Trustee presentation

I’m an Executor/Trustee.
Get me out of here!
14 May 2013
Presented by:
Chris Greenwell
Scott McKittrick
Claire Herbert

What we want to tell you about
• Choosing trustees
• Removing trustees
• Beneficiaries' right to information
• Duties, obligations and breaches
• Reliefs
• Protecting trustees who part with trust assets

Choosing trustees
Who chooses trustees?
• Trustees are initially chosen by settlor (via
trust document or Will)
• New trustees are chosen by an appointor or
current trustees (if there is no appointor)
• In unusual circumstances new trustees may
be chosen by either the beneficiaries or the
court

Choosing trustees
Factors that may limit the choice of trustees
• The trust document can impose restrictions.
• If the settlor or a beneficiary (or potential
beneficiary) is a trustee, there may be a
conflict of interest.
• If the trust document does not contain a
charging clause, a professional trustee will
not act.

Choosing trustees
• If a trustee is a director or shareholder of a
company in which the trustees hold shares,
the law does not allow the trustee to receive
directors' fees unless the trust document
expressly authorises this.
• A company can only act as a trustee if its
articles of association allow it to do so.
• There are some specific restrictions on an
undischarged bankrupt acting as a trustee of
certain types of trust.

Choosing trustees
Who can be a trustee?
• Settlor
• Beneficiary
• Professional person
• Any other individual
• Company
• LLP
The trust document can impose restrictions

Choosing trustees
How many trustees?
• Only four trustees can be appointed for a
trust of land
• Two trustees are required to give good
receipt under a trust of land except where a
sole trustee is a trust corporation
• It is only permissible to have a sole trustee
if the original trustee was a sole trustee and
the trust is not a trust of land

Choosing trustees
Factors to consider
• Individual trustee may know the settlor and
his family personally but there can be
practical problems if he dies or loses capacity
• Corporate trustee provides continuity in the
trusteeship but there is likely to be a turnover
of employees dealing with the trust

Choosing trustees
• Professional trustee should be regulated and
offer a level of expertise but charges for the
service
• A trustee being appointed to an existing trust
should examine books and documents to
review the state of the trust

Choosing trustees
Common choices for UK trusts
• For a small trust, two or three family trustees,
who carry out some of the trust administration
themselves and instruct professional advisers
when needed.
• For a medium-sized trust, between two and
four individual trustees, including both family
members and professional trustees. A
professional trustee's firm usually administers
the trust.

Choosing trustees
• For a large trust, a corporate trustee and one
or two family trustees. The corporate trustee
usually provides trust administration services.

Choosing trustees
Conflict of interest
• If the settlor or a beneficiary is a trustee, there
is a possible conflict of interest between his
interest as settlor or beneficiary and his duties
as a trustee
• If family members are appointed to be
trustees of family trust, certain issues need to
be considered e.g. is there a balance
between different parts of a family

Removing trustees
Express power of removal
• Trustees may be removed by exercise of a
power expressly conferred on a person by the
trust instrument
• An express power of removal is strictly
construed
• The power is usually fiduciary (exercised for
the benefit of the beneficiaries and not of the
donee of the power himself)

Removing trustees
Replacement (S.36 Trustee Act 1925)
• The power to replace trustees may only be
exercised in specific circumstances
• The power may be exercised by those
nominated by trust instrument or continuing
trustees (if there is no person nominated)
• The power may be limited in scope
• Appointment should be made by deed (allows
automatic vesting under S.40 Trustee Act
1925)

Removing trustees
Removal by the court (S.41Trustee Act 1925)
• A claim under this section is appropriate to
replace trustees where two conditions are
met:
• It is expedient to appoint a new trustee(s)
• It is inexpedient, difficult or impracticable to
do so without the assistance of the court
• It may sometimes be more appropriate to use
court’s inherent jurisdiction (e.g. where
trustee wishes to remain in office)

