Trustees are in dispute - any advice welcomer

[LittleLegsLdn (Mike)]

My client is one of three trustees to her deceased father’s will along with her sister and the primary beneficiary (“B”) is her step mother who is in long term care at the moment I believe.
The sister of B wants to invest the trust fund via a financial consultant in several investment funds and the FC would charge approximately £5-10K for the service and ongoing commission. The two daughters - who would be next beneficiaries - are wary of such investment given and simply want to leave the funds in cash Isa’s, bonds or deposit accounts arguing more surety to the funds and ever increasing rates of return whilst also (on all trustees signatures) funds can be obtained if and when necessary for B.
The sister is now threatening fiduciary neglect and threatening to have the Court decide and/or removal of the two daughters as trustees for the reasons of not capitalising/meeting the needs for trust profit.

In the event of B’s death I understand that the two daughters are the next beneficiaries.

I have advised that first off they need to place the funds in a high return easy access protected account and then perhaps use ADR to resolve the issues but in any case as long as they can substantiate their reasoning a Court is unlikely to have them removed. I have also noted that they could conversely ask that B’s sister be removed.

As ever delicate situations and unrational thoughts all around

N.B the value is rather substantial beyond the normal allowances for IHT

[FrancescaG (Francesca Gandolfi)]

There are Statutory duties of care under the TA 2000 which are designed to balance the risk the trust
funds could be exposed to and to make sure trustees act prudently in looking after the beneficiaries’ interests. Trustees must consider beneficiaries’ requirements.
TA2000 states that trustees have a duty to have regard to the need for diversification and suitability of investments.
This places emphasis on balancing risk and return across a portfolio of investments rather than looking at each investment in isolation. When considering whether investments are ‘suitable’, the size of the investment must be considered as well as an appropriate balance between income and capital.
Trustees must also consider whether investments should be varied from time to time in light of changing circumstances and markets.

One option would be to seek comparative financial advice - compare not only the investments recommended but the fees. The trustees may find an adviser with whom they are all happy with.
If the trustees cannot agree then the final option is to apply to the Court. Court applications must be a last resort, as there are potentially personal financial implications for any trustees involved in such an application.

[paul (Paul Saunders)]

Francesca has set out the statutory framework.

However, when applying that, it is also necessary to consider the circumstances of the trust. For example, the trust instrument might direct that a particular asset or category of asset is to be retained or avoided.

In the present instance, IF (and I emphasise IF) the 2 dissenting trustees are also the only persons entitled to the trust fund on the death of the step-mother, their views are an important element for consideration. However, there will need to be a balance between their interests and the interests of the life tenant. If the trustees adopt the dissenting daughters’ wishes, will the step-mother be worse off (or might those entitled to her estate believe that her interests were adversely affected by the actual investment policy adopted?

Another consideration will be the anticipate life expectancy of the step-mother. If this is relatively short, is any form of equity investment appropriate, mindful that equity investment is not generally considered appropriate for short term investment. If the step-mother has a life expectancy of, say, 5 years or less, equity investment (which will include the use of investment funds) may not be appropriate. Whilst not directly appropriate, the guidance published by the Court of Protection for the investment of funds held in Court might be helpful.

If the 2 dissenting daughters are the only persons entitled to the trust fund, other than the step-mother, perhaps the discussion of investment might include the step-mother, or her representative, as should she be supportive of the wishes of the 2 daughters it would seem wholly inappropriate for the other daughter to pursue investment via the financial adviser and, provided that they are appropriately informed, a court would be more likely to side with those entitled to the trust fund that the trustee who refuses to consider their wishes.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

[SaraS (Sara Spencer)]

Hi Mike

Several questions spring to mind here. Forgive me if I have misunderstood anything in your initial post.

I assume this is a discretionary trust as step-mother B is “Primary Beneficiary” as well as trustee with her two step daughters.

Does B have capacity to be a Trustee (you mention she is in long term care which at least raises the question)?

In the event of B’s death you understand (but presumably do not know) that the two daughters are the “next beneficiaries”. I take it from this that you have not seen the Will setting out the terms of the trust. You cannot advise if you have not seen that. I am not sure what your role is but presumably not a private client solicitor or other trust specialist (eg STEP member).

Are the settlor’s two daughters (as the “next beneficiaries”) perhaps remaindermen with B in fact having a life interest rather than simply being a discretionary beneficiary? Or was B stated to be considered the primary discretionary beneficiary during her lifetime (which doesn’t mean the other beneficiaries can’t benefit in that time).

