A matter of trust: how to choose a trustee
When making a Will, there can be great advantages to including trusts to allow precise estate and tax efficient planning.
People set up trusts for many reasons: to protect and preserve wealth for a particular side of the family and to protect assets or beneficiaries. But when setting up a trust, careful consideration must be given to selecting a trustee, as they take legal ownership of and responsibility for the trust assets, always acting in the best interests of the beneficiaries. If they choose the wrong trustee, a testator could jeopardise the safety of their assets in the future. Trustees have a big responsibility, which begins and ends in a substantial amount of (unsurprisingly) – trust – between both parties. But what things should be taken into consideration when choosing a trustee/s?
Duty of Skill & Care
Trustees automatically have a fiduciary responsibility to act in the best interests of the beneficiaries of the trust – this includes supressing their own interests and making sure there is no conflict of interests. Trusteeship is a position of utmost responsibility and must be carried out with the utmost care and good faith. Unless specifically authorised by the Will or by the beneficiaries, a trustee cannot profit from their position as a trustee. So integrity is clearly something a testator should look for in their trustee. But they should also be mindful of the level of skill and expertise the trustee will require in administering the particular trust. A frail and elderly relative may have unimpeachable standards of integrity, but they will likely be the wrong person to appoint as the trustee of a complex business trust as they may lack the necessary skills to carry out the necessary administrative tasks – in this case, it may be prudent to appoint someone who is still in the workforce and who has the appropriate business and administrative skills for administering the trust.
Who to Trust?
As a general rule, anyone over the age of 18 can be a trustee but suitability for the role requires careful consideration. It’s common for a trusted relative or friend to be appointed as trustees of testamentary trusts, while with Inter Vivos (lifetime) trusts the settlor can appoint themself, spouse/civil partner/partner as trustee(s) if preferred, ensuring a degree of maintained control over the assets. A professional trustee does not have to be appointed, but this can be helpful if others aren’t comfortable with the responsibility of the role.
If a professional trustee is the preferred route, ensure checks are made first:
- Are they regulated by a body / have they committed to any professional codes?
- Do they have professional indemnity cover?
- How long has the company been around?
- Does it have a good reputation?
- Do you know anyone who’s worked with the company before?
As well as making sure that a trustee has the necessary skills to act as a trustee, it is also worth considering:
- the age of the trustees appointed – this is particularly the case in relation to trusts for young children – the trustees are likely to have to hold their position for many years, and they should be young enough to be able to carry out their duties;
- location – it often makes more sense to choose a trustee who is proximate to the assets and/or the beneficiaries of the trust. This is not a hard and fast rule, but it will, for example, be harder to manage a rental property in Margate from Edinburgh than if the trustee lived just down the road;
- willingness – trustees need to agree to act when an Inter Vivos trust is created, whereas they can simply be named in a Will. They have no obligation to accept this appointment, and so a testator should discuss the potential appointment with their chosen trustees and make sure that they would be willing to take on the responsibility when the time comes;
- knowledge of the testator/settlor’s personal affairs and background – when creating, for example, a discretionary trust for children, it would perhaps make more sense to have a trusted friend or family member acting as trustee rather than, say, a business colleague or a professional trustee – they would know the testator/settlor and the beneficiaries, the reason for making the trust and they would have a sensitivity to the wishes of the testator/settlor.
Share the Administrative Burden
Trustees generally have to exercise their responsibility jointly and so administrative ease should be considered when appointing trustees – more than one trustee can ensure the administrative burden can be shared and there can be different specialist skills brought to the table by different trustees. It makes sense to make sure that any co-trustees are likely to get along: appointing warring siblings as trustees of a discretionary trust, for example, is likely to be a recipe for disaster. Four is the maximum number of trustees that can be appointed (unless it is a charity), and only one trust corporation is needed if a professional trustee is appointed. Thought should be given as to whether it is prudent to have four trustees and whether this could perhaps make the running of the trust administratively unwieldy – it is always possible to have a mechanism for trustee replacement should any be unable or unwilling to act, so this can guard against any need to have multiple trustees in case one drops out.
Trustee Relationships Turned Sour
And while most trustees act with due care and with integrity, there are occasions where a trustee will fail to meet the requisite standards. If a trustee has failed to act in accordance with their fiduciary duties, the beneficiaries of the trust or the other trustees can bring a claim against them. These are time limited in the case of non-fraudulent breaches to six years from the date of the breach:
- if a beneficiary has a future or contingent interest in a Trust, they cannot start a claim against a trustee until the interest becomes due to them, and the limitation period will not start until the beneficiary is entitled to an absolute interest.
- where a beneficiary has a life interest, they can bring a claim during the period of their interest and for six years after the breach. If a beneficiary obtains an interest in a trust after the death or a life tenant, they can only start a claim after the end of the life interest (and the limitation period starts at this point too).
Fraudulent claims are generally not subject to any time limitation, but they will be harder to prove the more time that elapses between the alleged breach and the claim.
Behaviour which might give rise to a claim against a trustee includes mismanagement of trust funds – not taking sufficient care when investing funds, being reckless with the funds or even using the funds for their own purposes. Trustees would be in breach if they showed a bias towards beneficiaries, failed to pay a beneficiary an entitlement that they were due or put their own interests ahead of those of the beneficiaries. Trustees can also be in breach if they fail to give beneficiaries information about the trust or if they stand by and let their co-trustees act in breach of trust.
If a trustee is found to have breached their duties to the trust, the remedy will generally be to put the trust back into the same position that it would have been in had the breach not occurred. This will generally require there to have been a loss (for example, if a trustee has breached their fiduciary duties when investing funds, but the trust is actually better off because of this, there is no loss as a result of the breach). The courts are also able to award interest on losses.
Tread with Care
Be careful who you make a trustee. If it’s for a Life Interest or Discretionary Trust, they have a lot of discretion! Testators can’t control beyond the grave, so it’s vital that they’re advised to think wisely about who they select. While an Expression of Wishes document allows a degree of guidance, it cannot compel a trustee to act, so it does, in the end, come down to trust.
Arken.legal ensures efficient and consistent drafting of both testamentary and Inter Vivos trusts through its solutions – Arken Professional and Arken Lifetime. Drafters can also get the latest on tax treatments and specific trusts with Trust Referencer. Access the most up-to-date information to generate a personalised report for your clients.
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