Acting as a trustee during a pandemic

As usual, we start with some basics.

General duties and responsibilities of trustees

The trustees are, basically, custodians of the trust property.  Their common law duties include the duty:

• To administer the trust property in the best interests of the present and future beneficiaries.

• To make it productive, i.e. invest it to earn income/produce growth.

• To use it for the benefit of all of the beneficiaries. This means that all of the beneficiaries (including different classes of beneficiary) must be treated fairly (note that “fairly” does not mean “equally”). This is particularly important when exercising trustee powers and discretions (if any) over the income and capital of the trust (e.g. income distributions, capital advancements, loans to beneficiaries etc).

These duties are in addition to the duty to act in accordance with the trust deed, act prudently, honestly and responsibly and, of course, to account for the way in which the trustees look after the assets that are under their control.

Additional duties apply under the Trustee Act 2000 in relation to trust investments. These are:

• a duty to have regard to the need for diversification and suitability of investments to the trust (these are referred to as the "standard investment criteria"); and;

• a duty to obtain and consider proper advice where appropriate.

These duties cannot be excluded by the trust instrument.

Duty of care

When exercising their functions, trustees are subject to the statutory duty of care under the Trustee Act 2000. This means that a trustee must show such skill and care as is reasonable in the circumstances of the case making allowance for his or her special knowledge, experience or professional status. Professional trustees are expected to show higher levels of skill and care.

In addition to the above statutory duties, being appointed as a trustee (or indeed executor, deputy or attorney)  creates a fiduciary role under common law which gives rise to a relationship of trust and confidence. This means that there is an ethical and legal responsibility to the client.  This is a relationship that requires trust and prudence on the part of the fiduciary. A fiduciary has a duty to act in a way that best meets their clients’ needs.

Breaching fiduciary duties

Trustees are personally liable for a breach of their fiduciary duties. A trustee remains liable for any decisions taken whilst acting in that capacity, even after retirement as a trustee. A breach of fiduciary duty can occur in several ways, including failing to disclose important information or profiting from a transaction involving trust property. If a beneficiary suffers a loss as a result of the breach, the case may, and frequently will, end up in the Court.

For trustees who have to manage investments and assets, care for their beneficiaries, and frequently also deal with their own businesses, the present situation gives rise to some unique challenges.

Issues of capacity and communication

The pandemic has exposed the vulnerability of many individuals who may be trustees, settlors or beneficiaries. The potential loss of capacity or a sudden health crisis may affect any one of us, and so dealing with and planning for those eventualities now appears more important than ever.

As more questions of capacity arise,  trustees should ensure they have full records of the instructions and the wishes of those whose health is declining, and plan for the loss of capacity of a settlor or beneficiary.

For example, where a settlor’s wishes have guided the trustees in the past, it may be prudent to update any letters of wishes, with appropriate measures taken to verify the settlor’s capacity.  Indeed, it may be appropriate to review the suitability of the current structure and governance of a trust, taking into account the current structure of the family, especially if this has not been done for a while and bearing in mind the current financial and health circumstances of the beneficiaries. 

Generally speaking, the frequency and scope of communications with beneficiaries could be reviewed, including more frequent updates and communication especially during periods of lockdown.

Finally, as mentioned last month, if there is a likelihood of any of the decision makers (be it the settlor, trustee or protector) losing capacity, steps should be taken to possibly remove or replace such a person with another less likely to lose capacity. In some cases, the appointment of a professional trustee may be an appropriate solution. If a trustee is mentally capable but self-isolating and so perhaps not able to fulfil their duties efficiently, an appointment of an attorney for 12 months could be considered.

Dealing with  HMRC

Despite these exceptional times, trustees have to comply with the various deadlines, such as IHT ten-year anniversary or exit charges tax returns for discretionary trusts and the payment of income tax and capital gains tax,  as appropriate.

Whilst HMRC has expressed sympathy for people caught up in the current crisis, trustees should not expose themselves to the risk of being penalised for any late filings and payments of tax. In particular, trustees should be aware that HMRC is currently experiencing significant delays in processing any correspondence, filings, payments and repayments. Trustees are advised to give themselves extra time to allow for such delays. Any communications with HMRC during this period should be made by email or phone, rather than via the post.

And for those trusts that have yet to register, there is the expanded TRS to consider. Fortunately, at least these deadlines are not imminent as  most trusts set up before 9 February 2022 (other than those that incur a liability to UK tax for the first time before 6 April 2021) must be registered on or before 10 March 2022.

Breaches of fiduciary duties - recent case law

Executor's failure to administer estate - Frejek V Frejek [2020] EWHC 1181 (Ch).

As indicated above the role of an executor or administrator (if the deceased died without a will) is a fiduciary one and is similar to that of a trustee in many respects. An executor has a legal duty to administer the deceased’s estate to ensure all debts are paid and the net estate then distributed to the beneficiaries in accordance with the deceased’s will. These steps should be carried out diligently and within a reasonable period of time.

