Trustees have always sought to avoid trust disputes; they are costly and can cause great reputational damage, even when the final judgment is in their favour.
Unfortunately, the UK Court of Appeal’s most recent ruling on the extent of ‘Hastings-Bass’ protection has made trustees even more vulnerable to litigation because a successful Hastings-Bass application can now only be made by a beneficiary and will only have a prospect of success based on a finding that the trustee has been in breach of their fiduciary duty.
Previously, it was the case that Hastings-Bass rulings were neutral as to the conduct and competence of the trustee, which enabled the trustee and beneficiary to apply for the ruling with a common goal and therefore helped maintain good relations between the parties.
That position has now changed and trustees find themselves more vulnerable to dispute and litigation than ever before.
STEP Certificate in Trust Disputes
All of this makes the recent launch of the STEP Certificate in Trust Disputes extremely useful and timely.
The certificate’s course material is aimed at helping trustees learn about and avoid the pitfalls that can lead to disputes and potential action in the courts. By taking a preventative measure in the form of this qualification, STEP is acknowledging that the avoidance of dispute in the first place is far more advantageous to the trustee than a court case (even a ‘successful’ one) can ever be.
As well as the Hastings-Bass ruling, there are other reasons why STEP may have been minded to launch the qualification. At the top of the list is likely to be the increasingly litigious nature of beneficiaries.
As a society, we are becoming more litigious but add the credit crunch (which hit precisely those areas where trust assets are commonly held – property, investment funds and equities) and the ensuing recession into the mix and beneficiaries, who have been disappointed by returns on those investments, are looking for someone to blame. The trustee is likely to be the first place they turn to in their quest for recompense.
There’s no doubt that the role of trustee is a difficult one and in many ways has been made harder by the professionalization of the trust relationship. Initially, when trusts were first conceived, they would be established between two individuals who knew each other, but in today’s commercial industry, the relationship between the trustee and the beneficiaries can be a distant one, making it difficult for the trustee to know and understand the beneficiaries and their needs.
Of course, the trustee has the trust deed and often a letter of wishes provided by the settlor to use as guidance and, whilst the needs and wishes of an individual beneficiary are just one of the factors for a trustee to consider, if there is a lack of understanding between the two parties, then it is more likely that a dispute will arise.
The regulatory explosion that has taken place over the last decade has definitely had an effect on the nature of the relationship between trustees and beneficiaries. Not only does greater regulation reduce the amount of time available to trustees but it can easily lead to reliance on tick box KYC/CDD forms as a poor substitute for real knowledge and understanding.
The truth is that, in order to minimise the risk of disputes, trustees need to take control of the relationship with beneficiaries and keep them onside by maintaining clear communication. This communication should strike the appropriate balance between proper confidentiality and the independence of the trustee and explain clear their activities with regard to the trust.
By taking a communicative approach to the beneficiaries, trustees are more likely to avoid disputes occurring in the first place and, as the saying goes, prevention is better than cure. In the same way, taking early legal advice when the first signs of a dispute appear can help avoid the issue escalating to the point of litigation.
The STEP certificate in Trust Disputes is designed to raise awareness of the issues that can lead to conflict with beneficiaries and by doing so it could become a powerful tool for dispute prevention.
Trustees need to be aware that, during a recession, without the old ‘get out of jail free’ card of Hastings-Bass and with the strong regulatory climate, they are particularly vulnerable to disputes. With the strong possibility of reputational damage from litigation, the onus is on them to take all the necessary actions to avoid disputes occurring at all and certainly to avoid them going all the way to court.