The Changing Role of Trustees

The days when trustees were professional advisers, family members and friends acting together as a benevolent oligarchy are over. Today, trustees are faced with onerous legal and regulatory duties; litigation is on the increase with trustees the targets for proxy wars fought by family members; beneficiaries are more active in holding boards to account; and the assets themselves may have significant liabilities and obligations attached to them.

The risks inherent in acting as a trustee have been recognised by large banks, many of which have closed their trust companies to new business, shut them down altogether, or sold them off. In order to cope with this new climate, trusteeship has to evolve, and this has ramifications for every family trust.

Professionalising trusteeship

The starting point for business families is to consider what their inheritance tax (IHT) liabilities will be and therefore whether a trust is a suitable structure for their needs. Since 2006, trusts have been subject to an upfront IHT charge of up to 20%, but they nevertheless remain an important vehicle for handing down wealth in a controlled manner — particularly in this era of fractured families.

Having decided to create a trust, it is vital to select trustees with the necessary experience and skills.

The need for better protection

Although a trust company can act as sole trustee, there may be a conflict of interest since it will have to approve its own fees and remuneration. We recommend you have at least one other trustee, who could be another professional adviser or a family member. The mechanism for approving fees and the basis of charging should be agreed at the start of the relationship and trustees themselves should be transparent about how their charges have been levied. Lay trustees are not permitted to charge for their services.

Indemnity insurance for lay trustees is essential. This is because they face a high level of personal risk. If they find themselves in a dispute, for example with a beneficiary or local authority, the court process can be lengthy and stressful. A lay trustee who is forced to defend their position in court may have to pay for their defence from their own pocket or, if they cannot afford that, to represent themselves. They may be held financially liable for breaches of trust. The payment of an insurance premium by the trust could itself be a breach of trust, since it is for the benefit of the trustee rather than the beneficiaries. Payment will therefore need to be agreed by the beneficiaries or settlor.

There are implications for professional trustees too. While they may have the benefit of their firm’s professional indemnity insurance, both they and their insurers could find themselves liable for the mistakes and breaches of co-trustees, particularly where these individuals adopt a ‘can’t pay, won’t pay’ approach.

Private family trust companies

Using a professional trust company and ensuring lay trustees have the right insurance cover, will be adequate for most families. However, there is another option. If your family is wealthy enough and the trust(s) large enough, you could consider creating a private family trust company to act as a corporate trustee.

The board could be made up of a mixture of professional advisers and family members. While there are compliance costs, the advantage is that a private trust company has limited liability — meaning that the board has fiduciary liability but the trustees do not have personal liability.

About Smith & Williamson

This article first appeared as an Insight by Smith & Williamson.

Smith & Williamson is one of the UK's leading independently owned private client houses. For more than a century, a major part of their business has been the provision of wealth management services to ultra-high net worth families, their trusts, and family companies.

Please visit their website to find out more about their family office services.