Issues for trustees during Covid-19
For trustees, who have to manage investments and assets, care for their beneficiaries, and ensure their own businesses continue to operate, the present situation gives rise to some unique challenges. With that in mind, our private client and contentious trusts teams have together produced a guide setting out some of the issues which trustees might find it helpful to consider, and explaining how they might practically protect their beneficiaries and themselves in uncertain times.
- Trust investments
- Protecting from the effects of cybercrime
- Capacity and communication
- Managing key person risk within trust companies
- Wills for key people associated with a trust
- What should trustees do if they are stranded in the UK (or elsewhere) due to Covid-19?
- Issues for trustees that who need to go to court
- HMRC deadlines
Trustees will no doubt be anxious about investments they hold and their performance, and they may also be receiving requests for distributions and other financial support requiring liquidity.
They should take the opportunity to check the terms and conditions of their investment management agreements, and the scope of their duties under the trust deed itself. It may well be appropriate for them to review investment performance, discuss investment strategy with fund managers and satisfy themselves that those managers are acting prudently.
Depending on the assets that are held, trustees may need to brace themselves for a reduction in income or even capital, and beneficiaries’ expectations may need managing. Good communication is essential.
In addition, many trusts hold corporate structures that may be under strain. This is particularly difficult for trustees who hold substantial controlling stakes making up a significant portion of the trust fund. A loss in share value and profits, along with increased beneficiary demand for distributions, can lead to exposure for trustees.
Where the trust assets include such shareholdings, trustees’ actions may come under renewed scrutiny, especially if losses are sustained and the value of the business itself suffers.
Again the terms of the trust deed are paramount here. Whilst trustees by default have a duty to supervise and intervene in the management of companies in which they have a controlling interest, that duty is usually circumscribed by so-called “anti-Bartlett” clauses in the trust deed. These often take the form of clauses that remove the duty to supervise and intervene except where trustees are on notice of serious mismanagement or wrongdoing in the company. These clauses therefore seek to mitigate trustees’ liability for losses suffered by corporate structures.
Although such clauses are prone to beneficiary attack, the recent decision of Zhang v DBS Trustee in the Hong Kong Court of Final Appeal (applying Jersey law) has provided trustees with some comfort that anti-Bartlett clauses can be effective in limiting trustees duties to supervise and interfere in the management of companies they hold. That said, the facts of this case were exceptional and there remains some doubt as to the impact of the decision in different or less extreme scenarios (we have produced a separate note setting out our more detailed thoughts on the implications of the decision in Zhang). Given in particular the ongoing debate as to the implications of Zhang, trustees should consider carefully the wording of the trust deed in relation to these issues, and whether that still leaves them with residual duties to supervise and intervene in the management of the company in times of stress. They should review what information they have and consider whether it is appropriate for them to seek more, particularly if the trust deed (or the law) permits or requires them to intervene in certain circumstances.
In short, trustees should be proactive in considering their duties and monitoring the effect of the current economic turmoil on the assets they hold – whether held through corporate structures or managed by investment managers, they must do what they can, within their powers, to protect what they hold. If they are in doubt about their position, they can always seek the directions and assistance of the court.
As the firm has previously reported, the UK’s top law enforcement agencies have warned that companies could face increased cybercrime and fraud as a result of the Covid-19 pandemic. Indeed, the National Economic Crime Centre has seen a surge in fraud, primarily driven by cybercrime, and cautioned that criminals were seeking to exploit the crisis to target businesses, investors and their customers.
Although the warnings were specifically targeted towards businesses and companies, trustees should not think that they are immune to cybercrime and fraud. To the contrary, with the vast amount of wealth managed by trustees or trust companies, they would almost certainly be a popular target for fraudsters.
Trustees should therefore be on high alert for any suspicious activities – any unusual payment requests by beneficiaries should be thoroughly investigated. Particularly, trustees should be mindful of their duty to exercise reasonable care and skill, throughout the pandemic and beyond. They should ensure they have proper processes in place to check payment requests being made remotely – in some cases it may be appropriate to introduce verification through two separate means of communication (at least one of which is ideally oral), particularly for higher value distribution requests. Trustees may also consider it appropriate to alert beneficiaries that meeting payment requests may take longer due to the additional checks which may be required.
