Trust Disputes Involving Landed Estates
Common features of landed estate ownership and management
A modern landed estate is no longer confined to historic stereotypes. Although many still provide a home for the family that has lived there for generations, many have changed ownership and are now owned and cared for by new families. Often the manor house or stately home remains, but for many of the larger landed estates the costs of maintaining such properties has long since resulted in them being sold or broken up. The continuing countryside location of many estates means that they retain strong farming practices. But the financial security of large modern landed estates relies upon modern business methods, diversification and looking for new opportunities. These opportunities can include music festivals, country shows, glamping, wind farms and solar power, commercial lettings, and woodland activities.
As landed estate stakeholders will know, it is nowadays rare for the estate and all its constituent parts to be entirely owned and managed by one individual. Indeed, ownership of landed estates can take many forms, and may include ownership by individuals, partnerships, charities, or corporate entities, which in turn will influence how the landed estate is managed (for example by a combination of business directors, family members, land agents, and legal and accountancy professionals).
Commonly however, landed estates are held in trust, and often one landed estate will be held by a combination of family members and trustees of one or more trusts. Historically, these trusts took the form of strict settlements governed by the Settled Land Act 1925 but, over time and with societal changes, trusts (save for those still governed by the Settled Land Act 1925) are now more bespoke and flexible. Many estates are therefore either managed or overseen by trustees.
Benefits and disadvantages of ownership in trust
Trusts can therefore take many forms, but the prevalence of more bespoke and flexible trusts means that many trusts are now discretionary in nature. That is, those individuals who can benefit from the trust will merely form part of a wider class of potential beneficiaries (for example, the children and grandchildren of family members) that trustees can potentially benefit. In turn, trustees of discretionary trusts will often have wide reaching powers that allow them to act as absolute owners of the property (provided their decisions are in the interests of the potential beneficiaries), and sometimes even to add or exclude individuals from the class of potential beneficiaries. Most importantly, who the trustees’ benefit, and for the most part when they do so, is at their discretion.
The benefits of trust ownership are accordingly varied and include: the ability to have professionals (in varied specialisms) guiding the management and future of the estate; the availability of tax reliefs and cohesive succession planning; and longstanding stable ownership that can ensure the preservation of the estate for future generations and avoid potential succession disputes, notwithstanding the potential vicissitudes in the lives of family members. You can read more about Succession Disputes Involving Landed Estates here.
These sensible and important benefits of trust ownership often outweigh ownership by one individual. However, that is not to say trust ownership is not without its risks. Trust ownership means that outright ownership is transferred away from either the family who have been attached to the landed estate for generations or the individual who has purchased it, to trustees who will have their own views how the estate should be managed and, importantly, specific fiduciary duties with which they must comply when exercising their powers under the terms of the trust. Although trustees will normally take into account a settlor’s wishes and may also consult with their beneficiaries when exercising their discretion, they are not bound to do so. This can inevitably give rise to tension between trustees and potential beneficiaries, which if not adequately resolved and can lead to conflict and even formal court proceedings, for the simple reason that individuals who perceive themselves as the ultimate owners of trust property are not able to make decisions in relation to it.
This conflict can take many forms, but often involves formal challenges to trustee decisions and / or allegations of breach of trust; court applications by trustees regarding issues arising in the trust administration; and applications by beneficiaries for the removal of the trustees themselves.
Challenges to trustee decisions / breach of trust
Where the family’s estate is held on discretionary trusts for the beneficiaries, the trustees will generally have a wide discretion to decide how to manage the trust assets as best as they see fit. But that does not mean that the trustees are entitled to deal in the trust assets with impunity. It is a fundamental principle of trust law that the courts have an inherent jurisdiction to supervise the administration of trusts. The courts’ power to supervise trustees exists primarily to protect the rights and interests of the beneficiaries in the trust assets and to ensure they are being administered in accordance with the terms of the trust and their fiduciary and legal duties. If the beneficiaries believe the trustees are failing to administer the trust properly, they are entitled to ask the court to determine whether the trustees have acted appropriately. Alternatively, if the trustees refuse to provide the beneficiaries information that might enable the beneficiaries to satisfy themselves that the trustees have acted properly, the beneficiaries may ask the court to order disclosure of that information to them.
The courts’ inherent supervisory powers do not generally give judges the power to supplant the role of the trustees by making decisions in their place. But they have the power to render invalid certain acts by the trustees if it was performed in breach of trust. Beneficiaries are entitled to challenge trustees’ actions on a number of different grounds, such as: the trustees exceeded their powers under the trust deed; they failed to exercise their discretion properly, either because they did not take a relevant factor into account or they took into account a factor that was irrelevant; or because the trustees acted for an improper purpose, which was not for the benefit of the beneficiaries.
If the court has determined that the trustees have acted in breach of their powers and duties under the terms of the trust in a manner that cannot be rectified by the court, the trustees may be found personally liable for any financial losses they have caused to the trust property and may be ordered to restore the trust fund to the value it would have held, but for the trustees’ breach of trust. They may also be personally liable for a proportion of the beneficiaries’ legal costs of bringing the claim.
