. . . an outgoing trustee will normally be under a duty to hand over to an incoming trustee all documents and information which relate to the administration of the trust so as to enable the incoming trustee to fulfill his duties.  However, the Court has a discretion to direct that documents or information not be supplied where satisfied, in its supervisory role, that this is the appropriate course.

In the Matter of The Bird Charitable Trust
and The Bird Purpose Trust [2012]

 

It’s not uncommon for trustees of an existing trust to retire and new trustees to be appointed or for assets to be moved to a new trust, when the trust instrument allows for those changes. I’ll provide some guidance to both the outgoing and incoming trustees regarding the process involved. On being notified that the assets of a trust are to be moved to a new trust or that a new trustee is to replace an existing trustee (retiring trustee), both the new trustee and the retiring trustee will immediately have new or additional responsibilities and obligations in their respective roles.

 

Due Diligence 

The new trustee should ask the necessary questions to help him understand the trust’s core elements. He should be satisfied that there is, in fact, a trust in existence, determine who the trust’s beneficiaries are and identify the trust’s objectives. The new trustee should use a questionnaire designed to address these issues and to elicit the necessary information from the retiring trustee. The response to those questions will also assist the new trustee in understanding the time and effort that will be required in the initial stages of the trust’s transfer. Particularly if the trust has been in existence for a while and its assets are extensive, it’s useful for all parties to have realistic expectations as to the time required for the transfer of assets to the new trust or the appointment of the new trustee and for the new trustee to understand the trust’s structure. 

In the Matter of Ogier Trustee (Jersey) Limited and CI Law Trustees Limited and CI Law Trust Group Limited [2006] (Ogier)1 involved a dispute arising out of a change of trustee of a trust in which the main asset were shares in a British Virgin Islands (BVI) company. The court noted the retiring trustee’s duty to: 

 

. . . co-operate fully and actively in the transfer by making all relevant documents and correspondence available promptly to the [New Trustee] and by providing any explanation to questions reasonably raised by the [New Trustee]. 

 

The new trustee submitted a questionnaire to the retiring trustee, which asked for certain documents, as well as information relevant to the trust. The judge found this request to be “entirely reasonable.” 

The response to that questionnaire would have assisted the new trustee in inventorying the trust’s assets and provided other crucial information. The response advised the new trustee that the trust owned 100 percent of shares in the BVI company. The retiring trustee, however, was unable to produce any documents to support this ownership interest, after the new trustee requested him to do so. The retiring trustee provided the new trustee with files of documents relating to the trust. The new trustee, left to sift through these files, was eventually able to find supporting documentation that confirmed the 100 percent ownership of the shares by the trust. The judge found that the new trustee “undoubtedly had a duty to establish for itself what assets were owned and to obtain the necessary evidence to prove that ownership, as well as gaining control.” Accordingly, the retiring trustee should provide full and complete information to an incoming trustee about a company that’s 100 percent owned. As the judge commented:  

 

So often the underlying valuable assets are held in companies owned by a trust and it would be nonsensical if a trustee could absolve itself of its responsibility to give or pass over full information by saying that it has passed over the information about the trust but not the underlying company.

 

What actually constitutes trust property might also not be entirely straightforward. In the recent case of In the Matter of The Bird Charitable Trust and The Bird Purpose Trust [2012] (Bird Charitable Trust),2 the judge found that legal advice obtained by the retiring trustee and paid for out of trust assets, while not constituting trust property (as argued by the new trustee) is, however, something that a trustee obtains to help him in connection with the administration of the trust. A retiring trustee will typically be under a duty to hand over to a new trustee all documents and information relating to a trust’s administration to enable the new trustee to fulfill his duties. So, it may be assumed that the retiring trustee should also provide such legal advice to the new trustee. The onus is on the retiring trustee to show why the rule shouldn’t apply. 

