Trust Disputes

What Are Trust Disputes?

Trust disputes are legal conflicts that arise between parties involved in a trust, including beneficiaries, trustees, and settlors. Trust disputes can involve disagreements over trust administration, interpretation of trust terms, breaches of trustee duties, or challenges to the validity of the trust itself.

Trust disputes typically occur between the trustees or trustees and beneficiaries, where the trustees are alleged not to have adhered to their duties or fallen short of the standard expected.

Common Types of Trust Disputes

Many trust disputes concern trustee misconduct and breach of fiduciary duty (including failure to act in beneficiaries’ best interests and self-dealing). Trustees may also face allegations relating to trust administration such as failure to distribute assets, poor investment decisions, inadequate record-keeping, and failure to provide accounts to beneficiaries.

Trust instruments are not always clearly drafted, and disputes can arise over interpretation and construction where the meaning of the terms of the trust is unclear. Challenges can also be made to a trust’s validity based on the settlor’s lack of capacity, undue influence on a settlor or fraud, and improper execution of the trust instrument.

Beneficiaries can also become involved in disputes over their entitlement to trust assets or regarding the appointment or removal of trustees.

Grounds for Challenging a Trust or Trustee

A trust or trustee’s actions can be challenged on several grounds.

A challenge can be brought based on the circumstances in which the trust was created, such as where the settlor lacked capacity or was unduly influenced. The settlor may have had their signature forged or been defrauded such that a trust or certain terms of a trust were created without their knowledge or approval.

Trustees have several fiduciary duties to their beneficiaries, including:

• a duty to exercise reasonable care
• a duty of loyalty
• a duty to act impartially between beneficiaries
• a duty to invest the trust assets prudently
• a duty to disclose sufficient information and accounts
• a duty not to profit from the trust (unless expressly authorised)

A legal challenge can be brought if a trustee is in breach of any of their fiduciary duties, such as where a trustee has acted negligently, mismanaged trust assets or benefitted improperly from the trust. Trustees can personally liable for losses to the trust caused by a breach of their duties.

Beneficiary Rights in Trust Disputes

Beneficiaries under trusts have rights, many of which mirror the duties of trustees, including:

• the right to information about the trust, including the right to see certain trust documents and accounts
• the right to proper administration of the trust according to its terms
• the right to hold trustees accountable for breaches of duty
• the right to apply to court for directions or for the removal of a trustee.

The extent of disclosure of information required can differ depending on the status of the beneficiaries. Generally, only residuary beneficiaries have the right to see the estate accounts. Potential or discretionary beneficiaries will need to prove to a court that they have a real chance of benefitting under the trust, and that disclosure of the information that they are requesting is proportionate to their interest under the trust. Discretionary beneficiaries cannot challenge the decisions of trustees purely because they feel that the trustees have not exercised their discretion in their favour.

Removal and Appointment of Trustees

A mechanism for removing and appointing trustees is often expressly provided for in the trust instrument. For example, trustees may have fixed terms and be required to stand for re-election every few years.

Statutory powers for the replacement of trustees can be found under the Trustee Act 1925 and the Trusts of Land and Appointment of Trustees Act 1996.

The court has an inherent jurisdiction to replace or remove trustees where they have committed breach of trust, there is a conflict of interest, there is friction between trustees and beneficiaries, or it is otherwise in the interests of the trust. The grounds for removal include trustee misconduct, incapacity, prolonged absence, or where the trustee is unfit or unwilling to act.

The process for removing a trustee starts with an application (usually by a beneficiary or another trustee) to the court. The court must then consider whether it is in the interests of the beneficiaries and the proper administration of the trust to exercise its discretion.

Given that trustees can be personally liable for their actions while in office, it is important to ensure that there is proper documentation when they retire, are removed or are appointed.

Breach of Trust and Remedies

A breach of trust is a failure by a trustee to comply with their duties or the terms of the trust. Trustees may be in breach of their duties deliberately or negligently.

The remedies available to beneficiaries include personal claims against the trustee for compensation and/or damages, injunctions to prevent further breaches, and removal of the trustee.

The court assesses loss and compensation in trust disputes by considering loss to the trust fund attributable to the trustee’s breach of duty.

Trustees may have some protection from liability if there is an exemption clause in trust instrument. Exemption clauses are a common feature of modern trusts and can limit a trustee’s liability for breach of trust claims made against them, with the potential for financial reimbursement from the trust fund. Trustees will not have protection under an exemption clause for fraud.