Court applications by trustees
It is not only the beneficiaries who are entitled to invoke the courts’ supervisory powers in relation to the administration of trusts. There are a number of circumstances that may arise in the course of the administration where the trustees may (or indeed are obliged to) seek the guidance of the court before taking significant steps in relation to the trust assets. When these circumstances arise, the trustees are well advised to make an application to court, particularly bearing in mind the personal liability they could face in the event they are held to have acted in breach of trust.
For example, where the trustees are asked to make a momentous decision in relation to the trust, the trustees are entitled to seek the court’s blessing of their decision before it is made. This most commonly arises where the trustees are considering a sale of some or all of the trust’s principal assets. Particularly in circumstances where the estate has been held in the family for generations, a decision to sell part or all of the estate is liable to be a contentious decision (whatever the circumstances that have led to the decision having to be made). The trustees are entitled to seek the court’s blessing to their decision with a view to protecting themselves from potential claims.
There may be other circumstances where the terms of the trust itself causes the trustees to need to make an application to the court. This is commonly the case where the trust has been in existence for many decades and the terms of the trust no longer meet the current needs of the family due to the passage of time. For example, the trust may not provide the trustees adequate powers to manage the trust assets effectively or provide for the family in the way that everyone would like (such as in the case where the family wish provision to be made for an illegitimate or stepchild who does not fall within the class of beneficiaries). Alternatively, the duration of the trust may be coming to an end and there may be tax implications or other reasons why the beneficiaries may wish the trustees to extend the trust period so that the assets continue to remain in trust. In these circumstances, the trustees may make an application to court to vary the terms of the trust.
In other circumstances, there may be an uncertainty or error concerning the precise terms of the trustees’ powers and whom they should benefit. In which case, the trustees may be obliged to seek an order from the court to resolve the matter and if appropriate seek to rectify the terms of the trust.
The legal costs of these types of court applications will generally be made paid out of the trust fund. In many circumstances, such applications can be made with the consent of the beneficiaries, who will wish to assist the trustees to minimise the costs of the court proceedings. But if the trustees’ position does not meet the approval of some or all of the beneficiaries, they are entitled to oppose the court application, making the outcome less certain and the legal costs harder to manage.
Removing trustees
When the beneficiaries have lost trust and confidence in their trustees to the point where the relationship has irretrievably broken down, it is often appropriate for the trustees to make the decision to retire, taking into account what is in the best interests of beneficiaries as a whole. But in circumstances where only some of the beneficiaries believe the trustees should go, the trustees may reasonably take the view that they owe a duty to the other beneficiaries to remain in office. This is often the case where individual beneficiaries have competing interests in the trust assets (such as beneficiaries who are entitled to the income of the trust fund compared to those who have an interest in remainder in the capital) or diverging opinions on how the estate should be managed. Where factions amongst the beneficiaries have built up (commonly where more than one branch of the family benefit from the same trust), disagreements regarding the management the estate can arise. In these circumstances, the trustees often find they have an almost impossible balancing act to perform trying to keep everyone satisfied. At times, they can find themselves in the firing line despite their best efforts to keep the peace.
In some cases, the settlor who created the trust will have reserved to themselves under the terms of the trust the power to appoint and remove trustees during their lifetime or conferred that power on another individual (such as a ‘protector’). But in many cases the power of choosing the trustees’ replacement will rest with the trustees themselves. In which case, the only effective means of resolving the dispute may exist through court proceedings, in the event that an amicable resolution between the trustees and the beneficiaries cannot be found. Such disputes can represent a significant costs burden for the trust and can disrupt the management of and long-term planning for the estate, if they are not resolved swiftly.
Minimising disputes
The relationship between trustees and their beneficiaries is built on trust and confidence in the ability of the trustees to perform their role effectively and in the best interests of the beneficiaries. If the trustees understand the needs and demands of both the estate and the family and can work in effective partnership with their beneficiaries, it can go a long way to minimising the propensity for disputes to arise. The greater the extent to which the trustees are also able to communicate matters concerning the trust to the beneficiaries, the greater the likelihood the beneficiaries will appreciate the purpose behind the trustees’ actions and the perceived benefits for the beneficiaries.
Disagreements, either between the trustees and the beneficiaries or amongst the beneficiaries themselves, will inevitably occur from time to time. But mechanisms can be put in place to reduce the likelihood of them spilling over into a legal dispute. For example, if the trustees have put an estate management plan in place (which the beneficiaries have bought into), this can help ensure that everyone is working in the same direction and to the same agenda. Depending on the circumstances of the trusts, it may also be appropriate to put in place a family charter between the trustees and the beneficiaries, which would set out the family values and principles, by which the trustees and beneficiaries are expected to abide, and the responsibilities and expectations of each of the beneficiaries and trustees.
Arrangements of this nature cannot fetter the current or future decision-making of the trustees and their duty to act in the best interests of the beneficiaries but can work alongside the trust documents that are in place and provide a framework for the decision-making process. They can help promote cohesion amongst the various stakeholders in the family estate, particularly where the family’s estate is held and operated through a combination of personal and trust ownership and management.
For more information on the above please contact Oliver Auld, Tom Denham-Smith or your usual Charles Russell Speechlys contact.
