One of the impacts that we are seeing at this stage of our emergence from the Global Pandemic is a notable increase in enquiries regarding potential changes of trustee – this trend appears to be driven by three key factors: M&A activity involving regulated financial services providers; trustees taking a different view on risk appetite during times of market disruption and volatility; and clients seeking new support because of changing requirements or service levels.
This piece explores issues to be considered when changing trustee, including who has the authority and power to make such a change, indemnities and liens for former trustees.
When the Global Pandemic took hold in early 2020, the fiduciary services industry saw an initial freeze in activity, almost as if companies and clients were holding their breath, and waiting for some certainty to emerge from the disruption and turmoil. This unknown factor made fiduciary services providers and clients alike focus on client service.
Fiduciary service providers were trying to ensure that they could continue to provide their clients with an equivalent level of service from a workforce that was almost exclusively working from home.
Clients were not only concerned about their actual underlying assets and their security - but were also looking at whether they were getting the responses and service levels that they expected from their fiduciary service provider, and particularly whether the service they were getting justified the fees they were continuing to pay.
After the initial few months had passed, and the 'New Normal' working practice started to consolidate, a new phase started to emerge, with fiduciaries and clients starting to look more closely at the detail of their underlying structures and assets. The emergence of some clarity and certainty created an opportunity for all sides to take stock of their position, reassess their goals and priorities and plan for the future, taking into account a considerable number of new variables that previously may not have been needed.
Fiduciary services providers were now considering questions including:
- Whether it was still viable to continue given the increased compliance and administration costs over the last decade?
- Whether their existing book of business could sustain them?
- Whether, given the restriction on travel, they needed to have a permanent presence in another jurisdiction? and
- Whether they were in a position to expand their business and make an acquisition, or in a position to be acquired or merge with another provider?
On the other side of the table, clients faced their own questions, including:
- Whether their private wealth structure is still suitable for their needs?
- Whether they should expand their underlying assets and business, or streamline their structure to reduce unnecessary fees?
- Whether their fiduciary service provider is still able to provide them with the service they expect, or whether there is another provider better suited to their current circumstances?
These questions, amongst other things, have led to a marked increase in the number of fiduciary service providers either (i) terminating their service offering to clients, (ii) merging with another provider to add a greater foundation and stability to their offering, (iii) selling a book of business that did not fit their new business/risk model going forward, and (iv) acquiring or being acquired by another fiduciary service provider in whole or in part.
Such actions have had a knock-on effect on clients, who may either choose to remain with their present provider, or decide to look for an alternative provider who may be more suited to their current and future needs. As a result, we have seen a significant number of clients looking to changing their trustee, which has, in turn, led to an increased focus on the formalities for changing trustee and the associated indemnities that may be involved.
Transfers of Trusteeship
The mechanics for transferring a trusteeship are usually contained within what is referred to as an instrument of retirement, appointment and indemnity (or a variation thereof), in short a 'DORA'. The DORA is the document by which the incumbent trustee retires and and another is appointed in its place to take over the trusteeship. Legislation governing trusts (in Guernsey The Trusts (Guernsey) Law, 2007 (as amended) and in Jersey the Trusts (Jersey) Law 1984 (as amended) (together the "Trust Laws") can also have an impact on the terms of the DORA.
The Society of Estate and Trust Practitioners provides a template DORA, which is a great starting point. But as each client structure may have its own differences and its own bespoke requirements, the template should not be blindly 'copied and pasted'.
There are a few areas to pay especially close attention to when drafting or reviewing a DORA, to reduce the risk to either the incoming or outgoing trustee.
Issues: Powers and Consents
One of the first issues for consideration is where the power to change a trustee actually lies.
- Under the terms of the trust, is it the trustee or another person/office-holder that holds the power to appoint and remove trustees? If the trust is silent on who has such powers, are there any statutory powers under the trust's governing law that apply?
- Have the correct powers been exercised to transfer the trusteeship?
