The unintended consequences of family disputes and family trusts
Family wealth planning is frequently undertaken against a background of positive planning, often when the second generation is younger, and the family small and without complications. Over time this can change and lead to unintended adverse consequences for Trust structures if the family enters into a major dispute. Families and practitioners can learn from some of these issues, as Highvern's Richard Joynt and Forsters' Alex Tamosius outline.
Family members in a dispute position
Case study 1 demonstrates how having family members on a PTC Board can put them into direct conflict with one another, worsening any dispute and encouraging litigation. If the Articles of the PTC had built in flexibility around Board composition, conflicts of interests could be avoided. For instance, the family could have rights to appoint Directors but not actually take these up unless there was a material issue that they needed to vote on.
Case study 1
The patriarch settles his trading business into Trust for the family’s collective benefit after his passing. A PTC structure is chosen with the family having a majority on the Board to retain control. Son C, a beneficiary and a Director of the family business, objects to the way the business was being managed and enters into dispute with the family, complaining to the Trustees. The other family members are in a very difficult position as they sit on the Trustee Board and Enforcer Committee. The professional Trustee is also in a predicament as they are a minority on the Board and cannot resign as they are needed for quorum reasons.
Manage wide beneficial classes
From the vast body of trust case law, it is clear that beneficiaries have significant rights and can hold the Trustee to account for their actions. Establishing the Trust with a narrow class of beneficiaries at the outset allows the Settlor to see how family dynamics evolve over time, and beneficiaries can be added later. Managing the named beneficial class in this way can heavily reduce litigation risk.
Exit mechanisms
Any family dispute is unpleasant, but when significant wealth is involved, the accompanying litigation risk is high. Structures which include very illiquid assets and require family members to work together risk becoming the focus of family dispute litigation. Building dispute resolution mechanisms into the structure provides resilience and shows fairness if a dispute occurs since the mechanism applies to all family members. Case Study 2 shows that this can be as simple as the Settlor drafting a clear letter of wishes to the trustee, setting out how they intend the trust to function and how disputes should be resolved.
Case study 2
A trust owned UK real estate investments, together with a significant amount of cash. After a decade-long dispute, the trustee and beneficiaries agreed to divide the trust fund “equally”. Although the initial intention was to divide the trust fund in three, the differing tax status of each beneficiary meant that such an approach would not be equitable. Each applicable jurisdiction’s tax rules treated each asset differently; and even though it may be possible to divide the assets in such a way that did not give rise to immediate tax leakage, there was no way of doing so without creating long term tax concerns. This complex dispute could have been avoided if, at the outset, the Settlor wrote a clear letter of wishes to the trustee, detailing how he’d like the trust to function.
Trust the trustee
PTCs are an excellent planning tool as they allow family members to be involved in decisions concerning the family wealth. They also allow the family to design a Trustee management process that is specific to their needs and the individual nature of the assets. However, if they are being used as the family is reluctant to rely on the professional trustee, this is counter productive. Professional trustees spend their working lives understanding what trustee responsibilities are, and in the event of a family dispute, non-professional trustees who sit on the PTC Board are often shocked to understand what these responsibilities involve.
Bring the trust to an end
Ending the trust, either by distributing the trust fund to the beneficiaries or by appointing it onto new trusts with separate beneficiaries, can be the most pragmatic solution to disputes. A careful and fair-minded division of assets can be the best resolution, and negotiations leading to that point will often flush out underlying concerns in a manner that was not possible beforehand.
Conclusion
Planning for orderly family wealth succession is essential and structures remain an integral part of this. Whilst we may not wish to believe it could ever happen, it is important to consider what might happen in the event of a future family dispute and to plan accordingly when putting any structure in place.
Alex is a Senior Associate in our Private Client team.
The Life Cycle of Family Wealth
From growing a business to starting a family or handing over control of that business to the next generation, every individual has their own goals to aspire to. Our Private Wealth lawyers advise our clients throughout this family life cycle, providing the legal advice required for specific transactions such as purchasing a home or selling a business, whilst also advising on the long-term opportunities for succession and estate planning.
