According to recent statistics disputes launched in the High Court over property held in trust jumped to 111 in 2010 up from 44 in 2009 and 13 in 2008. These must surely just be the tip of the iceberg with a considerable number of trust disputes either settling at Mediation or being settled between the parties after inter solicitor discussions.
The extreme volatility of investments in recent years, together with increasing expectations on the part of trust beneficiaries has surely led to this explosion in trust disputes. Further whilst many trustees are family friends or relatives who may have taken the role on simply to “do a favour” to the family increasingly dysfunctional families often fuelled by an expectation led attitude see trustees as fair game for litigation.
Advice to Lay Trustees
In circumstances where the firm merely holds trust papers but does not act in the capacity of trustee, then the advice to be given to those lay trustees is that there should be regular review of the trust deed to ensure that they are not about to breach their duties. There should be a regular review of those investments which they have sanctioned to ensure that they still fit the profile of the individuals who are to benefit under the terms of the trust. There must also be proper annual accounts. Of course it is noteworthy that there is a slightly lower duty of care expected from a lay trustee than would be expected from a professional trustee. However this does not exonerate them from a potential challenge from a dissatisfied beneficiary and this is simply not enough for the lay trustees to sit back and allow the trust to take care of itself.
Whilst many lay trustees agree to take on the role without really understanding the legal risks the same is now increasingly true of practitioners where being a trustee may be a very small part of their day to day work. Those practitioners whose work regularly and primarily involves being a trustee are intimately familiar with the risks and obligations but there will be many high street practitioners who are trustees of funds, sometimes not even particularly large funds, where the same principles of trust management apply and yet those trusts may not receive the supervision nor risk management that they deserve.
The real effect of the Trustee Act 2000 is now beginning to be felt in that we have a statutory duty of care and rules under the Act are prescriptive. One major area of claim is where investments, and the choice of investment advisors, are not regularly reviewed. Trustees not only need to ensure that the investments are regularly reviewed and that they adequately explain to the investment advisors the risk profile to be followed but the actual choice of advisor needs to be reviewed regularly. This is especially true of small high street financial advisors who may have been amalgamated or taken over or form part of large national groups.
Failure to take into account the taxation consequences and the minimisation of Income and Capital Gains Tax is also another huge growth area.
Payment of capital instead of income to a life tenant can severely affect the remainder man’s interests and the allocation of costs and charges needs to be taken into account.
The Law Society Practice Note on File Retention for Trustees shows quite clearly the documentation which needs to be maintained in respect of a trust namely;
- The original Trust Deed;
- Originals of any supplementary deeds, such as Deeds of Appointment;
- The original Letter or Memorandum of Wishes;
- All original paperwork completed by the Settlor during creation of the trust including questionnaires, declarations and due diligence records
While the file has been created, it should normally be retained for the duration of the trust.
However, it’s simply not enough to ensure that you have all of the relevant documents on file when the trust was created. There is of course an ongoing duty to ensure that you are fulfilling your duties as a trustee. There should be an ongoing and regular review of the trust documentation to satisfy oneselves that nothing is being overlooked, and this means annual accounts, proper minutes of decisions and proper tax records.
The Trustee Act 2000 provides that a trustee must “exercise such care and skill as is reasonable in the circumstances, having regard in particular…to any special knowledge or experience”. This duty becomes even more burdensome when the trustee acts in the course of a business or profession, such that the trustee could be expected to have additional experience and skill and by reason of that said business for example, a financial advisor would find himself having a greater duty to the trust than a dentist by reason of the fact that it would be expected that the financial advisor would have a greater knowledge of financial investment products etc.
What Happens if a Claim is Made?
Trustees may be sued if they breach the statutory provision of the Trustee Act 2000. Rules under the Act are prescribed in respect of requirements. One of the main criticisms that Solicitor trustees may face is that they have failed to ensure that investments under the trust are reviewed so as to produce the greatest yield and provide for the beneficiaries under the trust. Furthermore the nature and type of investment can also be criticised if the financial product itself does not meet the specific risk profile of the purpose of the trust. Further and in addition trustees may also face criticism for failing to take into account the tax consequences of individual investments, and it must be borne in mind that trust taxation on income can be as high as 50% and 42.5% on dividends. Finally of course any payment out of capital as opposed to the income from an investment to a life tenant will of course also effect what the remainderman will receive. The most obvious criticism is where the trustee has made an unauthorised or ‘wrong’ investment.
All of these of course form potential heads of loss for the trustee and the beneficiary will have to be placed in the position that he or she would have been in had the trustee have discharged their duty in accordance with what is required under the Trustee Act 2000.
Should You Act if a Claim is Made?