- Have all required consents (i.e. from a settlor, protector, enforcer etc) been obtained and notice requirements been fulfilled?
- Have all the necessary persons been included as parties to the DORA?
- Are there any specific formalities that need to be observed under the trust terms for a trustee to retire? If there is no specific power to retire, is there a statutory power under the trust's governing law?
Subject to a few caveats, the Trust Laws provide that where a trustee resigns, retires or is removed it shall be automatically released from liability to any beneficiary, trustee or other person. This does not, however, cover liabilities to third parties.
To provide additional protection for outgoing trustees, the Trust Laws provide that outgoing trustees shall be entitled to request "reasonable security" against liabilities (existing, future, contingent or otherwise) before transferring trust assets to an incoming trustee. Although the term "reasonable security" is not defined in the Trust Laws, in practice, this usually takes the form of a contractual indemnity, ordinarily contained within the DORA.
Generally, an incoming trustee will be asked to indemnify the outgoing trustee in respect of liabilities for which it would have been able to seek reimbursement whilst it was still in office as trustee - so not fraud, wilful misconduct or gross negligence. That said, such indemnities do not fall into the "one size fits all" category, and the appropriateness and the terms of any indemnity should always be considered carefully. When doing so certain matters should be considered, including:
- Who is providing the indemnity? If the indemnity is being provided by a third party, and not the incoming trustee, does the third party have the means to "pay up" in the event that the indemnity is called on in the future?
- Will the outgoing fiduciary service provider exist following the transfer of trusteeship and, if so, will it be able to fulfil its obligations if necessary?
- What if the outgoing fiduciary provider merges or is taken over by another provider in the future? Should its successors and assigns also be able to benefit from the indemnity?
- Is the indemnity to be time limited? If so, why?
- Does the indemnity try and go beyond what is permissible by law – i.e. does it seek to apply to liabilities arising as a result of the fraud, willful misconduct or gross negligence of the outgoing trustee?
- Are there any circumstances in which the incoming trustee will be under an obligation to obtain or procure indemnities (either directly or indirectly) for the benefit of the outgoing trustee? Such as where the incoming trustee retires in favor of a successor or where the incoming trustee makes a capital distribution over a certain minimum threshold amount to a beneficiary.
- Is there a requirement for the incoming trustee to indemnify any former trustees (i.e. who held office prior to the outgoing trustee)? These are sometimes referred to as "chain indemnities".
- Who needs to be a party to the indemnity?
- Have any claims been made against the outgoing trustee or the trust fund prior to the new trustee taking over?
- Is there any on-going litigation between the trustee or the underlying beneficiaries that the new trustee should be aware of?
S.44 of the Trusts (Guernsey) Law 2007 (as amended) provides a trustee of a Guernsey law trust with a statutory non-possessory lien over trust property. The lien covers the trustee's right to pay liabilities from trust property and where it is not properly exonerated or reimbursed from the trust property, to follow, recover and appropriate the trust property for the purpose of realisation, payment and reimbursement. Therefore, when considering a Guernsey law trust, this is another safeguard that generally allows a trustee to reimburse itself from trust property when necessary, and this statutory right is commonly held in conjunction with an indemnity in the DORA.
The position under Jersey law is slightly different. Although the Trusts (Jersey) Law 1984 (as amended) does not provide for a statutory nonpossessory lien over trust property, Jersey's Court of Appeal has confirmed in relatively recent case law that a trustee does indeed have an equitable non-possessory lien over the trust fund. Notwithstanding this, and in practice, the preference of Jersey practitioners is still to insist upon contractual indemnities to be provided (in a DORA or otherwise) upon a change of trustee.
With ever-increasing activity in terms of fiduciary service providers merging or changing hands, as well as movement of underlying clients between fiduciary service providers, the need to act quickly and efficiently remains paramount. The issue of identifying all the concerns of a transfer of trusteeship and mitigating any associated risks, remains more important than ever for both fiduciary providers and the underlying clients.
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.