Trust corporations and professional trustees that take on the role of trustees as part of carrying on a business invariably wish to ensure they can:
- charge and recover their fees and expenses; and
- minimise their exposure to claims made against them for breach of trust.
Trustees' fees and expenses are frequently a source of disputes with beneficiaries, the settlor or successor trustees.
Trustees' commercial interests in administering the trust efficiently and profitably can, on occasion, conflict with their duty to administer the trust in the best interests of the beneficiaries. In order to manage this conflict it is suggested that trustees should:
- ensure that the trust instrument authorises the payment of the trustees' fees and expenses from the trust fund or that the settlor or some other person (with sufficient resources) has agreed to pay and, if necessary, provide security for such fees and expenses;
- ensure the level and type of fees charged are not precluded by the terms of the trust instrument and are clearly set out in the trustees' fee schedule;
- ensure their fee schedule has been disclosed to the settlor, protector, enforcer, primary beneficiaries, unit holders or such persons to whom the trustees have a duty to account1;
- provide sufficient notice (to the persons to whom the trustees have a duty to account) for any changes to the fee schedule; and
- clearly set out the level of fees and expenses charged to the persons to whom the trustees are required to account to.
In most common law jurisdictions, these requirements are reflected in the general law,2 applicable trust and regulatory statutes and codes of practice.
Trustees' terms of engagement often contain provisions which may purport to set out the services the trustees have agreed to provide, indemnify the trustees, release trustees from liability and limit the amount of the damages that the trustees may be required to pay if they become personally liable for any loss. This Guide considers the extent whether trustees' terms of engagement can achieve such objectives. This Guide also considers issues for trustees to consider when negotiating terms of exoneration and indemnification with their (unrelated) delegates.
The purpose of this Guide is to assist trustees in common law jurisdictions to manage the conflict between charging fees and expenses and minimising their personal liability on the one hand, and fulfilling trustee duties, on the other. The Guide is not specific to any particular jurisdiction but includes, by way of examples, reference to various statutes, regulatory requirements and cases from several common law jurisdictions.
PART 1- THE GENERAL LAW, THE TRUST INSTRUMENT & STATUTE
When may a trustee charge fees and recover expenses?
The general law position is that trustees:
- may not profit (including by way of fees or commissions) from their position unless they are authorised to do so.3; and
- are entitled to recover expenses they have properly incurred in connection with their administration of the trust.4
The trustees may be authorised to charge fees by:
- the trust instrument (by a charging clause);
- the sole beneficiary (if the trust is a bare trust such as a nominee arrangement) or all the beneficiaries who are together absolutely entitled to the trust property5;
- statutes which expressly provide that particular types of trustees may be entitled to charge fees; or
- the court.6
The Trust Instrument
Often trust instruments limit the ability of trustees to charge fees to the following persons:
- trust corporations (which, in a certain number of jurisdictions, refer to trust companies licensed in that jurisdiction and may not extend to trust companies licensed in other jurisdictions or private trust companies7); or
- lawyers, accountants and certain other professionals.
In practice, trust instruments rarely include provisions authorising non-professional individuals to charge trustee fees.
Despite the absence of an effective charging clause in a trust instrument, certain jurisdictions' trust legislation, (such as England and Wales, Bermuda, Isle of Man and Jersey for example) include provisions authorising certain types of trustees to charge reasonable fees provided the trust instrument does not express a contrary intention.
However, those statutory provisions are often limited to:
- trust corporations8 and professional trustees9; or
- public trustees10.
It is important to consider the relevant definition of "trust corporations" or "professional trustees", for the purposes of such provisions to ensure that a trustee may take advantage of the particular statutory provision to charge and deduct its fees from the trust fund.
A number of offshore jurisdictions do not even permit trust corporations to charge fees without permission from the court unless the trust instrument authorises such charges.
Perhaps surprisingly, few if any statutes in common law jurisdictions (such as Barbados, Bahamas and Cayman Islands) authorise lawyers, accountants or other professionals to charge and deduct their fees where the trust instrument is silent regarding the trustees' remuneration.
