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An Introduction To Trust Disputes

Posted: Friday, 22 March 2024 @ 13:39

What do Trustees do?

The trustees are the legal owners of the assets held in a trust. The trustees hold the legal title to the assets upon trust for the beneficiaries. Their duty is to administer the assets in the trust and, eventually, to distribute them in accordance with the terms of the trust deed.

Their role is to:

•             deal with the assets according to the settlor’s wishes, as set out in the trust deed or their will

•             manage the trust on a day-to-day basis and pay any tax due

•             decide how to invest or use the trust’s assets If the trustees change, the trust can continue, but there always should be at least one trustee.

Who are the Beneficiaries?

There might be more than one beneficiary, like a whole family or defined group of people. They may benefit from:

•             the income of a trust only, for example from renting out a house held in a trust

•             the capital only, for example getting shares held in a trust when they reach a certain age

•             both the income and capital of the trust

What are the main types of Trust?

The main types of trust are:

•             bare trusts

•             interest in possession trusts

•             discretionary trusts

•             accumulation trusts

•             mixed trusts

•             settlor-interested trusts

•             non-resident trusts

If things are not working out, what should you do?

If you can try to sort things out yourself.

You can do this by initial Influencing Steps

Some of the effective initial influencing tools which have been proven to lead to successful outcomes include and have led to avoidance of the Court process include:

•             Have a Direct Meeting /Set Things out In Writing  - If you are concerned about what has gone on, simply ask someone for their take on what is going on either in person or in writing.

  •             Ask A Mutual Friend/Relative To Help Sort It Out - If you are not comfortable asking the other person directly what has happened, get a mutual friend/relative to ask on your behalf or act as a go between.

If that does not work, what should you do next?  

If your initial influencing steps have not worked and you remain concerned about the situation, it is worth considering taking legal advice and then advancing to more formal steps which can include:  

  • Write A Legal Latter  - You instruct a solicitor to set out your position in writing
  • Have A Round Table Meeting - One step which can be relatively inexpensive compared to going to Court is sitting around the table in order to discuss issues is to move a dispute forward.  A Round Table Meeting is simply a meeting where the parties and their legal advisors can meet, with the goal of settling the dispute. The meeting takes place on a without prejudice basis, which enables the parties and their lawyers to speak freely without fear that what is discussed will later be used against them in court if they cannot reach agreement.
  • Engage In Mediation - With mediation, a middleman/independent person will help the two sides in a dispute to focus on the issue and consider the best way of solving it. The needs of both sides are taken into account, and you will try to find common ground to find the best solution to the problem.  The mediator is not there to make a decision but will help both sides to agree a solution. You can make a mediated agreement legally binding if you make a signed mediated agreement. Selection of the mediator and the timing of the mediation are critical variables.
  • Use Early Neutral Evaluation  This is unknown to many lawyers, but this is when an independent and impartial expert is appointed to give the parties an assessment of the merits of the case. It is not binding so that the parties do not have to implement the assessment. The principle is that a third party (such as a barrister) provides the disputing parties with an objective view on the strengths and weaknesses of their respective cases, which can then serve as a basis for negotiated settlement. Very useful in big Estates (£1million +) and particularly when the respective lawyers have reached a cul de sac on their view of the law.
  • A Without Prejudice Conversation/Letter In general, what someone says can be used against them in court. The without prejudice (WP) rule means that statements which are made in a genuine attempt to settle a dispute cannot be used in court as evidence of admissions against the party that made them. Thus, you can say something which is effectively off the record. Sometimes on longstanding cases, a simple phone call between disputing parties’ representatives on a without prejudice basis can lead to positive discussions and a settlement happening.  As a consequence, it is worth considering this approach at all points in a dispute.

What Legal Things Should You Focus On?

First focus on the trust instrument.

 This is a key document, which trustees should disclose to beneficiaries if requested. The same applies to supplemental documents such as:

•             Deeds of appointment and retirement of trustees.

•             Instruments adding assets to the trust.

•             Instruments varying the trust.

The trustees may wish to redact information that does not re-late to the beneficiary making the request (for example, by obscuring the names of other beneficiaries in a deed). If a beneficiary requests redacted information, the trustees ought to inquire why (there might be a valid reason, so they should not re-fuse outright).

The trust instrument is the document which creates or sets out the terms of the trust. It can be something as straightforward as a will which leaves assets to minor children, a settlement deed or declaration of trust comprising many pages.

Whatever it is, there is a pretty good chance that it will set out, or refer to / amend legislation which sets out, the trustees’ powers and duties.

It may also set out the person or persons who may or may not appoint, remove, or substitute trustees of the trust and how they can do that. e.g many trusts provide for no fewer than two trustees with power to appoint and remove trustees and some trusts extend that power to beneficiaries acting unanimously or, particularly in the case of offshore trusts, to protectors.

Focus on the legislation

Trustees can also be removed without the court’s intervention by fellow trustees if one or more of many conditions is met. These conditions are set out in s.36 Trustee Act 1925 which provides: “(1) Where a trustee, either original or substituted, and whether appointed by a court or otherwise, is dead or re-mains out of the United Kingdom for more than twelve months, or desires to be discharged from all or any of the trusts or powers reposed in or conferred on him, or refuses or is unfit to act therein, or is incapable of acting therein, or is an infant, then, subject to the restrictions imposed by this Act on the number of trustees, — (a) the person or persons nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust; or (b) if there is no such persons, or no such person able and willing to act, then the surviving or continuing trustees or trustee for the time being, or the personal representatives of the last surviving or continuing trustee; may, by writing, appoint one or more other persons (whether or not being the persons exercising the power) to be a trustee or trustees in the place of the trustee so deceased, remaining out of the United Kingdom, desiring to be discharged, refusing, or being unfit or being incapable, or being an infant, as aforesaid.”

Also consider s.36 (9) Trustee Act 1925 which lays down that where a trustee who lacks capacity is also a beneficiary of the trust then it is necessary to make an application for that person’s removal to the Court of Protection; the court which deals with matters of physical and mental welfare.

When is a Trustee Unfit to be a Trustee?

This can be very subjective and will be disputed. Being ‘unfit’ depends on the circumstances of the case. Generally, a person who has been made bankrupt or convicted of a fraudulent offence will most likely be deemed to be unfit to act as will a trustee guilty of a significant breach of trust or of acting in a way which causes a conflict as between their person-al position and their duty to the beneficiaries, known as their ‘fiduciary duty’.

Even if a trustee is removed under s.36 Trustee Act 1925, it is entirely possible that they could challenge such a decision by way of court action. Further, as is clear from s.36 Trustee Act 1925, this remedy is not automatically available to beneficiaries unless they are also trustees or they have power to remove trustees under the trust instrument.

What Court Steps Need To Be Done?

Like much of High Court litigation someone who complains has to do a lot of front-loading with cases. A Claimant has to do a Claim form together with a statement.  Under the Part 8 procedure written evidence is served with the Claim Form. The defendants have 14 days within which to acknowledge service and file their evidence.  However, this may be extended by written agreement by a further 14 days. All the trustees should be parties.  The beneficiaries should also be joined, unless perhaps they have consented to the application. The settlor (if alive) and any person nominated to appoint new trustees should also be joined.

A key factor to consider is legal costs. The winner of the Court case is likely to get most of their costs back.    

Please note this is the law as of 1st January 2024 and you need specific advice for your situation.