Lockdown Lowdown (Part 1): What Trusted Advisors Need to Know

It goes without saying that we are living in unparalleled times, and dramatic changes have been made to the way we communicate and connect with each other over a matter of weeks.  With social distancing now a priority, the question for trusted advisors is how to go about “business as usual” in light of these massive changes.  What would have been simple in the past - the act of signing a document in the presence of someone else is just one example - may suddenly prove fraught with problems related to having someone in close proximity. 

Trusted advisors now face a range of novel issues never before raised by their clients.  This note will identify some of the key issues that trusted advisors need to be mindful of, in the current climate.

1. Execution and Witnessing of Documents

In the wake of the recent restrictions imposed across the world, video conferences have proved to be a popular alternative to face-to-face meetings. Whilst financial markets plummeted, the video conferencing company, Zoom, saw its share price more than double since late January. Electronic signatures are also a convenient solution for those who now have limited access to printing, scanning and post. However, one question which has come into focus is: to what extent can this technology sit alongside the legal requirements for the execution of documents?

The validity of electronic signatures and video witnessing was reviewed by the Law Commission last year, click here for more details. Its report concluded that electronic signatures can be a valid means of executing documents if the person signing intends to do so. This is provided that any additional formalities that are required by statute are satisfied, such as having the signature witnessed. However, the Commission found that the requirement under current law for a deed to be signed in the presence of a witness can only be satisfied by physical presence, not remote presence. It also highlighted the risks that individuals could be exposed to (particularly those who are vulnerable) if the use of electronic signatures were to be extended to instruments such as Wills, powers of attorney and transfers of land.

The issue of virtual witnessing in the context of deeds arose in Yeun v Wong, a recent case which concerned a Land Registry TR1 Form (a form used to transfer the ownership of land) that had been witnessed via Skype. The First-Tier Tribunal was asked to determine whether this satisfied the statutory requirement (under the section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989) for the deed to be signed “in the presence of a witness”. The tribunal judge agreed with the Commission’s conclusions and found that remote presence did not amount to physical presence, and as a result the necessary formalities were not met.

In March, the government confirmed that the use of electronic signatures for many documents in the context of commercial transactions is valid under English law (click here), without the need for legislative reform. However, in accordance with the Commission’s recommendations, Lord Chancellor and Secretary of State for Justice Robert Buckland noted that a “wider review” is necessary for the law of deeds.  

For now, trusted advisors should adhere to the above guidance, and based on the governing law of the document, should seek local legal advice.  For instance, in civil law jurisdictions, certain documents may require notarisation, in order to authenticate the document.  This may require the relevant parties to physically appear and execute the document in front of a notary.  In some cases it may be possible for the contract or document to be signed by a staff member of the notary based on a power of attorney granted in their favour by a client, removing the need to physically appear.

2. Execution of Wills

With the current circumstances offering a time for reflection, many clients are turning their attention to estate planning (click here), and once a Will has been prepared which reflects the client’s wishes, it is crucial to ensure that the document is properly executed.  The best course of action will always be to have individuals witness the Will in person. However, with the current rules on social distancing and isolation, situations will inevitably occur where no one is able to witness the Will, or perhaps only close family members who are named as legatees are available, and witnessing would therefore invalidate their gift.

STEP has published guidance which notes that where a testator is in isolation and unable to ask independent witnesses to be present in the same room, there is case law (albeit very old case law (Casson v Dade (1781)) which suggests it may be sufficient for witnesses to simply be in the line of sight. The signature can therefore be witnessed from another room or through a window, for example.

Where physical witnessing is not possible, the Law Society has recommended that trusted advisors ask clients to video record the signing of the Will, as well as keeping detailed notes on how instructions came in and how the Will was signed (click here). For absolute certainty, the Will should be re-signed once the restrictions are lifted or the opportunity permits.

Where clients have assets in a number of countries, care should also be taken to check whether there are additional execution requirements in the relevant jurisdiction and to ensure these are met.  Much will depend, however, on the jurisdiction concerned and additional considerations, such as the client’s residence. 

3. You may “Know Your Client” but do you Know Where your Client Is?

For trusted advisors involved in a client’s wealth protection structure (be it a trust, foundation, family investment company etc) knowing where settlors / founders / beneficiaries etc are “locked down” is vital for communication purposes.

Further, if these key people are stranded in places they might not normally be resident, this may give rise to unexpected tax consequences for the client and / or their wealth protection structure.  For example, a beneficiary of a discretionary trust may be temporarily stuck in, say the United Kingdom (UK) or France.  A UK resident beneficiary who receives a distribution from such a trust will have reporting obligations and may have to pay tax on the distribution.  Existing loans to / from a beneficiary / settlor may also give rise to tax and reporting obligations, including for the trustee.   The simple fact of a French resident being a beneficiary of such a trust will give rise to reporting obligations in France for the trustee and beneficiary and may also give rise to punitive tax consequences.  It is worth noting that some revenue authorities (including HM Revenue & Customs in the UK) have in certain circumstances relaxed their residency rules in light of the fact that clients currently have no control over their residency situation. 

