What is the key decision which repays very careful thought when setting
up a trust or a will containing a trust?
Is it who can benefit from the trust (the beneficiaries)? Of course, that is very important. Or whether it is a fixed interest or a
discretionary trust? Absolutely, money
in the right hands at the right time, naturally. But I would argue that there is one matter
that trumps even both of these. No
prizes for guessing (the clue is in the title!) – the No.1 spot has to go to
choice of trustees. Poor decision-making
on this front can lead to big regrets all round as it is far from easy to force
trustees to retire once they have accepted the position. Read on if you require further persuasion.
Some clients prefer to appoint family members as trustees and indeed in
theory there is no problem if a trustee is also one of the beneficiaries of the
trust. The potential conflict of
interest that this situation creates is tolerated under English law. However, just because it’s possible doesn’t
mean it’s good! The skills and
personalities of the family members must be honestly considered. For example, if one child shows no interest
in managing money or another likes to lord it over his siblings, trouble can
ensue if parents appoint them as trustees.
Partisan family trustees can tie themselves in knots when they do not try
to understand their trustee responsibilities.
This is not a new phenomenon. In 1918
(in the case of Klug v Klug), the court overturned the
decision of a trustee-mum who refused to pay out trust funds to her
beneficiary-daughter when she reasonably asked for them, all because she had
married without her mother’s consent. Maybe
trustee-mum was rightfully angry with her daughter but unfortunately her
personal preferences should have been irrelevant when it came to deciding how best
to exercise her trustee powers. A
trustee’s primary duty is to act in the best interests of the beneficiaries, even
if she disapproves of them. Only
relevant factors must be considered by trustees; irrelevant ones must be
ignored.
An assessment of the merits of any proposed trustees involves time and,
yes, money, if a professional adviser is offering counsel. However, it will be money well spent because the
legal wrangling that can ensue when trustees prove to be unsuitable is very
costly indeed, both in terms of fees and broken family relationships.
A particular danger area, I feel, is off-the-shelf trusts provided by
life insurers and pension providers which,
notwithstanding the health warning given on completing them, are often filled
in by the policyholder without any advice being taken. These can end up holding significant sums of
money, sometimes more than is passing under the will, and so the choice of
trustees is critical. A good planning
tip is to see who is named as executor and trustee under the will – is it
appropriate to name the same people as trustees of the life policy/pension lump
sum trusts, in order to co-ordinate more effectively the management of all
assets after death? If not, is it time
to make a new will naming the right people?
It pays to take it slow when choosing trustees. And be realistic about their capabilities.
