Trust Disputes

Trustees have various legal powers to administer a trust, the scope of which are set out in the trust  instrument. Some trusts are extremely prescriptive whereas other trusts allow the trustees to exercise their discretion on how best to allocate trust assets and income.

Trustees have duties of honesty, integrity, loyalty and good faith to the beneficiaries of the trust. The trustees must always act in the best interests of the beneficiaries. They must observe the terms of the trust, exercise reasonable care and ensure the correct distribution of assets, act impartially between the beneficiaries and provide certain information to the beneficiaries when asked to do so.

Yes, a troublesome trustee can be removed but the law in this area is complex. The first port of call is to check the trust instrument to see if a power to remove trustees has been vested in another party (namely the settlor, or a beneficiary/group of beneficiaries).

There are also statutory powers enabling a trustee to be removed without the court’s intervention.

The Trustee Act 1925 provides that if a trustee is “dead or remains out of the United Kingdom for more than 12 months, or desires to be discharged from all of any of the trust or powers reposed in or conferred on him, or refuses or is unfit to act therein, or is incapable of acting therein, or is an infant” they may replaced by another trustee (subject to restrictions). Some of these grounds are far more difficult to show than others, in particular that a trustee is “unfit” or “incapable”.

The Trust of Land and Appointment of Trustees Act 1996 allows beneficiaries who are of full age and capacity and who are absolutely entitled to the property subject to the trust to unanimously agree to replace a trustee. The power is only available in the instance that there is no provision in the trust instrument to appoint other trustees and the power under the Act is not excluded in the trust instrument.

The last resort is to look to the court to remove a trustee. The court’s main guide is the welfare of the beneficiaries and in instances of serious misconduct the decision to remove a trustee is likely to be straightforward however in all other instances it is less clear cut. For example, friction or hostility between the trustee and the beneficiaries is not of itself enough to have a trustee removed.

Trustees have a duty to keep beneficiaries informed and to provide trust accounts and beneficiaries have what is referred to as a “legitimate expectation of disclosure”. This means that they can expect to be provided, upon request, with trust documents which set out key information about the trust such as the trust deed, deeds of appointment/retirement and trust accounts. However beneficiaries are generally not entitled to see documents pertaining to the trustees’ decision-making process, such as correspondence between the trustees, agendas and minutes of meetings.

It is important to note that a beneficiary must be able to prove that his/her prospect of benefiting under the trust is sufficient to enable the disclosure of information he/she is requesting.

We can provide advice to both beneficiaries and trustees as to their rights and duties in respect of the provision of information relating to trusts.

If a trustee wishes to change the express terms in the trust, they can either rely on a clause in the trust deed or seek the consent of all the beneficiaries to the trust. If either of these things are not possible, then the trustee will need to seek the assistance of the court.

If all the potential beneficiaries of a trust are of full age and capacity, and are absolutely entitled to the trust property, they are able to bring the trust to an end and share out the assets in whatever proportions they decide, or resettle the assets on agreed terms.

If all parties agree that there is a problem which needs a solution, typically in relation to the construction or administration of the trust, this is known as a “friendly dispute”. In these circumstances, the trustees would generally adopt a neutral stance and their costs would usually be paid by the trust.

If however, there is a third party claim brought by or against a third party, a trustee will be liable to pay their own costs and may risk liability to pay the costs of the third party in the event of an adverse costs order. In these situations, it is common practice for a trustee to apply to court for directions as to whether to bring, continue or defend proceedings.

This is known as a “Beddoe Order”. This ensures that trustees are indemnified by the trust fund for their own costs and any adverse costs in the event that the proceedings are unsuccessful.

Where applicable, a Beddoe application should be made as soon as possible and ideally before taking any steps in instigating or defending the third party litigation.