It is suggested that, under the general law, a court, under its inherent equitable jurisdiction over the administration of trusts, also has a discretionary power to authorise remuneration of any trustee (including a de-facto trustee).11 However, an express statutory provision giving the court the power to authorise trustees' remuneration provides trustees which fall within such a provision a clearer basis for their application to court for approval of their fees.
On occasion, a trust corporation may act as trustee of trusts governed by the laws of a jurisdiction in which the trust corporation is neither incorporated nor carries on business. If there is no charging clause in the trust instrument, the trust corporation may wish to seek advice as to whether the governing law of the trust authorises the trust corporation to charge fees in those circumstances. It may be (as discussed) that the applicable statute only authorises trust companies licensed in the jurisdiction of the governing law of the trust to charge remuneration. Consideration may need to be given as to whether the trust instrument may be amended to authorise trust companies to charge fees irrespective of their place of incorporation or trustee license registration.
Can de-facto trustees charge and recover fees and expenses?
Trustees that have not been properly appointed (for example, in accordance with the formalities set out in the trust instrument) are known as "trustees de son tort" or "de-facto trustees".
Statutes and trust instruments often do not specifically authorise de-facto trustees to charge or deduct fees from the trust fund. The general law position is that de-facto trustees are not authorised to recover from the trust fund fees charged for administering the trust unless such fees are approved by the formally appointed trustees, all beneficiaries together entitled to the trust property, or the court.12
The general law position is that de-facto trustees are entitled to have their reasonable expenses reimbursed from the trust fund provided they have acted in good faith13 and would have been entitled to be reimbursed for such expenses had they been formally appointed.14
Formally appointed trustees are required to exercise reasonable care when determining whether to approve de-facto trustees' fees, expenses and actions. It is suggested, in these circumstances, the formally appointed trustees should determine whether the:
- work performed by the de-facto trustees was within the powers of formally appointed trustees under the trust instrument;
- work performed by the de-facto trustees was in the interests of the beneficiaries or the proper administration of the trust; and
- amount of the fees charged and expenses incurred by the de facto trustees were reasonable in the circumstances.
Can trustees charging fees give rise to licensing issues for PTCs?
While definitions may change slightly from jurisdiction to jurisdiction, in broad terms, a private trust company (PTC) is a company:
- established for the specific purpose of acting as trustee of a particular trust or group of trusts which are established in connection with the same person, family or entity; and
- which does not market its services to the public.
A number of jurisdictions require trustees who carry on trust business within the particular jurisdiction to be licensed. Many such jurisdictions also grant PTCs exemptions from the licensing requirements. It is important trustees ensure that they qualify for a PTC licensing exemption if they wish to take advantage of it. In a number of jurisdictions, the trustee may not satisfy, or be less likely to satisfy, the PTC exemption if it (directly or indirectly) charges remuneration for acting as trustee. A detailed exploration of licensing requirements of trustees, exemptions and the impact of trustees charging remuneration upon the availability of such exemptions, is beyond the scope of this Guide. However, it is important to bear in mind the jurisdiction's trustee licensing requirements when determining how any remuneration of the PTC, its directors or administrators is structured in order to ensure that the PTC is not required to be licensed.
Can payment of remuneration of PTCs or PTCs' directors have implications for FATCA reporting?
The United States (U.S) Foreign Account Tax Compliance Act15 (FATCA) has been implemented in most jurisdictions by intergovernmental agreements (IGAs) such jurisdictions have respectively entered into with the U.S government. The IGAs have generally been followed by enabling legislation to facilitate foreign (i.e. non U.S) financial institutions in the jurisdiction to comply, clarify certain aspects of local FATCA reporting and introduce penalties locally for a failure to report.
