A trustee’s top three – part three

Read our article in the Cayman Financial Review Magazine, eversion 

Part I:  A trustee’s top three

Part II:  A trustee’s top three: Watch this Space 

In the first two parts of this three part
series, we reviewed some of the common issues to which trustees of Cayman
Islands trusts have been exposed as a result of instability in the global
economy since 2008.  We also
discussed recent case law developments, and the renewed sense of optimism which
has become evident in the private client arena over the course of 2010. 

In the final part of this series, and in the hope that the “green
shoots” of recovery will continue to be seen, we look at more fundamental
principles to which a trustee should have regard in its day to day interactions
with settlors and beneficiaries and other recent developments, both in case law
and in legislation. 

1. A
trust does not have “clients”
 

While this statement may seem somewhat
trite, experience shows that there can be a tendency among less experienced
trust administrators to regard the settlor as “the client” of either the
trustee or the trust. Often, this mindset has been generated by the settlor,
who may not be entirely au fait with the concept of a trust structure. Clearly
this can be very dangerous as it fosters a frame of mind wherein the trustee’s
role is merely to follow the directions of the settlor. 

It is important to remember that,
following the settlement of property into the trust, the settlor has divested
himself or herself of legal ownership of that property; it can be a very
difficult – and unattractive – concept for the settlor to have to grasp, but
once settled, the assets are no longer his or her property. While his or her
views and wishes may be taken into account, unless the settlor has reserved
directive powers in the terms of trust deed, they are not binding on the
trustee. Instead, the trustee’s duties will lie in relation to the
beneficiaries or other objects of the trust and not the settlor.  

There is clearly a balance to be struck
between shutting out the settlor entirely and acting slavishly at his
direction. The point to appreciate is that treating the settlor as the client
can expose the trustee to potential challenge that it is not acting either
independently or in the best interests of the beneficiaries. In extreme
circumstances, it could result in the trust being found to be little more than
a sham. 

2.
Indemnities and exoneration clauses
 

A further “hot topic” for trust
administrators, particularly in the light of recent global events, is the
provision of appropriate indemnity and exoneration provisions in the trust
deed.  

As a general principle in equity, a
trustee has the right to be indemnified against personal liability for the
costs and expenses which it incurs in the course of its office, provided those
costs and expenses have been properly incurred and not in breach of the
trustee’s duties. Equally, under the Trusts Law (as revised), a trustee is
entitled to be indemnified out of the trust fund against liabilities which it
has properly incurred in its capacity as trustee, including for the costs of
defending any claims or actions involving trust property.   

In addition to these implied indemnities,
it is the usual practice for trust instruments to contain express indemnity and
exoneration provisions in favour of the trustee. Typically, these clauses are
drafted in very wide terms in an attempt to cover any and all types of
liabilities which may arise. For these reasons, these clauses are often the
subject of great scrutiny. The validity and enforceability of such clauses has
been confirmed in the well-known English case of Armitage v Nurse [1998] Ch
241. This confirmation was, nonetheless, given subject to the proviso that the
trustee must draw the indemnity and exoneration provisions in the trust deed to
the attention of the settlor at the time of drafting of the trust deed in order
that the settlor might be given an opportunity to take independent legal advice
as to their consequences.   

As a matter of good practice, trustees
should ensure that the indemnity and exoneration clauses – and trustee
remuneration provisions – in their standard trust deeds are brought to the
attention of the settlor, and agreed by him in writing, at the time the trust
is set up. Failure to do so, may lead to scuffles later on and, ultimately,
could result in the trustee being unable to rely on the provisions. 

3.
Terminating the trust
 

In the uncertainly of the past two years,
we have seen a steady stream of instructions to dismantle trust structures. The
motivation for termination varies; often a change in structure is needed to
address a change in the settlor’s investment needs or personal circumstances.
In other cases, the trust has simply served its purpose.  

A proposal to terminate a trust should be
considered by the trustee with the utmost care, particularly if the act of
termination is to be carried out by the trustee itself using one of its
discretionary powers. In line with our comments above, the trustee may not be
in a position simply to comply with an instruction from the settlor to
terminate the trust simply because he has changed his mind and wants his money
back. As with all its powers, the trustee holds its dispositive powers in a
fiduciary capacity. When confronted with a request to terminate the trust, the
trustee should weigh up a number of factors including the reasons why the
settlor established the trust in the first place. Have the original objectives
been achieved? What effect will termination have on the beneficiaries? Is
termination in their best interests?  

