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Choosing a trustee: the questions you need to ask

Simon Rylatt and Geoffrey Todd are partners in the Tax and Private Client Department at Boodle Hatfield.

When setting up a trust, one of the biggest decisions is choosing a trustee. Who is best able to look after your assets? Simon Rylatt and Geoffrey Todd look at the fundamental questions you must ask before making this vital decision

It is regularly the case that large amounts of money are spent on obtaining detailed legal advice on the terms of a trust, the scope of the class of beneficiaries, the letters of wishes from the settlors and the taxation consequences of the proposed structuring.
 
However, a question that sometimes falls lower down the order of priority is that of who to choose to administer the structure being established. Yet surely this is at least as fundamental to consider and get right? After all, the trustee is actually going to own and control the assets transferred to the trust; it may also be responsible, subject to the terms of the trust, for deciding who will receive the assets (and, importantly, who will not) and when; and it will be the entity with which settlors and beneficiaries must liaise while the assets are retained in trust. It is also to be remembered that it is unlikely (at least in the case of a classic trust structure) that the beneficiaries will be able to "hire and fire" the trustee. Consequently, if things go wrong, expensive and time-consuming litigation can result and this ultimately benefits no-one.

In light of this, what should you take into account when selecting a trustee? Obviously, any list of desirable qualities needs to be tailored according to individual circumstances, but the following generic, non-exhaustive list of questions should be asked in each case:

A professional or lay person?
Where the trust is likely to involve complex legal or tax issues, the benefits of having a professional trustee involved come to the fore. It would perhaps be unfair to expect a family friend to spend significant amounts of unpaid time learning about and understanding such issues before being able to take trustee decisions. Clearly, such issues could delay decisions if advice needs to be arranged and understood.

On the other hand, the lay trustee may have better understanding of the family dynamics and the beneficiaries themselves; something the professional trustee would have to work on and may never achieve. Also, is the trust of a suitable value to justify having a permanent professional trustee?
 
Professional advice can be called in where necessary by a lay trustee, although one always runs the risk that issues requiring attention are not necessarily obvious to a lay trustee. For example, how should a trustee of a family trust act in circumstances when it first becomes aware a beneficiary is involved in divorce proceedings? A trustee may think this has little to do with him/her, but early preparation for what may follow if the trust is brought into the frame can be valuable. Perhaps the ideal is to have a mix of the two types of trustee.

Settlors and beneficiaries may be trustees too. The risk in making such appointments is that it could give rise to a lack of objectivity in taking decisions and a breakdown in relations between those trustees and the other beneficiaries who are resentful or who may disagree with the trustees' approach to the administration and distribution of the trust assets.
 
Any trustees who are also settlors and/or beneficiaries must remember that the two capacities are entirely separate and that acting as a trustee brings with it numerous fiduciary obligations that should not be ignored or compromised.

How many to appoint?
The practice can vary widely here. As a general rule, however, it is unusual for there to be a sole individual as a trustee, given the risk of death or incapacity. The same sort of risks are diminished with a sole corporate trustee, although there is always the risk of corporate insolvency to consider.
 
There should also be more than one trustee to reduce, for example, the risk of fraud or (perhaps more likely) problems arising from the trustee being inactive, intransigent or capricious.
 
Again, as a general rule, trustees must act unanimously, so having an odd number is not crucial and there is no casting vote for a chairman of the trustees in the same way as there might be on a board of directors.

The maximum number of trustees that can be registered as owners of land in England and Wales, for example, is four, and having more than that can make administration unwieldy in terms of arranging signatures, meetings or making decisions. It is most common for trusts with individual trustees to appoint two to four. Where trust companies are appointed, it would be rare for there to be more than two appointed for any one trust and, more usually, there would be a sole corporate trustee.

Who has the power over the trustees?
Often, the settlor wishes to retain the power to alter the trusteeship. If tax is an issue and there are ongoing links for the settlor with high tax jurisdictions, care should be taken to ensure that the retention of any such powers does not give rise to unpleasant or unintended tax consequences.

Having said that, it is natural that settlors may wish to retain some power to protect the family if the trustee acts improperly. There is nothing to prevent the settlor from reserving appropriate powers to deal with trustees with this in mind. Alternatively, the settlor might consider appointing a "protector" (who could be a family friend or a corporate entity separate from the trustee) and giving it certain powers so that it can, effectively, act as a check and balance against the trustee. Of course, similar considerations in appointing a trustee apply to the appointment of a protector and this should not be forgotten.

Another way in which the actions of a trustee might be influenced by the settlor, or indeed the beneficiaries, is to consider the use of a private trust company. In short, a private trust company is a company formed to act as a trustee to a limited number of trusts, often for the benefit of a single family or different branches of the same family.

The costs involved in establishing and maintaining a private trust company should not be overlooked, but in cases where the wealth is substantial and, for example, private family company shares are held in trust, there are certainly benefits to adopting such structures. For example, a private trust company board might have a family member or trusted advisors appointed to it.

Some thought should also be given to how the trustee can, voluntarily or otherwise, be encouraged to interact with the settlor and the beneficiaries. We consider this to be one of the most important jobs for a trustee – without talking to the beneficiaries, how can the trustee be sure that it is acting in their best interests?

By way of reminder, it is the obligation to act in the beneficiaries' best interests that forms the core of a trustee's role and duty. A possible means of achieving this is to adopt some form of family charter. This is a document that can be agreed between the beneficiaries, settlor and trustee (although it can also be agreed by the beneficiaries alone) and which seeks to govern the relationships between them. It need not be legally binding and it can be an expression of principles or a more formal document.
 
The overriding aim of such tools is to promote communication and involvement in order to facilitate participation and understanding.

Where should the trustee be?
There are a number of considerations here:

- How contactable is the trustee (eg, is it in the same time zone)?
- Is there any advantage to having an offshore trustee (eg, tax mitigation)?
- Does the jurisdiction regulate trustees and is the Court system one where any dispute could be handled with suitable efficiency, reliability and expertise?
- Are there tax issues to consider (either in the jurisdiction itself or by reference to the other jurisdictions connected with the assets, the beneficiaries or the settlor).

The ultimate choice will again depend on the individual circumstances of the case.

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