If the executors are not carrying out their duties expeditiously or there is some other concern regarding their handling of the administration of the estate, any beneficiary or interested party can make an application to Court seeking the removal of the executor. If granted, alternative executors will then be appointed by the Court.

But what happens if having obtained such an order the outgoing executor fails to comply with it?

In this case the claimant, Andrew Frejek and the two defendants, were brothers and sister. They were the three children of Brenda Frejek who died in 2009. Stephen F was appointed executor of his late mother’s estate but by June 2017 little, if anything, had been done by him as regards the administration of the estate. Andrew therefore made an application to remove him as executor seeking an order that he be appointed executor in Stephen’s place and his application was granted.

The 2017 order included directions for Stephen to provide an inventory and to transfer all of the estate’s papers and funds to Andrew. Stephen did neither of those things. Andrew sought and was granted an order seeking Stephen’s compliance in December 2018. This order included a penal notice to comply within 28 days or be in contempt of Court and at risk of criminal sanctions including a fine and/or imprisonment.

By February 2019 Stephen had still not complied with the order and so Andrew issued a committal application. By the time of the Court hearing in May 2020, Stephen had still not complied with the terms of the order. Indeed, he had failed to respond at all.

The judge held Stephen in contempt of Court and ordered that a warrant be issued immediately for Stephen’s arrest so that he could be brought before the Court for the purpose of sentencing.

The outcome of the sentencing hearing has not been published but in view of Stephen’s blatant refusal to comply with the Court’s orders there must be a real risk that any sentence will be custodial.

This case is a cautionary tale to all executors and administrators and serves as a useful reminder of the importance of ensuring compliance with their legal obligations to ensure that the administration of estates is dealt with efficiently and within a reasonable period of time.

While the delays in this case took place before the pandemic and were clearly inexcusable, the chances are that some leniency would be shown as regards delays during the pandemic, especially during any period of lockdown. Nevertheless, wherever possible executors should proceed with the administration of the estate without delays as they might risk being removed and facing personal costs.

Possible breach of trust by making payments to the settlor - Sofer v Swissindependent trustees,  [2020 ]EWCA Civ 699. 

This case has not yet been finally decided as far as the liability of the trustees is concerned but it is interesting in that the Court of Appeal has overturned a decision of the High Court in which a trust beneficiary’s claim for breach of trust against the trustees for paying out trust funds to the settlor, when they were only permitted to make loans, had been struck out on the basis of an exoneration clause.

The Court of Appeal unanimously agreed that the claim should not have been struck out and considered that the beneficiary should have been permitted to amend his particulars of claim to plead particulars of the trustee’s alleged dishonesty.

In this case, the claimant, Roger Sofer (Roger),  was a beneficiary of a discretionary trust, the Puyol Trust, created in 2006 by a wealthy South African bookmaker and investor, Hyman Sofer (HS). The professional trustee, a trustee company based in Switzerland, was given the power to lend trust assets to beneficiaries but was prohibited from paying or transferring trust property to the beneficiaries prior to the death of HS, who was added as a beneficiary of the Puyol Trust shortly after it was created. Between 2006 and 2016, the trustee paid significant sums out of the Puyol Trust to HS, recording the payments as loans, but without making any provisions for security, interest or repayment. HS died in 2016, at which time the total paid to him out of the Puyol Trust was nearly $19.2 million, a sum which his estate was unable to repay to the trust.

Shortly following his death, the trustee released HS’s estate from its purported obligation to repay the outstanding loans.

Roger alleged that the payments made by the trustee to HS between 2006 and 2016 were gifts rather than loans, and were made in breach of the prohibition in the trust deed.

The trustee responded to the claim by applying to strike it out, alternatively requesting summary judgment dismissing the claim. The strike out application was made on the basis that the Puyol Trust deed contained a trustee exoneration clause which excluded any liability on the part of the trustee except where the loss was caused “by acts done or omissions made in personal conscious and fraudulent bad faith” and, as the particulars of claim did not contain adequate particulars of dishonesty, the trustee was entitled to rely on the exoneration clause.

Roger applied for permission to rely upon amended particulars of claim, which did expressly plead dishonesty, which as stated above the Court of Appeal allowed.

The case is interesting as the trust provisions, including the exoneration clause,  as well as the actual facts of the case, are not that unusual so it will be very interesting to see the final outcome. In the meantime of course the case should also be a warning to those trustees who perhaps all too often simply follow the wishes of the settlor without proper consideration of the rights and needs of all of the beneficiaries, or indeed the actual provisions of the trust deed.

Comment

The responsibilities of the trustees are potentially even greater during a pandemic and the two cases mentioned above may provide some food for thought for trustees and executors. Next month we will look at the challenges facing trustees when investing or reviewing trust fund investments.