Question of trust
11 May 1996
10 June 2013
Principles applicable to legal costs incurred in trust-related proceedings in Jersey by trustees, other fiduciaries and beneficiaries
1 October 2013
25 September 2013
31 October 2013
20 May 2013
The fundamental characteristic of a settlement is that its trusts are administered for the benefit of the beneficiaries. It ought therefore be a matter of real concern if its trustees learn that beneficiaries are not content with the way in which they have run it.
If trustees are to benefit their beneficiaries, they must know what their beneficiaries' needs and interests are. They ought to communicate with the beneficiaries, if the beneficiaries are not already in touch with them. There is much to be said for trustees asking beforehand whether there are any matters the beneficiaries would like them to consider in a review.
That process is also useful in defending a trust against an attack alleging that it is in reality a nominee arrangement that does not involve the trustees in a genuinely independent exercise of their power. The trustees of a discretionary trust with a wide range of objects will, however, have to consider carefully how widely to make their inquiries. They may properly limit themselves to communicating directly with beneficiaries on whom there is a real prospect of their conferring a benefit.
If beneficiaries tell the trustees that they are unhappy about the way in which a trust has been administered, the trustees ought to establish the reasons why as quickly as they can. They should then make appropriate enquiries into the relevant matters.
In some cases, the enquiries are relatively simple. In other cases, they may be complex and involve several jurisdictions. If there is a question whether the trusts have been implicated in commercial fraud, lawyers and accountants in more than one jurisdiction may have to be consulted, and legal proceedings initiated urgently. If the trustees do not take steps, the omission might itself amount to a breach of trust, or put the trustees into a position in which their interests and duty conflict.
The trustees ought to keep in mind that a conflict of interest may become apparent between their position and the beneficiaries' position. They may need to take advice at their own expense as to their own position. If they charge the cost of taking such advice to the trust fund, then the advice becomes part of the trust property, and the beneficiaries are entitled to see the documents and to know the substance of the advice.
Beneficiaries can be aggrieved by what they see as a failure by the trustees to act fairly. They are entitled to see the trust deeds and the trust accounts. They are entitled to see the formal resolutions of the trustees and the minutes of trustees' meetings deciding upon and implementing courses of action. But the trustees are entitled not to disclose to beneficiaries the reasons why they exercised their discretion and powers in particular ways, or documents recording those reasons. If, however, they record those reasons in writing, they may well have to pass on such documents to any successor trustees, who are free to disclose them to the beneficiaries. If the beneficiaries sue the trustees, then such documents will have to be disclosed by the trustees as part of the discovery of documents between the parties. Trustees cannot safely assume that any of their documents will always be immune from production.
If the cause of discontent lies in the way in which the settlement's underlying companies have been administered, then the trustees may have to instruct accountants or management consultants to investigate and advise them. If the costs of that exercise are significant, then it may be appropriate to seek the sanction of a court before incurring those expenses.
The results of their investigations may require the trustees to use their control of the company's shares to vote for boardroom changes, or they may have to commence legal proceedings. The trustees may be well advised to seek the sanction of a court before instituting legal proceedings. Court approval will give them substantial protection against the beneficiaries if costs are made against them in the litigation.
The power of a court to give directions to trustees in difficulties is being used increasingly in many jurisdictions. It has clear advantages for trustees. First, for them to act in accordance with the court's direction cannot later be attacked as a breach of trust, unless the court has been misled as to the true position. Second, the views of the beneficiaries and any protector of the trust can usually be put before the court, and their position established. Third, the trustees are the applicants and exercise greater control over the conduct of the application than if they are sued as respondents. Fourth, unless they have acted unreasonably in bringing the application, they will be awarded their costs irrespective of the outcome. It is therefore a powerful weapon in the efficient administration of a trust by trustees in situations of adversity.