A trusted advisor will guide clients to seek advice early, to ensure that where necessary, steps are taken to mitigate exposure to tax (for example, it may be beneficial to temporarily exclude certain beneficiaries from benefit).

4. What is the Succession Plan for Communication?

Many trusted advisors will maintain a single line of communication with the family (perhaps the settlor / economic founder of a structure) so now is the time to establish an emergency channel for communication if anything should happen to a lead family member.  Thought should also be given to the possible scenarios in the event that any key individual was to become ill or so remote that contact would be no longer possible.  If a single family member has the lead in terms of communication, what is the communication plan if anything were to happen to that family member?  How should a trusted advisor confirm that a key family member is indeed ill, perhaps even to the point of being incapacitated? 

In many cases this problem can be resolved by designating one or more other family members that are able to take up the communication, however this can be even more challenging in situations where the next generation do not know the extent of the wealth structures that have been set up for their benefit.  For example, perhaps the client has settled a Cayman STAR trust the terms of which eliminate the beneficiaries’ information rights.  In addition to securing a long-term relationship with the family, the trusted advisor may have been appointed as an enforcer of such a trust and so also has a real practical need to get to know the beneficiaries of that trust well.  The trusted advisor will need to find specific ways to forge a relationship with the next generation (and to encourage the client to help him / her to do so). 

Ways to do this might be to open up discussions about the next generation having suitable Wills and powers of attorney in place.  The trusted advisor can then keep in touch in respect of these documents going forward, and then stay aware of any changes in the individual circumstances of the next generation.  Done correctly, a trusted advisor may be able to position themselves as the gatekeeper in relation to the wealth protection structures which were the foundation of the relationship he / she had with the original client.  Where possible, trusted advisors should be encouraging clients to introduce them to the next generation (where relevant) to protect the long-term relationship with the family. 

5. Help! My Portfolio is Down...   

We can expect that following this time of market upheaval, beneficiaries will be re-looking at portfolios to see whether appropriate steps had been taken to mitigate anticipated losses.  In many cases wealth holding fiduciary structures will have been designed to mitigate investment risk for a trustee, using one of a number of techniques (for example, exoneration clauses or reserved power trusts).

Unfortunately however, many fiduciaries assume that blanket protection is offered against all and any risk, without assessing whether the actual circumstances could impact on this conclusion.  For instance, would a standard anti-Bartlett[1] clause be sufficient to mitigate all risk associated with unwieldy markets?  In a time of unprecedented market activity, could the fiduciary who chooses not to enquire whether potential losses are being mitigated appropriately by the investment advisor, ever be liable if losses result? The recent decision from the Hong Kong Court of Final Appeal in Zhang Hong Li v DBS Bank (Hong Kong) Limited [2019] may give fiduciaries comfort that the answer to this would usually be no, however whether this is actually the case will depend a great deal on the provisions in the legal documentation as well as how the wealth holding structure has been administered.  This would be a time then for trusted advisors to revisit the terms of their mandates, and assess whether there are any limitations on the protection afforded by the terms of the legal documentation. 

6. Are Structures “Fit For Purpose”?

 Many clients are also concerned about their trust, and whether they are fit for purpose.  This is an  opportune time for trusted advisors to stress test structures to assess what the impact could be if a key family member were to suddenly drop out of the picture.  

Many structures may have a position built in for a family member such as protector, so providing for succession in the office of protector is relatively straightforward.  For structures where the client may reserve a place in the structure or office, what alternatives have been set in place if that individual may not be contactable?  For underlying companies, where a sole individual holds a seat on the board, are contingency plans in place in the event that the individual is unable to act?  Note that in some jurisdictions this may be solved by the simple act of appointing an individual to act where the main director is unable to, assuming the Memorandum and Articles of Association allow it (BVI as an example allows for the appointment of alternate directors for BVI incorporated companies). 

Fiduciaries should also revisit definitions of “incapacity” in trust documents, to ascertain whether this could extend to being temporary unavailable for a certain period of time.  In the event that it does this may allow a fiduciary to take the view that a planned course of action can go ahead where an individual is not contactable, on the basis of their being deemed to be “incapacitated”.  And finally, don’t forget Letters of Wishes and other documents, which may have been drafted when the structure was first set up, may well be out of date and require amendment.  Now is the time to talk to clients and check that their objectives in relation to any wealth protection structures are still being met and have not changed. 

Trusted advisors should be encouraging their clients to revisit, review and above all reflect on current arrangements and structures, with an eye to the future.  The real challenge is how to use this period of self-isolation to do exactly the opposite – to get closer to clients and families.  Social distancing could prove to be a golden opportunity for all of us, by providing the time that we have often lacked in the past, to really get to know our clients.