Trustees must be discreet, and act in the best interests of beneficiaries. There remains legal debate on how far beneficiaries can challenge how trustees act. This article examines a series of cases and issues.

In this article – the third in a series from law firm Hugh James â€“ the author examines how trustee powers can be challenged. The writer is Roman Kubiak, partner and head of private wealth disputes at the firm. (See his first two articles here and here.) To jump into the conversation, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The usual editorial disclaimers apply; the editors are pleased to share this content and invite comments.     

Challenges to the exercise of trustee powers and discretions are becoming more frequent, with beneficiaries, and those advising them, scrutinising the actions of trustees.

It’s generally accepted that trustee decision-making processes are confidential. That said, trustees aren’t prohibited from giving disclosure of their reasons. Voluntary disclosure may be made in an attempt to give reassurance that a decision was taken after proper consideration or to avoid adverse inferences being drawn.

The exercise of trustee discretion is fundamental to trust administration, allowing trustees to make decisions in the best interests of beneficiaries. However, the extent to which beneficiaries can challenge these decisions has been a subject of ongoing legal debate and refinement.

In Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 the court outlined four categories of powers:
1. Bare powers with no obligation to exercise; 
2. Fiduciary powers held by trustees or others as trustees of the power itself; 
3. Powers that are actually duties to form judgments about particular circumstances; and 
4. Discretionary trusts where trustees must select beneficiaries and distribute trust property.

The classification impacts the duties owed and the ability to challenge decisions.

Traditionally, objects of mere powers (essentially discretionary beneficiaries) had limited standing to complain about breach of trust (Re Manisty's Settlement [1974] Ch 17).

However, the Privy Council decision in Schmidt v Rosewood Trust Ltd [2003] UKPC 26 expanded the court's discretion to allow objects to challenge the exercise of powers in some cases and the courts now have an overarching jurisdiction to intervene based on the extent of the object's expectation and the reason for invoking the court's help.

This principle has been applied across the various trust jurisdictions. For instance, in Jersey, Freeman v Ansbacher Trustees (Jersey) Ltd [2010] W.T.L.R. 569 applied the Schmidt principles confirming that the object of a fiduciary power has legal standing to apply to the court for relief, including for reconstitution of the trust fund where loss has been caused by a trustee's breach of trust. 

More broadly, trustees have a duty to consider properly the exercise of their discretionary powers.

Re Hay's Settlement Trust [1982] 1 W.L.R. 202 outlined a threefold duty: 
1. consider periodically whether to exercise the power; 
2. consider the range of objects; and 
3. consider the appropriateness of individual appointments.

In Turner v Turner [1984] Ch 100, where trustees exercised a power of appointment under a discretionary trust without exercising their discretion because they failed to realise that it existed, were held to be in breach of their duty to consider the appropriateness of the appointment, and the appointment was therefore invalid. 

With that being said, courts are generally reluctant to interfere with trustees' discretions (Re Beloved Wilkes' Charity (1851) 3 Mac&G 440) and will generally only intervene where:
1. there has been an excessive exercise of power;
2. the exercise has been for unauthorised purposes;
3. the exercise is for ulterior purposes i.e. to funnel funds to a non-beneficiary (a fraud on a power);
4. a failure to take into account all relevant considerations and discount all irrelevant considerations;
5. a failure to consider the discretion at all; or
6. where the decision is so unreasonable that no reasonable trustee would make it (Edge v Pensions Ombudsman [1998] PLR 15).

There are some key principles which have been established in the context of discretionary trusts.

First, provided a trustee exercises their power honestly and in good faith, the court cannot interfere (Gisborne v Gisborne (1877) 2 App Cas 300).

This is important as it goes to, or perhaps challenges, the root of the court’s so-called supervisory jurisdiction over trusts and the “non-intervention principle” which was discussed in the UK Supreme Court decision of Lehtimäki and others v Cooper [2020] UKSC 33 and which Lady Arden described as follows:

“The jurisdiction to intervene in relation to the discretionary actions of trustees is in general governed by the principle, known as “the non-intervention principle,” that (in the absence of evidence of breach of duty) the court does not intervene in the exercise by a fiduciary of a discretion.”

Trustees aren’t under a duty to “give a hearing to both sides,” but a sudden change of tack may give rise to justifiable questions and scrutiny by beneficiaries and the court (Scott v National Trust for Places of Historic Interest or Natural Beauty [1998] 2 All ER 705).

Trustees must therefore turn their minds to the question of whether or not to exercise their discretion (Re Hay’s Settlement Trusts [1982] 1 WLR 202) and must not allow personal prejudices to inform their discretion or, indeed, to prevent the exercise of their discretion (Klug v. Klug [1918] 2 Ch 67).

