Equiom Jersey’s Client Services Director and trustee, Alice Dumoitier, shares her view on the common factors that can contribute to contentious and litigious situations in trusts, drawing from her 25 years in the trust industry.
1. Do you have the power?
One of the most common reasons for litigation to occur in respect of a trust is in circumstances when a trustee has acted (or failed to act) without having the power to do so, either by the trust instrument or the law. Common breaches of trust are distributing trust assets to a beneficiary who is not appointed or investing funds in a way that is not permitted within the trust instrument.
As every trust instrument is bespoke, it is key for a trustee to check whether they have the power to complete the transaction they are proposing to enter into.
A common scenario is where the beneficiaries are all entirely in agreement about a proposed course of action, however when they present it to the trustee it’s not in their best interest. It’s not just when the beneficiaries are in conflict that you must consider that something could be heading in the wrong direction.
2. Births, deaths and marriages
The very nature of trusts means they are often dynastic, with the settlor’s intention being that the wealth will endure from generation to generation. This generally works well for the first generation whilst the family dynamics remain static, however, the introduction of new spouses or a divorce, can very often see a family trust torn apart as the interests of the beneficiaries are no longer aligned.
Furthermore, as second and third generations reach the age of majority, it is commonplace for them to begin to probe the efficacy of earlier decisions in relation to the trust, which can turn into a contentious matter. The importance of detailed and accurate record keeping is key in these circumstances to provide the trustee with the protection of understanding why a decision, which is now under scrutiny was taken originally even if that was some years ago.
The trustee may have previously enjoyed longstanding relationships with the settlor or a member of the beneficial class, but often there may need to be an adjustment period to take account of the differing situations and views.
Care must be given to ensure that correspondence and decision making is impartial, taking account of the interests of all the beneficiaries, considering relevant and not irrelevant factors. In some scenarios, the trustee may not feel able to safely make a decision to act, which means an unavoidable application to Court to seek directions, with the possibility of the trustee having to surrender its discretion to the Court.
3. Sale of a family business/asset
The sale of a family business can be a very emotive subject, particularly if the business is being sold to one family member, but another or more than one family member feels they are the best person to run that business going forward.
In these circumstances a trustee must consider the views of all parties. It might be worth considering obtaining an independent market valuation of the family business, particularly if the dispute relates to the value one member of the family is willing to pay. Taking account of other factors, such as latent embedded tax gains and the benefit of receiving cash as a liquid asset versus a non-liquid, higher risk trading asset is key, as these may affect the valuation of the business over which disputes can often arise.
4. Not adhering to advice
Obtaining advice and then not following it is a common error which often leads to litigation. Alternatively, receiving defective advice can be equally as troublesome. In those circumstances, consideration needs to be given to how to remedy any loss to the trust fund. A common route is to apply to Court to set aside a transaction.
The importance of keeping tax and legal advice up to date cannot be underestimated and regular health checks are a key way to mitigate this potential risk for a trustee.
5. The unexpected…
Who can predict the unexpected? A swift change in legislation or a beneficiary changing residency can often have far reaching consequences that were not anticipated when the trust was initially created. It can be possible to mitigate some of these issues, for example including ‘flee clauses’, or automatically removing beneficiaries if they become resident in a certain jurisdiction.
Considering an exit strategy if you have fiduciary duties to discharge is important as it can be very difficult to step back, if necessary. We have all seen cases where a structure has become overly litigious and then you cannot exit the structure because of the fiduciary duties that you must continue to discharge. To mitigate the potential risk, consider putting a strategy in place before you proceed, undertake rigorous due diligence; have access to historic correspondence; meet with the current lawyers and understand the resourcing requirements and overall liquidity of the structure.
Family disputes can be hugely emotive, requiring trustees to balance personal views and relationships as well as their fiduciary duties. A trustee must be mindful that when the beneficiaries themselves are in conflict, they all have their own litigation strategies. Their interests won’t necessarily be aligned, and the trustee must remain impartial, understand the conflicts and work out how to manage them.
The cost of litigating can be huge, not just in terms of the financial burden but the personal stress arising for all involved, and it can serve to further fracture already strained relationships. Whilst the common belief is that if you win you will receive your costs, the reality is that you will never receive the full amount of your costs, and most likely only between 50% to 65%.
Wherever possible, some form of mediation (family, lawyer to lawyer) or financial dispute resolution is always preferable to costly legal challenges in terms of ironing out disputes. The important thing is to understand what everyone would like to achieve from a mediation session, keeping in mind how expensive these exercises can be and trying not to drift away from the goal of resolution.
While every care has been taken in producing this note, neither the author nor Equiom shall be liable for any errors, misprint or misinterpretation of its content. it does not purport to give legal, financial or professional advice and is provided for information only.
This article was first published in the ThoughtLeaders4 Private Client Magazine Issue 10.