Lesley King discusses Blades v Isaac & Alexander  EWHC 601 (Ch), which raises some some interesting points on the role of executors and trustees of discretionary trusts.
Private client practitioners often, and rightly, recommend the use of a discretionary trust in cases where there is family tension. However, the higher the tension levels, the more difficult the job of the trustee becomes.
Blades v Isaac & Alexander  EWHC 601 (Ch) is a case in point, and it raises some some interesting points on the role of executors and trustees of discretionary trusts.
The testatrix left her entire estate (just under £1m) on discretionary trusts and appointed professional trustees. She had two daughters, Felicity (aged 56) and Deryn (aged 70). She had consulted solicitors because of tensions which had led to difficulties between herself and Deryn, although to an extent relations improved.
The beneficiaries of the trust were originally Felicity, her husband and children, and the deceased’s cleaner. The testatrix’s letter of wishes suggested gifts to members of the class, but also 5 per cent of the estate for Deryn, although she was not a member of the class. The trustees exercised their power to add Deryn to the class.
The executors and trustees named in the will were a partner in the firm of solicitors that prepared the will, and two other professionals who renounced probate on the basis of conflicts of interest. The sole accepting executor and trustee appointed a partner in his firm as a co-trustee of the will trusts.
Felicity was unhappy with the firm from the outset. The firm had written to both sisters asking them to limit communications with the executor ‘as they only add to the costs of the administration’. Felicity responded that, whilst she did not wish to increase the costs, she wanted a more sympathetic approach and more explanation, and did not see why that should add more cost.
More importantly, on a number of occasions Felicity asked the firm for a detailed breakdown of the testatrix’s estate. The defendants refused on the basis that the estate accounts were documents confidential to the executor and the trustees, and were not to be distributed to the beneficiaries of the will trust. Felicity’s complaint was that since the executor was one of the trustees, and both were partners in the law firm acting in the administration, nobody apart from themselves could scrutinise what one of them (the executor) had done or how much their own firm had charged in relation to the administration of the estate.
The trustees’ position was that they were aware of the difficult relationship between the two sisters and that they had genuine concerns about the disclosure of the information sought to one of the two daughters. They considered that they would have to make the information available to the other and that this would cause problems.
Felicity’s response was: ‘I am quite sure that I understand the family dynamics and my relationship with my sister better than the Defendants. In any event, I am 56 years old and Deryn is 70; we are both adults and we do not need a trustee to manage our relationship for us.’
Master Matthews comment on this bears repeating in full:
‘The Claimant says that she and her sister are adults and do not need a trust. Of course they are adults. But even on the basis that the sisters do not need a trust, the estate assets belonged to the Testatrix to deal with, and on advice she decided that, rather than give them outright to her daughters (or either of them), she would impose a trust on the assets on her death. Whether the Testatrix was wise or not to do this is not a matter for the Claimant, nor indeed for me. In the absence of a Saunders v Vautier application by all the beneficiaries, the Claimant by herself has no business or right of imposing her own will on the trust which her mother wished to create. She is entitled to the rights conferred on her by the trust, neither more nor less.’
The trustees offered to make the accounts available to a third party firm who would advise on whether there was anything in them which could give rise to a legitimate concern. This was not acceptable to Felicity.
The trustees obtained counsel’s opinion which supported their refusal to make disclosure. Felicity applied to court. The trustees eventually changed their minds, apparently on the advice of different counsel, and gave the requested disclosure.
Master Matthews made the following points in the course of a costs application.
(1) The trustees had refused to make counsel’s opinion available to Felicity on the basis that it was privileged. This missed the point. The opinion had been obtained by the defendants as trustees, for the benefit of the trust rather than for their personal benefit, and therefore it was proper for them to pay for it from trust funds.
The corollary of this was that it was a trust document, and therefore in the same category as other trust documents, that is, available to the beneficiaries if the court so considered. In relation to such documents, there can be no legal professional privilege as between trustee and beneficiary.
(2) Had disclosure not been given, there were two bases on which the court could have ordered it.
(a) The testatrix left assets in her will to be administered by her executor, who, after the administration was complete, would pass them to the legatees, as trustees, to be held on discretionary trusts for the beneficiaries, including Felicity.
The trustees could hold the executor to account, and seek details of the costs charged by the law firm in the administration. Felicity was not a legatee of the estate, and did not directly enjoy the information rights of a legatee. Yet she could hold the trustees to account for what they had received and what they had done with it. The rights of the trustees as legatees to information about the estate were properly part of the trust estate. If need be, therefore, Felicity could claim as against the trustees that as trustees they should exercise those rights, or, if they could not or would not unreasonably do so, claim to exercise them herself.
(b) Alternatively, the trustees had an obligation to check that the correct assets had been paid over to them by the executor, and to get in any assets not so paid over. Felicity, as an object of the discretionary trust, had standing to challenge the trustees over any failure to check that the correct amount had been paid over, and also any possible overcharging by the executor’s lawyers.
(3) As to costs, the trustees had at most breached their duty to account to a beneficiary by providing appropriate information: no loss had been caused to the trust fund. They had had genuine concerns about the harm that might be done to the relationship between the sisters if they supplied information showing an unequal distribution out of the trust. Moreover, they had followed counsel’s opinion in refusing to make such disclosure and had obtained a second opinion after the commencement of proceedings.
Therefore, in the exercise of the court’s discretion under CPR 44.2(2), the costs of both parties should be paid out of the trust fund on the indemnity basis. The effect was that the costs would come out of assets in which Felicity and her family had the greatest interest, but that could not be helped. The trust fund was not the alter ego of the claimant.