THE ROLE OF THE TRUSTEES

Foreword
· Once a trust is created the appointed trustee solely acts in favour of the trust and those provisions that are clearly set out in the deed. The trustee actions are to protect and enhance the trust assets subject to the terms of the trust in favour for those mentioned in the deed as beneficiaries.

Trustee's Duties
The trustee's duties are those actions which he is required to perform. They are either laid down by statute or have been formulated from case precedents. The main duties of offshore trustees are as follows.

To carry out the provisions of the trust deed
This is the primary duty of a trustee and its intention should be self-explanatory.

Prior to the appointment
The trustee should read the terms of the intended trust deed and familiarize himself with the nature of the property which is to be held in trust. If he is replacing an existing trustee or acting as an additional trustee he has a duty to enforce that no prior breaches of trust have occurred (otherwise he will also be liable for any losses which could result from that breach). To do this he should request a copy of the trust deed(s) and accounts and make other enquiries which would seem reasonable to determine the status of the trust property.

To secure and control the trust property
On appointment, a trust should make sure he has the legal ownership of the trust property and that the trust property is under his control.

To act unanimously
Where there is more than one trustee they have a duty to act personally and jointly. Unless the deed so specifies, a majority decision cannot bind the minority.

General duty of care
Trustees owe what is often described as a general duty of care. This means that when the trustee is managing the trust funds he must take all the precautions which an ordinary prudent man of business would take in managing similar affairs of his own.

Professional trustees, such as trust corporations and those other corporations or individuals who charge a fee for acting a trustee, owe a higher duty of care and are also expected to display expertise in every aspect of their administration of a trust.

Duty of Investment
Trustees have a general duty to invest the trust assets prudently and also a specific duty to invest the assets either in accordance with the terms of the trust deed or if the deed is silent, within the provisions of local trust statutes.

Distribution of Assets
Trustees must ensure that distributions are made from the correct part of the trust fund (i.e. fro income or capital) and that they are only made to beneficiaries who have interest in the trust property. Distributions must not be made to those who are not beneficiaries.

Not to profit
A trustee cannot profit from his role unless the trust deed expressly empowers him to do so. Charging a fee for the provision of trustee services is considered to be a profit and unless the trust deed authorises a fee the trustee will not be paid for his services. If the deed is silent and the trustee is a bank, in theory the bank cannot claim normal bank charges if it also provides banking services to the trust.

If the deed is silent the trustee might still be able to charge a fee if he can obtain the approval of all of the beneficiaries, although this could be difficult especially in respect of discretionary trusts where perhaps some of the beneficiaries are minors or not yet ascertained. If the trust deed allows, the terms could be changed to authorise fee charging. As a last resort the trustee could always obtain the consent of the Court to charge a fee but this option could be an expensive process and the Court may ask why the trustee consented to act in the first place without a fee clause in place.

Profit does not include disbursements and so reasonable expenses are allowable whether or not there is a specific power to charge a fee.

To Keep accounts and report to beneficiaries
Trustees must keep clear and accurate accounts of the trust property and in the case of fixed trusts, inform the life tenant and remainderman of the extent of their interests by sending them copies of the accounts.

In discretionary trusts, the trustee may have to release details of the trust property if he receives a request for this information from a discretionary beneficiary, but he is not under an obligation to release information which relates to the reasoning behind the exercise of a discretion.

To keep trust property separate
A trustee is under a duty to keep the trust property separate from his own assets. Such segregation means that trust property will not form part of the trustee's own property and will therefore be 'ring fenced' in the event of his death or his bankruptcy.

Duty to act impartially
Trustees are expected to act after taking into account the interests of all the beneficiaries. This does not mean that they must treat the beneficiaries equally (unless the trust deed tells them to).

Reducing or waiving duties under an express provision
Many offshore trust deeds contain provisions which are designed to reduce the duties expected of the trustees. Whether such provisions are valid will depend on the circumstances of the case in question and also whether any statutory provisions exist which prevent a reduction in those duties.

Usual Powers of Trustees
The powers would usually be contained in the trust deed although in some cases statutory powers may be available. The following is a summary of the usual powers which are contained in offshore trusts.

Power to Sell
The trustee will usually have the power to retain the trust property or to dispose of it. This is often referred to as a trust for sale. Under a trust for sale, the trustee will be able to sell by whatever method obtains the best price which could, in the case of realty, be by auction or by private treaty.

Powers to borrow and to lend
The trustee would usually be empowered to borrow funds using the trust property as security and the power to lend would usually only extend to loans to beneficiaries.

Powers of maintenance and advancement
Trustees usually have the power to make maintenance payments and to advance capital.

