In my last note, we looked at how poor Family Governance can adversely affect disputes outside the family in offshore trust situations. Poor Family Governance is the term I use to indicate a lack of accountability of trustees, and how it can adversely affect disputes.
This week, I will look at how poor Family Governance can adversely affect disputes within the family.
Last week, I was the guest of the International Business Finance Summit, presented by the Bahamas Financial Services Board. It was clear from the Government Ministers who attended and spoke, that the Bahamas is focussed on positioning itself to be the most attractive jurisdiction for businesses owning families to base their home and headquarters.
However, if it is to succeed in attracting these highly discerning clients, it needs to be able to demonstrate that their trust structures operate good Family Governance.
Let’s take the situation of Don who is keen to set up a trust with his second wife Susan. Don has a son from his first marriage, Ali, a son from a brief relationship, Josh following his divorce and a young daughter with Susan, Rebecca. He gave Ali a house and a large settlement when he divorced his mother, and the same for Josh when he became 21. He wants to benefit only Susan and Rebecca.
The trust was set up for him before Josh was born and the beneficiaries are, his wife, children and grandchildren. He is very concerned that on his death, incapacity or the sale of his business that Josh and Ali, will put in a claim against the trustees for a greater share. He asked what he could do.
There are a number of provisions which can be included to deter Josh and Ali from bringing a claim, many provisions are variations of a ‘no-contest clause’. This is where a beneficiary who brings a claim against the trustees will be excluded from benefit.
My personal view is that such clauses are a retrograde step. Trustees must be accountable to the beneficiaries and if they do not act in the best interest of their beneficiaries, the trustees must be made to account. If this right to make trustees accountable is removed the are then beyond reproach.
Another possibility is to ask the beneficiaries to declare that in receiving a benefit on reaching 21, they will renounce any further right to benefit. This could again act as a deterrent, but it is by no means watertight against a claim.
Don is citizen of a country where children are forced heirs, which means they could put in a claim that the trust be put aside on the basis it is a sham. If the case succeeds then each child will get such share as is permitted by law.
To succeed Josh and Ali’s lawyers will need to analyse the trust in close detail to see what powers the trust has and whether these powers were exercised by the trustees independently from Don – which is unlikely.
The other avenue that Josh and Ali could pursue would be to see whether the powers over the trust were reserved to a Protector and to explore whether the Protector only exercised his powers at the request of the Settlor, in which case it may be argued that the Protector was the Settlor’s alter ego – and was therefore an administrative sham.
To make these arguments against the trust – are likely to be extremely expensive in legal and fiduciary costs. If both Ali and Josh are excluded as beneficiaries from the trust, the trustees would have no alternative, but to continue the action, because they may otherwise be restricted in their means to negotiate a settlement.
In most family disputes, excluded beneficiaries do not care how much a trust costs to resolve a dispute, on the basis that if they cannot benefit, they will make sure there is little left after legal fees for Rebecca and Susan!
My personal view is to steer Don away from ‘ruling from the grave’, and to put in place good governance principles. Mechanisms which will make the trustees or people who take the trust decisions accountable with their office, and not their pocket.
One trust dispute with which I was involved in a similar situation, was frozen in taking a decision, and as each year passed with the dispute unresolved, the legal and fiduciary fees got ever bigger.
If the trustees making the decisions could lose their office if they failed to resolve a dispute swiftly they are more likely to act in the best interests of the beneficiaries and resolve the dispute as soon as possible.
My suggestion for the Bahamas if it wishes to attract the business it wants, is to promote themselves as a jurisdiction which specialises in and understands Family Governance which is reflected by their trust law. I am actively advising clients on setting up robust wealth ownership structures.
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