Trustee Trips and Traps 11-20

?????????????? ?????????? ?????? ?????????? - a series of issues where I have seen trust practitioners get caught out. [Caveat - not all trusts and trust jurisdictions are the same]

For the first ten trips and traps see: https://www.dhirubhai.net/pulse/trustee-trips-traps-first-10-richard-grasby-tep

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See my recent post - https://lnkd.in/ggjB2Pf

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In basic terms this is the exercise of a trustee power for a purpose, or with an intention, which is outside the scope of the power being exercised.

It can often come up when creative solutions are being sought. Take the following scenario.

A is a beneficiary of a trust. B is an excluded person. B needs funds. A wants to help.

Can the trustee pay funds to A? Yes

Can A make a gift to B? Yes

Can the trustee pay funds to A so A can make a gift to B? Not likely (unless there is some form of benefit to A).

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Rather than request trustees to charge assets, it may be prudent to charge the assets before they are settled.

Likewise rather than having a trustee give up voting rights attaching to shares, why not settle non-voting shares?

Non-voting shares and limited partnership interests can be a good way to limit trustees' exposure to control issues whilst preserving the economics.

Furthermore trusts where the trustee can elect that VISTA or special company provisions apply to shares should be avoided. How can it be in the best interests of the beneficiaries for the trustee to limit its involvement? The default should be that these provisions apply to all such shares.

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As someone who has spent a lot a time obtaining and comparing trustee fee proposals, it can often be difficult to compare apples with apples. It can be a bit like when (a long time ago) BA was a premium airline and Easyjet the new upstart. The headline fares were, say, GBP80 for BA and GBP0.99 for Easyjet. But when you added to Easyjet the items you also wanted - choosing a seat, checking in a bag, food and drink, taxes etc the fares were much much closer.

Similarly with trustees- suppose trustee A quotes X and trustee B quotes 2X. Potential settlors are attracted to trustee A (fees are not the only criteria I admit)

In my experience some forensic accounting still needs to be done! Does the fee include accounts? Does the fee include any time spent? If so how much? Since time will need to be spent for a trustee to do its job, how is this charged? Does the trustee require a PIC in which case, is the cost included? New items for CRS and economic substance review/reporting are also being added - are these included?

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[Caveat2 - simple summary] Under many common law jurisdictions, property which has vested absolutely can be called for by such beneficiary at 18. To defer this, the interest needs to be made subject to various contingencies. Many US states take a different view and allow for the age of 18 to be increased as per the Settlor's wishes.

In terms of the rule in Saunders v Vautier (the "Rule"), if all of the beneficiaries are adult and of sound mind, they may together terminate the trust. This is the general position. Jersey and Guernsey have a statutory definition of beneficiary and the Guernsey courts have recently applied this principle in "Rusnano". However the Rule does not apply for example to Cayman STAR trusts. The Rule can be disapplied for up to 20 years in a BVI VISTA trust. In the Bahamas the Rule will not apply if it would defeat a "material purpose of the Settlor" unless the Settlor consents.

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We've all seen the complex trust structures with multiple committees, persons holding multiple positions on such committees with powers which may or may not be fiduciary, committee A appointing members of committee B and vice versa etc etc. It is often very difficult to see how the administration is to take place, how is a decision made, who needs to consent, how are conflicts dealt with? If the people drafting the trust can't work this out quickly, how are trust officers to do so 5 years down the line?

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It is perfectly acceptable to have corporate beneficiaries and it can be very beneficial for a trustee to fund a beneficiary's business or provide a guarantee. But since a body corporate is not the end of the line in terms of benefit, a corporate beneficiary can be a way for a stranger to a trust (or even an excluded person) to benefit - for example via nominee shareholders or call options over shares in the corporate beneficiary. Some trust deeds require corporate beneficiaries to be owned / majority owned by natural beneficiaries but that is hard to police.

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If a trust has an underlying PIC and a distribution needs to be paid to a beneficiary, far better for a distribution to be made to the trustee by the PIC and then a second distribution to be made to the beneficiary. Try to avoid direct payments from the PIC to a beneficiary (even if the correct paperwork is done). This is especially true if the trustees are not in control of the PIC.

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In certain jurisdictions a dissolved company can be reinstated by persons showing an interest for a certain period of time (BVI up to 10 years) and could, in certain cases, "re-constitute" the trust.

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Many trusts jurisdictions only permit the establishment of charitable purpose trusts in accordance with English common law principles – namely, that their purposes fall within one of the four ‘heads of charity’ namely:

the relief of poverty;

the advancement of education;

the advancement of religion;

other purposes beneficial to the community, not falling under any of the preceding heads.

There are exceptions such as Bermuda which has a statutory definition.

Philanthropic ventures and political lobbying may not satisfy such tests.

Non-charitable purposes will be void unless such jurisdiction allows for such trusts and the conditions are met.

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