Maintenance payments are generally of an income nature and are made to infant beneficiaries to cover day to day expenses incurred or payable on their behalf such as school fees. Often the deed will state that any income which is not applied for maintenance purposes must (and this is not a power but a directive) be accumulated, which effectively means the income is then treated as capital Any income so accumulated should be held in a separate income accumulations account and, depending on the terms of the trust, might be payable to the infant when he attains majority. It should be noted that the laws of most offshore centres allow for income to be accumulated for the duration of the trust period but this is not the case in the UK where income can only be accumulated for a certain period of time.

An advancement is a capital payment and would usually only be made to cover the cost of substantial, non-repetitive items which the beneficiary wishes to buy such as a house for his occupancy. Statutory provisions usually restrict the amount which can be advanced to each beneficiary (e.g. one half of their presumptive share). They are also taken into account when calculating a beneficiary's final entitlement from a trust. The adding back of funds advanced is called hotchpot. As a result it is common for trust deeds to allow a greater proportion of the trust fund to be advanced and that any sums paid will not be taken into account when making future capital distributions.

Power to appoint capital
Trustees would usually have the power to appoint capital either to the beneficiaries or perhaps to other trusts which have been established for the benefit of those beneficiaries. In addition, there may also be the power to appoint capital to separate funds within the same trust which can create tax advantages as the assets subject to the appointment do not leave the trust and therefore there is no transfer (if there were this would usually trigger a taxable situation.)

Power to delegate
Trustees will usually be empowered by the deed (and always by statute) to appoint agents to assist them with the administration of the trust property. This enables trustees to appoint, for example, bankers, accountants, solicitors and investment managers.

Appointing an agent does not mean that the trustee can delegate his decision making powers. If he does he will be in breach of trust. However, the trustee can delegate his discretionary powers for a limited period of time by executing a power of attorney. Such an action is usually reserved for the situation where the trustee is likely to be absent from the country for a prolonged period and his absence could affect the administration of the trust. The trustee would still be liable for the actions of the attorney during the period of the attorney's appointment.

Power to Invest
Usually the trustee will have wide powers of investment. If the deed is silent he can invest trust funds but only in accordance with local statutory provisions which will generally be restrictive.

Power to appoint trustees
Trustees would usually have the power to appoint new or additional trustees.

Power to add and remove beneficiaries
Usually the trustees will have the power to appoint additional beneficiaries in discretionary trusts as well as the power to exclude beneficiaries.

Power to Change the Proper Law
The trustees of offshore trusts will usually be empowered to change the proper law of a trust.

Power to receive additional trust property
A great number of offshore trusts are created with a nominal initial trust property, e.g. ?1000. The trustee will therefore be given the power to receive additional property from the settlor, or from any other party, which he will hold under the same trusts as the initial property which he received.

Power to appoint protectors
The trustee would often be empowered to appoint the trust protector in a discretionary trust.

Power to incorporate companies
Many offshore trust deeds contain a clause which enables the trustees to incorporate underlying companies and for those companies to be assets of the trust.

Power to Insure
Although most countries have statutory powers covering the insurance arrangements for trust property, the extent of the cover which the trustees ca arrange would usually be restricted to loss or damage by fire. It is therefore advisable for the trust deed to contain a power which enables the trustees to arrange wide and comprehensive cover.

Power to give receipts
A clause would often be included in a trust deed enabling the trustees to give valid receipts for the transfer in or sale proceeds of al types of property, especially realty. Some statutory provisions restrict trustees receiving certain assets (e.g. sole trustee can often be restricted fro providing a valid receipt for the proceeds of the sale of land). A clause which gives the trustees power to receive any property is often useful.

Power to Terminate the Trust
It is usual for trustees to be given the power to terminate a trust ahead of the expiry of the perpetuity period or duration period as set out in the trust deed.

The Appointment, Retirement and Removal of Trustees
Most offshore trust deeds will contain provisions which cover the procedures required for a trustee to be appointed or removed and also how they can retire. However, if the deed is silent on these issues there will always be the statutory provisions to fall back on.

Each centre will have its own statutory requirements but in general terns the statutory provisions would usually be drafted along the following lines.

Statutory provisions
Statutory Power of Appointment
Usually, the statute would first mention that the power to appoint a new trustee would pass to the person nominated in the trust deed. However, if there is no such person the power would usually pass to the present, surviving or continuing trustee or the personal representative of the last surviving trustee.

Vesting of Trust Property
Usually, the trust law of a centre will state that if the retirement and appointment of a trustee is performed by a deed or instrument, trust property will be deemed to have vested in the new trustee, unless of course further documentation is required by law to effect a transfer (such as a stock transfer form for an investment).

Usual Express provisions
In most cases the trustee will have an express power to the trust deed to appoint a replacement or additional trustee. However, there is a growing trend that this power is given to a trust protector or in some trusts, to the settlor.

