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TRUSTS


rights to ask why, and question whether or not the trustee has fulfilled their fiduciary duty. In Alistair Davidson’s view, the more trusts holding more wealth, the more disputes we are likely to see. “Now you have trustees who administer


very large pots of wealth, who are responsible for investment decisions and employ investment advisers, and there’s a whole industry that has grown up on the back of this,” he explains. “Of course, the more money involved, the more risk there is, and the more likely that someone’s going to be very annoyed if it goes wrong.” A recent English Court of Appeal decision


on a cornerstone of trust law known as Hastings-Bass, may curtail an opportunity available to trustees to rectify actions that have had unintended adverse consequences – usually, and as is so in this case, leading to a higher-than-necessary tax payment. In essence, the Hastings-Bass principle


allows a transaction to be reversed by the courts if the effect of a trustee’s action is different to what they’d intended – a kind of ‘get out of jail free’ card. The recent decision of the English Court


of Appeal threw uncertainty on the stance of the Channel Islands – though it became clearer recently, when the Royal Court of Jersey decided not to follow the English Court of Appeal’s decision. This important ruling illustrates the different attitudes of the English and (so far) Jersey Courts in relation to Hasting-Bass and adverse tax consequences resulting from a mistake. “As it stood, Hastings-Bass provided


a neat, quick and cheap way of rectifying something that’s inadvertently gone wrong,” says Gillian Robinson, a Partner at Appleby in Jersey. “If the English position is followed in Jersey, the availability of that remedy will be considerably reduced. It could result in an increase in litigation either in the form of beneficiaries claiming against trustees for breach of trust, or a trustee suing its advisers for professional negligence.”


Crisis begets crisis In Davidson’s view, the recent financial crisis has brought disputes firmly into focus. “The biggest change has obviously come about with the fall in the market in 2008 and onwards. You’ve had investment positions that have collapsed and huge amounts of wealth wiped out overnight from portfolios across the world. If you’re a beneficiary who’s


24 businesslife.co August/September 2011


been used to receiving rather a large amount of money and all of a sudden that’s been cut off, then the question becomes: Who do you blame?” In theory, in a case like that, the finger


can be pointed at the trustees. However, proving the trustee has been guilty of incompetence or worse isn’t easy. “What happens if the beneficiary is sufficiently disgruntled at how the trust has been run? Well, they may want to remove the trustee,” explains Robinson. “In most cases that would


Family constitution


SIMON MORGAN is Private Client Director at trustee service firm Vistra. He advises trustees on trust administration and dispute resolution. Many trustees now encourage beneficiaries to set up processes that anticipate future conflicts. “If the family estate is held in trust, we stay neutral and seek help from our advisers.


These disputes can be hugely expensive and long running, so mediation becomes a good option, even though it’s underused at the moment. “The main reason for using mediation is to avoid litigation. It’s quicker and cheaper


and very often you can get to the heart of the dispute quickly, because there are times when the dispute stems from something irrational. Typically, however, when you have significant family business assets, there are steps that can be taken early on to ensure good family governance at a later stage. “Above all, this means being able to agree on how to disagree if a dispute does


arise. That is something that probably needs a little bit of thought at the outset. You can never completely mitigate all disputes, but it might be worth the effort to sit down before the structures are put together to avoid the worst. You could call it a family constitution. If the family has significant assets there needs to be a plan for succession in the business, and what would happen in case key people left. “The key is decision making. What you need in any family is the ability to make


a decision and when there is a difference of opinion you need to be able to resolve that calmly. And that’s where a family constitution comes in.”


most likely be by consent. And then what might happen is that the new trustee is under obligation to review the trust as is and decide whether there’s any cause of action against the former trustee.” If that happens, then it is almost inevitable


that the lawyers will get involved. Indeed, once a dispute reaches that point, trustees must then think about protecting themselves from any potential claim. Thankfully, better understanding of trust law and more attention on how trusts are set up has meant that


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