The author of this article argues that while the landscape has undeniably changed, and will continue to do so, trusts still remain a powerful and effective tool.

In the final part of this three-part series on trusts, Roman Kubiak, partner and head of private wealth disputes at law firm Hugh James examines the evolution of the trusts landscape in recent years with increased levels of scrutiny and accountability. The editors are pleased to share these comments; the usual disclaimers apply. We invite readers to jump into the conversation – remember, this news service is a platform on which industry figures can thrash out ideas. Take advantage, and email tom.burroughes@wealthbriefing.com

As my colleague Alix Langrognat discussed in the first article in this series, despite a greater focus on trust taxation and regulation, trusts remain an effective tool for asset protection and wealth planning, helping to ensure the safe, considered and effective transfer and preservation of wealth through the generations.

However, a marked global shift in the legal and regulatory framework around trusts, coupled with a societal paradigm shift regarding the role of trustees, has led to increased scrutiny and accountability of trustees. Gone are the days when many trustees could act with apparent impunity. 

Beneficiaries, and those seeking to pierce the veil of trust arrangements, are now more willing to challenge the perceived status quo through litigation.

The Big 4
The duties, powers, obligations and responsibilities of trustees derive from a combination of statute, common law, equitable principles and, of course, the trust instrument(s). 

Alongside trust disputes in the context of matrimonial disputes (see Victoria Cannon’s second article in this series), the most common issues faced by both trustees and beneficiaries relate to:

-- applications for an account and associated disclosure applications; 
-- the exercise of trustees’ discretions; 
-- trustee investment decisions; and 
-- removal and replacement of trustees. 

A number of court decisions both in England and Wales and offshore have sought to clarify the extent of a beneficiary’s right to challenge the actions of trustees. 

Perhaps the most notable is the decision in the England and Wales Court of Appeal in Armitage v. Nurse (1) where the court referred to the “irreducible core of obligations owed by trustees to beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts.”

Key elements of that decision, for instance concerning trustee exoneration clauses, were endorsed by the Privy Council and so became binding on Commonwealth countries, crown dependencies and UK overseas territories. In other contexts, for instance around the provision of accounts and disclosure, offshore trustees have arguably enjoyed a little more freedom. 

Applications for an account and associated disclosure applications
In Armitage, the Court of Appeal left no doubt that “[every] beneficiary is entitled to see the trust accounts.” This largely aligned with other authorities at the time which suggested that beneficiaries had a proprietary right to various trust documents, including the trust accounts.

However, in 2003 the Privy Council, on appeal from the Isle of Man court, took a different approach (2). It held that beneficiaries do not necessarily have an absolute right to call for disclosure of trust documents or accounts and that any such decision: 

1. depends on the nature and extent of their interest (whether actual or anticipated); and
2. is, in any event, subject to the court’s inherent jurisdiction to order such disclosure which it will consider on a case-by-case basis.

Generally speaking, the greater and more immediate the beneficiary’s interest, the more likely the court is to order disclosure of relevant trust documents.

Such requests are undoubtedly the most common precursor to potential trust litigation. They are, in essence, an attempt to scrutinise the management of the trust by the trustees.

The potential right to disclosure of trust documents can even extend to legal advice obtained by the trustees if paid for out of the trust funds. As such, it is vital to understand the context behind any requests for disclosure and whether there is any risk of litigation against the trustees. If so, trustees may wish to fund any such legal advice personally, albeit with a view to reclaiming those costs in due course, whether out of the trust fund or from any beneficiary personally.

Subject to that, trustees and their advisors should consider the extent of the beneficiary’s interest, the impact of providing any such disclosure (both on any such beneficiary as well as any other beneficiaries of the trust), and the risks in either withholding or providing such disclosure. Indeed, early disclosure by trustees can often help to temper any potential fallout.

With that said, certain documents do not necessarily fall within the definition of “trust documents” and so are not disclosable. These can include documents dealing with any exercise of discretion by the trustee, though can include documents otherwise reviewed in the course of considering any such exercise, and any legal advice obtained by the trustees in that regard. 

The exercise of trustees’ discretions
Trustees of discretionary trusts not only have a power but, except in rare instances, a legal duty to exercise their discretion when considering what, if any, advancements to make out of the trust fund, and to whom.

Any such exercise of discretion must be made honestly, in good faith and within the scope of powers provided for under any trust instrument(s). While trustees can and will often have regard to any letters of wishes prepared by the settlor of a trust, they cannot allow their discretion to be fettered in any way.

Challenges to such exercises of discretion are most often brought by beneficiaries who have either been refused an advancement or who feel that they have been overlooked in favour of other beneficiaries. They are a complaint that the trustees have acted in breach of trust.

In 1974 the court laid out a test for determining whether a power had been properly exercised. Known as the “Hastings-Bass rule” from the case of the same name (3), it established that trustees have a duty to take into account relevant considerations and discount irrelevant considerations when exercising any such powers. 