We have all seen that the need to protect vulnerable family members continues to be emphasised in government guidelines. Those vulnerable family members may also, for trustees, be settlors, principal beneficiaries or managers of family companies which the trust owns. The current health crisis therefore brings into sharp focus the nature of the role of those individuals, and what happens if they lose capacity or suffer a sudden health crisis. Dealing with and planning for those eventualities now appears more important than ever.
That all comes at a time when family dynamics will be affected by the worry and stress of the Covid-19 crisis and concerns regarding the protection of a medically vulnerable person and their assets will be heightened.
Trustees need to manage these dynamics whilst fulfilling their duties with considerable care. As more questions of capacity arise, it is vital that trustees maintain full records of instructions and wishes of those whose health is declining, and plan for the loss of capacity of a settlor or beneficiary. Disputes – including as to capacity and validity of wills even before death – can easily arise out of such high-stress situations.
Though the need for sensitivity is utmost, trustees must also consider the consequences of, for example, the death of a settlor or a principal beneficiary. Things to consider include:
- where a settlor’s wishes have guided the trustees in the past, it may be prudent to update any letters of wishes, with appropriate measures taken to verify the capacity of the writer;
- the trustees might also take the lead in encouraging families to engage in and discuss succession planning, both in the context of family decision-making and the management of family businesses;
- the need for a family constitution (in whatever form is appropriate) may become apparent and trustees can use their expertise to help put one in place;
- the suitability of the current structure and governance of a trust, taking into account the current structure of the family, could also usefully be re-evaluated; and
- the frequency and scope of communications with beneficiaries could be reconsidered, including whether updates about trust assets and investments could start to be shared more widely, in addition to measures which trustees are already no doubt implementing to facilitate day-to-day communication with beneficiaries during periods of lockdown. Of course in all communications, trustees should be mindful of maintaining confidentiality and privilege (where applicable) and sharing information in a way which is GDPR compliant.
No one can predict whether or when one may catch Covid-19, or the seriousness of its impact on a particular individual. Given the fact that trustees are usually required to act unanimously, this represents a potentially significant problem for the day-to-day running of a trust, should a trustee fall ill due to Covid-19. Accordingly, trustees (and indeed, other trust officers such as protectors) should be proactive and put in place contingency plans to prepare for such an eventuality.
The best way to mitigate this risk is to put in place trustee powers of attorney. However, trustees should be aware that they cannot further delegate the powers delegated to them by the settlor, unless permitted by the trust document or statute.
For directors of trust companies, they should consider appointing alternate directors so that the board can still function in the event that some directors are unable to attend board meetings as a result of illness.
In the last month or so, there has been a surge in demand for updated wills by anxious testators, many of whom are settlors or beneficiaries of existing trusts. Trustees should, where possible, be encouraging settlors and beneficiaries to update their wills. When making or updating wills, settlors and beneficiaries should be mindful of how their wills would affect any existing trust structures. This may be particularly true in more rarified cases where settlors or beneficiaries can exercise by will a testamentary power of appointment in a trust.
For those seeking to amend an English will, we have produced separate guidance in relation to ensuring a will is valid despite the restrictions that have been imposed.
In summary, the requirements for executing a valid will are set out in legislation that is over 180 years old and which requires a will to be signed in the presence of two witnesses present at the same time. It is vital that testators ensure that they comply with the formalities, so that the wills can be admitted to probate after their deaths.
Our recommendations for testators wishing to sign English wills during the lockdown (including those who may be non-domiciled or proposing to use English law under foreign rules such as the EU Succession Regulation) are as follows:
- do not ask a family member who (or whose spouse or civil partner) stands to benefit from the will to act as a witness, as this would normally invalidate any legacy to them;
- as current English case law makes it clear that the signing of a will via video-link will not be valid, the best alternative would be to ask two neighbours to witness the signing in a venue where social distancing measures can be adopted. There is no requirement under the Wills Act for the individuals concerned to be within two metres of each other, nor do they need to use the same pen. To minimise the risk of transmission, all three individuals can also wear disposable gloves and facemasks; and
- to the extent there is any concern that the capacity of the testator to sign the will may be questioned in future, doctors and solicitors can attend the signature remotely, by means of a video conference, to provide a capacity assessment.