In the unfortunate event that a beneficiary does feel sufficiently aggrieved to make a claim against a trustee, the firm of course will be in the firing line. The concern is whether the firm should itself defend any action made by an aggrieved beneficiary. The Law Society do not offer a specific practice note in relation to these particular disputes. However the SRA’s guidance note, as contained within Indicative Behaviour 5.6 does state quite clearly that “a solicitor should not be….acting in litigation if it is clear that [the solicitor] or anyone within your firm, will be called as a witness in the matter unless you are satisfied that this will not prejudice your independence…”
Generally speaking it must be that there is a conflict of interest where the trustee, being criticised and who is supposedly acting in the interests of the beneficiaries under the trust, is seeking to defend the claim made by the aggrieved beneficiary. There are two reasons for this. Firstly, no doubt the professional trustee will be seeking to make a charge to the trust for defending his actions. Secondly, they cannot be guaranteed impartiality in the circumstances.
Therefore the trustee who is under attack by a beneficiary should, as soon as it becomes clear that the matter is to become litigious, refer the matter to the firm’s professional indemnity insurers. This however may be problematic.
What Insurance Cover is Provided for your Firm?
In the unfortunate event that a claim is made by a beneficiary the worst thing that can happen is that your professional indemnity insurance does not provide adequate cover for instances where your firm carries out work in capacity of trustee. The amount and level of cover should be contained within the terms of the insurance policy but it is worthwhile checking to ensure that there is a cover for instances where the actions of a trustee are being challenged under the Trustee Act 2000.
If at trustee is put on notice that a beneficiary has appeared out of the woodwork with a challenge to one or other of the actions to the trustee, then it is imperative that in the first instance, reference is made to the Trust Deed itself to ascertain whether protection is afforded by the Deed. It may well be that the Trust Deed provides that whatever actions are undertaken by the trustee, irrespective of how negligent they appear to be at first instance, are incapable of being challenged. This provision however is unlikely to extend to the actions of a trustee where it is clear that his intentions were fraudulent of course.
A further bar to any potential claim by an agreed beneficiary would be caused by limitation. The right of action of course does not accrue until the beneficiary’s interest has vested. Therefore if the complaining beneficiary is a remainderman, time will not start to run until the life interest has terminated. It follows therefore that the very latest date by which an action could be taken against a trustee is more likely to be six years from when the last beneficiary’s interest vests. This end-point may be postponed in certain circumstances including where there has been a fraud or a deliberate concealment which would have meant it is impossible to discover even at the point of vesting at the end of the trust period. Further time cannot run against a trustee and remains in the position of a trust property.
In the ordinary course of events, a breach of trust claim should be brought within six years from the accrual of the right of action, being when the actual breach is committed.
Consider a Beddoe Application
This provision is utilised to enable a trustee to obtain direction and/or consent from the Court as to whether they should prosecute an action or continue in litigation generally if proceedings have been brought by a third party against the trust. One may ask the question why it would be necessary to apply to the Court for a Beddoe Order when in most instances the trustee’s right to an indemnity from the trust fund in relation to those charges and expenses properly incurred will provide for reimbursement. However, such is the uncertainty of litigation and with it, the prospect that should they successfully defend or prosecute an action, that the Court may determine that those legal costs which have been incurred should be borne by the trustee personally, thus it is in most instances advisable to obtain the direction of the Court via a Beddoe Order.
Even in cases where a trustee has obtained a very clear opinion from counsel that either the claim or defence is more likely than not to be successful. In the moment it is not of course without the benefit of the Beddoe Order and there is every likelihood that costs of an unsuccessful action will be borne by the trustee personally. Therefore given that there is such a risk to the trustee in these situations and given that the procedure for obtaining Beddoe Orders has been streamlined it is advisable in all circumstances to obtain such an order so as to protect the trustees own pocket on the outcome of any hostile litigation, provided that it cannot be shown that the trustee has acted unreasonably in any event.
Howell and Others – v – Marcus Lees-Millais
Here the trustees’ case was that the Court should sanction various claims and involved a eight day hearing at substantial costs. The Court in fact only sanctioned one such claim. The resulting costs fallout from this unsuccessful application were huge and are still to be resolved. Lindsay J made it very clear in the course of his judgement that in his view the trustees had acted inappropriately partisan way.
There is clearly a balancing act. Trustees should not merely jump in front of a judge merely to obtain his blessing for a proposed legal action without considering whether that action is appropriate in the first place. If the court is of the view that the proposed legal action was a non-starter, the trustees will be personally liable for the costs of the application for a Beddoe Order.
The life of a trustee is never an easy one and it seems that there are no safeguards from criticisms either from the beneficiaries or the court. The only way to potentially avoid coming under fire is to be seen to be acting in the best interests of the trust and avoid where possible conflict with other trustees as well as beneficiaries and above all keep proper records. Of course this is easier said than done, especially when one needs to charge properly for that work.