Step change

Step change Offshore trusts are relatively portable, in the sense that it is common to see a trustee retiring or being removed and a replacement appointed, especially where there are corporate trustees involved. Beneficiaries and their advisers are increasingly aware that there might be good reasons for a switch of trustee at some stage and trust instruments for offshore trusts are usually drafted to cater for this through the inclusion of express powers of removal and appointment.

Practical problemsHowever, the increased ease of changing trustees has brought with it some practical problems. A project group formed by the Society of Trust and Estate Practitioners (Step), drawing together leading practitioners from a number of different offshore jurisdictions, has recently examined this area and published some practical guidance, which has been widely welcomed as setting a new standard for the offshore trusts industry. The group’s conclusions are set out in a Step publication entitled ‘A practical guide to the transfer of trusteeships’, which covers the principal trust jurisdictions – the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, the Isle of Man, Jersey and Singapore – and explains in each case how local law and practice differs from English trust law.

A particular concern that has been identified is the matter of indemnities. Certain practices seem to have developed offshore as to what is regarded as ‘standard’ indemnification on the transfer of a trusteeship. For example, in Jersey and Guernsey trust companies and their advisers often adopt a tough negotiating stance, insisting on an indemnity that provides for a ‘chain of covenants’. Under this approach, the terms of the indemnity require that the new trustee (T2), on making a distribution of trust property (either to a beneficiary or upon the transfer of the trusteeship to a further trustee (T3)), must obtain a replacement indemnity in favour of the original trustee, from the beneficiary or T3 accordingly. Once this arrangement has been entered into, the future administration of the trust is inevitably hampered by the need to obtain a replacement covenant each time a distribution is made.

If the trusteeship is later transferred to another trustee, the drafting of the instrument of retirement and appointment is inevitably complicated, as there is a need to ensure not only that the previous covenant in favour of the original trustee is taken over by the new trustee, but also that the now current outgoing trustee receives appropriate indemnification. The justification for this approach is that the trusts law provides an outgoing trustee with the right to require that they be provided with reasonable security before surrendering the trust property (Article 34 of the Trusts (Jersey) Law and Section 43 of the Trusts (Guernsey) Law).

The right approach?These rigid arrangements can be softened by including a time limit on the indemnity and possibly a proviso enabling a certain proportion of the trust property to be distributed annually without the need for a replacement covenant to be obtained. This can help to some extent, but the more fundamental question is whether the ‘chain of covenants’ approach is the right device to be using at all. The point that is commonly overlooked is that, subject to any specific concerns regarding the past administration of the trust, an outgoing trustee rarely needs to have an indemnity of this kind, or one that is unlimited in time or quantum. Offshore trustees and their advisers too often seem to fall into the trap of failing to identify exactly what the potential liability is that needs to be covered, before reaching for a standard-form indemnity clause contained in a precedent. For example, if the only asset of the trust is an investment account managed by an institutional investment manager and the administration of the trust has proceeded smoothly, with no issues regarding investment underperformance, can the outgoing trustee really be justified in demanding an indemnity that includes a chain of covenants? On the face of it, that would provide far heavier protection than is needed if there are no anticipated liabilities.

There are other devices available that ought to be considered in appropriate cases, such as making an appropriate retention, or relying on the equitable (non-possessory) lien, where that forms part of the trust law of the particular offshore jurisdiction. The lien can provide protection in respect of properly incurred expenses and liabilities, taking precedence over the beneficiaries’ rights, without the need for a negotiated (contractual) indemnity.

Dealing with documentsA further area where problems commonly arise on the transfer of offshore trusts is the question of precisely which documents ;should ;be transferred to an incoming trustee. ;This ;question sometimes seems to be confused with the distinct issue of beneficiary access to trust documents and frequently leads to delays, unnecessary negotiations and costs. The Step project group has put forward a suggested means of ;identifying and categorising documents, according to a test based on their relevance to the trust administration, to facilitate a less adversarial approach.

The project group also found that many offshore precedents for the transfer of trusteeships contain various provisions that are instantly recognisable, but which, on closer examination, throw up specific drafting issues. For each of the offshore jurisdictions covered in the guide, suggested new precedents have been prepared that are, as far as possible, standardised, but which also take into account whether the lien is available under local law and also differing local practices on indemnities. These are accompanied by a detailed drafting commentary that provides a clause-by-clause explanation, highlighting drafting nuances. There is, of course, no single right answer to drafting deeds of this kind, but it is hoped that the new guide will provide some much-needed assistance in this area by setting out a starting point, especially in respect of indemnities, that can be adapted to suit the particular case. nRichard Williams is group head of risk and compliance at Investec Trust, Jersey, and general editor of ‘A practical guide to the transfer of trusteeships’