Removing trustees
Removal by the court under its inherent jurisdiction
• The welfare of the beneficiaries is the focus of
the court's consideration
• The court also exercise their jurisdiction with a
view to the security of the trust property, an
efficient and satisfactory execution of the trusts,
and a faithful and sound exercise of the powers
conferred on the trustee

Removing trustees
Compulsory retirement (S.19 Trusts of Land and
Appointment of Trustees Act 1996)
• This power can only be used if certain
requirements are met and can be excluded by
the trust document
• A direction must be given by beneficiaries in
writing
• A trustee must retire if he receives a valid
direction
• Retirement should be effected by deed

Removing trustees
Replacement for mental incapacity (S.20 Trusts
of Land and Appointment of Trustees Act 1996)
• This power can only be used if certain
requirements are met and can be excluded by
the trust document
• A direction must be given by beneficiaries in
writing
• Trustee must lack capacity within the
meaning of the Mental Capacity Act 2005.
• Appointment should be effected by deed

Removing trustees
Procedure for court to remove trustees
• Removal may be carried out as part of an
administration claim or as a stand-alone claim
• In urgent cases the court may order removal
on an interim application
• The court will decide who pays costs in a
claim for removal

Right to information
Information trustees are under a duty to provide
• An adult beneficiary who has an interest in
possession is entitled to know of the
existence of the trust and the nature of their
interest
• Objects of discretionary trusts should know of
the existence and nature of their interest
• Trustees ought to inform those who are real
potential candidates for benefit under a
discretionary power

Position before Schmidt -v- Rosewood [2003]
• Beneficiaries had a proprietary right to see
trust documents
• The right to see documents only extended to
documents relating to the ownership,
management or administration of any
property vested in the trustees

The trustees were exempt from disclosing:
• The agendas of trustee meetings
• Correspondence between the trustees
• Correspondence between the trustees and the
beneficiaries

• Minutes of trustee meetings and other
documents disclosing:
• The deliberations of the trustees as to the
manner in which they should exercise their
discretionary powers;
• The reasons for any particular exercise of
such powers; or
• The materials on which such reasons were,
or might have been, based

Facts of Schmidt -v- Rosewood [2003]
• The case was decided under Manx law, but is
based on English trust law principles and
mainly English case law
• Two discretionary settlements, created in
1992 and 1995 by Mr Schmidt's father and
established under the laws of the Isle of Man
• Rosewood Trust Limited had been the trustee
of both settlements since 1997

• The assets of the settlements were worth
over US$105million
• The settlor died intestate in 1997, and letters
of administration to his estate were granted to
Mr Schmidt
• Mr Schmidt began proceedings in the Isle of
Man in June 1998, alleging breach of trust
and breach of fiduciary duty
• Mr Schmidt obtained an order requiring
extensive disclosure of information

Mr Schmidt was not satisfied with the disclosure
he obtained as it ‘raised more questions than it
answered’, especially as parts of some of the
disclosed documents had been obliterated
• In June 1999, he brought proceedings seeking
fuller disclosure in two capacities:
• His personal capacity, as the possible object
of a wide power to add to the class of
beneficiaries
• His capacity as administrator of his late
father's estate

• The trustees opposed disclosure, arguing that
the claimant was not a beneficiary under the
settlements, and his father was never more
than a mere object of a power
• An order for disclosure was made by the High
Court of the Isle of Man but set aside on appeal
• The claimant then appealed to the Privy
Council in London

Decision in Schmidt -v- Rosewood [2003]
The Privy Council held that a proprietary right
was neither necessary nor sufficient for the
exercise of the court’s jurisdiction:
• ‘A beneficiary’s right to seek disclosure of
trust documents, although sometimes not
inappropriately described as a proprietary
right, is best approached as one aspect of the
court’s inherent jurisdiction to supervise (and
where appropriate intervene in) the
administration of trusts’