Whether or not a trustee is required to register and report to its government (under a Model 1 IGA) or report directly to the U.S Internal Revenue Service (under a Model 2 IGA) primarily depends on whether the trustee is a:
- foreign financial institution (FFI), which is required to register and report unless otherwise exempted; or
- non-financial foreign entity (NFFE), which is generally not required to register and is not required to report unless it has decided to register as a direct reporting NFFE.16
A company that carries on business as a trustee would generally fall within the applicable IGA definition of an FFI. However, classification of PTCs may not be as straightforward, particularly as a PTC may not carry on business as a trustee and may not be part of a wider group of FFIs. The fact of trustees charging for their services is often regarded as an indicator of carrying on a trust business. In addition, the classification of a PTC for the purposes of FATCA (and consequently the classification of the trusts of which it is trustee) may depend in part on whether the PTC is deemed to be "managed by" (as opposed to simply "administered by") an FFI and also satisfies a "financial assets test" (otherwise known as a gross income test) respectively within the meaning of FATCA, the applicable IGA and enabling legislation.17
It has been suggested that remuneration of directors of the PTC may also impact on whether the PTC is managed by an FFI.18 This may be an issue if the PTC has corporate directors which themselves charge fees or are made available by an FFI as part of the FFI's service arrangement. However, subject to the applicable IGA and enabling legislation, individuals generally do not fall within the definition of an "entity" or an "FFI".19 As a consequence entities may not be managed by FFIs simply by reason of the fact that they are managed by individuals. Further, it is suggested, the remuneration of PTC directors who are individuals may not impact upon a PTC's classification provided those individuals are not made available pursuant to an agreement with an FFI. The PTC may also need to carefully consider whether it is managed by a PTC for the purposes of FATCA in circumstances where one or more of its individual directors, but not all, are provided by an FFI pursuant to a service agreement in return for fees.
From a strategic point of view, a PTC which is not an FFI (if permitted under the applicable enabling legislation) may nevertheless wish to register so that the trusts (of which the PTC is the trustee) may qualify as "trustee documented trusts". This would enable the PTC to report on behalf of the trusts without having to arrange a separate sponsor agreement with an FFI. If a trust is not a trustee documented trust, it may be required (as a "non financial foreign enity") to report a greater amount of information to discretionary fund manager FFIs and other FFIs or withholding agents which may manage the trust's assets. A more detailed analysis of FATCA, entity classification and reporting is beyond the scope of this Guide. However, the remuneration of PTC directors (directly or indirectly) and PTCs should be borne in mind for the purpose of categorising PTCs and the trusts of which they are trustees.
Who is responsible for paying the trustees' fees and expenses?
The trust instrument may specify that the trustees' fees and expenses are payable from the trust fund. However, on occasions, trusts (often commercial trusts) provide that the trustees' fees and expenses shall be paid (for example) by the company who arranged for the trust to be established and not out of the trust fund. The inclusion of such a provision in the trust instrument would generally override any statutory entitlement of the trustee to charge and recover fees and expenses, or general law entitlement to recover expenses, from the trust fund.20 In such circumstances the trustee may be precluded from recovering its fees and expenses from the trust fund subject to the court being prepared to authorise it to do so.
What is meant by the expression "properly charged or incurred"?
Assuming that, pursuant to the terms of the particular trust, the trustees are authorised to deduct their fees and expenses from the trust fund, trustees are generally only entitled to recover fees and expenses properly charged or incurred in the administration of the trust.21 It is submitted that a fee or expense was properly charged or incurred by a trustee in the administration of a trust if the work performed or expense incurred and the amount of such fee or expense was:
- authorised (expressly or implicitly) by the terms of the trust;
- reasonably required to facilitate the administration of the trust in the interests of the beneficiaries or to further the trust's purposes; and
- reasonable in amount given the nature and extent of the work performed.22
Trustees are generally under a duty to act honestly and in good faith and exercise reasonable care in managing their conflicts of interests when determining whether their fees and expenses were properly charged or incurred.
It is not uncommon for trustees to perform work or incur expenses which may be construed as being primarily for the purpose of defending or furthering the trustees' own personal interests. Examples include the time trustees may spend and the expenses they may incur defending the level of their fees or responding to breach of trust claims or obtaining advice to remedy issues arising from their breach of trust. Trustees are not generally entitled to charge such fees or to be reimbursed for such expenses from the trust fund.
