Being a trustee in today’s financial and regulatory environment brings with it many challenges and risks. Nowadays, a trustee needs to be able to anticipate when and where those next challenges will arise, which requires a forward-thinking and holistic approach. In this article, Vicky Stables, Client Director, Private Client Services, considers three key areas for trustees to consider.
1. Being a trustee means being adaptable to change
A trustee faces and needs to adapt to change on a regular basis, whether it be market, industry and regulatory developments or client and business demands. Change is constant and a trustee must embrace this.
Being a trustee in today’s environment holds significant risk. These risks must be taken seriously and the consequences considered every time a trustee decision is made. Professional trustees cannot see into the future, but they do have a considerable amount of information at their disposal. Bringing this information into the decision-making process enables the trustee to make more informed decisions to further protect their businesses, themselves and, most importantly their clients.
Access to information plays a key part in the ability for parties to challenge trustees. Turn on your phone and you have the world at your fingertips. With this knowledge comes the ability to compare financial performance, seek the opinions of multiple parties – from the amateur to the seasoned expert – and observe the consequences of actions like never before. The interested parties have never been so well informed as they are today, and with transparency at the forefront of a trustee’s regulatory obligations, this only adds another layer of challenge and risk for the trustee.
Circumstances can vary dramatically in different situations. Trustees may find themselves having to make difficult decisions, sometimes as a result of unforeseen consequences or court directions. A trustee needs to be able to demonstrate that it has acted with prudence and due consideration.
One of the best defences for a trustee is comprehensive record keeping. Documenting the rationale and background to a decision-making process is one of the most important things a trustee can do; detailing the challenges and rationalising why a particular decision was made can be vital.
Secondly, robust policies and procedures form the framework of how decisions can be set out and the regulatory and business environment within which they have been made in.
Thirdly, knowledge is key. The ability to understand what is being considered and how this impacts on all parties is critical. All decisions and actions are challengeable, but a trustee must have the ability to demonstrate why that decision was made.
2. Being a trustee means having one eye on the future
The trustee and family office relationship can span generations as wealth is built, relationships prosper and businesses and families grow. As trustees, we enter client relationships with the view that we will build these relationships over the long term.
From the outset trustees will consider the longevity of a trust. How can the assets be best utilised to ensure the potential needs and expectations of beneficiaries may be met, both now and in future, while taking into consideration competing demands of different generations of the same family?
Those responsible for settling funds into a trust can often be entrepreneurial in nature; it may even be the reason behind the family’s wealth in the first place. Whether they remain involved in the trust as a beneficiary or not, the chance to repeat their successes may challenge the trustee, as they are faced with considering whether or not the next entrepreneurial idea will result in success or failure.
Common considerations for trustees include “What could current or future beneficiaries think of the decisions made in the past?” and “Could a trustee be seen as simply going along with the demands of a material influencer?”
While the wealth may have been generated from one successful business idea, the trustee will still need to consider whether the current business idea stands up against the long-term prospect of the trust, as well as whether or not these decisions protect the interests of future beneficiaries?
3. Being a trustee means uncompromisingly acting within the best interests of the trust
The decisions faced by trustees often involve and impact more than just a single party. This means it can be difficult, if not near impossible, to meet the needs of all those parties. A trustee needs to be able to exercise impartial expertise and be strong at managing conflict.
The risk-reward ratio is terminology that is often overused. But what does this mean to a trustee? It is not simply about getting paid the right amount of remuneration for the function undertaken; it goes much further than that. It is about ensuring that decisions made are the right decisions for the entire beneficiary class, while understanding that not all beneficiaries may see it that way. A trustee needs to consider, with every decision, what all likely outcomes will be.
Another consideration is where conflicts of interest occur. Trustees should not attempt to be ‘all things to all people’ and, when necessary, must seek the expertise of professional third parties such as lawyers, accountants and tax experts. This will often involve the decision to spend some trust monies, but not doing so can be much costlier if an uniformed decision is made.
You don’t need to look too hard to seek out some well-known cases and the consequences for those involved – Public Trustee v Cooper (1999) and B v Erinvale PTC Limited (2020) are prime examples to note.
This all gives rise to the costs involved in setting up, managing and maintaining a trust. Operating a trust can appear to be expensive and clients may not always see the value added, nor understand what it has taken to reach a certain decision.
Being a trustee can be a very rewarding role, often you have the ability and the power to help clients reach their goals and support families and various charities. But with this comes the daily challenge of protecting the trust, the client and the trustee against any risks that arise.
Ultimately, it is important that a client chooses a trustee with whom they believe they can build a long and trusted relationship, and with whom they can have faith that the decisions made are done with due care and consideration. There may well be situations where the decisions made are not be exactly what the client had hoped for, but they need rest assured that these decisions have been made with their best interests in mind, as well as those of the wider beneficiary class.