• ‘The right to seek the court’s intervention does
not depend on entitlement to a fixed and
transmissible beneficial interest. The object of
a discretion (including a mere power) may also
be entitled to protection from the court of
equity, although the circumstances in which he
may seek protection, and the nature of the
protection he may expect to obtain, will depend
on the court’s discretion’

• ‘No beneficiary (and least of all a discretionary
object) has any entitlement as of right to
disclosure of anything which can plausibly be
described as a trust document. Especially when
there are issues as to personal or commercial
confidentiality, the court may have to balance
the competing interest of different beneficiaries,
the trustees themselves and third parties’

• ‘Disclosure may have to be limited and
safeguards may have to be put in place.
Evaluation of the claims of a beneficiary (and
especially of a discretionary object) may be an
important part of the balancing exercise which
the court has to perform on the materials placed
before it. In many cases, the court may have no
difficulty in concluding that an applicant with no
more than a theoretical possibility of benefit
ought not to be granted any relief’

Position after Schmidt -v- Rosewood [2003]
• Beneficiaries right to information is not based
on any equitable proprietary right but fiduciary
duty of trustees to keep them informed
• Beneficiaries are not entitled to disclosure as
of right but have a legitimate expectation of
disclosure
• Beneficiaries need to prove that prospect of
benefiting under the trust is sufficient to
warrant disclosure requested

How should trustees deal with requests?
• Trustees have discretion (the beneficiary has
no entitlement as of right) and should conduct
a balancing exercise considering all the
relevant circumstances at the time
• Whether or not trustees decide to exercise
their discretion to disclose may depend on
the type of document requested
• Beneficiaries commonly request documents
such as the trust document and the settlor’s
letter of wishes

Commonly requested documents - trust deed
• The trust document is a key document, which
trustees should disclose to beneficiaries if
requested
• The same applies to supplemental
documents such as:
• Deeds of appointment and retirement of
trustees
• Instruments adding assets to the trust
• Instruments varying the trust

Commonly requested documents - redaction
• The trustees may wish to redact information
that does not relate to the beneficiary making
the request (for example, by obscuring the
names of other beneficiaries in a deed)
• If a beneficiary requests redacted information,
the trustees ought to inquire why (there might
be a valid reason, so they should not refuse
outright)

Commonly requested documents - accounts
• Trustees have a duty to keep clear trust
accounts and to be constantly ready with
those accounts
• If a beneficiary requests a copy of the trust
accounts, the trustees should provide a copy
• If they do not, the beneficiary can seek the
accounts via the court, and the court usually
orders the trustees to pay personally (not
from the trust fund) the costs of obtaining the
order

Commonly requested documents – accounts
• If a beneficiary seeks disclosure of trust
accounts apparently in order to attack the
trust or trust property (such as a challenge to
the validity of the trust which would be against
the interests of the beneficiaries as a whole)
the trustees ought to be cautious
• If the trustees are unsure of the reason for
the request, they should clarify that with the
beneficiary before making a decision.
However, there is a strong presumption in
favour of disclosure

Commonly requested documents - letters of wishes
• Settlors often leave a letter addressed to the
trustees setting out their wishes in relation to
the exercise of the trustees' discretions.
• Trustees must consider those wishes, but are
not bound to comply with them. Settlors often
specify that the letter is to remain confidential.

• A number of cases provide guidance on
beneficiaries' requests to see letters of wishes.
• A New South Wales case Hartigan
Nominees Property Limited -v- Rydge (1992)
29 NSWLR 405
• The Jersey case of Re Rabaiotti's
Settlements [2000] WTLR 953
• The recent English case of Breakspear and
others -v- Ackland and others [2008] EWHC
220 (Ch)

In the light of the case law, trustees should:
• Consider the reasons for the beneficiary's
request for a letter of wishes to be disclosed, and
whether disclosure would be in the interests of
the administration of the trust.
• Not refuse disclosure simply because the settlor
has requested that the letter remain confidential.
• Not feel obliged to give reasons for their decision.
• Consider obtaining an undertaking of
confidentiality or, if appropriate, redacting
information in the letter before disclosure.

