Mariel Stringer-Fehlow outlines her tips and practical advice for trustees on spotting the early warning signs of a matter turning contentious, using four common scenarios
While the role of the English trustee (this article looks only at the duties of a trustee under English law) has never been easy, recent trends in case law have certainly not made it any simpler.
In addition, beneficiaries with an axe to grind are growing increasingly aware of their legal rights and appear to be less inclined than they used to be to keep such matters private, in turn fuelling the public’s interest in stories about the dysfunctional family dynamics of high-net-worth individuals.
That said, however, the core legal tenets governing trusts and trustees’ duties remain much the same as they have for generations, albeit with an increasingly pragmatic interpretation. This article is aimed at assisting trustees in being better able to spot ‘red flags’ early on, as knowing when to seek advice and take a step back to consider the position can prevent matters from turning litigious later – or at the very least prevent the trustee from being more exposed than they need to be, if pulled into litigation regardless. I set out some repeated themes of ‘reasonableness’, alongside four common scenarios which contentious practitioners would generally consider to be the ‘first step’ in a matter becoming litigious, as well as practical tips on how to approach each situation.
All of my suggestions are subject to the caveat that it is fundamental that trustees maintain detailed and up-to-date records. Files need to be updated, meetings promptly minuted and of course the trust accounts prepared in a timely fashion. Dealing with the below scenarios is made much harder, and indeed can open the trustee up to criticism, if the relevant paperwork is not easily to hand.
1. Disclosure
One of the most common scenarios which can lead to matters turning contentious is when a trustee receives a request from a beneficiary for information which they consider to be outside of the category of your standard ‘trust documents’ (being the trust instrument and, potentially, subsequent deeds, which are generally disclosable).
If a beneficiary is disgruntled, they will likely require additional information in order to have the necessary ammunition to start proceedings against the trustee and may be embarking on a ‘fishing expedition’ with their request. Therefore, requests for disclosure need to be considered very carefully by the trustee and advice sought at an early stage. In particular, where the trustee believes the information requested is connected to previous distributions, or a refusal by the trustee to make a distribution, the starting point for trustees to remember (as dealt with further below) is that they do not have to disclose the reasons for their dispositive decisions.
Schmidt v Rosewood [2003] 2 AC 709 remains good authority for beneficiaries having no entitlement as of right to disclosure by the trustee. Instead, a balancing exercise will need to be conducted by the trustee regarding each request. While the scope of the trustee’s discretion in this area has been the subject of debate in the courts since Schmidt, a general rule for trustees to consider (especially in light of the recent judgment in Lewis v Tamplin [2018] EWHC 777 (Ch)) is that if the disclosure is required by the beneficiary as they genuinely cannot hold the trustee to account without this information, the court is very likely to order disclosure of it, and accordingly the trustee should have agreed to disclose said information at the time of the request.
Lewis v Tamplin is also relevant to the principle that trustees’ reasons for making certain decisions are not disclosable. In this case, however, documents relating to the trustees’ administrative reasoning were in fact ordered to be disclosed (that is, the reasons for their refusal to disclose the requested information). In contrast, documents relating to the reasoning behind dispositive decisions remain protected from disclosure: the judgment did not alter the general rule here.
A major factor in Lewis v Tamplin was the conduct of the trustees, who had denied the claimant beneficiaries any information regarding the trust. The court clearly felt that the balance of knowledge and power between trustees and claimant beneficiaries had to be reset, and so ordered disclosure of everything sought, including:
- legal advice given to the trustees
- correspondence with professional advisers
- agreements made with potential developers
- trust accounts.
While this recent decision may have nuanced the legal position, the key message of the court here remains consistent: trustees must provide beneficiaries with enough information that they can hold them to account. Simply refusing requests for information is frankly not helpful and such conduct may well be criticised by the court.
Top tip: Instead of starting with a blanket refusal, consider potential ways of sharing what you can, while protecting the confidentiality of the remainder as may be necessary. Redacting documents can be a useful way of achieving this and demonstrates willing by the trustees and reasonableness in their approach.
Alternatively, seeking agreement from other beneficiaries – whose confidential information may be held by trustees – to share aspects of this information could also be a good step to take. The court will consider whether the trustees are being reasonable when requests are made of them and have considered ways of fulfilling the request where possible.
