A bad day at the trustee’s office

The Mourant Ozannes International Trusts conference followed the day in the life of a trustee and the issues that may come up with regard to information requests from beneficiaries and tax authorities, confidentiality rules, financial management and in negotiations with trust protectors, as well as legal issues such as the potential for a court to set aside certain actions by a trustee made by mistake. 

While no single day is ever going to be like this, said conference chair Shan Warnock Smith, the one-day event sought to combine everything that a trustee could face, which would be difficult to handle, presenting it in a mix of lectures, interactive sessions studying case studies and even role play akin to a Latin telenovela.  

The issues debated at the conference hosted by law firm Mourant Ozannes at the Ritz Carlton, Grand Cayman, on Friday, 14 October, were as varied as mental capacity of a settlor, confidentiality obligations in the light of increasing disclosure and the applicability of the rule in Hastings Bass.   

Mental capacity  

Mental capacity or the lack of it can be a matter of dispute with regard to trust and estate decisions, particularly when the settlor reaches an advanced age or falls ill. Key note speaker Robert Hunter of Herbert Smith addressed the issue of mental capacity of the settlor when making important decisions or taking in information, because “it is enormously common for professional people to miss issues of capacity on the part of settlors”, he said. 

The reason for this is to some extent social veneer, the social skills used by those with capacity issues to conceal the fact that they don’t really understand what is going on. This is particularly developed in people with boardroom skills.  

The second reason, Hunter said, “is that most people don’t understand the process involved when they are giving instructions to someone who is actually absorbing information and making a decision on what he is going to do with his money”. 

In addition to the relevant case law and factors determining the level of understanding required on the part of the settlor when making certain decisions, Hunter took an excursion into psychology and neurological science to make his point. 

Hunter described the Atkinson Shiffrin model as the main model used in most cases to assess mental capacity. According to the model, memory consists of three stages starting with iconic memory, a form of sensory memory used to briefly store visual information, for example when reading a document, as well as the complementary echoic memory for hearing and haptic memory for touch.

In addition the brain uses short term memory and long term memory. Long term memory, he explained, is split into a declaratory and a procedural part and declaratory memory itself is split into episodic and semantic memory. 

Episodic memory, storing for example where one was and when, would decline in normal aging, whereas semantic memory, including the meaning of words, actually tends to improve in the aging process, Hunter said. Procedural or implicit memory, such as the ability to ride a bike, is in turn something that is unaffected by aging.  

Rather than the complete displacement of memory, capacity issues with long term memory tend to be interference, he said. “You cannot remember whether it was Tuesday or Wednesday that something happened because you have so many memories and they are interfering with one another.” 

Short term memory, in contrast, is used most of all when a settlor is trying to understand what a document does. Memorising a certain number of facts, generally thought to be about seven chunks of information, makes heavy use of acoustic coding in the short-term memory, whereas the long term memory codes information semantically. The acoustic coding in the phonological loop works like a tape loop that records over and over. 

“When you are handing documents to a settlor and he has damage to this area of memory, he may not be able to read quite as well,” Hunter said.  

The reason he explained the details of this theory, he said, is to make trust professionals and lawyers understand how complex the issue is and avoid blanket statements about mental capacity. For instance a settlor’s episodic memory can be great but is not necessarily indicative of the ability to understand what a document means and the effect it has, he said. 

In order to document mental capacity, lawyers should ask settlors open questions about their thinking behind a certain action or decision, he advised. 

Confidentiality  

A panel debating confidentiality in the light of the increasing burden of disclosure concluded that Tax Information Exchange Agreements have not had a major effect on the trust business or the preservation of confidentiality rules.  

International financial centres did not see many information requests as a result of TIEAs, the panel of trust experts from Cayman, the Bahamas, Guernsey and the UK noted. Moreover, it is also not a major issue for clients and has not stopped the business from growing, according to Butterfield’s Julien Martel. 

Robert Shepherd, partner at Mourant Ozannes in Guernsey said trustees should bear in mind that foreign tax authorities need to meet certain procedural requirements, such as the identification of the taxpayer and the need to exhaust all local powers first, before an information request can be complied with. There are a lot of things that trustees can and should do to honour their obligations of confidentiality, Shepherd said.  

Confidentiality obligations could however lead to issues in other areas, for example with regard to due diligence disclosures when undertaking investments. The difference between an investment fund’s due diligence requests and disclosure obligations by law can be a significant obstacle, the panel noted.  

Although beneficiaries in trust cases want the trustee to be able to disclose certain information, it is important to understand the costs and benefits, said Rawlinson & Hunter’s Alan Milgate. The consequence is that a lot more planning has to go into the preparation of an investment and the trust structure has to be explained upfront. 

Hastings Bass not quite dead  

A session looking at the latest development regarding the rule in Hastings Bass found that Hastings Bass is not dead but now much more narrowly defined. The rule effectively meant that if a trustee made a mistake, an application could be made to the court to set aside the decision. The rule has most commonly been invoked to avoid unintended tax liabilities in cases of tax planning gone wrong. 

Trustees were very naturally pleased with this “get out of jail free card” and professional advisers were very pleased with it because it meant they could not be sued for professional negligence, said Alison Meek of Harcus Sinclair. 

However, the judiciary became increasingly uncomfortable with the rule because it was something that trustees could use but ordinary citizens could not. Meek quoted judge Park in Breadner v Granville-Grossman who argued: “There must surely be some limits. It cannot be right that whenever trustees do something which they later regret and think they ought not to have done, they can say that they never did it in the first place.” 

In the appeals in Pitt v Holt and Futter vs Futter the Court of Appeal clarified the law on mistake by concluding that a trustee’s exercise of discretion can be void if it was outside the scope of the trustee’s powers and it can be voidable if it was within the trustee’s power but breached fiduciary duties.  

If the trustee failed to take into account relevant considerations or took into account irrelevant considerations this would normally constitute such a breach of duty. However, if the trustee has taken into account or acted on professional advice a decision cannot be set aside, resulting in a much more narrow scope for the Hastings Bass rule.  

The decision is currently subject to an appeal to the Supreme Court.  

Copy of Trusts conference 014

Panelists at the Mourant Ozannes International Trusts conference. From left Julien Bartel, Alan Milgate, Shan Warnock Smith, Robert Shepherd and Ziva Robertson.

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