Beneficiaries in dispute with trustees

Whilst it is never the intention when they are created, a variety of disputes can arise in relation to trusts. Trust disputes can be ‘friendly’ or ‘hostile’.

‘Friendly’ trust disputes

These disputes are when both the trustees and beneficiaries of the trust agree that there is a problem. For example, this could relate to an ambiguity in the trust document.  Whilst termed ‘friendly’ beneficiaries can often become very bitter and confrontational about what they believe to correctly reflect a settlor/testator’s wishes in the trust instrument.  In such a dispute, it is possible for the trustees to apply to the court for directions on the correct construction of the trust or to seek a rectification of the trust instrument.

‘Hostile’ trust disputes

Hostile disputes can include a challenge to the trust itself, i.e. allegations that the trust instrument was a sham, or that the trustee has not acted in accordance with his or her duties.

Dispute between trustees and beneficiaries

Trustees’ duties includes, but are not limited to the following:

1. To bring the trust property under control
2. To observe and comply with the terms of the trust
3. To act impartially i.e to not favour one beneficiary, or one class of beneficiaries over another
4. To invest in authorised investments
5. To provide the beneficiaries with such information as to the management of the trust as they are entitled to
6. Duty to pay the right amount to the right person
7. Duty not to delegate
8. To avoid a conflict of interest and not to personally enter into transactions with the trust
9. In the exercise of powers, to act within those powers, honestly and in the interests of the beneficiaries
10. To maintain the appropriate standard of care in the management of the trust
11. To be ready with his or her accounts.

It is often as a result of a breach of one or more of the above duties that trust disputes arise.

Breach of trust

A breach of trust is committed where:

• A trustee breaches a trust duty
• A trustee acts other than with absolute honesty or fails to observe the required standard of care.

The first duty is for the trustee to bring trust property under control.  He must ‘get in’ the trust property i.e it must be vested in his name. If assets are not vested then beneficiaries may not have rights at all because the trust will not have been completed.  This means that a breach of trust will have been committed if loss is caused. The absence of trustee control could also lead to the finding of a sham in that case.

The beneficiaries’ remedy is to peruse the  trustee personally for any loss suffered. However, there are defences available to the trustee including (i) an exoneration clause in the trust instrument; (ii) statutory relief under section 61 of the Trustees Act 1925 where the court may relieve the trustee wholly or partly from a breach of trust if the trustee has acted reasonably and honestly and should be excused for the breach and for failing to seek directions from the court ; (iii) the beneficiaries who are of full age and capacity have given their consent and have assented to the breach; and (iv) the limitation period for brining a breach of trust claim (6 years) has expired.

Self-dealing

Trustees have a duty not to enter into personal transactions with trust property i.e the trustee must not sell trust property to themselves. This is the self-dealing rule. The beneficiaries primary remedy is to set aside the transaction. The remedy is available even if the trustee acts with absolute honesty, and in the best interests of the beneficiaries e.g the trustee may have paid a higher price than would have been obtainable. The principle is very much in play where a trustee is also a beneficiary and appropriates property to themselves.

There is, however, a defence for the trustee where the trust instrument includes an exoneration clause or a clause authorising self-dealing.  It is important to check carefully any self-dealing clause as they can vary considerably.  In Caldicott v Richards and Walker [2020] a purchase by a trustee of shares from the trust was not authorised by the relatively narrow self dealing clause.

Duty to act impartially and in the best interest of all beneficiaries

This is  particularly difficult to balance in case of a life interest trusts. In this case the life tenant is entitled to receive the income generated by the capital of the trust for their life. The remaindermen are the beneficiaries who are entitled to the capital of the trust once the life tenancy comes to an end.

The dilemma for the trustees is whether to focuses on generating  income for the life tenant, often to the detriment of the growth of the capital and therefore the remaindermen. Or do they do they focus on the growth of the trust capital, at the expense of its income generation?

Whilst trustees are under a duty to balance the interests of the life tenant and the remaindermen, some trust documents explicitly exclude this duty, to allow the trustees to favour the interests of the life tenant.

Where this duty is not excluded by the trust document, a  difficult balancing act is to be struck. It is often advisable for trustees to take  advice from an investments manager. It would also be prudent for trustees to offer consultations to the beneficiaries to ensure that all parties are clear on the investment/growth strategy of the trust.

Where beneficiaries feel their interests are not being taken into account by trustees, they have a range of options open to them. The first step may be to make written request to the trustee to seek an explanation of their investment strategy, and to remind them of their duties of impartiality, as well as their fiduciary duties to the beneficiaries. As a final resort, beneficiaries might look to make an application to the court for directions.

Removal of trustees

As a last resort, a trustee may be removed from office.  The easiest way to do this is to rely on an express power in the trust instrument.  Alternatively, a trustee may be removed by the court, following an application by a beneficiary or a co-trustee. It is important to give careful thought to who should be the replacement trustee. The court will consider this when determining any claim for removal of a trustee.

If you are a trustee or beneficiary of a trust and have any questions about the topics raised in this article, please get in touch.