2. Trustees: beneficiary dialogue and the threat of removal
Many beneficiary / trustee disputes that come across my desk are more about the personalities at play than the proper administration of the trust.
A beneficiary who is disgruntled with a trustee or believes that a trustee favours another beneficiary is a common problem and requires careful handling. Beneficiary / trustee disputes can be resolved in correspondence, but a common pitfall is for trustees to respond very defensively to beneficiaries’ correspondence, raising tensions instead of reassuring or addressing their concerns. Where trustees receive hostile correspondence from a beneficiary and try to respond and communicate reasonably with that beneficiary, but are met instead with increasing hostility, it is possible that the beneficiary in question is attempting to show a breakdown of trust and confidence in the relationship, in anticipation of an application for the trustee’s removal. If a trustee detects the escalation of a dispute, legal advice should of course be sought swiftly.
Simply refusing requests for information is frankly not helpful and such conduct may well be criticised by the court
There are a number of ways in which a trustee can be removed, the most straightforward of which would be in accordance with the relevant terms of the trust instrument. While there are statutory powers enabling the court to remove a trustee, these can be quite fact-specific, and do not commonly apply to the situation as described above.
As a last resort, the court can be asked to remove a trustee pursuant to its inherent jurisdiction to remove trustees to protect the interests of the beneficiaries. Letterstedt v Broers (1884) 9 App Cas 371 is the authority for how the court will likely approach a removal application. While trustees may wish to rely on Lord Blackburn stating in this judgment that “friction or hostility between trustees and the immediate possessor of the trust estate is not of itself a reason for the removal of the trustees”, they should take note that the beneficiary may in turn be relying on Lord Blackburn’s other frequently quoted statement in this judgment, that: “[if] it appears clear that the continuance of the trustee would be detrimental to the execution of the trusts, even if for no other reason than that of human infirmity would prevent those beneficially interested, or those who act for them, from working in harmony with the trustee… it seems to their lordships that the court might think proper to remove him.”
In practice, this means that friction and hostility between beneficiaries and trustee is not enough to justify the trustee’s removal. If, however, a beneficiary can show that the relationship has broken down to such an extent that it would not be possible for the trust to be properly administered, were the trustee to continue in their role, then the court may remove them even where the trustee has committed no breach of trust. The more recent case of Brudenell-Bruce v Moore & Cotton [2014] EWHC 3679 (Ch) showed that the court is wary of beneficiaries seeking to manufacture a breakdown in relationships in a contested removal scenario, but it did confirm that Letterstedt v Broers remains good authority.
Top tip: A trustee’s tone in correspondence with beneficiaries is crucial, as is endeavouring to appear reasonable and to genuinely engage with the beneficiary’s concerns. This remains the case even when it would appear to the trustee that the beneficiary is uninterested in reconciliation or resolution. There remains a risk that, if a trustee lets themselves be dragged into a ‘war of correspondence’ with a beneficiary angling for their removal, the court may consider it better to replace the trustee with someone able to work more in harmony with the beneficiaries.
3. Trustees’ considerations: dispositions
As many readers will know, trustees must periodically consider whether or not to exercise their powers, especially with regards to distributions. In a discretionary trust, when considering their dispositive powers, trustees need to review the range of beneficiaries and the methods of disposition, and consider the appropriateness of said disposition on a case-by-case basis (Re Hay’s Settlement Trusts [1982] 1 WLR 202).
A scenario which often prompts matters to become contentious is when trustees prefer some beneficiaries over others, which they are entitled to do – despite what many discretionary beneficiaries may believe. This is often a key moment for ‘stress-testing’ the relationships between trustee and beneficiaries. If there is a good relationship, and the trustee considers their decision to make a disposition (or not) to be fair and reasonable, there may be some merit in sharing the reasons behind coming to that decision, and diffusing the situation by limiting any misunderstandings at an early stage. It is important, however, to be aware that the trustee does not have to disclose their reasoning, even if under pressure from the beneficiaries to do so.
