Lessons learnt from global trust cases
The problem with trusts is that there are so many things that can go wrong. Trustees can find themselves either being directly attacked or in the middle of what becomes a protracted and expensive dispute.
To add to this, trust law constantly evolves and the last couple of years has seen some really important decisions across the offshore world which potentially impact on the exposure of trustees to liability and their ability to tackle disputes.
Recent cases where we have been involved have highlighted:
- The need for trustees to be aware of a trust’s “proper purpose” when exercising decisions
- How trusts should be restructured (particularly when there is disagreement about how that should be done) and the involvement of the Court in that process
- That capacity (or rather the lack of) is increasingly a key element of a trust dispute
Trustees making decisions – they must be made for a “proper purpose”
The long running case of Grand View Private Trust Company v Wong is important not only because Stewarts acted for the winning party (by 5-0) in the Privy Council but because this case should now be considered every time a trustee makes a decision.
The basic facts involved two trusts in Bermuda. Trust A was a discretionary trust for the remoter issue of the economic settlors. Trust B was a purpose trust with a mixture of non-charitable and charitable purposes but it conferred no benefit on family members. The beneficiaries were members of a very prominent and wealthy Taiwanese family and the structures held multiple millions of dollars of assets (in fact this is the largest by value trust dispute in Bermudan legal history).
The trustees of Trust A executed an irrevocable deed which added the trustee of Trust B as an object of Trust A, excluded all the existing objects and beneficiaries of that trust and transferred all its assets to the trustee of Trust B. So, all the assets of Trust A were then held by the trustees of Trust B on a purpose trust from which no family member could benefit. As if that wasn’t good enough, the trustees then terminated Trust A. Obviously, the excluded beneficiaries were not happy about this!
“Trustees need to be aware of this rule every time they exercise a power – especially powers which exclude beneficiaries or which could be seen to fundamentally alter the purpose of a trust. “
Our client prevailed at first instance but lost on appeal. The Privy Council then unanimously found in his favour, finding that the trustees had exercised their powers for an improper purpose because the manner in which they did so deprived the beneficiaries of benefit from the trust rather than further their interests. This was even though, on paper, what the trustees did was permissible under the trust deed. The Court determined this by looking at both the wording of the relevant powers in the trust instrument but also by scrutinising the wider context of the creation of the trust and the core function and essence of the relevant power.
The proper purpose rule is not new but its application to discretionary trusts has long been debated by the Courts and academics and so this decision of the PC – as the final appellate Court – carries great weight.
The practical impact is that trustees need to be aware of this rule every time they exercise a power especially powers which exclude beneficiaries or which could be seen to fundamentally alter the purpose of a trust. It also suggests that great care is needed from a very early stage to properly understand and document the purpose of a trust to limit the scope for future disputes.
We expect that this decision may lead to more Court applications. Undertaking such a momentous decision without the blessing of the Court will be fraught with enormous risk – it took 10 years of litigation in Wong to reach this point at substantial cost and reputational damage to the trustee.
Contentious trust restructures
One significant area of work for our team is contentious trust restructures, which appear to be increasingly commonplace both in England and offshore. They usually occur after the death of the patriarch or matriarch or when they are moving into their last stage of life and the wider family are no longer happy for their interests to all be within the same structure.
They also occur where the trust holds a private company and particular branches of the family are less involved with it and perhaps less likely to benefit from directorships and formal roles within it. At that point the less involved branch often wish to separate their interest, or even liquidate it. Naturally this is likely to be a momentous decision for the trustees and one which they are often concerned about the ramifications of, particularly where the discretionary trust involves minor and unborn beneficiaries. The upshot is that the trustees will insist upon a court blessing – that involves the coordination of detailed consultation procedures, corporate and tax advice.
The court is then presented with a so-called Public Trustee v Cooper application where it is essentially asked to determine whether the trustee’s proposed course of action is a proper exercise of their powers on the basis that, because the decision is particularly momentous, the trustees wish to obtain the court’s blessing.
In practice, if the restructuring is straightforward, you would expect trustees to seek court approval only when they have formulated final proposals. But what we are seeing in more hostile or complex cases is a staged approach where trustees ask the court to bless an ‘in principle’ decision or certain aspects of the restructuring proposal before seeking a final blessing. This happened in a case we are involved in called XYZ Trusts where in 2017 the Bermudan court approved the trustees’ decision to develop detailed proposals for restructuring the trusts and later approved the actual final proposals in 2022.
Another Bermudan case of In the matter of the P Trusts in 2023 is also worth referring to as it demonstrates that valuation of the underlying assets can be particularly contentious, particularly as valuation is both an art and a science and therefore open to debate. The case involved the trustees of three family settlements (each principally for the benefit of one of three family branches) applying for the court’s blessing to give effect to a settlement agreement signed by the adult beneficiaries for the redistribution of trust assets, so as to implement a clean break between the three family branches.
As often happens, whilst initially everyone seemed to be on the same page, an issue arose. Essentially, one of the key assets subject to the settlement agreement were shares in a family company, some of which were held in a company owned by two of the branch’s settlements, but with the majority being owned by or controlled by the other branch. Under the agreement, the shares were bought back at a negotiated price, and the proceeds were split equally between the two settlements. There was then an onward sale of the shares shortly thereafter, at a higher price which benefitted the third branch. At that point the other two branches argued that the settlement agreement was voidable on the basis that they were induced to enter into it by an implied representation – that the third branch would not benefit to a greater extent – which had turned out to be false.
