All too often, disruption and fighting can be an unhappy by-product of the process of dividing up the estate of a deceased relative. This can cause significant extra stress for family members at an already difficult time.
High profile disputes have been common in recent months, with the financial legacy of a number of public figures being contested in public. For example, the family of TV personality Lynda Bellingham, who passed away in 2015, have been subject to a media frenzy recently after widower Michael Pattemore reportedly spent over half a million pounds on a new home, having allegedly evicted his stepsons from his late wife’s previous marriage.
While we do not know the full details of the case, it serves as a timely reminder of the advantages of appointing independent professional trustees to ensure all beneficiaries’ needs are considered, while minimising any potential conflict.
Indeed, the benefits of a trust are much wider than tax mitigation alone. Although trust arrangements are a valuable planning tool that can help mitigate inheritance tax liability, an often-overlooked benefit is that they provide significant control over how assets are distributed on death.
This control can be achieved in part through a discretionary trust, which hands trustees discretion over how best to divide assets among beneficiaries. By putting in place a letter of wishes, settlors are able to provide guidance and some direction to the trustees, indicating how they would prefer the assets to be distributed.
Trustees can normally be expected to follow the guidance set out in an expression of wishes, although, ultimately, this is not binding and in some circumstances the trustees may be able to justify decisions the settlor may not have approved of.
This discretion can pose problems after the death of the settlor, particularly where close friends and family members have been appointed trustees. Often one or more of the trustees are also beneficiaries, presenting an obvious risk of a conflict of interest.
Trust law also places a duty on trustees to review investments and take proper advice over the management of the trust: for example, by seeking tax advice on the impact the distribution of assets may have on beneficiaries.
Furthermore, the trustees also have a duty to treat all beneficiaries of the trust fairly. For instance, some beneficiaries may prefer lower-risk investments designed to preserve capital, while others may favour longer-term growth assets. It is the duty of the trustees to consider the interest of all beneficiaries and balance their interests proportionately when making decisions.
When establishing a trust, it is also possible to put in place a “protector”. In effect, an individual appointed as protector has final say should their fellow trustees fail to reach an agreement on a particular decision. This can alleviate stalemate situations if the trust requires consensus among all trustees (or a majority decision); however, it places additional pressure on the protector.
Responsibilities for trustees
These responsibilities create a number of challenges and potential pitfalls for trustees to overcome. Nonetheless, when choosing a trustee, many people default to family members and friends, feeling confident those individuals will be able to act impartially to exact their wishes. This might seem like an obvious choice but the reality of the responsibilities of trusteeship should not be taken lightly.
Whereas a friend or family member might struggle with the complexities of trust and tax law (especially if the trust is subject to a different jurisdictional legal system), clients with a professional trustee can rest assured the trust provisions and regulations are not being breached.
A professional trustee also removes the moral and personal burdens of providing objective decisions, which may weigh heavily on a friend or family member. Additionally, without the possibility of personal complications, a client can be confident his stated wishes will be fully taken into account.
Although not specifically a trust issue, the dispute involving Bellingham’s widower provides a good example of the potential for conflict to arise where it is argued assets have been distributed unfairly.
It is even possible beneficiaries may seek to sue trustees through the courts if they believe they have failed in their duties. Lay trustees should be aware of this worst-case scenario before taking up trusteeship.
Professional trustees will not be suitable for everyone but clients should give careful consideration to the pitfalls of appointing a lay trustee before asking a friend or family member to oversee the distribution of their financial legacy.
Rachael Griffin is financial planning expert at Old Mutual Wealth