Our Trust and Probate Litigation team is now ranked in Band 1 of Chambers High Net Worth's Private Wealth Disputes category. The team contributed this article to the new guide, surveying current trends and ongoing developments in trust disputes.
In England and Wales and overseas jurisdictions, trends are emerging that may lead to a greater volume of and complexity in disputes being brought concerning trusts and estates. These are caused by both changing attitudes and demographics of trustees and the actions of the courts themselves.
Capacity disputes on the rise, particularly in the trusts context
Challenging a will on the basis the testator lacked testamentary capacity is a fairly common line of attack. Recently, we have seen not only the establishment of trusts challenged on the basis of lack of capacity but also decisions made by trustees and power holders. Setting up a trust is a complicated process that draws in concepts of ownership, tax consequences and control (or lack thereof) over assets. It is often far more complicated than executing a will and therefore requires a higher level of mental capacity to be able to understand the transaction.
For example, we find that settlors frequently do not fully understand that letters of wishes are non-binding, particularly in jurisdictions that do not follow common law. A settlor establishing a trust needs to foresee the consequences of setting up the trust, and focus on understanding that the assets no longer legally belong to the settlor but rather to the trustee. These are not always straightforward concepts.
Beneficiaries are also now more inclined to challenge decisions of trustees and other power holders on the basis that the person making the decision lacked the mental capacity to do so. Reacting to this requires an analysis of what the decision is – is it an affirmative decision requiring weighing up of pros and cons, expert advice, and considering the interests of the beneficial class as a whole? Or is it a more straightforward 'sign off' decision? The requisite capacity depends very much on the type of decision.
As settlors and power holders age, these types of disputes are only going to become more frequent.
An increased emphasis on transparency
There is a tension between individuals' expectations of privacy in their personal or family affairs and the principle of open justice.
In trust and probate cases in England and Wales, the starting point is that there is no general exception to the principle of open justice. Accordingly, applications for privacy are likely to be rejected.
Where minor beneficiaries or vulnerable adults are involved, the courts will weigh the open justice principle against the risk of harm to their interests. Although the courts appear unlikely to allow private hearings, they may order reporting restrictions or anonymise judgments to avoid minors being identified. However, it is now clear that anonymity is not the default position even where minors are involved.
That is the position in England and Wales – however, the relevant trust will often be governed by the law of an offshore jurisdiction. We frequently work alongside local lawyers in such jurisdictions and recent judgments in Bermuda, Jersey, and the Cayman Islands illustrate that offshore courts are far more willing to anonymise judgments and hear matters in private. This is because these courts are more likely than English courts to take the view that the interests of the beneficiaries and the trustee's ability to administer the trust outweigh any public interest in open justice.
So while open justice is viewed as a fundamental principle by all common law jurisdictions, courts seem to accept to varying degrees that exceptions should apply in certain circumstances. The scope of the exceptions varies, as does the extent to which judges appear willing to exercise their discretion and the importance attributed to relevant factors.
Generational change creates tension in existing structures
As the second or third generations of wealthy families become the primary objects of benefit in dynastic trusts set up decades ago, both the growing number of beneficiaries and their changing attitude to wealth can create tension within these structures – tension that is intergenerational, intragenerational and between beneficiaries and trustees.
There often comes a time when the custodians of many structures, even those with a certain amount of flexibility built in by prescient settlors, struggle to accommodate the increasingly divergent wishes of their beneficiaries as well as the changing wishes of the settlors themselves.
Courts in England and Wales and offshore jurisdictions with substantial trust industries are accordingly seeing an increase in applications relating to trust restructurings. While these are not necessarily contentious, in many cases the interested parties agree that the trust(s) should be restructured but cannot agree on how that should be done. In such cases the process of consultation with beneficiaries and court approval (sometimes in two or more stages) can take years before the trustees are finally able to implement their proposals.
Similarly, litigators are seeing more trustees who seek proactive advice due to concerns about the potential for disputes to arise because of inherent vulnerabilities in their structures, or the obsolescence of certain provisions due to changes in law, regulation or practice. Once the issues have been identified, many of them can be addressed pre-emptively. This can help to prevent (or at least gives the trustees a degree of protection against) possible attacks by beneficiaries, creditors or government authorities.
Courts are focussing on substance over form when it comes to trust disputes
Another after-effect of the rise of the bespoke offshore family trust has been that courts have had to grapple with issues which do not always allow a straightforward application of traditional trust law principles. These relate to both the drafting and the administration of such trusts. The courts have shown a notable willingness to look beyond the form of trust instruments and consider the practical effect or application of provisions and the wider context of the offshore trust industry.
This is not a new trend – precedent-setting example cases TMSF and Pugachev are twelve and five years old respectively – but it is one which characterises many of the latest significant judgments coming out of principal trusts jurisdictions. See for example the recent Bermuda Court of Appeal judgment in X Trusts, where the practical considerations of a protector's role feature prominently in the construction of a protector power; or the Privy Council's judgment in Grand View v Wong, where the Board looked beyond the literal scope of a trustee power to the wider context of the trust in its application of the proper purpose rule.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
