When it comes to investment and financial arrangements, even the most mutually-beneficial agreement can flounder on lack of trust. Rarely is this more evident than in the Trusts industry, which hinges on the notion of trusting an individual to manage assets and investments, and yet has been hit in recent years with a wave of litigation. Breakdowns of communication or transparency between trustee and beneficiary benefits no-one, but is it too late to rescue the Trust industry from those that are taking advantage of the system?
Trusts are all too often abused by those with questionable motives, and to find a reason for the recent growth in Trust litigation we need look no further than the motivation behind forming the Trust, or the ulterior motives of its ‘salesman’.
When it comes to salesmen, few are as prolific, or as historically unscrupulous, as the big banks. For the banking sector, the Trust industry became a chance to sell clients in-house products that fuelled profits for the bank, at the unfortunate expense of the Trust itself. Is it at all surprising that this mentality all too often leads to litigation, when any beneficiary who took time to monitor their portfolio could spot the damage?
This damage can often be laid at the feet of in-house products, not far from the deep, dark hole that payment protection insurance (PPI) was spawned in. These products are rarely competitive and often involve hidden commissions and kick-backs. Thus, in order to increase profitability from a Trust, the bank acting as the trustee’s parent would need to squeeze assets out of the Trust, or may try to tie the Trust into exclusive agreements by way of loans or investment advice. Damage to the Trust harms all beneficiaries, running counter to the notion of a trustee as a third party unaffiliated with the investment advisors, and receiving no commission from them.
The understandable backlash against this behaviour came in the form of increasing litigation against banks in the Trust sector and so, their fingers burned, banks started to withdraw. This leaves space for another set of investors to ask not ‘how may we be of service?’ but ‘how much can we make?’.
Private equity’s move into the Trust sector highlights the key problem from which these exploitation issues stem: the replacement of the trust relationship with a relentless drive for profit. By prioritising short-term financial gain over longer-term fiduciary relationships, the modern trend away from old-fashioned trusteeship is continuing the downward slide the banks began. In an industry where families rely on their trustees to act in their best interests, cutting corners to maximise revenue will only result in yet more disputes.
The same issue of exploitation occurs even in Trust structures set up for high-net worth individuals or families. Individuals that have a proven need for Trusts to protect assets from family and business risks can undermine this sensible arrangement by trying to keep control whilst denying ownership. You cannot have your cake and eat it. Increased control by the Settlors can give rise to a multitude of difficulties. Asset shifting designed, in whole or in part, to defeat the interests of others can be counterproductive.
Inevitably, Trusts such as these are often beset by problems, including attacks by creditors and disappointed business partners or routine actions against the trustee for mismanagement. However, things turn particularly acrimonious when the dispute involves family.
We once represented an elderly lady, shortly to be divorced from her husband of 30 years, who had received a letter from a magic circle lawyer serving her with notice to leave the family home. Unbeknownst to her, the property was not in fact the matrimonial home, but was owned by a company that was itself owned by a Trust.
Her husband claimed he did not own the house, as it was part of a Trust, and an affidavit of means revealed almost nothing of substance in his name. However, upon further investigation, it was discovered that he was the owner and director of the Trust structure, reserving all powers to himself. Exploiting a Trust structure in this way was counterproductive across the board because it gave rise to litigation and was a poor advert for relevant service providers.
Whether the Trust structure is undermined by a bank, private equity house, or an unscrupulous husband or debtor, this trend is unsustainable and harms all potential investors for whom a Trust may be a sensible decision. We need to return to traditional models of trusteeship, with unaffiliated, trusted trustees who care about the wellbeing of all beneficiaries. Until we see a return to the basics, litigation will only continue.