Within the family office the role of the trustee is to safeguard assets and present investment options to the family. In today's litigious society failure to manage these duties can be severe. Henry Frydenson outlines the pitfalls for trustees and offers advice on ways to avoid problems
In the current economic climate, wealthy families are often preoccupied with two concerns; furthering the example set by the originator of the wealth, while at the same time trying to ensure the wealth remains within the family.
Such concerns are often the motivating force for creating a family office. There are several critical functions performed by a family office, including acting as a trustee, devising a financial investment strategy and the provision of back office support services.
While maintaining his/her essential independence, the family office trustee will need to be efficient, responsive, cost-conscious and flexible. He/she will be aware of the family's objectives and will ensure that those objectives are achieved.
As trustee, it is important to administer the trust, and to review with the family various options that arise. The trustee will also need to ensure that trust assets are kept safe and are invested appropriately so as to enable the distribution of income and capital of the trust in accordance with the trust deed.
The role of the trustee has always been seen as an onerous one. In the modern framework of litigation, the consequences of failing to recognise and comply with the trustee's duties or, even worse, mismanaging those duties, are increasingly severe.
Beneficiaries who feel hard done by are quick to bring actions against the trustees in spite of the very considerable costs of protracted and complex claims. In some cases, the cost element pales into insignificance compared with the possibility of considerable recovery from a successful action. In other cases, the objective of the beneficiary is less focused on financial gain, and more a matter of revenge, in which the trustee is caught like the proverbial "piggy in the middle". In such cases, the beneficiary is not likely to be deterred from pursuing litigation by such hurdles as the existence of a wide exoneration clause in the trust deed, or the difficulties of proving loss in a given case.
A common assertion by a disaffected beneficiary is breach of trust in relation to investment. This is most common in with respect to the following three areas:
- Failure to review investments.
- Trustees' general duties with regard to investment.
- Express powers of investment.
The classic mistake by a trustee in relation to investment is a failure to review the investments regularly or at all. In England, The Trustee Act 2000 amended the law with regard to investment, and sections 3 to 7 of the Act contain the crucial provisions, including an obligation on trustees to review, and consider varying, the investments.*
The dicta of Lindley MR in Re Whitely (1886) ChD 347 at 355 are still very important indeed. He said: "The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide."
A common error one often sees in relation to trustee investment stems from the initial structuring of the trusts.
A settlor has a business or investment which he settles in trust. He does not expect the trust to sell and reinvest, or even to review the investment unless and until he, the settlor, thinks it is time to do so. The trustees then do nothing until the investment proves to be a disaster, as of course so many have been shown to be in recent months. If the trust documentation did not specifically set out the settlor's intentions were to leave the trust be until he decided otherwise, then the trustee would have no protection when the trust failed.
Ideally, in order to protect the trustees, it would be prudent for a trustee to have clear exoneration clauses removing the standard duty to diversify investment; no duty to put directors onto the Board of the company; no duty to require disclosure of accounts; no duty to compel dividend payments; no duty to sell the business; and no duty to obtain third party consent before sales. In practice, unfortunately from a trustee's point of view, such clauses are seen rarely.
* Although the cases cited make reference to English law, they are almost universally applicable.