In this case, substantial sums were spent on legal advice. The new trustee lost its first argument that it needed the legal advice, which might be of significant value in the future administration of the trust. However, the new trustee also contended that the legal advice was extremely expensive and the new trustee was entitled to consider whether the expenditure had been properly and reasonably incurred by the retiring trustee. While the court took the view that the legal advice couldn’t assist the new trustee with future administration of the trust due to the specific advice sought, the retiring trustee failed to satisfy the court that the new trustee wouldn’t need the advice to satisfy itself that the trust had been properly administered. Thus, the court held that it was entirely proper for a new trustee to satisfy itself that payment for legal advice was reasonably and properly incurred. 

 

Duties of Retiring Trustees

In In the Matter of Caversham Trustees Limited and Andrew Crichton and In the Matter of Essel and Bruce Trusts (Caversham), the judge outlined a number of steps that retiring trustees should have initiated from the moment they were instructed to transfer the assets of the trust to a new trust, and it became appropriate for them to resign as trustees. The court said that when the transfer process commenced, the retiring trustees were under a duty to proactively pursue the transfer of the assets by:

 

(i) Instructing lawyers in the jurisdiction of the governing law of the trust (in this case, Jersey) to draft the formal documents by which the assets would be appointed to the new trust and any indemnities to be given;

(ii) Marshalling and preparing the assets so that they were ready to be transferred;

(iii) Ascertaining the identity of the entities to whom the assets were to be transferred;

(iv) Where necessary obtaining advice on the steps required to effect the transfer and the tax implications, if any, of the cost to be incurred in the actual conveyance or transfer of the assets in the jurisdictions in which they were sited;

(v) Setting out a timetable for the transfer of the assets;

(vi) Providing information to the new trustee to enable it to properly accept the assets;

(vii) Carrying out due diligence on the new trustee;

(viii) Providing explanations to questions reasonably raised by the new trustee in relation to the assets.

 

The duty to transfer the assets is subject to the [Caversham] Trustees’ right to be provided with reasonable security for liabilities whether existing, future, contingent or otherwise. We acknowledge that a transfer is a two-way process and is dependent therefore upon the co-operation of the new trustee.3 

 

Time Frame

During the transfer of assets to a new trust or the appointment of a new trustee, the retiring trustee remains obligated to act in the best interest of the trust’s beneficiaries. Therefore, the retiring trustee must ensure that he complies with his duty to transfer the assets in a timely manner, so as not to act to the beneficiaries’ detriment. In Caversham, the court was satisfied that the delay of the outgoing trustee in being cooperative with the transfer of the assets was mostly due to a dispute over fees. As a result, it took one year and eight months from the commencement transfer date for the retiring trustee to confirm that he was willing to cease his involvement in the trusts and to transfer the assets, but even then he wasn’t prepared to relinquish control over all the assets of the trusts until provision had been made to reimburse him for the costs of the transfer. It took over three years to effect the transfer. The court made it clear that, as of the commencement transfer date, the retiring trustee had a duty to give effect to the transfer process subject only to retaining reasonable security in relation to his fees. The court referred to In the Matter of the Carafe Trust [2005],4 which held that it was improper for a trustee to seek security over the entirety of a trust fund until its disputed fees were paid.

The court further concluded that in circumstances in which a retiring trustee’s continuance as trustee is detrimental to the execution of the trust, the trustee should press for the appointment of a new trustee. If the trustee can’t get the appointment, it should apply to the court for direction to bring that about. This decision may have expanded the duties of the retiring trustees, in that they can’t be passive in their obligation to comply with the duty to transfer the assets in a timely manner, even when the delay isn’t due to any action or failing on their part. If there’s delay in the transfer that might be detrimental to the beneficiaries, the retiring or new trustee may be obligated to seek the court’s assistance. It’s important to note that the courts have an inherent supervisory jurisdiction over trustees. In Bird Charitable Trust, the court found that although one starts from a presumption that a new trustee should be placed in just as good a position in all respects as the outgoing trustee, nevertheless, the court has discretion as to whether a trustee must provide specific documents or information in a particular case by virtue of the court’s inherent supervisory role. 

In Ogier, the court also stated the importance of bringing home to the trustees their duty to comply fully when handing over trusteeship. The retiring trustee provided to the new trustee only partial information about the trust’s structure and its assets and as a result, the new trustee incurred costs that the court ultimately awarded to him. The court ordered the retiring trustee to indemnify the beneficiaries for those costs, because the retiring trustee breached his fiduciary duties. 