It may be that the decision to terminate
is out of the hands of the trustees. The settlor may have reserved a power of
revocation in the trust deed. The ordinary effect of revocation is that the
trust property will revert back to the settlor and the beneficial interests
created by the settlement will come to an end. If the settlor purports to
revoke the trust, the trustee will need to satisfy itself, firstly, that such a
power is actually vested in him and, secondly, that the exercise of the power
is effective. Usually the trust deed will stipulate that revocation should be
made by deed. If it does not, the trustee should insist on receiving notice of revocation
in writing. If consents are required, make sure they have been obtained and
that they are in writing. The trustee should also consider if there are any
other circumstances – for example, incapacity, duress, undue influence – which
may affect the settlor’s decision to revoke. If there are, the trustee may have
to seek directions from the Grand Court.  

 4. Other recent developments 

(a)
Further developments in the Hastings Bass rule
 

In part 2 of this series, we discussed the
Hastings-Bass principle and its use in extricating trustees from the unintended
consequences of their decisions. The recent decision of the English Court of
Appeal in Pitt v Holt and Futter v Futter, released on 9 March 2011, overrides
previous English authorities and is likely to restrict dramatically the scope
for trustees to unwind actions that have resulted in unforeseen and unfortunate
consequences.  

In the Pitt/Futter case, the trustees had
sought to set aside a decision they had made on the grounds of mistake and in
reliance on the Hastings-Bass principle. In considering the facts, the English
Court of Appeal confirmed the already established position that to set aside a
voluntary transaction for mistake: there had to have been either a mistake as
to the legal effect of the transaction or a relevant mistake as to a material
fact. However, the court went on to state that if the trustee had sought advice from an
apparently competent professional as to the implications of the act and
followed that advice, then the trustee would not be in breach of its fiduciary
duty by failing to have regard to relevant matters if the failure occurs from
the advice being wrong. Accordingly any acts done in reliance on that advice
could not be considered nullified by the error and will not be voidable (as
they have been in the past).  

This judgment is at
odds with current case law in Cayman. If the judgment is approved by the Cayman
courts in due course, it will be much more difficult for Cayman trustees to
undo their mistakes in reliance on the rule in Hastings Bass. Provided they
have the necessary fighting fund and taste for litigation, trustees may well be
left to recover their losses from their professional advisers if the loss has
been caused as a result of incorrect advice. 

(b) FATCA 

In our last article we
also discussed the US Hiring Incentives to Restore Employment Act, which was
signed by President Obama law year. The HIRE Act also sounds a further
legislative warning bell in the form of the Foreign Account Tax Compliance Act
2009.  

FATCA
is the latest attempt by the US authorities to prevent the avoidance of tax on
income from assets held abroad. FATCA aims, among other things, to impose new
rules for taxing certain benefits received from foreign trusts by US persons
and will introduce strict new reporting, disclosure and compliance obligations. 

FATCA
directly impacts on a variety of persons connected with offshore trusts:
investment managers of trusts into which US persons have settled assets,
trustees or directors of a company within an offshore trust structure (provided
they meet the definition of a “non-financial foreign entity”), and those
falling within the defined term “material advisors” – that term seemingly
covering cover trustees, lawyers and other professional advisors outside the
US. 

Any
failure on the part of these persons to comply with the new reporting regimes
will give rise to a withholding tax of 30 per cent on any withholdable payments
of US-source income made to such entities. Any person required to deduct and
withhold that tax would be personally liable for the tax. 

The effective date for
FATCA has been identified as 1 January 2013. We anticipate that FATCA will have
a widespread impact on US investment in the offshore community, although the
extent of that impact will only be seen in due course.

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Bernadette Carey

Bernadette Carey is Counsel in the Litigation and Private Client departments of Conyers Dill & Pearman in the Cayman Islands. Bernadette was admitted as a Barrister and Solicitor of the High Court of New Zealand in 2002 and began her career working in large law firms in both New Zealand and Australia. She initially joined Conyers in the Cayman Islands in 2008 as a Senior Attorney, where she appeared regularly before the Grand Court of the Cayman Islands and advised on a number of cross-border insolvency and restructuring cases, general commercial litigation, and private client disputes. Bernadette was also part of a civil procedure advisory committee reporting to the local Judiciary. Between 2012 and 2016, Bernadette returned to work in both Australia and New Zealand, including as a sole practitioner. She continued to advise clients across both jurisdictions on a variety of general litigation cases, including in relation to general commercial disputes, insolvency proceedings, and trust disputes. Bernadette re-joined Conyers in the Cayman Islands in December 2016, and her international client base currently includes large corporations, insolvency practitioners, private trust companies, high net worth individuals, trustees, beneficiaries, and other similar entities.

Bernadette Carey
Counsel
Conyers Dill & Pearman
Cayman