Acting as a professional trustee can be something of a balancing act. Like any other business, a trust company needs to generate profits and to offer professional trustee services competitively to attract and retain clients.
However, the trustee role brings with it great exposure to risk, which has only increased over recent years as a result of ever-growing regulatory burdens and the increasingly complex problems faced by globally mobile and fast-evolving families. At the heart of the trustee role is the trustee's duty to act in the interests of their beneficiaries, regardless of the trustee's personal interests – failure to do so could potentially expose the trust company to personal liability (sometimes even where losses have been occasioned by innocent error).
With all of this in mind, it is essential for a trust company to adopt an appropriate and proportionate risk mitigation strategy that appropriately addresses threats whilst taking into account the trustee's commercial objectives and fiduciary duties. Below we have set out our top three recommendations to trustees to assist in mitigating risks, based on our experience in practice.
Recommendation 1: Maintain active oversight of the administration of trusts through effective governance
Active oversight is essential to ensure the effective administration of the trust in line with the trust deed. This necessitates appropriate levels of engagement from all key stakeholders in the trust company and the proper implementation of and adherence to policies, procedures and controls.
Typical examples of issues arising during the ongoing administration of a trust include:
Trust officers should take care to ensure that close attention is paid to the express terms of the trust, to the action being taken by officeholders in respect of the trust and to the use and management of trust assets. Any red flags should be raised and addressed sooner rather than later to reduce (or, if possible, avoid) exposure to complaints from beneficiaries or attacks on the trust by third parties.
Recommendation 2: Exercise the trustee's custodial function with due care and skill, including by keeping proper records
It is of paramount importance that a trustee properly performs its custodial function, which applies not only to trust assets but also to trust documentation. This means safeguarding any important documentation concerning the trust and its assets. A lost trust deed, for example, can necessitate an extensive remediation exercise, the costs of which will likely be laid at the trustee's door. Furthermore, if the trustee loses proof of title to assets, any resultant losses to the trust fund will be the responsibility of the trustee.
Correspondence, emails and attendance notes of day-to-day activities and decision-making processes can be essential evidence if a dispute connected to the administration of the trust arises in the future. In a disputes context, it will often be very difficult for a trustee to demonstrate proper and considered decision making when all it has on file is a basic one-line resolution (or worse yet no resolution at all). Where the trustee is making a particularly risky, high-value or momentous decision it is essential for this to be properly documented and usually the resolution to proceed should be prepared by legal counsel in consultation with the trustee, particularly in an application for the court's blessing.
A proper document management and retention policy is therefore of vital importance to professional trustees. The trustee should be very careful to ensure that appropriate records are maintained and properly filed and if there are any rearrangements within its business (for example, a merger with another trust company), the trustee should complete a thorough audit of the trust documentation to ensure its records are complete.
Recommendation 3: Obtain appropriate expert advice
In the majority of cases, a trustee will have the right to recover from the trust fund the costs it incurs in taking appropriate expert advice as needed. If a trustee fails to obtain such advice and this omission results in a loss to the trust fund, the trustee could be held personally accountable and, worse yet, there may be a risk that such costs would not be covered by insurance. Proceeding without proper advice is therefore very much a false economy.
Obtaining and engaging with appropriate legal, tax and investment advisors should be a matter of course for a professional trustee particularly in situations where decisions must be made quickly, relate to complex regulatory or fiscal rules or are simply momentous in nature. Where the trust fund comprises specialist assets (for example art, yachts, or aircraft), the trustee should instruct appropriate experts in the relevant field.
Particular issues can arise where trustees fail to obtain legal advice in all relevant jurisdictions with regard to the formation of trusts as this can severely limit the application of the Cayman Islands asset protection regime. Another classic example of how failing to obtain legal advice can backfire is the trustee de son tort issues which commonly arise from defective appointments of trustees (where the documentation around the appointment and retirement of trustees is incomplete or contains critical errors so that the new trustee's appointment and potentially that of subsequent trustees is invalid). This places the falsely appointed trustee in a very difficult situation: it faces the same risks and liabilities as a properly appointed trustee but does not benefit from the rights and protections set out in the trust deed. A trustee's right to have its fees paid from the trust fund can also be challenged. Outgoing trustees will not be properly discharged and will remain on the hook for liabilities. These issues are notoriously difficult to unpick and, in some situations, may require an application to court to be properly addressed.
It is essential that the trustee can rely on any advice obtained and a copy of the advice should always be placed on the file. However, the trustee should also think carefully about the appropriate recipient of the advice and whether there are any conflicts of interest which should be taken into account or any privilege issues to address prior to release, especially in contentious circumstances.
Given that there are circumstances in which a trust company can be held personally liable for costs, which may be very substantial, failure to proactively adopt risk minimisation strategies brings to mind the old adage "penny wise pound foolish". Whilst it will not be possible to pre-empt every issue which a trust company may face (and the costs of attempting to do so would, in any case, be prohibitive), the steps recommended above are nonetheless simple and relatively inexpensive measures that will give professional trust companies comfort that they are as well-prepared as possible for the demands of the job.
Partner and head of Carey Olsen's trusts and private wealth practice in the BVI and Cayman Islands. Bernadette has a broad private client practice advising on wealth structuring and estate planning matters, including the administration, restructuring, and termination of trusts, as well as probate and testamentary issues. She also has significant experience in trust litigation, regularly appearing before the Grand Court of the Cayman Islands on multi-party contentious trust disputes, estate litigation, and other cross-border private client disputes. Bernadette is admitted as a barrister and solicitor in New Zealand (2002) and Australia (2005), and as an attorney-at-law in the Cayman Islands (2008).
Sarah-Jane is an associate in Carey Olsen's Trusts and Private Wealth team. She advises individuals, trustees and family offices on a broad range of contentious and non-contentious matters in the private wealth context.
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