The Number of Trustees
This is important. Most trust deeds will specify the minimum number of trustees required but if not, the local trust statute should cover this point. Usually, the trust law of a centre will state that two trustees will be required for local trusts which are created for the benefit of minors or for those trusts which are to own realty.

However, the trust laws of most centres will allow local trust corporations to act as sole trustees of most types of trust (perhaps the only exception being non-charitable purpose trusts), although there may be a requirement that the trust corporation would have to be approved (which might involve having to meet certain capital requirements).

There is a potential problem if the local trustee wishes to retire and a trust corporation from another centre wishes to be appointed. The proposed trustee might not meet the criteria of a trust corporation in the centre where the trust is based and the result would be that the current trustee could not retire as the appointment of his replacement would be invalid.

The Use of Co-Trustees
Some clients prefer more than one trustee to be appointed to manage their trust and will insist that co-trustees are appointed.

As we saw when considering the duties of trustees, if more than one is appointed they must act unanimously and unless the trust deed specifies, a majority decision will not bind the minority.

Usually, a co-trustee is appointed in those cases where a trust corporation is not involved. They are therefore most commonly found in those where the client has appointed trusted advisers to act (such as partners in a particular legal or accountancy practice). Often a member of the settlor's family is appointed alongside a 'professional' trustee (which in this context has been taken to mean someone who provides trustee services as part of their livelihood and who is paid for their services).

More than one trustee can help in the decision making process, usually by assisting discussions concerning the merits of a particular distribution or the exercise of an administrative power. This is usually the case where a family member, who is aware of the settlor's intentions and wishes, is appointed alongside a professional trustee.

However, they can also create potential problems. For example, if one of the trustees is resident offshore and the other is located onshore, the tax authorities in the onshore centre might decide the trust is taxable in that jurisdiction on the basis that part of the management and control is exercised from that location.

In addition to possible taxation problems, the settlor should also be aware of potential administration problems which can stem from the duty of the trustees to act together. Depending on the number and location of the co-trustees, it could be a difficult task to obtain the consent of them all before a particular action is taken. As a result, distributions could be delayed, as could the simple appointment of an agent, such as an investment adviser or banker.

The Appeal of Trust Corporations
Before moving on to the role and rights of the settlor, we should consider the use and appeal of trust corporations in offshore centres, as although it is possible for individuals to be appointed, it is much more common for a corporate entity to be used for offshore trusts.

Licencing requirements
In some centres a trustee has to be licensed and there would usually be a capital adequacy requirement which often only a corporate trustee could meet.

Continuity
Unlike individuals, a corporation can continue in perpetuity and so the death or transfer of an employee will not affect the continuance of the trusteeship, nor would one hope the quality of the service.

In addition, a trust corporation will seldom change location. It may move offices within the offshore centre but it would rarely decide to relocate to another jurisdiction. There will therefore be continuity in terms of residence in the offshore centre chosen for their trust.

Multi-jurisdictional
Many trust corporations have operations in more than one centre. This can provide a greater base of experience and knowledge of the offshore industry and also provides an opportunity for the trust to migrate to another office of the organisation in the event of a trigger event under a flee clause provision. A flee clause is one under which the law of the trust or residence of the trustees will change on the happening of a predetermined event, such as civil unrest, in the offshore centre originally chosen.

Expertise
Trust companies pride themselves on possession a high degree of expertise as well as the necessary resources to service trust business effectively and efficiently.

Many trust corporations also possess investment departments which can be used to provide investment management services. In some cases they will also be affiliated to a bank or a company management function which can mean that the entire management and administration of an offshore structure can be conducted under the same roof. This is a factor which can create certain efficiencies and cost savings.

Internal audit
Trust companies will usually be subject to external audit requirements and in addition, they will also have in place internal controls and checks to ensure that the service is being delivered efficiently as well as effectively. Many of the larger institutions will have internal audit departments which help police the various offices and can play a very useful trouble shooting role.

Security
Many settlors favour trust corporations because of the security aspect. If there was a dispute and the trustees were found to be at fault, it would probably by easier for the beneficiaries to obtain financial recourse from a negligent trust corporation than from an individual who was acting as trustee.

The Rights and Role of the Settlor
Many trustees believe that the settlor of a trust will retain certain rights over the trust property. However, unless the trust deed specifically provides them with certain powers, the settlor of a trust will have no rights whatsoever over the administration of the trust or the trust property.

The Rights of the Beneficiaries
It is sometimes possible for trustees to forget that the beneficiaries of a trust have certain rights. Although most of these rights should be a matter of applying common sense on the part of the trustees, it is often the most obvious issues which are most commonly missed.

The "common sense" rights are as follows: