Deals – known as indemnities – structured with former trustees can be the biggest obstacle to moving a family trust from one jurisdiction to another writes Robert Reynolds.
These indemnities are given to former trustees to protect them against any future litigation or liabilities that could follow on from their management of the trust.
The handover from the old trustee to the new trustee can be prolonged by what trust lawyers term the "greed" of the former trustee. "The outgoing trustee will want to be 100% covered," says Alasdair McLaren, director of accountants Saffery Champness in Guernsey. "The client and the new trustee may take the view that the former trustee should be only partly indemnified. They may argue that the former trustee should carry some responsibility for issues which relate to its period of tenure."
This has become such an issue that the Society of Trust and Estate Practitioners (STEP) instigated an 18-month research project looking at 10 leading trust jurisdictions. Richard Williams of Investec Trust, who led the project, told Campden FO:
"Indemnities are the key issue. Negotiations with the former trustee can drag on far longer than they need to. As a group, we wanted to assist clients and the trust industry by developing a protocol for fairness in dealings between retiring and incoming trustees. It is too early to determine whether the protocol is having an effect, as it was published last year in our report A Practical Guide to the Transfer of Trusteeships.
"We compared the trust law across the 10 jurisdictions and found that, with regard to indemnity principles, there were few differences," continues Williams. "Jersey is, however, distinctive in that it does not have what is called a trustee lien, which is a device that permits a former trustee to have access to trust assets to satisfy properly-incurred liabilities. Guernsey has adopted this lien in the recent revision to its trust law this year and Jersey is considering whether to follow suit. The lien is under-used and could certainly help to shorten negotiations in some cases."
Most trust lawyers agree that it should take between six weeks and three months to move a trust if everything goes smoothly. However, in practice, these processes can go on for months. The most extreme example of this is where there is a chain of trustees. A client and its new advisor will need to consider what indemnities they will grant to all previous trustees and to what extent this will limit the trust from making future payments to the beneficiaries. If the funds of the trust are locked away to indemnify former trustees, the scope for future disbursements can be severely limited.
"The settlor and the new trustee will not want to give too much away in terms of absolving the former trustee from any future legal liability. This is particularly acute where the family or the settlor aims to change provider because of any perceived failure by the former trustee. There may be a suspicion that if the trustee has been slack in administration or answering family questions, there may have been a general weakness in service provision. So they will be cautious about what they give away in indemnities," says McLaren.
"On the other hand, trustees are changed quite frequently and so a particular trust provider will not want to develop a reputation as being obstructive. It will be a barrier to winning future business," he said.
Although it is widely agreed that it is in the common interest to agree speedily, good sense does not always prevail. Matters can get worse where there is a sequence of previous trustees. "It is fairly straightforward if all the paperwork has been done efficiently. But if there are missing links or the paperwork is incomplete, the matter can become more complicated."
It is possible that the new trustee could argue that the former trustee was responsible for ensuring the integrity of the chain. Therefore, the former trustee may be obliged to accept fewer indemnities if the chain had not been maintained properly. There will be concerns about complexity issues arising out of the different indemnities afforded to individual former trustees.
These disputes arise because settlors are increasingly dissatisfied with trustees. Trusts are highly popular among wealthy families to manage and protect assets. The trust environment is increasingly competitive with more products available and a greater number of jurisdictions providing trust services.
In this changing environment, families frequently want to change their trust provider. This happens for a variety of reasons. Family members may change residence to a different part of the world; they may seek more information about how the trust is managed or invested; and they may be concerned about the reputation of particular trust locations.
"The chief reason for moving a trustee is client dissatisfaction," says Chris Lintott, of Penningtons, the UK-based law firm. "Family members may believe that the trustee is too slow or inefficient, and they lose confidence in the trustee's capacity to do the job. So, they will seek another trustee which can be in the same jurisdiction or it can be elsewhere."
Families become impatient with trustees who do not do what they are asked or are unable to answer fairly straightforward questions. In the final analysis, the relationship between trustee and settlor is highly personal as well as professional. Once this starts to crack it is unlikely to be recovered.
A trusted history
Trusts were created first in English law several centuries ago and they have been used widely by wealthy families since then to ensure that resources are safeguarded and that assets are enhanced.
The scope of trusts and their application has increased rapidly as jurisdictions have modernised and expanded their trust laws and regulatory regimes, new centres offering trust products have opened and the numbers of high net worth individuals and families have grown substantially. The vast expansion of wealthy entrepreneurs in China, India and the rest of East Asia is a prime example of this transition.
Judith Ingham, partner at Withers, said: "Some families set up trusts in New Zealand which were quite popular at one stage. But a UK-based family may now wish to have the administration of the trust closer at hand, so it may choose to move it to one of the Crown Dependencies – Jersey, Guernsey or the Isle of Man – so that the trust administration is in the same time zone. This is a matter of accessibility.
"This is one of the key reasons for moving a trust – there are many others including securing extra protection for the assets, a change in the regulatory structure in a particular territory or enhanced political risk. But beyond all other factors, the biggest reason for moving is dissatisfaction with the trustee."
Some settlors want only to change the trustee. They have no reason – tax structure, friendliness of local regulation, improved asset protection or even location – to move, so in most cases a new trustee in the same jurisdiction is proposed by the family lawyer. Given a lack of confidence in the outgoing trustee, the selection will be determined by a reputation for delivery and a capacity to get on with the settlor.
"When I come to recommending a new trustee I try to identify one who will get on with my client and will meet my client's expectations," said Michael Greenwood of Towry Law.
The factors involved in selecting a new trustee are:
– Does the family wish to change trustee but not the location?
– Does the family want to change the location but not the governing law?
– Does the family want to change the location and the governing law?
If the question is purely service level, then it will be possible for the advisor to suggest more appropriate trustees in the same jurisdiction. If the family is happy with the trustee but wants the jurisdiction shifted, many trustee operations operate in a variety of trust locations. There may also be a question of the governing law of the trust being altered. The family and its advisors may conclude that the governing law of a trust in a particular location may reflect better its objectives for the trust.
The scope for manoeuvre is outlined in the trust deed. Among other things, this sets out the powers of the settlor in replacing the trustee. In recent years, the professionals who write trust deeds have been alert to the possibilities of change of location and administration.
Ingham says that in most cases the groundwork for determining which location, which governing law and which trustee will be done at the creation of the trust. So a change of location would be determined by the changes in the configuration of the trust which the settlor is seeking.
Mountains of paperwork
In purely pragmatic terms, there will a considerable amount of paperwork to be processed. This will grow exponentially according to the types, locations and value of assets. Edward Reed of Macfarlanes says: "In some cases, the assets are held in an underlying company which makes the transfer much easier. It does depend what form the assets take. Complexities in documentation will always hold matters up. But every case is different. In many circumstances, we are dealing with only one former trustee but, depending on the age of the trust, there could be multiple former trustees."
The move to a commonly applied industry benchmark for indemnities and the handover of trust paperwork, as envisaged by the STEP group, could reduce disputes in the future. This could be enhanced by more effective use of the trustee lien in appropriate cases. Nevertheless, disputes will continue and family members should be aware that delays can occur. What may seem a simple process can turn into a contentious nightmare.