The past two years of global economic downturn have, among other things, brought about fundamental reassessment of the importance of the concept of risk, and in many cases have resulted in increased aversion to any loss.
This same market turmoil has produced a range of buying opportunities for those ready to exploit them. Such opportunities are likely to interest mainly those with a higher risk appetite, given that (supposedly) risk-free alternatives (such as cash deposits) continue to deliver historically low returns.
Being entrepreneurial in the current environment is relatively easy for an individual who controls assets directly. They can exploit opportunities as they see fit and make sure that the cash/leverage is in place to help progress their plans.
If the assets (or the majority of them) are held in trust but not controlled directly by the beneficiaries, the beneficiaries need to request that the trustee consider making such investments. This requires the trustee to consider risks and be more adventurous than they ordinarily might. As a result, trustees may refuse these types of requests.
However, if the trustees agree the principle (and the terms of the trust allow), myriad tactical opportunities present themselves, including:
- purchasing land, product and stock at bargain prices
- buying up assets from distressed firms
- acquiring the competition to increase market share.
Unlike fund managers, trustees are not paid a performance fee for taking risks. It is a moot point whether remuneration based on performance would or should affect trustees' decision-making. Fund managers have a different, performance-driven, focus to trustees, who have a primary duty to protect and enhance trust assets. So, the prudent trustee must be risk-averse by nature.
In the future, inflation may cause assets to depreciate faster in real terms. Cash and gilts may be low-risk investment solutions for clients in the current climate, but will they be regarded as prudent in hindsight by beneficiaries when there has been below market performance in the trust fund?
'A process must be established whereby the trustee can take a degree of risk within the trust, without abdicating his responsibility as a "prudent man"'
If trust assets are illiquid, then leveraging the trust assets is a possibility to generate liquidity for investment purposes. Taking on debt must be considered carefully by a trustee, although many have experience of leveraging portfolios and property for this purpose and, of course, the trustee can usually appoint an expert to advise the trust on such matters.
Where a trustee has concerns that the entrepreneurial project or loan proposed is too onerous, it may be possible for the trustee to make a distribution to a beneficiary, to allow the beneficiary to use the money as they see fit. Such a step would, however, require a consideration of the tax consequences for the beneficiary.
Problems facing the trustee
Assuming access to funds has been resolved, other issues will need to be addressed before a project is undertaken. Such questions might well include the following:
- Are all the beneficiaries ascertained as a class, are they all considered in the request, and what are their views of the proposed investment? If the beneficiaries are not considered in their entirety or don't have a consensus view, can this course of action be considered to be in their best collective interests? If not, the trustee may risk being considered to be in breach of trust.
- Are the trustees demonstrating control of their structures? If a trustee agrees too readily or with insufficient information then how are the trustees demonstrating independent control? Moreover, is governance actually resting with the client where he is resident? If the governance of the structure is found to be tax inefficient, then the underlying structure may well be considered to be resident for tax purposes where the client is, which may leave the trust open to investigation from the relevant fiscal authorities.
- If the settlor dictates how the assets within the trust are used and the trustee administers the trust strictly in accordance with his directions, then the question of sham comes into play. If the trust is found to be a sham, there are potentially painful consequences, as the trust assets may need to be redistributed back to the settlor.
Of course, settlor-directed trusts get around these problems, but many trusts are not created as such for tax purposes. In addition, in In Re Esteem Settlement  JLR 188 the Court held that both settlor and trustee intended that the assets should be held on terms different to those in the trust deed and that the trustee went along with the settlor's intention in a reckless manner, so the test is no longer unilateral.
All three scenarios have the potential to lead to a trustee's worst nightmare: being sued by the beneficiaries for breach of trust.
The risk/reward matrix
The heart of the problem lies in the risk/reward matrix. The law tends to punish the trustee who takes risks that are subsequently proven to fail, but is unlikely to punish the risk-averse trustee, irrespective of subdued performance.
In Bartlett  1 Ch 515 Brightman J stated that 'a professional corporate trustee is liable for breach of trust if loss is caused to the trust fund because it neglects to exercise the special care and skill which it professes to have'. The trustee was held not to have discharged its duties in supervising the new ventures of the company, and was ordered to make good all losses within the trust.
