Trust disputes

What is a Trust?

A trust is a way of managing assets.  For example, money, investments, land or buildings.

The person who puts assets into the trust is known as the settlor. 

The person who has responsibility for managing the trust is known as the trustee.

The person who ultimately benefits from the trust is known as the beneficiary. 

Why do people create Trusts?

Trusts can be used in a variety of contexts for example:

1. Where someone is too young to handle their own affairs.
2. Where someone is unable to manage their own affairs for example because they are incapacitated.
3. To control and protect family assets.
4. To pass assets on while a person is still alive.
5. To pass assets on when a person dies.
6. Where someone dies without a will in accordance with the rules of inheritance.

What is the role of the settlor?

The settlor is the person who puts assets into a trust.

The settlor decides how those assets are to be used. This is usually recorded in a trust deed.

What do trustees do?

The trustees are the legal owners of the assets held in trust. They have strict duties and obligations and their role includes:

1. Ensuring that assets are dealt with in accordance with the settlor’s wishes.
2. Managing the trust on a day to day basis.
3. Ensuring that trust assets are appropriately invested and obtaining advice in this regard where necessary.

Beneficiaries

It is possible for there to be more than one beneficiary for example a whole family or specifically defined group of people. Beneficiaries may benefit from:

1. Both the income and capital of the trust.
2. Capital only for example being entitled to shares held in trust when they reach a certain age.
3. Income only for example rental proceeds from a property held in trust.

What kind of trust disputes are there?

Trustees have a great deal of responsibility.  This includes a duty to manage the trust efficiently and always to act in the best interests of the beneficiaries.

Where a trustee fails to comply with their strict obligations, it may be possible for a beneficiary of the trust to make a claim.  Examples of some of the potential claims against trustees are as follows:

• Failure to act impartially between beneficiaries
• Mismanagement of trust funds – for example, incorrect distribution or the making of poor investments
• Using trust resources for personal benefit
• Preventing a beneficiary from living in a property or receiving funds that they have a right to under the trust
• Failure to pay trust income to a beneficiary
• Failure to make appropriate disclosure regarding a trust
• Generally acting in breach of the trustee obligations or standing by whilst a co-trustee acts in breach of trust

If it can be demonstrated that a trustee has acted in breach of his/her strict obligations then it may be possible to seek:

1. Removal or replacement of a trustee;
2. Information in relation to the trust and its accounts;
3. Recovery of incorrectly allocated trust assets.

Initial steps when considering a trust claim

Any dispute which arises in the context of administering a trust is defined as a trust dispute.  This can be wide ranging for example where there are differing opinions as to the interpretation of the trust, disputes between beneficiaries, allegations of breach of trust by trustees and disputes in relation to the value of trust assets.

It should be noted that not all trust disputes are hostile.  There will be occasions where all parties recognise that there is an issue to be resolved, for example with regard to the structure of the trust.  In such proceedings, as the neutral party, the trustee would usually be entitled to recover their costs from the trust. 

It is important at the outset to review all relevant documentation such as the trust deed or relevant will.  We can assist you in obtaining and reviewing such documentation. 

Where beneficiaries believe that a trustee has acted in breach of their duties and they wish to seek removal of that trustee the first step is to review the trust documentation to see whether any party has been given the power to do so, for example a beneficiary. 

Additionally the Trustee Act 1925 allows for the replacement of a trustee in certain circumstances including where the trustee:

• Is dead
• Remains outside the UK for over 12 months
• Is in agreement to being discharged from their duties
• Is unfit or incapable
• Is an infant

Where there has been serious misconduct the Court does have the power to remove a trustee.  However, where it is merely a case of a difficult relationship between a beneficiary and a trustee the Court is likely to be reluctant to intervene although it will depend upon all relevant circumstances. 

Trustees are required to act jointly.  Where the relationship between trustees has broken down to such an extent that they are incapable of making decisions collectively or administering the trust then the Court will intervene. 

What is a breach of Trust?

Trustees have strict duties which they are obliged to comply with. In summary they must:

1. Exercise reasonable care and skill.
2. Adhere to the terms of the trust document.
3. Act impartially between beneficiaries.
4. Invest in authorised investments.
5. Act in the best interests of the beneficiaries.
6. Avoid conflicts of interest.
7. Act in good faith and with honesty and integrity.
8. Take control of trust property.
9. Inform beneficiaries of their position, providing such information concerning the trust as the beneficiaries are entitled to.
10. Keep proper records and accounts.
11. Not profit from the trust.

Where a trustee fails to act in accordance with the terms of the trust or in breach of duty a breach of trust will arise.

It should be noted that trustees are jointly and severally liable for any breach of trust to their beneficiaries where that breach has given rise to a loss.

Common grounds for breach of trust are:

1. Incorrect distribution of trust assets.
2. Improper investment of trust assets.
3. Breach of fiduciary duty or breach of the common law or statutory duty of care.

What standard of care can beneficiaries expect?

The statutory duty of care is set out at Section 1 of The Trustee Act 2000.  A trustee must exercise such care and skill as is reasonable in the circumstances, having regard in particular:

1. To any special knowledge or experience that he has or holds himself out as having, and
2. If he acts as trustee in the course of a business or profession, to any special knowledge or experience that is reasonable to expect of a person acting in the course of that kind of business or profession.

The common law duty of care requires trustees to take such care as the ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.

How can a trustee defend his/her actions?

Exemption clause

There may be an express clause within the trust deed exempting trustees from loss or damage.

Statutory relief

Under Section 61 of The Trustee Act 1925 it is open to the Court to relieve a trustee wholly or partly from personal liability for a breach of trust if the trustee is found to have acted honestly, reasonably, and ought fairly to be excused for the breach and for failing to obtain Court directions.

Beneficiary consent

If a beneficiary of majority and capacity of their own free will assents to or concurs with the breach.

Limitation

The prescribed statutory time period for making a claim for breach of trust is six years.  It should be noted that in the event of fraud and/or recovery proceedings there is no period of limitation.  The general limitation period for claims on a deceased person’s estate is twelve years.

Delay

Where a claimant is found to have delayed unreasonably in pursuing a breach of trust claim and such delay prejudices the trustee’s position the Court may refuse to allow the claim to proceed.

What happens when a trustee is found to have committed a breach?

In such circumstances a trustee would be required to restore the trust fund to the position it would have been in had the breach not occurred.

Potential cost protection for Trustees

In the event of a hostile dispute involving a third party the trustees will be liable for their own costs and potentially at risk of liability for the costs of the third party.  The trustees may be able to rely on an indemnity from the trust assets however this is open to challenge from the beneficiaries.  With this in mind trustees should consider applying to the Court for an order approving them bringing or defending a claim.  Such an order is known as a “Beddoe Order”.  If granted such an order means that the trustees will be entitled to use the trust assets to fund the litigation without risk of personal liability. 

If you are a beneficiary and believe that you have a potential trust claim or a trustee on the receiving end of a dispute then we would be happy to speak with you on a no obligation basis. Please contact Anna Sutcliffe or Katie Alsop.