Our trust documents have a standard clause that says trustees can remove beneficiaries. My client is querying this as the beneficiaries are her children. It can be removed. Would you recommend removing it?
Roselyn Blackman
Blackman and Brereton
There’s no “need” for it and it is unlikely to be used. It partly depends on the nature of the trust.
Such provisions might be used where a beneficiary is moving to a jurisdiction that doesn’t like trusts and will tax discretionary beneficiaries irrespective of distributions (such as Germany or in some cases the US) or perhaps where you want to cut down the class to focus on one side of the family. In many cases (depending on the circumstances) you might be able to achieve this using discretionary powers of appointment instead of powers of removal.
If the settlor doesn’t like it there is no particular reason to fight to keep it.
Andrew Goodman
Osborne Clarke LLP
I am not a solicitor, but from a purely practical point of view the main objective of a trust is asset protection - what happens if one of her children is made bankrupt, divorces, has a gambling (or other) addiction or suffers some other unfortunate circumstance where it would be beneficial for all concerned (including both the trustees and the other beneficiaries) if it were possible to remove someone. Flexibility should always be considered and she could always provide a letter of wishes explaining the circumstances under which she would prefer that the trustees do not exercise this option.
Maxine Higgins
Citroen Wells
Depends on the type of trust and the effect of doing so. If it is a discretionary trust, then there is no real reason to ‘remove’ them. Or are you taking about removing the actual clause? Probably would still depend on the type of trust and who the trustees are.
What is the concern here?
Kamlesh Samji
KRS Estate Planning
If the power to exclude is within a firm’s standard trust precedent, my first question is to ask why the form included it in the first place. Once the logic of that decision is understood, the client can be provided with a clear explanation and reach an informed view of whether or not they wish it to be retained in their proposed trust.
The power to remove beneficiaries is, perhaps, more popular in offshore jurisdictions. It is frequently included for the reasons noted by Andrew Goodman, especially now that an increasing number of jurisdictions have penal tax codes where a tax resident has an interest in a trust regardless of whether they receive any benefit. It may also be used, say, following the divorce of a beneficiary.
If an individual remains a beneficiary and is ignored when the trustees consider the exercise of their discretion, this could cause such exercise of the discretion to be open to challenge, which would not be the case if the beneficiary had been excluded (although the exclusion itself could be challenged).
It’s really a case of appropriate circumstances. If an intending settlor doesn’t want the power to remove excluded, then I do not see it should be imposed.
Paul Saunders
Thank you for your response
The concern is that she has chosen not to appoint professional trustees and so this clause applies to ‘lay’ trustees.
Roselyn Blackman
Blackman and Brereton
Has she retained the power to add or remove the trustees? You’d like to think the trustees will carry out the wishes of the settlor (in case of a discretionary trust) or comply with the law.
Kamlesh Samji
KRS Estate Planning
With regard to Kamlesh’s posting, unless the trust instrument requires that the trustees comply with the settlor’s instructions, the trustees must exercise their own judgment when considering if they should carry out the wishes of the settlor.
I have seen issues when trustees have blindly complied with the settlor’s “instructions” which have resulted in a “car crash” for them. A regular instance is removing from the beneficial class the spouse of a family member when divorce is mooted in order to try and protect the trust fund from being included as a source of wealth.
When a request to remove beneficiaries is received, trustees need to be mindful that they will invariably be acting in a fiduciary capacity and the defence of “we were just doing as we were told” could result in them being personally liable for their own costs, at least.
Paul Saunders