in some cases, will run for a long time it is highly likely that at some point during the administration of the trust tricky issues will arise that will cause the trustees to seriously consider what powers they have and what duties and obligations they are under.

As we all know those powers, duties and obligations are wide ranging and can at times seem baffling to professionals let alone lay people. Consequently, finding '¨the right way through may not be for the faint hearted!

Take for example the issue of the self dealing rule. An issue that can arise in the context of family trusts where perhaps the trustees are also beneficiaries. Broadly, a trustee is not allowed to place himself in a position where there is a conflict between his duty and interest.

Consequently, trustees who individually or together exercise their dispositive powers in their own favour commit a breach of the self-dealing rule unless:-

1. the rule is disapplied by the terms of the trust deed or will; or

2. the trustee is placed by the settler in a position of necessary conflict by being given a power which can be exercised in their own favour.

'¨Well drafted trust deeds or wills often address the self dealing rule and expressly disapply it. However, this is not always the case. Fortunately, following the case of Edge v Pensions Ombudsman ([1998] Ch 512 affirmed [2000] Ch 602 CA) the rule can be disapplied expressly or by the implied terms if it necessary to give effect to the terms of the trust. Therefore the absence of any express provision in the trust deed may not be an issue, although much will depend on the exact circumstances in which the rule is being considered.

The second exemption applies where the trustee has not placed himself in a position of conflict of interest and duty but has been placed there by the settlor or the terms of the trust.

For example, if the settlor appointed the trustees and selected them as beneficiaries and those trustees are now attempting to benefit themselves a conflict is unavoidable and so the rule is likely to be avoided.

While there are often ways round issues like the self-dealing rule they need to be considered by the trustees together with broader issues such as whether the exercise of a power (while technically correct) is a proper exercise of the power in the context of the purpose of the trust.

Letter of wishes

Trustees must always take into account '¨all relevant considerations before reaching a decision to exercise a power; who are '¨the beneficiaries, what is the purpose '¨of the trust, are there any views they should take into account (perhaps beneficiaries who are not receiving the benefit of any assets from the trusts), is there a letter of wishes and if so what does it say? Should the trustees consider releasing a copy of any letter of wishes to beneficiaries in support of their decisions?

A letter of wishes is confidential (Breakspear v Ackland [2009] Ch 32) and so trustees need not disclose it to beneficiaries unless in their view disclosure will aid the administration of the trust. Management of beneficiaries is of course one of the keys to successful trust administration and is yet another pressure on trustees.

Once a course of action has been agreed upon the trustees should record accurately the reasons for their decision. This will '¨act as a clear record for the future and help to counter any future challenges to the decisions made!

In the absence of any contrary '¨provision in the trust deed or will, '¨trustees must act unanimously. They must exercise their powers jointly and if they can't agree nothing can happen. There might be very good reason in any particular case why one trustee may not agree with a course of action and that is the benefit of unanimity.

However, we as professional advisers should be guiding our clients and spending as much time as needed with them to ensure the right individuals are appointed. For example, there is perhaps nothing to be gained and a lot to be lost by not understanding that a client's children do not see eye to eye.

While many clients often want to treat their children equally that particular circumstance might call for the appointment of a professional trustee (with or without the children) and even an amendment to the general position so that decisions can be taken by a majority of the trustees. This approach may help '¨to satisfy the client's wishes while providing a workable position m'¨oving forward.

Needless to say, arguments between trustees will only end up in delay over the administration and could even lead to costly court action to sort out the position.

As can be seen, acting as a trustee is an onerous role and should not be taken lightly by anyone willing to act. Testators or settlors can help the position by taking time in deciding who to appoint. Do they have the necessary skills and time to discharge effectively their duties; do '¨they fully understand what they are '¨asking of the people they would like '¨to appoint.

If not, we as professional '¨advisors should set out as clearly as possible the duties and obligations '¨imposed on trustees so that clients are '¨well informed when making what is '¨a very vital decision.