While beneficiaries under a discretionary trust generally have a hope but not a right to assets held on trust, as Lord Reid made clear in Gartside v I.R.C. [1968] A.C. 553: â€śa beneficiary under a discretionary trust…has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a Court of Equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion “fairly” or “reasonably” or “properly” that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes.”

Having exercised their powers, trustees are occasionally faced with the situation where these transactions need to be set aside. Historically trustees would have recourse to what has been termed the “Hastings-Bass” rule following the eponymous 1975 case. That case originally allowed beneficiaries to set aside a trustee’s exercise of a power if they had failed to consider relevant factors or considered irrelevant ones and where there had been unintended consequences, usually around tax.

However, that rule was significantly restricted following the UK Supreme Court in the joint hearings of Pitt v Holt, Futter v Futter [2013] UKSC 26. 

Now it is necessary to show that trustees have committed a breach of duty. If trustees have followed competent advice, an exercise of a power will not in general constitute a breach of duty. Even if the rule might otherwise apply, the court has a discretion not to set aside the decision unless it can be argued that there has been a mistake. This, in essence, has seriously restricted the Hastings-Bass rule and ability of settlors, beneficiaries and trustees to set aside transactions which have led to unintended consequences.

It is helpful to look at how other jurisdictions have applied these rules. Because, in short, many have not. 

Jersey and Bermuda quickly enacted legislation to preserve the rule in Hastings-Bass. 

In Jersey we have Article 47 H of the Trusts (Amendment No.6) (Jersey) Law 2013 which states that:

“(2) The court may…in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and – 
(a) has such effect as the court may determine; or 
(b) is of no effect from the time of its exercise. 

(3) The circumstances are where, in relation to the exercise of his or her power, the trustee or person exercising a power – 
(a) failed to take into account any relevant considerations or took into account irrelevant considerations; and 
(b) would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that failure to take into account relevant considerations, or that taking into account of irrelevant considerations. 

(4) It does not matter whether or not the circumstances set out in paragraph (3) occurred as a result of any lack of care or other fault on the part of the trustee or person exercising a power, or on the part of any person giving advice in relation to the exercise of the power.”

That provision was applied by the Royal Court of Jersey in In the Matter of the Z Trust [2016] JRC 048 where a beneficiary of a Jersey trust applied to set aside: 
- the appointment of UK-resident trustees;
- the appointment of a UK incorporated director; and 
- the transfer of shares in a company to a UK incorporated nominee for the purported new trustees. 

The settlor hadn’t taken proper tax advice on the consequences of moving the trust to the UK and, despite it having been recommended to her that she do so, she was unaware of the tax fallout arising by reason of the appointments. She was also under the mistaken impression that moving the trust onshore to the UK would make it less vulnerable to attack by her family. It was also more recently applied in August 2024 in Representation of Dominion Fiduciary Trust Limited re the E Trust [2024] JRC168. 

The case involved the E Trust, a Jersey law discretionary trust settled in 2016 by a settlor for his family's benefit. The trust owned two substantial London properties worth ÂŁ54.5 million ($68.2 million), plus other assets totalling about $33 million. The trustees and settlor sought to set aside a 2016 declaration of trust due to mistakes made based on incorrect tax advice with potential significant inheritance tax and other tax liabilities.

It was submitted that a more tax-efficient structure would have been for the settlor to hold the properties directly through a nominee. The court considered whether the statutory test under Article 47E was met to set aside the transfer due to mistake.

It found that: 
1. a mistake was made in reliance on the incorrect tax advice;
2. the settlor and trustee would not have entered into this transaction but for the mistake; and 
3. the mistake was of a serious character.

The court therefore declared the 2016 declaration of trust voidable and ordered that: 
1. the properties were held on trust for the settlor absolutely;
2. the shares in the nominee holding companies were vested in the settlor absolutely; and 
3. the settlor was ordered to give restitution for monies expended by the trustee related to the properties.

With that being said, an important recent decision of the Jersey Court of Appeal was the 2021 case of In the Matter of the M Settlement where the new trustees sought to partially set aside some transactions and treat others as gifts instead of share sales to avoid an inheritance tax charge. It was held in that case that, despite meeting the requirements of Article 47, the court could not “effectively substitute a different transaction from that which the parties entered into” and “rewrite history.” 

Over in Bermuda the Trustee Amendment Act 2014 inserted a new section 47A into the Trustee Act 1975, which provides that: 

“(1) If the court, in relation to the exercise of a fiduciary power, is satisfied on an application by a person specified in subsection (5) that the conditions set out at subsection (2) are met, the court may: 
(a) set aside the exercise of the power, either in whole or in part, and either unconditionally or on such terms and subject to such conditions as the court may think fit; and 
(b) make such order consequent upon the setting aside of the exercise of the power as it thinks fit. 

