How Robust Is Your Structure? The Trustee Identity Crisis

This update comes from a Global Elite Membinar, hosted by leading trust and estate litigators in July 2020.

Trustee conflict

• If we were held to the basic rule that a trustee shouldn't place themselves in conflict between their own interest and that of the beneficiaries, we would have to find spectacular trustees with suicidal self-interest to make difficult decisions for others' benefits. This is thin on the ground. When choosing a trustee, you need to consider their self-interest, and the ability to profit from their position.
• You might well not want to think about conflict too much, but even in that warm sunny upland before the dark clouds of litigators, there are clearly conflicts and the potential for conflicts. You need to stop and think about where the fault lines are between the people making the structure. It's an important step for long-term viability.
• You also have to think about the possibility for tension between the trustee and the directors of underlying companies, which will multiply when you're dealing with the same sorts of people on both sides of the fence.

Cost as a key consideration

• In addition to finding an independent and trustworthy trustee, the settlor will only want a certain number of people involved. Cost is key.
• All too frequently, unless you're dealing with a trust company with in-house or go-to lawyers, you will see lawyers running at the problems believing that they're acting for both the trustee and the settlor.
• Consider the two-party rule, where the trustee is acting in their capacity in two trusts: offshore this happens frequently. Jersey is looking at an amendment to their trust law which will do away with the rule, whilst it is already gone in Guernsey.

Trends

• It's common practice for advisors to point favourable clauses out, to indicate theoretical conflicts and the commercial reality. Frequently, standard exculpation clauses are included with trustees invariably wanting to include things like gross negligence. But settlors do not want that included, and if you're acting for the family, it's the norm for gross negligence to be removed.
• As families get bigger and wealthier, we're seeing families getting separate advice for the trustee. However, it does depend on the size of the structure and cost pressure.

 Trustee reputation

• If the same lawyer is advising the settlor, trustee and beneficiary, it is common but dangerous. The lawyer will eventually not be able to work for the trustee due to conflict.
• Even if the trustee is exonerated there will be painful proceedings in the interim. Often their name is anonymised, but it will usually come to light. Worst case scenario would be a regulatory issue: you might breach your own regulator's rules on how to behave.
• Not an uncommon tactic by an aggrieved beneficiary to include letters to the regulators, but often they won't get involved in alleged conflict onshore. They will keep private disputes at an arm's length.
• Offshore regularly deal with corporate trustees and regulated service providers, so regulators tend to look at conflicts properly for transparency purposes.

In practice, how do we address conflict?

• In practice, the trustee wants to amend the trust so that they can add a remuneration clause. This is when you surrender discretion to the court. It does have to be a proper and genuine conflict for trustees to surrender.
• Outcome: The court recognises conflicts exist and don't see paralysis or removal as the only two options. Trustees are not in an awful position- there are courts which are amenable to helping trustees out when they're in difficulty so long as they're not coming to court because they don't want to make a decision and be criticised for it. In a way, if someone points out that you have a conflict, it's helpful.
• You can't avoid conflict completely from nurturing a relationship, however things can be made better through this. Communication is key. Do make sure that you see around corners as much as possible as a trustee.