 

Importance of Indemnity

Section 47 Trusts Law (2011 Revision) in the Cayman Islands provides that:

 

(1) A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects or defaults, and not for those of any other trustee, nor for any banker, broker, or other person with whom any trust money or securities may be deposited, nor for any other loss, unless the same happens through his own willful default. 

 

(2) A trustee may reimburse himself or pay discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers.

 

There’s nothing in Cayman Islands law that restricts or narrows the indemnity that a trustee might seek in respect of a trust. Thus, Armitage v. Nurse5 remains the leading authority on the subject. Trustees may, therefore, seek indemnification from a wide range of liability for specified risks. The Court of Appeals’ decision determined that it was permissible for trustees to exclude liability for all loss except that caused by actual fraud. The Privy Council in Spread Trustees v. Hutcheson [2011]6 affirmed the decision in Armitage.

A starting point for such indemnity should be within the trust document itself. It should ensure that the indemnity takes effect immediately upon the trustee’s retirement so the trustee can avoid seeking an agreement from the new trustees to the indemnification. The comprehensiveness of the indemnity within the trust deed will prevent legal wrangling later on as to the terms of the additional indemnity being sought. 

At the time of the retirement, both the new trustee and the retiring trustee should take stock of the current circumstances. The guidance in Caversham sets this out as item “(i) Instructing lawyers in the jurisdiction of the governing law of the trust (in this case Jersey) to draft the formal documents by which the assets would be appointed to the new trust and any indemnities to be given.”7 

The possibility of residual risks should be taken into account, and, therefore, properly drafted indemnities are crucial. In Caversham, the retiring trustee drafted a deed of retirement and appointment of trustees, including the following in the indemnity clause:

 

… the New Trustee hereby covenants with the Retiring Trustee (for themselves and for the benefit of the Original Trustee and the officers and the employees of both the Retiring Trustee and the Original Trustee and of any associates of both the Retiring Trustee and the Original Trustee and of any and all companies incorporated in any part of the world whose shares form part of the Trust Fund and which shall hereafter be referred to as ‘Trust Companies’) to keep them fully and effectively indemnified against etc…8

 

The new trustee agreed to extend the indemnity to the directors, officers and employees of the trustees, but not to associates or other companies in which the trustee had invested. The indemnity would also expire after six years.

In the end, the court found that the trustee had the right to seek security by way of an indemnity. It’s reasonable to extend that security to the trustee’s officers and employees, and the court took judicial notice of the fact that it’s not unusual for such indemnities to be extended to a trustee’s officers and employees. However, the court went on to say that there’s no legal or other basis to reasonably extend the right to seek security by way of an indemnity to officers and employees of the trustee’s associates or companies in which the trustee may have invested the trust fund. This point of contention, among others, although eventually resolved, caused a delay in the appointment of the new trustee and resulted in costs and damages awarded against the retiring trustee.

A retiring trustee needs to keep in mind that the indemnity will only be as good as the trust assets and any security that it wishes to put in place. The trustee can’t retain control over all the trust funds. Trustees should also keep in mind their motives for delaying the smooth transition of the transfer of trust assets to the new trust or the appointment of the new trustee. To do so under the guise of seeking counsel or otherwise could result in costs being awarded against them personally. As in Ogier, such a miscalculation could end up costing the offending trustee personally.

 

Endnotes

1. In the Matter of Ogier Trustee (Jersey) Limited and CI Law Trustees Limited and CI Law Trust Group Limited [2006], JRC158.

2. In the Matter of The Bird Charitable Trust and the Bird Purpose Trust [2012], The Royal Court JRC006, Jan. 5. 2012.

3. In the Matter of Caversham Trustees Limited and Andrew Crichton and In the Matter of Essel and Bruce Trusts, The Royal Court JRC065 (2008).

4. In the Matter of the Carafe Trust [2005], JRC 65 (2008).

5. Armitage v. Nurse, Ch 241 (1998).

6. Spread Trustees v. Hutcheson [2011], 071 PBLR.

7. Caversham, supra note 3 at p. 10.

8. Ibid., p. 13.