(2) The conditions referred to in subsection (1) are that:  

(a) in the exercise of the power, the person who holds the power did not take into account one or more considerations (whether of fact, law, or a combination of fact and law) that were relevant to the exercise of the power, or took into account one or more considerations that were irrelevant to the exercise of the power; and 

(b) but for his failure to take into account one or more such relevant considerations or his having taken into account one or more such irrelevant considerations, the person who holds the power:
(i) would not have exercised the power; 
(ii) would have exercised the power, but on a different occasion to that on which it was exercised; or 
(iii) would have exercised the power, but in a different manner to that in which it was exercised.”

Again, the courts in Bermuda applied that provision fairly soon after the enactment in the case of Re F Trust [2015] SC (Bda) 77 Civ, where the appointment of a British resident trustee which led to adverse income and capital gains tax consequences was set aside.

Meanwhile in Guernsey, for a while it appeared that it would follow the more restrictive approach adopted by the Supreme Court in Pitt. In M v St Anne's Trustees Limited [2018] GRC 4 the Royal Court of Guernsey refused to set aside a transaction which had given rise to a large UK tax liability. 

However, that decision was successfully appealed, with the Guernsey Court of Appeal departing from the strict requirements in Pitt for there to be a breach of fiduciary duty, finding that any breach of duty, whether fiduciary or otherwise, can be enough for the court to exercise its discretion and set aside a transaction for mistake. 

Likewise, over in the Cayman Islands we had the case of Schroder Cayman Bank and Trust Co Ltd v Schroder Trust AG (2015) 18 ITELR 567 where the court, though setting aside appointments which led to unintended inheritance tax consequences, did so only because the mistakes were of sufficient gravity and it would be unconscionable and unjust to leave the mistakes uncorrected.

But, in 2019 the Cayman Islands legislature enacted section 64A of the Trusts Act (2021 Revision) (Section 64A) to preserve the Hastings-Bass rule over the more restrictive rule in Pitt. The key part of that section reads:

“(1) If the Court, in relation to the exercise of a fiduciary power, is satisfied by a person specified in subsection (5) that the conditions set out in subsection (2) have been met, the Court may: 
(a) set aside the exercise of the power, either in whole or in part, and either unconditionally or on such terms and subject to such conditions as the Court may think fit; and 
(b) make such order, consequent upon the setting aside of the exercise of the power, as it thinks fit. 

(2) The conditions referred to in subsection (1) are that: 
(a) in the exercise of the power, the person who holds the power did not take into account one or more considerations (whether of fact, law or a combination of fact and law) that were relevant to the exercise of the power, or took into account one or more considerations that were irrelevant to the exercise of the power; and 
(b) but for that person’s failure to take into account one or more such relevant considerations or that person having taken into account one or more such irrelevant considerations, the person who holds the power: 

(i) would not have exercised the power; 
(ii) would have exercised the power, but on a different occasion to that on which it was exercised; or 
(iii) would have exercised the power, but in a different manner to that in which it was exercised.”

This new section was recently applied in the unreported 2023 decision of Re Settlements made by Declarations of Trust dated 9 May 2023 where three trusts were established in the Cayman Islands which had in fact triggered substantial potential tax liabilities. As such, the Grand Court agreed to set them aside, albeit commenting that relief can only be obtained where the settlor has acted in good faith and not deliberately pursued a course of conduct with a view to gaining an undisclosed and impermissible onshore tax advantage or to procure any other improper benefit. 

Practical implications
So what are the practical implications of all of this?

For trustees:
a. It’s important to ensure decision-making processes are carefully documented. 
b. Trustees should always review the terms of the trust instrument carefully to determine the full extent of their powers, duties, obligations and liabilities. 
c. To avoid a justified complaint by a beneficiary, a trustee’s exercise of discretion should take the following approach:
i. a periodic review of whether or not to exercise powers;
ii. a periodic review of the class of objects and methods of disposition available; and 
iii. a consideration of the appropriateness of each disposition.
d. Never has it been more important to engage professional advice in complex decision-making processes.
e. Depending on where the trust is based, the options and availability to set aside transactions which have led to unforeseen consequences varies.

For beneficiaries:
a. There is a higher threshold for successfully challenging trustee decisions in the UK.
b. The differing approach by the offshore trust jurisdictions opens the door to potential “forum shopping” in international trust structures.
c. Information rights and disclosure are now often a precursor to challenges.