Best Practice for Setting Up Trusts – preventative measures to minimise disputes.
The old adage prevention is better than cure applies equally to trust drafting. Trust disputes can be extremely expensive. Legal fees are not the only expense of trust litigation. Litigation often creates an emotionally charged atmosphere that can pit family members against one another at the incalculable cost to family harmony. Despite these factors, contentious trust disputes continue to rise – both in number and value.
Though there are evolving battlegrounds at the heart of these disputes, a core group of issues continue to provide fertile ground for litigation, from year to year. Experience is often the best teacher, of course, and, in this context, few experiences have the potential to educate more than litigation experience.
Leveraging the insights gained from trust litigation can provide effective guidance for trustees and other fiduciaries to achieve what should be a primary goal: avoiding disputes in the first place. Those who have litigated in the trenches – arguing over the construction of specific trust provisions, the nature of a specific power and how that does or does not permit the power holder to exercise its power in a certain way – can be leveraged to help drafters and wealth planners to spot red flags and avoid potential disputes before they happen. The unique perspective of trust counsel who has represented trustees, beneficiaries and other fiduciaries is invaluable in the stress testing and risk assessment of a trust at all stages including on design and formation and when measures like decanting or trust amendments are being considered.
This article aims to provide an insight into both common and novel problems fuelling trust litigation by exploring some, non-exhaustive, examples and to outline potential steps to mitigate the risk of disputes consistent with the theme that prevention is better (and less expensive) than cure.
Design and creation of effective trust administration processes
Certain core causes often spark and feed the vast majority of trust disputes. Poor drafting, a lack of foresight and communication failures can all provide the elements necessary to ignite protracted, costly and emotionally damaging trust disputes.
Thoughtful design and creation of a trust instrument, and well-thought out processes for trust administration, succession, amendment and evolution can reduce the potential for expensive (and often contentious) court applications.
Good drafting
The most fundamental way to insulate a trust instrument from dispute is good and thoughtful drafting. A trust instrument should articulate the settlor’s intent and wishes clearly, in a manner that is both accessible to the reader and not susceptible to misinterpretation. Investing in good drafting reduces the risk of a dispute and the time, financial cost and emotional toll that any dispute takes.
It is not uncommon to come across older trust instruments that represent time bombs for potential disputes due to clunky, overly complex, virtually impenetrable language often full of ambiguous archaisms and legal jargon. Writing in plain English is crucial with the use of words and phrases that have a precise, consistent meaning. Good drafting eschews words that are potentially ambiguous. Even though some words and phrases have been staples of legal drafting, this does not guarantee consistency of meanings in different contexts, which can create ambiguity and confusion – a breeding ground for disputes. Effective drafting breaks concepts down into separate, easily digestible parts with short simple sentences and paragraphs.
Effective drafting also requires the use of express, unambiguous defined terms within the instrument rather than relying simply on ‘understood concepts’ and one’s use of ‘similar language in many prior instances’. Best practice requires revisiting any ‘carry-over’ language every time it is used, to make certain the drafting is clear and concise, avoids misinterpretation, and is effective for the specific matter to which it is being applied
By way of example, there is a particular need for caution when seeking to mirror one beneficial class with another beneficial class, particularly if that involves trust instruments governed by different laws. In particular, care must be taken to examine all defined terms and other provisions in each Trust instrument for consistency. Whether the beneficial class is effectively mirrored may turn upon the actual phrase used in each instrument, any defined terms and common law or statutory provisions of each jurisdiction. For example, does the word “spouse” include a widow, such that the widowed spouse continues to be a beneficiary? Kessler in Drafting Trusts and Will Trusts points out [5.30] that there is a “long established rule that the word ‘Spouse” in its natural sense does not include a widow.” If it is intended to include a widow in the definition of spouse then it would be prudent to say so in the trust instrument. Any dispute about the meaning of a given phrase can be put beyond doubt by the inclusion of a clear, express defined term in the Instrument reflecting the intention of the settlor. The same can be said for words such as “issue“, “child(ren)” “descendants” and “next of kin“.
This is all the more significant in modern day trusts where the concepts are effected by modern day families, attitudes and technologies. It can no longer be assumed that such terms include only legitimate, biological descendants, as may have been the case many years ago prior to changes brought about by legislation and a change in social attitudes. Disputes can be avoided by express, unambiguous defining terms.
Carefully considering the appropriate governance of a Trust Structure
A well-designed governance structure should be fit for purpose and mitigate the risk of disputes. There are a variety of governance structures that can be built into a trust structure, depending on bespoke requirements and needs of the settlor, and the nature, rationale for, and complexity of the structure. Consideration should be given to which persons/entities can best serve as trust officials: be it, individuals and institutions; professionals and non-professionals; family members or corporate entities.
