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This week I'd like to write about something I consider of utmost importance when planning for family wealth structures.
The term ‘Family Governance’ is a term I used some twenty years ago in response to the question: Why do most companies survive for a considerable time after the death of the founder, whereas most trusts do not?
At that time, I was due to go on a long-haul flight, so took with me the Cadbury Report and the Greenbury Report (which later became the Combined Code of Corporate Governance) to see what I could incorporate into trust structures with substantial wealth to assist in creating dynasties.
As a result I coined the phrase Family Governance, which I define ‘to facilitate effective, entrepreneurial and prudent management of family assets that can deliver long term success of the family wealth.’
At the heart of good governance is accountability; the executive or directors of the company are accountable to the Shareholders. In a similar way in the traditional trust, the trustees are accountable to the beneficiaries. However, beneficiaries have never had the power to remove the trustees – the trustees are accountable not through their office but through their pocket. If any decision causes a loss to the trust fund the trustees are obliged to make good such loss.
As trusts became ever more useful tool for international families with substantial wealth, so did the need for professional trustee indemnity became important. Now, it is commonplace for the trustee to be liable only for acts of fraud or gross misconduct. This I contend has undermined their accountability and good governance.
There are three areas in which disputes arise, which I will look at over the next three weeks to see in which ways accountability has been undermined, with reference to cases in which I have been involved. The first area of dispute is with extra family parties.
Trust assets are outside the reach of the creditors of the settlor, provided the assets are properly settled within the time limits set by the jurisdiction which governs the trust. I was working for a very wealthy individual, he was anxious about putting his business into a trust structure, given the need he said for the trustees to make good commercial decisions affecting the running of his business, which he did not feel comfortable that they could do. A few years later he was sued by a former business colleague who accused him of fraud. If he had put his business into a Trust in a timely fashion as advised, he would have saved his business. Instead it suffered irrecoverable loss.
Protectors are often given powers to remove and appoint new trustees, but the office of a Protector is not comfortable. Take the situation in which I was involved recently. A beneficiary requested the trustee to pay to him trust assets in specie. The trust was of considerable value to the professional trustee, so they acted slowly and with extreme caution.
My client asked the Protector to remove and replace the trustee, but the trustee sent only a record of the decisions taken without any reasons behind them, and refused to fund him to take a legal opinion. The Protector with no recourse to the trust fund to indemnify him against the cost of legal action, was afraid to do anything, but if he did nothing, and a loss was incurred he knew he could be sued by the beneficiaries for breach of his fiduciary duty to remove the trustees when required.
In a similar case, trustees were asked to bring a trust to an end in favour of a particular beneficiary. They incurred huge costs in approaching each of the other beneficiaries to get consent to the distribution and a waiver of any right they may have against the trustee. The beneficiary disputed this cost as not being for his benefit but for the benefit of the trustees. However, the trustees were not liable as the loss incurred was not as a result of fraud or gross misconduct.
The third area of dispute is with regard to the spouses of the settlor and/or the beneficiaries. One case in which I was involved many years ago, involved a settlor of a substantial estate. She subsequently divorced her husband. He claimed in the divorce, that the trust assets should be brought into account, since the trustees had never denied her request for monies. The matrimonial judge made an order in favour of the husband, but the trustees refused to make the payment to my client on the grounds that the payment was not for her benefit but for the benefit of her former husband.
In due course, the Judge made an order that she was in contempt of court, and threatened her with prison. She pleaded with her trustees to make the payment to stop her going to prison – which they did but not without a waiver from her of her rights to sue them for loss due to their breach of fiduciary duty.
These cases highlight the frustrating situations which arise due to a large degree on a lack of good governance which is prevalent in most international trusts.
Next week I will address the difficulties which can arise between families and how poor governance exacerbates the problems.
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