As a starting point, the residence of a trust is determined by the current tax residence of the individual trustees. Thus, the main concern for trustees who find themselves in the unfortunate situation of being stranded in the UK (or elsewhere) due to Covid-19 should be the risk of altering the tax residence of the trust. We have previously published an article on the UK statutory residence test and what constitutes “exceptional circumstances” under the test. Reassuringly, HMRC has confirmed that it will be sympathetic to those who are stranded in the UK. The Organisation for Economic Co-operation and Development, too, has suggested that it is unlikely that the Covid-19 lockdown measures would affect the treaty residence position of individuals who are currently stranded.
Notwithstanding the above, trustees who are currently stranded in the UK should consider appointing additional non-UK resident trustees, such that a majority of trustees would be non-UK resident. Directors of corporate trust companies should consider whether their residence status would affect the corporate residence of the trust company. For details on how Covid-19 affects corporate residence, we have produced a separate article.
With all of the complexities of managing a trust, which may well now be exacerbated by the present situation, trustees may need to give thought as to how they will deal with difficult or even litigious situations. In that context, trustees have both the privilege and sometimes the burden of going to court – occasionally very urgently – in order to resolve a difficult issue, undo a mistake, or obtain approval for a momentous decision.
Trustees should be reassured that many courts around the world, including the English court, continue to list hearings and conduct business, as far as possible, as usual using technology to facilitate remote hearings with multiple parties and complex sets of documentation.
However, there are some particular issues which trustees who need to go to court in England need to be aware of:
- the courts will expect trustees to recognise the difficulties parties to trusts proceedings might have in complying with deadlines, and should be reasonable about timetables and granting extensions of time;
- when trustees apply for directions, they are required to explain what consultation has taken place with the beneficiaries of the trust. Trustees therefore need to take steps to organise effective consultations in good time, taking into account the additional difficulties of having to do so remotely; and
- care still needs to be taken over ensuring that hearings can take place in private where appropriate, or that other measures are put in place to protect sensitive information that may need to be shared with the court and the other parties during any court proceedings.
On this last issue, there are a number of points which trustees and their advisers should bear in mind, some of which may have wider application than just the English system.
- The default position - that justice should be open and hearings held in public – remains.
- Trustees or other participants in trust proceedings can still apply for a hearing to be heard in private, or for restricted reporting orders or similar – for instance, because the proceedings involve the interests of children or personal confidential matters, or the publicity would defeat the purpose of the application. However, the courts require detailed and cogent evidence in support of any orders and will not grant protection automatically.
- Where a court orders that a hearing is to be heard in private, that order will generally be published, and it remains open to non-parties to apply to have it heard in public, or to intervene at the start of the hearing.
- The use of virtual hearings means that the media or other interested parties may more easily browse a list of hearings from home and apply to be present at a hearing otherwise listed in private, without the need physically to attend court to make that application. Trustees and their advisers will need to be alert to the possibility of such challenges where sensitive family information is being discussed in court.
- The need to ensure the security of the technology used to hold video hearings remotely where the court has ordered that hearings make take place in private and/or subject to other privacy orders is critical. Trustees and their advisers will need to ensure that they have the necessary in-house expertise to facilitate this or arrange for trusted technology providers to set up and test secure systems, and to do what is possible to prevent unauthorised recordings of court proceedings.
- Trustees will need to ensure that sensitive documentation which is communicated between the parties and the court is suitably secured and, if possible, encrypted. Trustees will need to agree bespoke arrangements with the court in relation to documents which only the court is to see (as is sometimes the case with, for example, legal opinions in Beddoes proceedings authorising the costs of litigation).
- Any privacy and restricted reporting orders to be obtained should be tailored to cover the additional data and information which may be generated by hearings being held remotely. Thought should be given to obtaining suitable orders in advance of the main substantive court hearing.
Trustees still therefore retain the ability to seek the assistance of the court despite the current restrictions on mobility, but the new ways of undertaking court business may carry with them additional risks which trustees and their advisers should take care to manage.
Despite the exceptional times that we live in, trustees are reminded that key deadlines, such as ten-year anniversary tax returns and the payment of capital gains tax from the disposal of UK residential properties, should still be adhered to. Whilst HMRC has expressed sympathy for people caught up in the current crisis, trustees should not expose themselves to the risk of being penalised for any late filings and payment of taxes. In particular, trustees should be aware that HMRC is currently experiencing significant delays in processing any correspondence, filings, payments, and repayments. Trustees are advised to give themselves ample time to prepare for such delays. Any communications with HMRC during this period should be made by email or phone, rather than via post.
If any of the above points have raised questions for you, please feel free to get in touch with your usual Macfarlanes contact.