There are advantages and disadvantages to each of them, which should properly be considered. It is not unusual for the Settlor to choose a non-professional individual or group of individuals, such as a family member, friend or business partner, because he or she has intimate knowledge of the settlor’s values and wishes, the family’s situation and dynamics or knowledge of the family business. A recent case Ogier has been involved in, however, highlights the importance of the changing dynamics of the trust over time, when a Management Committee appointed by the Settlor some decades ago may no longer represent the views and wishes of the younger generation of beneficiaries, particularly in areas such as socially responsible investing, such that there is a danger that trust and confidence is lost.
Accordingly, the following considerations are crucial:
- What does the governance structure look like? e.g. should there be Individual or multiple Trustees, a Corporate Trustee, PTC, Protector, Enforcer, Management or other fiduciary Committee?
- Do those persons/entities appointed (the Trust Officials) have the skill and experience suitable to the role that they will play within the trust structure?
- What powers and duties should be allocated among those roles?
- What is the nature and scope of such powers and duties?
- Should those powers be broad or narrow, fiduciary or non-fiduciary?
- What mechanisms should be included for succession: for example removing a Trust Official and appointing a successor Trust Official?
- What mechanisms should be included to deal with issues of incapacity, death, deadlock or simple lack of communication/ knowledge of the whereabouts of each Trust Official, to ensure appropriate consents can be obtained and avoid jeopardising the validity of the trust’s administration.
Nature and scope of the powers of Trust Officials
In designing the governance structure, careful consideration should be given to the scope and types of powers granted to the Trust Officials. In respect to any power-holders, it is important to consider whether the nature of the power, is broad or narrow, fiduciary or non- fiduciary?.
To avoid any misunderstandings, the trust deed should make it very clear how the power holder is to be expected to exercise its powers. Taking the example of a Protector, recent case law from Jersey1, Bermuda2 and England3 has highlighted differing judicial approaches to the scope of a protector’s consent to a proposed exercise of a trustee’s power. The issue in hand is whether the protectors consent powers confer an independent decision-making discretion on the protector (the “wide view”) or merely a power to ensure that the trustees’ substantive decision was a valid and rational one (the “narrow view”). Each competing construction has practical implications on the governance and administration of the trust. In circumstances where it remains to be seen how the Cayman Courts and the Courts of other common law jurisdictions will treat the recent caselaw, it is advisable that the trust instrument expressly sets out how the power holder is to be expected to exercise its powers.
Furthermore, as fiduciary status and the attendant liability for breaching fiduciary duties can be an important check on the Trust Official, it is important to spell out in the trust instrument, whether a person or body holds a power in a fiduciary or non-fiduciary capacity4. This can affect both how the person/body exercises that power, as well as the degree to which the exercise or non-exercise of the power creates risk of a trust dispute.
Can the power be exercised in the person’s/body’s own interests? Or, are they, like trustees, bound to exercise these powers in a fiduciary manner strictly in the interests of the beneficiaries of the trusts?
If this is not expressly set out in the trust instrument, it will be a question of construing the trust deed and may incur a potential costly trip to the court.
Powers, post Wong5
The recent Privy Council decision in Wong, which clarified the operation of the ‘Proper Purpose’ rule, confirmed that that trustees must act within the scope of the intention (or proper purpose) for which powers are given. One practical consideration that emerges from Wong is the importance of trust drafting. In particular careful consideration should now be given to inserting language into a trust instrument which makes clear the purpose or purposes for which powers are to be conferred on the trustee in order to limit the scope of future disputes.
Succession planning and mechanisms to prevent stifling the administration of the trust
Another hotbed for costly, avoidable redress to court, is a lack of clarity in succession planning. The proper design of a trust instrument should include clear provisions detailing the process for appointment and removal of trustees, protectors and other Trust Officials. The less ambiguity, the fewer grounds for dispute.
The same consideration should be given to appropriate mechanisms to deal with issues of incapacity or death of a settlor, trustee, protector or other power-holder. Special care must be taken when drafting trust instruments, to ensure a definition of incapacity is included in the defined terms, and any powers given under the trust instrument are subject to the power holder having capacity when exercising the given power(s).
The inclusion of incommunicado clauses can provide a mechanism to ensure appropriate consents are obtained so as not to stifle the administration of the trust in circumstances where there has been a persistent lack of communication from a relevant trust official or where their whereabouts is simply unknown. Moreover, care should also be taken to avoid issues of potential deadlock where powers are to be exercised by more than one power holder.
Forum of Administration, dispute resolution and exclusive jurisdiction clauses
It is still quite common for trust instruments to include a “Forum for Administration” clause. Such a clause could potentially be construed as identifying no more than where, geographically, the trust is to be administered or, depending on context and the actual words used, it could be interpreted as a jurisdiction clause indicating a choice of court to determine issues related to the administration of the trust.