However, other instances are less clear. For example, the outgoing trustees' negotiation of the terms of the trustees' indemnification on retirement may be construed as being primarily to protect the outgoing trustees' personal interests. It is submitted that it is in the interests of the efficient administration of the trust that the outgoing trustees' exoneration and indemnification be clarified by an instrument of retirement and indemnity to the extent the trust instrument or the law do not already clarify the position of the outgoing trustees in this regard. Professional trustees or trust corporations may be less likely to accept trusteeship if they were not entitled to charge reasonable fees in connection with negotiating the terms of their retirement. Negotiating the terms of trustees' indemnification on retirement (or removal) is an inevitable part of trust administration when transferring trusteeship. Accordingly, it is suggested the outgoing and incoming trustees' reasonable fees and expenses are properly charged or incurred in these circumstances to the extent they do not relate to the applicable trustees' breach of trust. As an aside, one may contend that the costs of, and problems associated with, negotiating terms of trustees' retirement is a reason why utilising PTCs may be attractive. The composition of the board of the PTC can be changed without changing the trustee and directors of PTCs are rarely exposed to genuine personal claims for which they require indemnification23.
It is further suggested that, subject to the terms of the trust or subsequent to an agreement to the contrary, former trustees should be permitted to charge and recover reasonable fees and expenses in connection with:
- negotiating a chain indemnity with a successor trustee; or
- responding to requests or disclosure orders for information or documents related to the trust,
which may be charged or incurred, even many years after the former trustees have ceased as trustees of the particular trust.
An outgoing trustee may be wise to clarify the position by ensuring the instrument of retirement or removal expressly provides that it may charge fees in such circumstances.
Trustees may consider making an application to the court (to exercise its supervisory jurisdiction over the administration of trusts) to inter alia request orders or declarations that the trustees' proposed course of conduct:
- is authorised by the terms of the trust24;
- be approved by the court as a proper exercise of the trustees' discretion (for example, in circumstances where the trustees' proposed exercise of their discretion would constitute a momentous decision in the circumstances of the trust)25; or
- relates to a proposed decision by trustees to commence or defend proceedings in their capacity as trustees of the trust26,
and for the trustees' fees and expenses in connection with the course of conduct to be paid from the trust fund. When making the application, the trustees are generally required to disclose all relevant facts and documents to the court.27
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1 The trustees' duty to account rarely requires trustees of a discretionary trust to negotiate fees with and, at its own initiative, disclose invoices and accounts to, all beneficiaries. In addition to the above suggested disclosure requirements, trustees are required to disclose invoices and accounts to beneficiaries upon request. Consider also the impact of king pin provisions on trustee accountability i.e. where powers have been reserved or granted by the settlor. This is discussed later in the Guide.
2 The common law and equity.
3 Bray v Ford  A.C. 44.
4 See Carver v Duncan  A.C. 1082.
5 In an application of the principle in Saunders v Vautier (1841) 10 L.J. 354. Note that certain jurisdictions' statutes have expressly restricted the application of Saunders v Vautier in relation to amendment of the trust instrument. See, for example, section 10 of the International Trusts Act 1984 in Cook Islands and sections 86 and 87 of the Trustee Act Chapter 176 in Bahamas.
6 For example, section 32 of Bermuda's Trustee Act 1975 provides the court discretion to authorise any person to charge remuneration for the services as trustee. Article 51(2)(a)(ii) Trusts (Jersey) Law 1984 (TJL) provides that the court may in its discretion make an order concerning the remuneration of a trustee. section 44 of the Barbados Trustee Act 1985 Cap. 250 and section 50 of the Trustee Act Chapter 176 in Bahamas respectively provide inter alia the Court the power to authorise remuneration of any trustee where the circumstances appear to justify it. Section 43 of the British Virgin Islands Trustee Act Chapter 303 provides that where the court appoints a corporation to be a trustee it may authorise the corporation to charge such remuneration as the court considers fit.