This rule was considered so intrinsic to the trustee role that it was enshrined in both Bermuda’s (4) and Jersey’s (5) trust legislation. Meanwhile, other jurisdictions have distanced themselves from this rule, choosing, instead, to follow the UK Supreme Court’s decision in the joint appeals of Pitt v. Holt and Futter v. Futter (6) .  

In the context of trustee exercise of discretion, the Supreme Court’s decision has provided some comfort by confirming that trustees who have sought professional advice will have satisfied their duty to take account of all relevant considerations. In that case it is not open to the court to challenge any such exercise of discretion. 

Trustee investment decisions
Trustees of discretionary trusts are often given wide powers of investment, usually as if they were absolute owners. Such investment powers and duties are, again, usually laid out in the trust instrument(s). 

Where applicable, these powers are complemented or dictated by statute, common law and tortious principles.

In England and Wales, the statutory position is governed by Part II of the Trustee Act 2000 with similar rules enacted in other jurisdictions. Meanwhile, a number of key court decisions have helped to clarify trustee duties and, crucially, potential liability in this regard.

One of the leading decisions was Nestle v. National Westminster Bank (7) where the Court of Appeal clarified that:

1.  A loss on trust investments is not, in and of itself, sufficient to show a breach of trust by the trustees; and
2.  when considering trustee conduct in relation to investments, it is important to do so in the context of the information available to trustees at the material time i.e. without the benefit of hindsight.

As such, challenges to trustee investment decisions have proven notoriously difficult, more so where the trustees have taken independent financial advice, considered diversification of investments where appropriate (including adopting a Modern Portfolio Theory approach) and in line with the trust instrument(s) and guidance from any trust protectors.

That said, there are still risks for the unwary, particularly for trustees who engage in more speculative or volatile investments (think cryptocurrencies and emerging tech), who favour specific investments at the expense of others (think ESG or other principle-based investment strategies which may not necessarily perform as well) or who favour one class of beneficiaries over another, for instance placing greater emphasis on income over capital growth or vice versa.

With such investments taking centre stage in more recent years, and pressure on trustees to maximise returns and outperform the market, there are likely to be those who go a step too far.

Removal and replacement of trustees
Again, unless otherwise provided for by the trust instrument(s), the power to remove and replace trustees is either laid out in statute or exercisable in any event by the court under its inherent jurisdiction. 

In the context of trust disputes, the potential grounds for removal are many and varied but generally arise from the above and a general breakdown of trust and confidence as between the trustees on the one hand and settlor, protector or beneficiaries on the other.

When faced with a potential claim for removal, trustees need to adopt an entirely objective approach, ensuring that any steps taken, including resisting any such claim, are taken in the best interests of the trust and its beneficiaries. That is not to suggest that mere disagreement between the trustees and beneficiaries is sufficient to warrant removal. 

The key issue is whether a trustee remaining in situ will, to quote an often-cited passage from the Privy Council decision in Letterstedt v. Broers (8), "be detrimental to the execution of the trusts." That is all the more likely where the claim for removal arises from the actions and breaches of any such trustee. 

However, whether removed voluntarily or forcibly, an outgoing trustee should usually be entitled to some form of indemnity in respect of any costs and potential liabilities properly and reasonably arising during their tenure.

Bless you!
In this landscape of prospective litigation what should trustees be doing?

Aside from the usual rule of taking advice at appropriate stages, most key jurisdictions provide for trustees to apply to court to direct, sanction or “bless” any proposed or actual steps.

Often known as a Public Trustee v. Cooper application from the eponymous case (9), and adopted in a number of offshore jurisdictions, these can be powerful tools in providing comfort both to trustees and beneficiaries regarding any steps or “momentous decisions” by ensuring that any proposed step has the court’s blessing. 

Trustees or, indeed, beneficiaries who may be faced with potential conflict are therefore well-advised to consider seeking the court’s guidance in a perhaps less adversarial manner by invoking its jurisdiction to provide direction and guidance.

Conclusion
While the landscape has undeniably changed, and will continue to do so, trusts still remain a powerful and effective tool. The modern trustee needs to be alive to this everchanging landscape while also ensuring active and considered management of the trust in line with their powers and duties.

With litigation on the rise, it is key for trustees and beneficiaries alike to seek professional advice and input early on to help avoid larger issues later down the line.

Footnotes
1,  [1997] EWCA Civ 1279
2,  Schmidt v. Rosewood Trust Ltd [2003] 3 All ER 76
3,  Hastings–Bass (deceased), Hastings and Others v. Inland Revenue Commissioners [1974] 2 All ER 193
4,  See section 47A Trustee Act 1975
5,  See section 47H Trusts (Jersey) Law 1984
6,  [2013] UKSC 26
7,  [1993] 1 WLR 1260 (CA) 1269
8,  [1884] UKPC 1
9,  [2001] WTLR 901 ChD