In coming to the decision to prefer some beneficiaries over others, the trustee’s considerations should not take into account irrelevant, improper or irrational factors (Cowan v Scargill [1985] Ch 270); on this basis, they are then entitled to make whatever decision they wish with respect to distributions. Common factors to be considered include:
- any letter of wishes (albeit this is not binding on the trustees)
- the circumstances and relative needs of the beneficiaries
- l the impact on the remainder of the beneficiaries / the trust, were the trustee to make this disposition.
As to this final point, as I have flagged above, the current state of the law is that trustees are not under a duty to give reasons for their dispositive decisions (Re Londonderry’s Settlement [1965] Ch 918). If there is any concern regarding the potential impact that the sharing of such reasons might have on relationships between beneficiaries, then trustees should seek advice early on as this can often be a legitimate reason to refuse to share the reasoning behind decisions. I have touched on some of the more practical ways to approach requests made by beneficiaries for disclosure of information such as this.
Top tip: Even if you are confident in the reasonableness of the decision arrived at, consider carefully whether there is any adverse impact in informing the beneficiaries of the reasons behind reaching your decision. Consistency is key – sharing this information with one beneficiary, but potentially being inconsistent in this regard the next time a request is made, could be used as an example of hostility or a lack of even-handedness in the future, should a beneficiary dispute arise.
4. Investment decisions
Investment decisions made by trustees can be something of a minefield if the investment loses value, and the value of the trust assets is consequently affected. Trustees are under a common law duty of care with respect to such investment decisions, so they should conduct themselves as a “prudent man of business” would, with a moral obligation to the trust (Speight v Gaunt [1883] UKHL 1; Learoyd v Whiteley [1887] UKHL 1). Professional trustees receiving remuneration for their services will be held to a higher standard than a lay trustee in this regard (Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515).
Statute has also set a standard for trustees to meet when making investment decisions (see schedule 1 to and section 3 of the Trustee Act 2000) and, accordingly, trustees must have regard to the standard investment criteria (see section 4 of the Trustee Act 2000) and are under a duty to take advice, and, in addition, keep any agreed strategy under review.
While doing all of this should help to protect a trustee from criticism in the event that an investment still loses value, trustees should ensure that they take all steps necessary to ascertain whether an investment is appropriate prior to making it on behalf of the trust. Given the onerousness of all this, it may be tempting for some trustees to avoid the issue entirely and let the trust assets remain static. It may however surprise you to know that it is often the perceived inaction of trustees which can lead to criticism being levelled at them, especially where beneficiaries claim that following the investment ‘philosophy’ of the relevant time would likely have led to an increase in value. Accordingly, trustees cannot simply avoid engaging with investments, if properly administering the trust: this duty must be grappled with.
Top tip: If in any doubt as to whether something is as risk-free or as promising as the investment adviser suggests, consider – where appropriate – consulting with the beneficiaries before agreeing to it, and ensure that they too understand the risks and can evaluate the information provided. You should consider getting a second opinion, even if it could make your relationship with the investment adviser somewhat awkward; it may be worthwhile to show you have fully considered the relative pros and cons of the investment.
Conclusion
The reality is that, despite their best efforts, even the most reasonable and conscientious trustee can end up being pulled into litigation. From the point at which a matter begins to turn contentious, the way that a trustee conducts themselves can, however, make a huge difference to both the outcome of the dispute, and how quickly it may be resolved. The worst-case scenario of ending up in litigation, having behaved in a manner that the court considers to be unreasonable, is that you could find yourself personally liable and unable to rely on your indemnity.
The best-case scenario is, of course, that the litigation does not begin at all. As a solicitor working on the purely contentious side of trust law, all too often I see trustees take immediately an entrenched and intransigent position when first confronted with a suggestion of wrongdoing or a request which they are uncomfortable with. This very rarely puts off beneficiaries or co-trustees from pursuing the dispute, and more often than not just polarises the parties early on, making the issue far harder to resolve.
My concluding top tips? Avoid knee-jerk reactions. Instead, try to genuinely engage with and consider the issues arising in the scenarios I have discussed, and think practically about potential ways to satisfy all parties. A good way to make yourself take a necessary step back is to try and imagine if your correspondence and/or actions were being scrutinised by the court. If in any doubt, take advice at an early stage, and if all else fails focus on being ‘reasonable’ and you will (hopefully) not go too far wrong.