7 See, for example, section 1 of Bermuda's Trustee Act 1975 which defines of trust corporation as a trustee holding an unlimited trust license issued under the Trusts (Regulation of Trust Business) Act 2001, but does not include private trust companies or trustees incorporated in any jurisdiction or trust corporations licensed in jurisdictions other than Bermuda. A similar approach is taken in a number of the jurisdictions
8 See section 22A of Bermuda's Trustee Act 1975 which provides that a trust corporation may charge reasonable remuneration for its services as trustee subject to a contrary intention in the terms of the trust or any order of the court. Notably, the statutory power does not appear to extend to professionals such as lawyers, accountants and so on. See also section 29(1) Trustee Act 2000 England and Wales which provides that a trust corporation (which is not trustee of a charitable trust) may charge reasonable remuneration for its services. Section 29(2) Trustee Act 2000 provides that a trustee acting in a professional capacity may charge reasonable remuneration provided such trustee is not the sole trustee and all the other trustees agree in writing.
9 Article 26(1A) TJL provides that where the terms of a trust are silent regarding a trustee's remuneration, a professional trustee shall be entitled to reasonable remuneration for services that the professional trustee provides after the paragraph came into force during 2012. Article 1 of TJL defines professional trustee as a trustee registered under Article 9 of the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission to carry on trust company business as defined therein.
10 See section 35(4) of the Trusts (Guernsey) Law 2007 (TGL) which permits public trustees to pay its fees from trust property provided it has been appointed to act as trustee under the Public Trustee (Bailiwick of Guernsey) Law 2002. However, TGL does not presently appear to include provisions authorizing trust corporations or professional trustees to charge and deduct remuneration from the trust fund in the absence of (in accordance with section 35(1) of TGL) authorization from the trust instrument, all of the beneficiaries in writing or an order of the Guernsey Royal Court.
11 See In the matter of the Representation of BB, A & C- In the matter of the D Retirement Benefit Trust  JRC 672.
13 Travis v Illingworth  W.N 206.
14 See Soar v Ashwell  2 Q.B. 390 and Phipps v Boardman  Ch. 992.
15 Chapter 4, Subtitle A (sections 1471 through 1474) United States Internal Revenue Code of 1986.
16 But is still generally required to certify to withholding agents that is has no U.S accountholders that are U.S persons or to provide the name, tax identification number on its substantial U.S owners to the withholding agent.
17 See paragraph 2.28 of the The Implementation of the International Tax Compliance (United States of America) Regulations 2014, HM Revenue and Customs, 28 August 2014.
18 Peter A. Cotorceanu, FATCA and Offshore Trusts: A second bight of the elephant, 23 October 2015, http://www.taxanalysts.com/features.nsf/Features/DA7E5C0B6EF087B385257C0D0046A8F8?OpenDocument, web-site visited on 30 May 2015.
19 See paragraph 2.28 of the The Implementation of the International Tax Compliance (United States of America) Regulations 2014, Op, Cit.
20 See Lewin 17th edition at 21-03.
21 Re Grimthorpe  Ch. 615.
22 Note section 29(3) Trustee Act 2000 England and Wales provides that "reasonable remuneration" means, in relation to the provision of services by a trustee, such remuneration as is reasonable in the circumstances for the provision of those services to or on behalf of that trust by that trustee and for the purposes of subsection (1) includes, in relation to the provision of services by a trustee who is an authorised institution under the Banking Act 1987 and provides the services in that capacity, the institution's reasonable charges for the provision of such services.
23 See HR v JAPT  pens. L.R. 99 but note Bayley v SG Associates  EWHC 782 (CH)
24 See Public Trustee v Cooper  WTLR 901.
26 Re Beddoe  1 Ch 547.
27 In the matter of [AAA] Children's Trust. Guernsey Royal Court. 8 January 2014.
Previously published in The Trusts and Wealth Management Journal, December 2015
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.