Nonetheless, the decision offered some potential for the trustee to make commercial choices, by making clear that liability will not be attributed to a trustee who has committed no more than an error of judgement from which no businessman, however prudent, can expect to be immune. The Court went out of its way to say that a trustee is not 'bound to avoid all risk and in effect act as an insurer of the trust fund'.
The way forward
All may not be lost for trustees who have entrepreneurial demands being made of them, and possibilities exist that allow them to be more active with trust funds. Even so, a process must be established whereby the trustee can take a degree of risk within the trust, without abdicating his responsibility as a 'prudent man'.
If a settlor is aware of a need for entrepreneurial decision-making within the trust prior to a structure being created, it is possible to create a structure that keeps the settlor, beneficiaries and trustee aligned with this objective. However, standard structures and drafting are unlikely to be suitable.
Jurisdictions and structures
One of the obvious possibilities is to select a combination of jurisdiction and structure that allows the trustee (and in certain circumstances the settlor) more flexibility in managing the trust's assets.
Private trust company (PTC): Many consider the PTC the most appropriate and flexible structure for family businesses. The board of the trust company can comprise family members, advisors and fiduciaries. The settlor's family are usually closely involved with the trust company, and can influence the underlying structures.
- Special purpose trust: BVI VISTA trusts, which can be created for the sole purpose of holding shares in a BVI company that is run by its directors, without any power of intervention being exercised by the trustee. The settlor's family can comprise the directors of the board.
- In comparison, Cayman's STAR trust regime allows trusts to be created for a pure purpose, for beneficiaries, or for both. The trust deed can be drafted so as to exclude the rights of beneficiaries to information. The STAR trust can be used for holding operating companies that principally comprise the director's family as the board.
- Settlor reserved powers: Jersey also offers purpose trusts, which allow settlor-reserved powers within the trust deed. These powers can provide the settlor with a high degree of influence over the trust and assets. In reality, their application is normally for sophisticated hybrid purpose trusts or business purpose trusts where an investment advisor (usually a client-controlled company) is appointed pursuant to a business plan which the trustee is bound to follow. In most cases, the settlors are usually experienced investors.
- Foundations: Entrepreneurial families may find foundations an effective way of exercising influence over a structure. Although Jersey foundations must have at least one Jersey-regulated person on the council, the other council members can include the founder or family members.
- One of the key features of a Jersey foundation is that the council is answerable to a guardian (who can be the founder or his representative) rather than the beneficiaries. The council does not have a fiduciary duty to the beneficiaries (and the beneficiaries have no right to information) and, accordingly, a foundation may be able to undertake more entrepreneurial activity than a trustee.
- Using corporate structures: Trustees often use a standard structure of trust, holding company and subsidiary companies (such as operating companies). Bartlett comes into play here. But where there is an existing family business that is not substantially changing the direction of its long-held business activities, many trustees would consider it unnecessary to have one of their representatives on the board. In reality, most trustees would be happy with regular shareholder reporting to meet their fiduciary responsibilities.
For riskier business, where the trustee is unlikely to have any particular expertise of the industry, having a representative on the board of the operating company is an option, which can help the trustees fulfil their fiduciary duties.
Trust drafting and settlor's investment profile
Many trusts have clauses within their deeds which exonerate the trustee from loss within the trust. However, as West v Lazard Brothers Co (Jersey) Limited  JLR 165 shows, trustees cannot lose significant trust assets and expect exoneration, if the clause has not been adequately explained initially.
Nowadays, professional trustees cannot realistically expect a court to view charges of negligence and gross negligence more leniently, as the professional trustee is deemed to be more qualified than his lay counterpart.
Yet where a settlor has a trust drafted from scratch, provisions can be included that allow the trustee to set aside a portion of the trust assets, which can then be used as part of a more adventurous investment path. Assets could be invested in a range of classes, including higher-risk equities, residential and commercial property and even buying into operating companies.
The entrepreneurial trustee needn't therefore be an oxymoron. Drafting options exist to accommodate a more aggressive investment approach and appropriate advisors and specialists can always be retained to help shape an investment strategy that can take maximum advantage of commercial opportunities.
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.