Commonly requested documents - legal advice
Legal advice obtained by trustees and paid for
from the trust fund is privileged but such
privilege is held for the benefit of the
beneficiaries and is therefore not a reason in
itself to refuse disclosure of the advice to the
beneficiaries. Where the advice relates to:
• Reasons for the exercise of the trustees'
powers and discretions, the trustees should
consider carefully requests for disclosure.

Commonly requested documents - legal advice
• A dispute between the trustees and a
beneficiary, and disclosure of that advice
would not be in the interests of the
beneficiaries as a whole, the trustees may
exercise their discretion not to disclose
(although this is subject to the court's ability
to override the trustees' decision).
• A claim against the trustees for breach of
trust, they are not required to disclose the
legal advice they obtain in order to defend the
claim, which is privileged.

Commonly requested documents - company documents
• Where trustees hold all the shares of, or have a
controlling shareholding in, a company, a
beneficiary may seek disclosure of company
documents.
• Company articles of association usually state that
only the company directors can see company
documents.

Commonly requested documents - company documents
• The leading case in this area is Butt -v- Kelson [1952]
Ch 197 CA, which established that beneficiaries can
be entitled to see information about underlying
companies (as if they were the registered
shareholders) provided that:
• The beneficiary must specify the documents he
wishes to see.
• He must set out why he wishes to see them.
• He must provide assurances that he will not
disclose the documents to others.
• There must be no valid objections by other
beneficiaries, or by the company directors (from
the perspective of the company).

On what basis can trustees refuse disclosure?
The trustees may decide (when exercising
their discretion pursuant to Schmidt -v-
Rosewood) to refuse disclosure because:
• There is a legal reason to refuse (for
example, if a document contains privileged
legal advice).
• There is a commercial reason to refuse (for
example, if a document contains
commercially sensitive information).

On what basis can trustees refuse disclosure?
• The document is confidential (for example, it
might be relevant to one beneficiary but not
another).
• Disclosure is impractical or too costly.
• The beneficiary has only a theoretical
possibility of benefiting from the trust.
• The information has been requested for an
improper purpose (such as challenging the
validity of the trust, which would not be in the
interests of the beneficiaries as a whole).

Other options available before refusing disclosure
• Offering redacted documents.
• Offering to release the documents to the
beneficiary’s advisers, rather than to the
beneficiary.
• Requesting an undertaking in relation to the
use of the information disclosed.

Other options available before refusing disclosure
• If there is no good reason to refuse, the
trustees ought to disclose (otherwise they are
at risk as to costs if the beneficiary then applies
to court for disclosure).
• If the trustees are unsure, they can make an
application to court by a Part 8 claim form
under Part 64 of the Civil Procedure Rules, but
they should consider carefully whether they can
justify the costs of doing so.

How can a beneficiary obtain information?
• Ask the trustees (beneficiary traditionally
meets the costs of copying and sending the
documents)
• If the trustees refuse and cannot be
persuaded) the beneficiary could consider
making a court application
• The costs of an application are at the
discretion of the court (costs order often
reflect the outcome of the application)

How can a beneficiary obtain information?
• Application under the Probate Rules for an
inventory and account

Disclosure and litigation/divorce
• Trustees can be subject to an order for pre-
action disclosure or an order for disclosure
once proceedings have commenced
• A beneficiary must disclose any trust interest
(including an interest under a discretionary
trust) in the divorce proceedings. The court
can then order that they disclose certain trust
documentation and they may in turn request
this information from the trustees

Trustees duties and obligations
• A trustee is one who holds property in trust
for another
• Trustees must act honestly and loyally
• Trustees must ‘take all those precautions
which an ordinary prudent man of business
would take in managing similar affairs of his
own’
• (Lord Blackburn, Speight -v- Gaunt 1883).
• Trustees not liable for loss or depreciation
caused by factors beyond their control

Duties and obligations
• This standard presupposes that the ordinary
man of business acts as though he has a
moral duty to others
• The standard is objective i.e. it is not a
charter for an honest incompetent
• The standard cannot be lowered because of
subjective matters particular the case

• Statutory duty
Section 1 Trustee Act 2000
• A trustee:
• ‘Must exercise such care and skill as is
reasonable in the circumstances, having regard in
particular to
• (a) any special knowledge or experience that he
has or holds himself out as having; and
• (b) if he acts as trustee in the course of a
business or profession, to any special knowledge
or experience that it is reasonable to expect of the
person acting in the course of that kind of
business or profession’.

