There is little doubt that all the major Trust and Company Service providers are now aware that they are the next to be squeezed by tax authorities keen to raise more revenue. The question is will their indemnity clauses hold up, or will they get caught in the cross fire and what can they do to protect themselves?
The case of Bartlett vs Barclays Bank [1980] makes it clear that a professional trustee has a high duty of care. Sir Herbert Bartlett set up a trust in which the main asset was 99.8% of the issued shares in the family company. On the board were two surveyors, an accountant and a solicitor. Barclays did not appoint a director on the board even though it had the power to do so.
The board decided to expand its business beyond managing property to developing property and embarked on speculative developments including the Old Bailey project which failed to get planning permission. As a consequence, the trust suffered a significant loss.
Judge Brightman J held that the bank as trustee had not discharged its duty as trustee, in failing to supervise the new ventures of the company. He held that, given the size of the shareholding, the bank should have obtained the fullest information and not rely on the supply of information it received in the ordinary course as a shareholder.
Its defence was that it honestly and reasonably believed the board of directors to be competent and capable of running the business. This was rejected.
The Judge upheld former decisions that the duty of trustees is ‘to conduct the business of the trust with the same care as an ordinary prudent man of business would extend to his own affairs’. With this then in mind is it right for a professional trustee to take on business and then indemnify itself from all liability, other than gross negligence or fraud, and for non-interference.
In Waterman’s Will Trusts [1952] the Judge said ‘A trust corporation holds itself out in its advertising literature as being above ordinary mortals. With a specialist staff of trained trust officers and managers, with ready access to financial information and professional advice, dealing with and solving trust problems day after day, the trust corporation holds itself out, and rightly as capable of providing an expertise which it would be unrealistic to expect and unjust to demand from the ordinary prudent man or woman who accepts, probably unpaid and sometimes reluctantly from a sense of family duty, the burdens of a trusteeship.’
It is inevitable that tax authorities keen to undermine a trust relationship, so that they can tax the underlying assets on the settlor, will jump on these tightly worded indemnity and non-interference clauses to argue that this is not a trust relationship, but a mere nominee arrangement.
The conundrum is that to do the job of a professional trustee properly takes time and money, which needs to be paid for through a proper fee. In many cases, however, the family can find a professional trustee who will charge up to ten times less, than it would cost a professional trustee to do a thorough job. To take an analogy, is it better to take out insurance which pays out on a claim or one which is ten times less expensive which does not?
Should the professional trustee, aware of this higher duty of care take on business for which it is being remunerated to do nothing other than collect fees and keep records. It will not be the first time that judges have looked at the level of fees to evaluate the level of advice and service being given!
But it cuts both ways. Like the case of Barclays v Bartlett, the family does not want to lose money either, and neither does the professional trustee want to get sued. The easiest way to solve this conundrum is to carry out asset audits.
Increasingly, when asked, I insist that trustees should only be given full indemnity protection if they carry out asset audits on a regular basis, and in particular where the main asset is the family holding company.
Once I started to suggest this as a solution it became so much in demand by beneficiaries eager to see; their single family offices, property portfolios, wine cellars, store of antiques, gallery of paintings, horde of jewellery, produce better returns that GFOS decided to offer asset audits across all asset classes including passion investments; yachts, wine, aircraft, jewellery, and alternative asset classes such as real estate, antiques and art.
If you would like to find out more please contact me on caroline@garnhamfos.com or call 020 3740 7422.