What is the key decision which repays very careful thought when setting up a trust or a will containing a trust? Is it who can benefit from the trust (the beneficiaries)? Of course, that is very important. Or whether it is a fixed interest or a discretionary trust? Absolutely, money in the right hands at the right time, naturally. But I would argue that there is one matter that trumps even both of these. No prizes for guessing (the clue is in the title!) – the No.1 spot has to go to choice of trustees. Poor decision-making on this front can lead to big regrets all round as it is far from easy to force trustees to retire once they have accepted the position. Read on if you require further persuasion.
Some clients prefer to appoint family members as trustees and indeed in theory there is no problem if a trustee is also one of the beneficiaries of the trust. The potential conflict of interest that this situation creates is tolerated under English law. However, just because it’s possible doesn’t mean it’s good! The skills and personalities of the family members must be honestly considered. For example, if one child shows no interest in managing money or another likes to lord it over his siblings, trouble can ensue if parents appoint them as trustees.
Partisan family trustees can tie themselves in knots when they do not try to understand their trustee responsibilities. This is not a new phenomenon. In 1918 (in the case of Klug v Klug), the court overturned the decision of a trustee-mum who refused to pay out trust funds to her beneficiary-daughter when she reasonably asked for them, all because she had married without her mother’s consent. Maybe trustee-mum was rightfully angry with her daughter but unfortunately her personal preferences should have been irrelevant when it came to deciding how best to exercise her trustee powers. A trustee’s primary duty is to act in the best interests of the beneficiaries, even if she disapproves of them. Only relevant factors must be considered by trustees; irrelevant ones must be ignored.
An assessment of the merits of any proposed trustees involves time and, yes, money, if a professional adviser is offering counsel. However, it will be money well spent because the legal wrangling that can ensue when trustees prove to be unsuitable is very costly indeed, both in terms of fees and broken family relationships.
A particular danger area, I feel, is off-the-shelf trusts provided by life insurers and pension providers which, notwithstanding the health warning given on completing them, are often filled in by the policyholder without any advice being taken. These can end up holding significant sums of money, sometimes more than is passing under the will, and so the choice of trustees is critical. A good planning tip is to see who is named as executor and trustee under the will – is it appropriate to name the same people as trustees of the life policy/pension lump sum trusts, in order to co-ordinate more effectively the management of all assets after death? If not, is it time to make a new will naming the right people?
It pays to take it slow when choosing trustees. And be realistic about their capabilities.