• Professional trustees.
• There are objective minimum standards that
have to be applied to anyone carrying out
trusteeship in a trade or profession.
• There are subjective higher standards for
those holding themselves out as having
specialist knowledge or experience.
• Brightman J in Bartlett -v- Barclays Bank
Trust Co Ltd (1) 1980

• ‘I am of the opinion that a higher duty of care is
plainly due from someone like a trust corporation
which carries on a specialised business of trust
management. (It) holds itself out in its advertising
literature as being above ordinary mortals
and...capable of providing an expertise which it
would be unrealistic to expect, and a trust to
demand, from the ordinary prudent man or woman
who accepts probably unpaid and sometimes
reluctantly from a sense of family duty, the
burdens of trusteeship…..’

• Trustees have a duty to keep beneficiaries
informed if they are asked to disclose
information pertaining to a beneficiaries
interest or reasonable expectation of interest
• Trustees are liable to third parties with whom
they contract subject a right of indemnity and
observing their other duties
• There is no such thing as a ‘sleeping trustee’.
If you are a trustee and decisions are made
by the trustees of the body whether you
participated or not you are fixed personally
with liability flowing from that decision

• Note a professional trustee making a
decision alongside a lay trustee may be
subject to higher obligations in respect of
consequences flowing from that decision
• A professional trustee relied on to advise by a
lay trustee and doing so carelessly may well
face claims in contract or negligence

• The powers to which the duties apply:
• Investment
• Acquisition of land
• Appointment of agents, nominees and
custodians
• Compounding liabilities
• Insurance
• Valuations
• Audit

• The duty of care applies to whether a duty
has been exercised or not and an honest but
improper exercise of duty may attract liability
though could be relieved of (which more
shortly)

• Generally
• A trustee in breach of trust for failing to
comply with terms of the trust or duty of
honesty has personal liability
• That liability is to reconstitute the trust fund
by making specific restitution where
possible or paying equitable compensation
for losses that would not have occurred but
for the breach

• Unlike other claims, for example against
negligent professionals, the loss in
question is recoverable even if it could not
have been reasonably foreseen as likely to
result from the breach
• Note the obligation and duty is to
recompense the trust fund and not
normally individual beneficiaries (who may
have other causes of action)

• Breach of duty of care
• There are greater restrictions on a trustee’s
duty to simply fail to exercise reasonable
care and skill rather than fail to comply with
the terms of the trust or being dishonest.
They are subject to loss being foreseeable
(the same as the obligation imposed on the
negligent professional)
• Put simply this distinction is basically
between a negligent or careless trustee and
a dishonest trustee or one acting deliberately
in breach of the terms of his trusteeship

• Quantification of loss
• A trustee causing loss will receive little
sympathy from the court
• If intermeddling with trust assets increases
value then this belongs to the trust. A
trustee is personally liable if the
intermeddling causes loss
• If unauthorised investments are made
trustees are liable for loss incurred on sale
whether they have any control over the
sale date or not

• If authorised investments are improperly
sold the trustees can be required to
account for the proceeds of sale or replace
them
• The trustees are liable for interest from the
date misapplication of funds

• Gains made out of trust property by
trustees acting improperly belong to the
beneficiaries
• Losses out of the same breach have to be
made good by the trustee (there is no
offset)
• Trustees are jointly and severally liable but
are entitled to contributions from fellow
trustees

