Trust establishment: Starting off right

    Read our article in the Cayman Financial Review Magazine, eversion 

    The relationship between trustee and stakeholder is one that evolves and grows over time. It has many nuances and is more intimate than a typical service provider/stakeholder relationship.  

    The inherent nature of the trustee role, where they hold legal title of the assets held to the benefit of others, means that a substantial level of confidence with clear channels of communication and understandable expectations must develop. It goes without saying that this takes some time to grow and must consistently be nurtured in order to develop properly. It is critical to the ongoing health of the trust that this relationship starts off in the right direction.

    The dialogue that takes place and consequential setting of expectations during the trustee selection and the trust establishment or take-on phase should consider this and set the path for the long term. We highlight below some specific areas that require focused attention in order to facilitate this important stage of the trust and the resulting relationships between trustee and stakeholders.

    Trustee selection and interview

    There is a widely diverse group to select from within the realm of available trustees. They range from personal acquaintances to privately held corporations to large multi-national institutions, with every possible permutation in-between.

    During the selection process, the settlor and his appointed representatives must ensure that they have performed sufficient due diligence to ensure that they have selected a trustee that fits the expectations and role that is envisaged, as well as to get to know the trustees, their operations and the key individuals that will manage the relationship. This can only be done if the settlor has set out clear criteria in advance, highlighting the trustee attributes that are important to fulfilling the terms of the trust.

    Key areas to consider include, technical competence, succession planning, accessibility, resource and operational adequacy and a fundamental belief that the trustee being selected is a good match for maintaining the necessary relationship with the stakeholders of the trust. Conversely, the trustee must also make an honest assessment as to whether they believe that they have the necessary skills and resources to properly discharge their obligations and, if not, suggest that alternative providers be selected.

    Fees

    Negotiating fees can be difficult at the best of times. When you are dealing with an individual or a family who are most likely a new relationship and in an industry where there are many types of fee systems, this can be a very sensitive issue. Complicating this further is that trusts by their nature are rarely static, but rather evolve continuously. It is very difficult at inception to fully predict the scope of the trustee role and it is certainly impossible to predict the circumstances that the trust will be faced with in the future. This has been highlighted in the current economic climate and the resulting challenges in maintaining adequate investment returns.

    Regardless of the fee arrangements that are established at the outset, it is important that there is transparency and a well-defined mechanism to adjust the fee structure as necessary throughout the life of the trust. Developing and documenting a comprehensive fee structure at inception, which encompasses details of what is and what is not covered by the fee, will lead to less uncertainty in the long term.

    Know your “client”

    The regulatory environment in today’s financial world is increasingly strict and will be unforgiving if you get it wrong. Not only do you need to know your client well enough to satisfy your own risk management and standards set by the regulator, but you also need to be able to satisfy the assortment of other service providers who will request this as you establish relationships with them.

    Inevitably when dealing with the high net worth individuals and institutions of today’s media-centric world, there is a plethora of information readily available within the public domain. It is a challenging task to separate truth from media fiction and to make a disciplined decision on whether you know your client in sufficient detail in order to accept your role as a fiduciary.

    Furthermore, understanding the definition of what constitutes a “client” and identifying all of the stakeholders on which you will be required to fulfil due diligence in order to appropriately cover the compliance aspects can be challenging. Settlors, beneficiaries, protectors, enforcers, other individuals who may contribute assets and others who stand to benefit or who may hold any powers over the trust potentially fall within the group on which due diligence must be performed.

    The take-on phase is the ideal time to gather as much information as is possible on the relevant entities and individuals in order to ensure that you as trustee hold all of the necessary pieces to effectively manage the relationship ongoing. It is also imperative from a risk management and reputational perspective that you have done all things necessary to ensure that you do fully know your client to a sufficient standard.

    Stakeholder education

    For those new to the world of trusts, the consequences of establishing a trust may not be fully understood and can often be difficult for them to accept. Prior to establishing the trust, the trustee has an obligation to highlight to the settlor and any others who will be impacted, what the separation of legal and beneficial ownership of the trust assets entails in practice.

    It must be made clear from the outset where the legal ownership rests and what powers vest with the trustee. The stakeholders of the trust will need to understand their position, rights, entitlements and perhaps most importantly what powers they do not have.

    The trustee in turn needs to understand the settlor’s needs and vision for the creation of the trust before the trust instrument is drafted. Hence communication between trustee and stakeholder is of vital importance, not just at the beginning of the relationship but throughout the relationship. Part of the trustee role involves communication with the other stakeholders, both to request new information and to relay information to them as regards the administration of the trust.

    This becomes a constant process of dialogue whereby the trustee receives valuable information from the stakeholders about their own needs, personal circumstances, perception of obstacles to be overcome and perhaps proprietary knowledge regarding underlying assets or operating businesses. The trustee conversely will need to communicate with the beneficiaries as to the proper operations of the trust. A clear path of ongoing dialogue, information exchange and proper two-way communication must be established to ensure a successful relationship.

    Trust terms

    Encompassing all of the above and the best way to ensure a disciplined approach, resulting in clarity, is the drafting of the trust instrument and any related documents. Within these documents, the role of the trustee, and the ‘tools’ to deal with all scenarios will be developed.

    Time and attention put into the drafting will avoid uncertainty and misunderstanding going forward. Matters including succession, indemnities, clarity on discretionary powers, the protector’s role if any, and the ability to make amendments all need to be well thought out at the set up stage. Creating the initial trust instrument requires careful focus and a detailed review to ensure the settlor’s wishes have been reflected and at the same time that the administration of the trust is achievable in practice. It is also, hopefully, when there are the least possible threats or distractions on the proposed trust assets and principals.

    The trust instrument and related documents, if properly drafted, will create a detailed road map which, in conjunction with the wishes of the settlor, will be the “rules” that the trustee will follow when managing the trust assets which they hold legal title to.

    The trust instrument can achieve the right balance of having the ability to meet the proper expectations of the stakeholders and achieving the objectives of the trust which are the clear goals for everyone involved. 

    Conclusion

    Once established, the path that a trust will take is anything but certain. Changes in regulatory or economic environment, in family circumstances or for the trustee themselves, along with any threats from legal challenges, can all create situations that need to be adapted to. Recognising these changes and then having the necessary skills, resources and the ability within the structure of the trust to manage accordingly is of fundamental importance.

    By applying some of the concepts discussed above at the establishment phase, the trustee can mitigate any potential issues that may arise and also allow themselves to continue to administer the trust effectively in accordance with their responsibilities.

    The importance of attention to detail when establishing the trust and developing proper relationships at the outset is imperative in order to manage any situations of uncertainty or challenges in a professional and diligent manner.