Assuming B has capacity, then I am not sure what business the trust investment is of B’s sister, who is neither trustee nor beneficiary (or is she a beneficiary)? That said you mention B’s sister being removed, which would imply she is a trustee.

If B has capacity to understand the trust’s financial position, is well looked after and receives what she wants / needs from the trust, and the fund is likely to see her out, then it is B’s two step-daughters (and possibly other beneficiaries) who are the ones to be concerned about investments, and whether there will be anything left for them. On the other hand, if B’s needs are not being met then that is another matter, but you do not mention this to be the case.

I presume this “financial consultant” (not a financial adviser? – are they regulated?) you mention looks after B’s sister’s investments, hence them offering their opinion. Without knowing the size of the trust (you only mention it is over IHT allowances) it is not possible to comment on the fees.

The trust is currently partly held in cash ISA’s - presumably the father’s estate is still being administered and these just haven’t been encashed yet. Trusts cannot hold ISA’s which are for individuals (Individual Savings Account). I am not sure what you mean by adding surety to the funds. Cash carries the often ignored risk of being eaten away by inflation, and that risk is ever growing at the moment. If B’s needs could be met from income generated by a well invested balanced portfolio, and the two daughters would intend to keep the investments when she died, then the trustees may well be justified in investing in equity based assets. On death their base cost for CGT would be uplifted to the value at the date of B’s death if it is a life interest trust, and the assets could be transferred in specie to the remaindermen. If it’s a discretionary trust then on B’s death the assets can if wished be passed out using capital gains hold over relief to defer tax until eventual sale by the daughters. In both instances IHT is likely to be payable from what you say.

Any legal/tax/investment advice needs to take into account (amongst other things) B’s financial circumstances, her mental capacity, and whether the trust is an IPDI/QIIP or a discretionary trust. If it will be aggregated with her estate and she has significant assets of her own, plenty to cover her foreseeable needs, then could there be some IHT planning with some trust assets being passed to the two daughters sooner rather than later (terms of the trust permitting). If the trust assets are in cash (as they seem to be from your comments) then no CGT would arise.

If B doesn’t have capacity then she may need to be removed as a trustee. Certainly there could be no changes to the trust investments, and I would imagine the funds could not be accessed if she could not give her agreement to expenditure/distributions. If she has a life interest then it is my understanding that an application to the court will be needed to remove her, to ensure her interests are protected.

The trustees as a body (who do not appear to be in dispute amongst themselves) need to find a good local private client solicitor who specialises in trusts. They can advise on the legal aspects, and will then be able to introduce you to a decent trust specialist Financial advisor/stockbroker who can advise on a suitable investment strategy based on all the beneficiaries’ circumstances. It is not an option to retain the status quo. The trustees are not at the moment meeting their duty to take the necessary professional advice to ensure the trust is properly administered/invested.

I also wonder who dealt with father’s probate – presumably not a solicitor as I would have expected the above to have been addressed by them (unless the execs/ trustees didn’t want to pay). Perhaps that needs looking at too. It sounds to have been a reasonable sized estate – enough to merit a solicitor’s involvement.

This link will help you find a qualified trust advisor https://www.step.org/directory/members.

Good luck

Sara

[MichaelDew]

This isn’t really an answer to the question; more a general comment. We
now have the highest rates of inflation for 40 years, which is even
longer than I have been a solicitor. While this continues it will surely
have profound implications for trustees’ investment strategies. Such
disagreements are likely to become more common.

[Max (Maxine Higgins)]

Sara - the post suggests that it is the sister of B rather than B who is the 3rd trustee and B (the step mother) is only the primary beneficiary. But as the original post is unclear, we are all speculating. I would also imagine that as the client is one of the 2 sister/step-daughter trustees Mike the poster will have had access to the trust before posting, although the post does seem very vague, so perhaps not…
Your advice about consulting a qualified trust practioner is sound.
Maxine

[SaraS (Sara Spencer)]

Hi Maxine

Yes, I was reading the first line as the trustees being the two daughters and B as trustees, as well as B being the beneficiary but I see what you are saying. Also, Mike’s comment that he “understands” the two daughters are the “next” beneficiaries clearly implies he has not seen the Will – if he had seen it he would know, not merely understand.

Perhaps Mike could clarify the position for us?

Sara