Relief from breach
• Don’t panic. There are ways of getting you
out of there!
• If a beneficiary has participated in or
positively consented to a breach of trust of his
own free will, he cannot take action whether
he benefited or not
• Beneficiaries relief and acquiescence i.e.
consent to breaches after the event

Relief from breach
• A beneficiary actually instigates or
demands/requests the breach of trust
• Certain claims against trustees must be
brought within six years of the breach
• There may also be a general remedy in law to
block cases if they have been long delayed
and are not subject to limitation
• Broadly dishonesty or intermeddling with trust
assets will never be relieved

Relief from breach
• Section 61 Trustee Act
• The Trustee’s ‘get out of jail free card’
• ‘If it appears to the court that a trustee is or
may be personally liable for any breach of
trust but has acted honestly and reasonably
and ought fairly to be excused for the breach
of trust and for omitting to obtain the
directions of the court in the matter in which
he committed such breach, then the court
may relieve him wholly or partly from
personal liability for the same’.

Relief from breach
• Thank goodness there is this provision!
• But note:
• It does not relieve the turning of a blind eye
to the obvious
• It is unlikely to relieve wanton and dilatory
carelessness however honest
• The greater the amount of money involved
the more difficult it may be for the trustee
to claim relief

Relief from breach
• Professional trustees are far less likely to
be relieved under Section 61
• Lay trustees or non-lawyer, or non
specialised professional trustees are well
advised to take legal advice if only as an
insurance policy against alleged breach
• Finally it may be possible to obtain trustee
indemnity insurance

Protection of trustees
When do trustees part with trust assets?
• Trustees change and retiring trustees transfer
the assets to successor trustees
• Trustees exercise their powers to appoint
assets to beneficiaries or to transfer them to
the trustees of another trust
• The terms of the trust provide that the trust
ends and the trustees transfer the assets to
beneficiaries who are absolutely entitled to
them

Why may trustees need protection?
• A trust is not a legal entity so trustees act on
behalf of the trust in their personal capacities.
This means that they may become personally
liable under:
• Contracts;
• Indemnities given to previous trustees;
• Claims made against them

Why may trustees need protection?
• Trustees who have retired, or who have
wound up the trust, remain personally
responsible for liabilities incurred during their
period of trusteeship unless they make
arrangements to change this

Protection under trust law
• Right of indemnity (from the trust fund for
liabilities they incur as trustees) provided they
have acted properly and within the scope of
their powers
• Equitable lien (gives trustee equitable interest
in trust assets to extent of their indemnity).
• The lien needs to be preserved if assets are
distributed to beneficiaries
• Trustees may need additional protection as
they may not be able to enforce the above in
certain circumstances

Steps trustees can take to protect themselves
• Delaying action
• Retaining assets to meet known liabilities that
are not yet due for payment (such as tax and
professional fees that have not been
quantified) or until they know whether a
particular liability will arise in practice
• Expressly preserving the equitable lien
• Contractual indemnities
• Limiting liability

Steps trustees can take to protect themselves
• Release by beneficiaries
• Legal charge over property
• Insurance
• Trustees in doubt as to the steps they should
take can apply to the court for directions for
guidance

What protection do trustees need in practice?
• Before parting with trust assets, trustees
should take a realistic view of the liabilities
that they may face afterwards
• Agree tax liabilities with HMRC is possible
or estimate if not
• Obtain up-to-date bills/estimates for
professional fees
• Review actual and potential liabilities under
contracts and indemnities

Conflict of interest
• There is always a potential conflict of interest
between trustees' interests in protecting
themselves and their duty to safeguard trust
assets in the interests of the beneficiaries
• It can sometimes be difficult for a trustee to
balance their need for protection and the
interests of the beneficiaries and in such case
it is advisable for them to consult counsel

Distributing to Minors
• Trustees cannot rely on any kind of indemnity
or consent from a minor beneficiary when
distributing assets
• Trustees do not often make substantial
distributions to a minor beneficiary as they
cannot give good receipt

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