Last weekend I was sitting having a cup of tea with Paul, in the weak Spring sun at the Lido café overlooking the Serpentine in Hyde Park. There is something chilling, but not unpleasant about being warm drinking a hot cup of tea, watching swimmers pound out their lengths in the freezing cold water.
Paul, before he retired was a top City capital markets lawyer and is therefore familiar with the law of trusts. More recently he has turned his skills to reviewing trusts for private clients and other related matters.
I asked, from his recent experience of private client trusts, whether they were as well drafted as trusts for commercial purposes. He said that standard forms of trust written by banks, on the whole, were well crafted, but this was not always the case for the more ‘tailored’ trusts.
This is not as surprising as it may seem. Banks do not allow Settlors to add or remove clauses. Their standard trust deeds are drafted by experts and approved by leading counsel.
However not all Settlors are prepared to accept a standard form when it comes to dealing with their world-wide wealth. Many Settlors want to set up trusts for their successors, but they do not want to lose control of their wealth, by giving their trustees too much power. They are used to getting their own way. They push their advisers into putting clauses into trusts which all but the very experienced trust professionals would find hard to resist.
The latest example, was for a family which I will call Gonzalez. They are based in South America, but have their liquid assets managed out of Switzerland. The structure was overly complex, but at the heart was a trust which reserved three powers to a ‘Protector’ which was Gonzalez, during his lifetime and thereafter his eldest child.
The first power was to decide on the investment strategy of the trust, the second was to remove and replace the trustee and the third was to determine when and to whom distributions were to be made.
I discussed these three powers with Paul. He agreed with me that to reserve powers of investment and choice of trustee is fine, but to reserve the right to decide on distributions was probably not.
Gonzalez has two sons and two daughters. His first child is a son and is the apple of his eye. He has followed his father into the family business, married well and has three beautiful children. However, his other son who is the youngest was not so well regarded by Gonzalez. He left school early to become a singer songwriter, but after a promising start had produced only a modicum of success and had slipped into a louche lifestyle of soft drugs, late night revelling and poor company. He had two children by two different mothers and Gonzalez feared he may be bisexual. His two daughters were fine, but feckless. They were both married, but to men who Gonzalez thought lazy.
On his death he wants his eldest son to step into his shoes, run the business, be the Protector of his trust and prevent his other children from inheriting any capital outright. However, it soon became clear that the three younger children would resist any arrangement whereby their older brother could decide how much or how little they were to inherit.
Under the trust document as drafted, it could be argued by the youngest three children that Gonzalez had not succeeded in creating a trust, but a nominee arrangement. If successful in this argument, his estate would pass under the laws of the country of his residence; one quarter to each child. However, it is not as simple as deciding which members of the family are right and which members are wrong. Family disputes only get resolved after months, if not years of arguing, and the longer the argument continues the more the family assets are eroded with legal fees.
Some advisers suggest to their clients that they leave the trust as drafted and set out how to resolve their concerns in a Letter of Wishes. In theory this is excellent. However, in practise, a Letter of Wishes or Family Constitution is for guidance only. Trustees keen on a quiet life are more likely to follow the path of least resistance than to ensure the Settlor’s wishes are followed.
Of course where neither party is ready or willing to compromise then the Trustee has no option but to get professionals involved. If the trust is well drafted differences can be resolved through skilled mediation, which is what we would recommend and do for a client wherever possible. Although more fees can be earned through litigation, we do not believe that litigation is the best way to resolve a family dispute. However, it is not always easy to get a family around a table and sometimes family members will only mediate if they are not made to sit in the same room as each other.
My preferred option to resolving disputes using third parties is to put in place a dynamic structure; trusts, private trustee companies and an Executive Entity where good governance principles resolve disputes rather than outside professionals. Structures which incorporate good governance principles can also meet most concerns of the Settlor without jeopardising the integrity of the structure or ignoring human nature.
If you have any comments on the above, would like Garnham FOS to review your trust structure or your family is in dispute over a trust, contact firstname.lastname@example.org or call 020 3740 7423 to arrange an appointment to see Caroline or any one of her team.