Trustee decisions must stand despite bad advice

Posted by admin at 15:51 on 13 Feb 2017

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Trustees of discretionary trusts (such as most Employee Benefit Trusts [EBTs]) sometimes face difficult technical issues when exercising their discretion in favour of one of more beneficiaries. And sometime they get it wrong.

For over 35 years, however, nervous trustees have been comforted by a piece of case law, the so-called Hastings-Bass rule which, broadly speaking, says that if trustees exercise their discretion but the results turn out to be different to what was expected, the court can reverse or modify the trustees' decision. This is so even if the trustees act in good faith but on the basis of bad advice which turns out to have unexpected consequences.

Reversal

Now time is up for this get out of jail card. In the recently decided cases of Pitt v Holt and Futter v Futter (surely from the pen of Charles Dickens?) the Court of Appeal has reversed the Hastings-Bass doctrine.

This decision is of great significance for tax planners and trustees alike. Although most trust deeds provide strong indemnities to the trustees, the opportunity to reverse bad decisions on the basis of bad advice has now been withdrawn. Trustees will now want to be certain of the competence of their professional advisers. The field of trust administration and tax has always been complex and, for employee benefit trusts, has recently become vastly more so by virtue of the so-called third party remuneration rules introduced in the 2011 Finance Bill.

In the case of Futter v Futter, the trustee sought advice from a professional advisor in good faith on the tax consequences of a certain course of action. In the event, contrary to the advice given, the trustees suffer an unexpected tax charge. To add insult to injury, one of the trustees was a partner in the firm that gave the advice.

Distinction

In deciding this case, the court drew a distinction between the following situations:

  • Where the trustees have acted outside their powers altogether, for example by appointing benefit to a person who is not a beneficiary of the trust. Such action is automatically void.
  • Where the trustees fail to take relevant matters into account (or take account of irrelevant factors). Such a failure is a breach of duty by the trustees. As such it is not necessarily void but may be voidable on application to the court by a beneficiary.
  • Where the trustees seek advice from an external adviser which later turns out to be wrong.

The Court held that, in the last case, the trustees could not be said to have failed to take account of relevant factors they had merely received the wrong advice. Accordingly, their action was not voidable.

It seems therefore that the remedy for cases of bad advice is for the trustees to sue the adviser for any adverse consequences, not for the courts to set aside the original decision. An appeal has been filed to the UK Supreme Court against the Pitt v Holt ruling, but this is unlikely to be heard until 2012.

Offshore trusts

Many trusts set up by UK companies are established offshore. A typical case would be where a company decides to reserve or warehouse a portion of shares for the purposes of providing equity based benefits such as share options or conditional share allocations through LTIPs. Many of these trusts are established under English law, so the above decision (unless overturned by the Supreme Court) will apply. Where trusts are established under other laws, for example those of Jersey or Guernsey, the decision will not necessarily apply as yet but in general the opinion of a senior English Court is regarded as persuasive in these jurisdictions.

If you wish to discuss any of the issues raised in this article, or for further information on the administration of onshore and offshore Employee Benefit Trusts, please contact us on 020 8949 5522 and ask to speak to any one of our advisers.