Many professionals in the legal, tax and financial planning sectors are now involved in the “Great Wealth Transfer”. With that comes a growing set of challenges. As more practitioners advise on intergenerational wealth transfers, contentious trusts and estates also appear to be increasing.
There may be no direct correlation, but modern family dynamics add complexity. Blended and multi-jurisdictional families, as well as cohabiting couples, are increasingly common, creating greater scope for disputes as wealth passes on.
With this in mind, it’s increasingly important to choose the right executors or trustees. It’s not just that they must be equipped to manage the transfer of wealth; they must understand the weight of responsibility they carry – and you must be confident they will act in the best interests of all beneficiaries.
Clients are often keen to appoint family members, but that can create obvious conflicts of interest, especially when they or their children are affected by the decisions. Even where trustees act with the best intentions, others may see matters differently. Given The Issues That Can Arise, Is There a Greater Need for Independent Trustees or Protectors?
There are obvious benefits to having someone impartial. They may:
- help prevent a breach of trust, provide an unbiased view on a decision,
- add oversight and integrity where decisions involve favouring a trustee,
- potentially break a stalemate, or
- act as a peacemaker to prevent or manage disputes.
But appointing an independent trustee isn’t necessarily enough to prevent disagreements. Where wealth and complicated family dynamics are involved, disputes are always just one misstep away. Further safeguards may be needed to preserve their authority and ensure their independence has practical effect.
The blocker
If the trust’s governing law or deed requires unanimous decision-making, appointing an independent trustee can ensure that no decision proceeds without their approval. However, that precaution only works if the independent trustee does not die or cannot be removed.
There will be circumstances in which removal is essential, for example where accountants cease to engage, or solicitors are struck off. But removal may also leave a trust without the independent third-party intended to provide oversight.
To avoid this, deeds could specify that there must be at least two trustees at all times, one of whom must be independent or a professional. Of course, the only way to guard against death, barring a spectacular scientific breakthrough, is to appoint a professional trustee company.
The veto
Where the deed removes the requirement for unanimous decision-making, or where majority rule applies by default, an independent trustee may find themselves outvoted. In Scotland, there is a concept of a trustee “sine qua non” whereby decisions cannot be made without their agreement, even if they are outnumbered. It’s effectively a right of veto and is a very powerful way to ensure that the independent trustee always has a say.
Other jurisdictions may have similar mechanisms, but more generally, drafting a right of veto into a deed could be helpful. Alternatively, the independent person could be appointed as a protector, with rights of veto or a requirement to vote on decisions.
The impartial voice
Trusts may include provisions allowing conflicted trustees to participate in the decision-making process. Where that happens, questions often arise. Having an independent trustee’s unprejudiced agreement adds credibility.
If there is no “blocker” or “veto” power, there may be restrictions that can be placed on trustees’ ability to act in conflict. A caveat could require that the conflicted party is not the sole trustee. However, families can get around that in majority-rule situations, where they favour each other in a series of decisions. That caveat could be extended to require the agreement of the independent trustee.
The peacemaker
In case of a stalemate or disagreement, a neutral trustee can play an important role in guiding co-trustees towards resolution. Their distance from the dispute allows them to take a balanced view and offer an objective perspective.
Some trust deeds include mandatory mediation provisions. These could be drafted to allow an independent trustee to require co-trustees to attempt mediation before matters escalate to court.
The problem
As noted above, independent trustees may still be vulnerable to removal. It is not unusual for the settlor to reserve the power to remove trustees. Thought should therefore be given to who might exercise that power if the settlor loses capacity.
The power could terminate on incapacity to avoid misuse. Alternatively, it might restrict the power by an attorney to only be used where that attorney is not a trustee or require that a suitable replacement must also be appointed.
The Scottish problem
In Scotland, there was a public policy need for a way to remove lawyers who had appointed themselves as trustees without having to apply to the court.
The Trusts and Succession (Scotland) Act 2024 introduced a power for co-trustees to remove a trustee appointed because of their profession if they are no longer a member of that profession.
That addressed one issue but created another: co-trustees may now be able to remove an independent trustee (e.g. who has retired or taken a career break). There is currently no mechanism for that trustee to object or seek reappointment. The legislation can be displaced by the trust deed. If the intention is to maintain a neutral trustee who cannot be removed so easily, the drafting considerations above may be crucial. Alternatively, parties may prefer to use a trustee company or appoint a protector.
Will independence solve the issues?
There is no silver bullet that will stop beneficiaries querying the actions of trustees, nor is it possible to avoid disagreements where family relationships are involved. Simply appointing an independent trustee is not enough if they can be outvoted or removed when their independence matters most.
An impartial trustee who can usefully use their position to ensure trust decisions are made correctly can protect both co-trustees and beneficiaries. They offer neutrality, balance and, hopefully, pragmatism, in passing on wealth to the next generation.
How we can help
Careful trust planning can help reduce the risk of disputes and ensure that independent trustees or protectors have the authority they need to act effectively.
If you are involved in a trust or estate dispute, please get in touch with Sarah-Jane Macdonald or a member of our team.
Published by thoughtleaders4.com