Minimising the risk of trust litigation

This article features in Issue Two of our Private Wealth Perspectives Newsletter.

Explore the Private Wealth Perspectives Newsletter for more updates.

The vast majority of trusts run smoothly without the need for court intervention or litigation. Having said this, litigation can sometimes be unavoidable for a trustee and so a thorough understanding of its duties, obligations, and potential risks are paramount to minimising the likelihood of trust litigation and ensuring that a trust is run smoothly.

In this article we consider trustees' primary duties alongside how these can be managed proactively in order to minimise the risk of trust litigation.

Trustees' primary duties

Perhaps the best starting point for any potential trustee and their advisors is to carefully consider their duties and obligations under the law. These duties cannot be understated as they are mandatory requirements which, if failed to maintain, will often form the basis of a breach of trust claim.

Before discussing trustees' duties in detail, it is useful to consider the role of a trustee itself. Firstly, it is important to remember that a trustee owes a fiduciary duty to the trust's beneficiaries (some of whom may not have been born at the time the trust instrument was created). A fiduciary duty is an important legal obligation which, if failed to meet, can result in trustees becoming personally liable to beneficiaries for their actions. It is therefore necessary for prospective trustees to understand the significance of their role alongside the important obligations that come with it. 

Article 21 of the Trusts (Jersey) Law 1984 "TJL 1984" provides that:

• Trustees must act with due diligence, as a prudent person and to the best of their ability and skill, and must observe the utmost good faith;
• Trustees must carry out and administer the trust in accordance with its terms;
• Trustees must, so far as is reasonable, preserve and, so far as is reasonable, enhance, the value of trust property;
• Trustees must keep accurate accounts and records of trusteeship;
• Trustees must keep trust property separate from his or her personal property and separately identifiable from any other property of which he or she is trustee; and
• Trustees should not directly/indirectly profit or cause any other person to profit from trusteeship, subject to the terms of the trust and/or approval from the court.

These duties form the core obligations required of a trustee and should be the starting point for any trustee when making decisions. A trustee that keeps these requirements in the back of their mind at the onset of every decision, will likely have a much better chance of minimising the risk of litigation when compared with a recalcitrant trustee, who fails to appreciate the fundamental requirements of their role. 

Acting with neutrality

In addition to the above, it is important to remember that, when carrying out their duties, trustees are required to act in a neutral manner that takes into account the interests of a beneficial class as a whole, when considering the wishes of certain beneficiaries. This is an area where a trustee can take a proactive approach by seeking to resolve disagreements between beneficiaries from the get-go, as opposed to long after a dispute has crystalised.

For example, a trustee should not do the bidding of particular beneficiaries and they should always keep their primary duties at the forefront of their decision-making process as per the decision in Crociani & O'rs v Crociani & O'rs [2017] JRC146. Furthermore, a trustee should not act against the wishes of beneficiaries in a self-interested manner by, for example, refusing to retire and attempting to retain the whole trust fund pending payment of its fees as per the decision in Re Caversham Trustees Ltd [2008] JRC 065.

In addition to the above, a trustee must always be mindful of the purpose of the settlement they are administering as per the decision in Grand View Private Trust Co Ltd and another (Respondents) v Wong and others [2022] UKPC 47 (which although not binding in Jersey, is likely to be highly persuasive). It is therefore paramount for trustees to consider the purpose of the trust in question when making decisions, because decisions that are held to be against this purpose may well be considered void.

Furthermore, a trustee must not put themselves in a position of conflict and once identified, it is important that the trustee recognises the situation and takes appropriate steps to resolve it immediately. A trustee always has the option of seeking the assistance of the court when faced with disagreements relating to the wishes of certain beneficiaries, however, this should always be seen as a last resort and not a default position.

Dealing with disclosure

Another thorny topic which trustees often find difficult to navigate is the issue of disclosure. Many trust jurisdictions have codified the duties and rights relating to trust disclosure. In Jersey, Article 29 of the TJL 1984 makes it clear that the terms of a trust can confer, restrict or remove beneficiaries' rights to documents and information about the trust. The trustee can therefore, subject to the terms of the trust, decline a request to disclose information if they are satisfied that this is in the best interests of one or more of the beneficiaries of the trust.

However, it is important to consider that there can be a personal cost risk to trustees for an unreasonable refusal of disclosure as per In the Matter of the I Trust, J Trust, K Trust and L Trust [2018] JRC 214. More recently, the decision of In the Matter of the Alpha, Beta and Delta Trusts [2023] JRC 138 underlined the court's willingness to intervene in relation to issues concerning the ordering of disclosure, if such disclosure is deemed to be in the best interests of the beneficiaries. This decision therefore demonstrates that the court is not restricted by the principle of non-intervention when it comes to ordering disclosure and it will not always take a hands-off approach.

Reducing the likelihood of trust litigation

In order to reduce the likelihood of trust litigation and avoid conflict, trustees are recommended to respond to requests for disclosure in a prompt and reasoned manner, taking into account the terms of the trust instrument and the best interests of the beneficiaries.

Seeking legal advice in relation to controversial disclosure requests is also advisable for trustees caught in a difficult position. Again, as a last resort, a trustee can, in certain cases, seek the assistance of the court in relation to requests for disclosure, but they should have been proactive and taken informed steps before doing so.

Managing trust assets

Another common subject of trust litigation relates to the management of trust assets themselves. This is an area worthy of much consideration because, as discussed, trustees owe a fiduciary duty to beneficiaries, and this extends to safeguarding the value of trust assets. It is therefore possible for a trustee to be held accountable for losses where they have, for instance, failed to manage a trust fund correctly.

When it comes to managing trust assets, it is important for trustees to prudently consider the suitability of certain investments (remembering that a professional trustee will be held to a higher standard of care and skill than a non-professional trustee).

In any event, trustees may well be advised to consider adopting a diverse investment strategy as opposed to riskier approaches where significant funds are placed in a single investment. Trustees should also consider taking financial advice in relation to certain investments as well as tax advice in order to prevent the occurrence of unnecessary tax penalties, which, if not paid on time, can have a devastating impact on the assets of a trust.

In addition, potential trustees would be well advised to take a proactive approach when it comes to managing trust assets and if necessary, seek early engagement with suitable professionals with relevant experience who can assist with any investment advice.

Moreover, it is highly advisable for a trustee to keep and maintain a paper trail which includes detailed minutes of their decision-making process as this is useful when referred to at a later date in the event of a potential dispute.

Conclusion

Due to the complex nature of the role, alongside the variety between trust instruments, it is difficult to provide a definitive list of recommendations that trustees should adopt when carrying out their duties. Nonetheless, there are a number of strategies which trustees would be well advised to adopt, in order to minimise the risk of trust litigation.

Keeping their primary duties in mind, acting with neutrality, dealing with disclosure requests in a reasonable manner and implementing a prudent investment strategy are all useful points, which, if followed, are likely to minimise the risk of trust litigation.

Furthermore, a trustee always has the option of seeking assistance from the court in appropriate cases, bearing in mind that the court is likely to be unsympathetic to a passive trustee that is unwilling to take a proactive role when discharging its duties.