The court gave directions that any issue of validity would need to be determined in separate proceedings. No such application was brought and so the court simply proceeded with the blessing application on the basis that the settlement agreement was valid. It then blessed the trustee’s decision to implement the settlement agreement as it did not appear to be irrational, nor one which no reasonable trustee could make, and there was no indication that the trustee had failed to have appropriate regard to all the relevant considerations.
Another prominent case is SG Kleinwort Hambros Trust Company v B in 2023 which has resulted in three public Jersey decisions over the last year already. It is interesting because the court appears to be taking a rather free form, interventionist approach.
Essentially the case involves a trustee application for a blessing of a proposed restructuring in circumstances where, following the settlor’s death, there were tensions between his widow and their two children, and his two children from an earlier marriage.
The trustees sought a number of procedural orders including directions as to whether they should surrender their discretion to the court, to what extent and on what basis. The Commissioner ordered that a hearing would be held whereby he would provide “non-binding guidance” to the trustees regarding the restructuring.
The widow and her two children appealed the order as they considered that the concept of the court giving specific non-binding guidance would fall outside the principle of non-intervention. Dismissing the appeal, the Court of Appeal held that the order in question fell within the Royal Court’s jurisdiction to make case management directions and did not contravene the non-intervention principle. It is worth noting, however, that the Court of Appeal did caution against judges expressing provisional views in the context of a proposed restructuring.
In the non-binding guidance judgment, the Commissioner noted that the judgment is not binding on the parties, and although a different course of action would be scrutinised, it does not mean that the decision would not be blessed.
It seems that going forward we cannot exclude the possibility that the Court will take an increasingly active stance in dealing with such applications.
Mental capacity issues
Two key issues have arisen in recent cases:
1. Challenges to the establishment of trusts due to the (in)capacity of the settlor
Challenges on grounds of capacity were historically the purview of probate disputes – nephews getting an aunt with advanced dementia to sign a will and so on. But we are now seeing lifetime capacity challenges arise independently, and also in a number of our trust cases.
Assessing capacity is generally both time and decision specific, so what are the key things to bear in mind.
Naturally decisions surrounding the creation of trusts are more complex than whether to make a gift of X amount to so and so and therefore require a higher degree of capacity. Giving up control and ownership of your assets to trustees is a concept that draws in questions of ownership, tax, and control. It sounds obvious but does the settlor actually understand the key trust terminology and concepts involved? Do they appreciate that the trustees have a wide ambit of discretion and that the letter of wishes is not binding?
What we are seeing in practice is what are essentially inheritance disputes that are now being played out during the settlor’s lifetime. It might be worth noting that in England, when it comes to lifetime capacity disputes being fought, they are usually heard by the Court of Protection which effectively oversees the affairs of incapacitated persons.
Currently, we are also dealing with applications concerning disputes over the validity of powers of attorney and wranglings over whether the incapacitated person should make large gifts to reduce the size of their estate and avoid unnecessary inheritance tax.
2. Challenges to decisions made by power holders
The key factors to consider here are slightly different.
Firstly, you need to look at the type of decision being taken:
(1) Is it a decision requiring the weighing up of pros and cons, expert advice, and the interests of the beneficial class as a whole? A decision to restructure the trust would be such an example and would clearly necessitate a high degree of capacity on the part of the trustee; or
(2) Is it merely sign off on that decision, as is often the case for protectors with consent or veto powers? This may require a lower degree of capacity. However, protectors are often tasked with the responsibility of essentially policing the trustee which means they should not simply be signing off when asked to do so – they clearly still need to be able to properly engage with the decision being made.
Secondly, it is crucial to look at the jurisdiction you are in to identify not only which capacity test applies but how in practice it is applied by the courts. In England and Wales, the test to be applied for lifetime decisions is set out by the Mental Capacity Act, whilst if you are dealing with anything testamentary then you look at the seminal 19th century case of Banks v Goodfellow.
It seems as though there is an entire generation of protectors in the firing line and we are expecting to see a lot of power holder capacity cases in the coming years. Many protectors were appointed in the 1990s when the office of a protector became more widely utilised. They were often the ‘right hand man’ of the settlor and put in place because the settlor was uncomfortable simply sending his money off to a faraway island, so he wanted to be able to ‘check’ on, and if necessary change, the trustees. Now this right-hand man is likely in his late 70s/early 80s, and is potentially facing challenges to his capacity and therefore authority to act from disgruntled family member beneficiaries.
Conclusion
There is a constant stream of trust and probate cases going through the English and offshore Courts and trust law constantly evolves. Great care is needed by trustees to keep up to date and understand the impact of the cases on the way in which they make decisions and administer trusts. We endorse regular “stress testing” – effectively casting a trust litigator’s eye over the trust structure to identify potential disputes. It is far easier (and much cheaper!) for trustees to be proactive and tackle potential disputes at an early stage than sit and wait for disputes to develop.