Differing judicial approaches to the construction of Forum for Administration Clauses has left trust litigators in no doubt, post Crociani6, that such a clause cannot be automatically relied upon to act as an exclusive jurisdiction clause in favour of the courts of the named jurisdiction, as the venue for the determination of disputes concerning the Trust and trust administration, even where the words ‘exclusive jurisdiction’ are present. It all comes down to construction of the clause itself (in Crociani for example a relevant factor was the fact the clause referred to the country rather than the courts of the country as the forum for administration). The Privy Council doubted that the insertion of the words “exclusive jurisdiction” in a clause otherwise concerned with the proper law of the relevant trust could ever sensibly be construed as having anything to do with jurisdiction at all. Interpreting the clause under review, the Board found that the reference to the forum of administration referred to the place where the Trust’s affairs were to be organised or run and was not intended by the draftsman to operate as a jurisdiction clause.
What is striking and a lesson for trusts draftspersons, is the different judicial interpretations of the provenance and meaning of the phrase “forum for administration”, which each canvas different arguments as to what it may or may not mean. For such a common phrase used in the drafting of trust instruments to have shown itself to be capable of bearing so many different meanings depending on the instrument as a whole and the relevant factual matrix, it is clear that caution should be taken before blindly inserting such a clause into the instrument hoping that it will confer upon the Cayman court exclusive jurisdiction to determine all disputes related to the trust.
Whilst the Cayman court7 has taking a careful and pragmatic approach to the interpretation of a forum of administration clauses, having regard to the clause itself and the wider context, trust draftspersons are of course well advised to take the advice of the Jersey Court of Appeal in Crociani and abandon the forum of administration clause in favour of an unambiguous exclusive, or non-exclusive, jurisdiction clause8. Indeed this approach is endorsed by Matthews9 in his article “What is a trust jurisdiction clause? when he advises:”
“trusts draftsmen the world over must revisit their precedents and decide, in the light of this case, whether to make any amendments. In particular, they may decide to suppress the use of the words ‘exclusive jurisdiction’ if they appear in what is otherwise a definition of the proper law. Secondly, they may wish either to omit reference to the ‘forum for administration’, or at least make clear exactly what it is intended to refer to. Thirdly, they should consider whether they wish to insert an exclusive jurisdiction clause for the resolution of disputes.” [Paragraph 33]
Application for directions – Section 48 Trusts Act
Notwithstanding, the precautions discussed above, where an issue does arise in respect to the proper interpretation of a trust provision, or exercise of a trust power, the Cayman Islands trust laws provide a variety of tools for resolving ambiguities or other administrative problems These mechanisms allow the trustee (or protector)10 to resolve more readily and cost-effectively, potential issues with less risk of them snowballing into a more significant dispute.
One such mechanism is provided by Section 48 of the Trusts Act which confers on the Grand Court the power to give an opinion, advice or direction on any question respecting the management or administration of trust fund. The benefit of obtaining the court’s direction is that, provided that the trustee11 makes full disclosure of all relevant information on the application, and acts in accordance with the directions or advice properly obtained from the Grand Court, the beneficiaries will be bound by the decision and will not be able to claim the trustee has acted in breach of trust in relying on that direction or exercised a power for an improper purpose. An example of such an application is the Cayman case of A v B et al12 where the trustee of a Cayman Islands trust applied to the court, pursuant to section 48 of the Trusts Act, seeking directions as to whether a power entitling the trustee, with ‘the consent of the settlor during his lifetime’, to vary, add to or modify the trust deed, was exercisable after the settlor’s death. The Court granted a Declaration as to the proper construction of the relevant provision and gave guidance in respect to the principles applicable for the interpretation and construction of trust instruments.
Conclusion
Minimising the risk of trust disputes starts with thoughtful trust design and formation which can be enhanced by insights gained from trust litigation. It continues with establishing and implementing processes for administering the trusts, including a continuous process for evaluating and adapting the trust structures. Developing best practices and procedures in trust administration should be an ongoing process, and one that is subjected to regular review for improvement and refinement. Open communication among trust officials and beneficiaries can also often play an important preventative role to minimise disputes.
1In the matter of Piedmont Trust & Riviera Trust [2021] JRC 248
2Re X Trusts [2021] SC (Bda) 72 Civ
3PTNZ v AS [2020] WLTR 1423
4A Trust Official can potentially hold and exercise one or more powers in either a fiduciary or non-fiduciary capacity.
5Grand View Private trust Co Ltd v Wen-Young Wong and others Ltd.[2022] UKPC 47
6Crociani v Crociani [2015] WTLR 975
7In the Matter of HSBC International Trustee Limited v Tan Poh Lee at al( Unreported 7 November 2019, Kawaley J)
8Crociani v Crociani [2014] JCA 089 at [155].
9Matthews, “What is a trust jurisdiction clause?”(2003) 7 Jersey Law Review 232.
10AA v JTC (Unreported 26 April 2024)
11(or protector, as the case may be)
12A v B et al (Unreported 13 February 2020, McMillan J)