Trustees may also have defences available to them, including if they received consent from the beneficiaries. Section 61 of the Trustee Act 1925 allows the court to grant trustees relief where they have acted honestly and reasonably. Trustees may also be able to rely on limitation periods if a claim against them is brought too late.

Trust Variation and Construction

There are multiple ways in which trusts can be varied, including with the consent of the beneficiaries or in accordance with the provisions of the trust instrument.

There are also various statutory provisions for the variation of trusts, including the Variation of Trusts Act 1958, which enables the court to approve a variation on behalf of beneficiaries who are not legally able to do so themselves (including beneficiaries lacking capacity, minors and persons not yet born). The court must consider that the variation of the trust is to the benefit (whether financial or otherwise) of the person(s) on whose behalf they are acting.

Where the meaning of trust terms is ambiguous or uncertain, it may be necessary to apply for court directions on how to construe the wording of the trust instrument. The court will consider the natural and ordinary meaning of the relevant words, the overall purpose of the instrument, any other provisions of the document, the facts known or assumed by the parties at the time that the document was executed, and common-sense approaches. The court may make reference to the settlor’s intentions and a letter of wishes where relevant.

The application to the court may arise out of a dispute or the trustees may choose to apply to the court where they are unsure how to proceed. Where a trust deed contains an error, an application can be made to the court to rectify the error if the settlor’s contrary intention can be proved.

Beddoe Orders and Trustee Protection

A Beddoe order is a court order that authorises trustees to bring or defend legal proceedings using trust funds and provides protection to trustees from personal liability for costs. Trustees should consider applying for a Beddoe order when faced with a claim against them, or when considering whether to pursue a claim. Trustees may also consider applying for a Beddoe order when uncertain about their duties, or when there are disputes between beneficiaries.

Trustees may also be able to rely on a letter of wishes by the settlor, the consent of beneficiaries or indemnity insurance.

Resolving Trust Disputes - Alternative Dispute Resolution

The courts expect parties to consider resolving disputes out of court, through alternative dispute resolution (ADR). The benefits of ADR can include the preservation of family relationships, confidentiality, costs savings and speed. The parties will also have greater control over the process and its outcomes compared with going to court.

Common forms of ADR include mediation and arbitration. Mediation is a structured negotiation process involving an independent mediator. Arbitration is a private alternative to court proceedings, where the arbitrator effectively acts as the judge.

ADR is frequently a better option than going to court, but court proceedings can be necessary where negotiation is proving impossible. However, there can be cost consequences for any party unreasonably refusing to engage in ADR.

Court Proceedings for Trust Disputes

Court proceedings may become necessary in a trust dispute, such as where ADR has failed, urgent relief is needed, or the dispute involves complex legal questions.

A party may bring a court claim for breach of trust, or make an application for the court to remove trustees, give directions, rectify the trust instrument or rule on its validity.

Costs in Trust Disputes

The general rule in court disputes is that costs follow the event (i.e. the losing party pays) but under the indemnity principle, trustees acting properly are entitled to be indemnified from the trust fund for their costs. Trustees’ costs may not be paid from the trust where they have acted unreasonably or in breach of duty.

Both parties’ costs may be paid for out of the trust fund for “non-hostile” applications. Non-hostile proceedings may include where an application has been made to the court for guidance on administration of the trust or on construction of an ambiguous provision of the trust instrument. If the losing party acted reasonably, then their costs may be paid from the trust fund.

It is important for parties to consider making offers to settle under Part 36 of the Civil Procedure Rules and to approach the other side to resolve the dispute via ADR. Part 36 and ADR offers both help to protect a party’s position when the court comes to decide on costs.

In all cases, disputes can significantly deplete trust assets so it is vital to undertake a cost-benefit analysis before commencing proceedings.

How LBMW Solicitors Can Help with Trust Disputes

At LBMW Solicitors, we have expertise in handling trust disputes on behalf of both trustees and beneficiaries. We assist clients in trust litigation, negotiation, and alternative dispute resolution.

Our services include advising on:

• breach of trust claims
• trustee removal applications
• trust construction disputes
• Beddoe applications
• mediation and settlement negotiations.

We take a pragmatic approach focused on achieving the best outcome while managing costs and preserving relationships where possible.

Please contact us for specialist advice on your trust dispute.

FAQS

What is a breach of trust?

A breach of trust is a failure by a trustee to perform their duties properly or to act in accordance with the terms of the trust. Breaches can range from minor administrative errors to serious misconduct such as misappropriation of trust assets. Beneficiaries can hold trustees personally liable for losses resulting from breaches.

Can I remove a trustee who is not acting properly?

Trustees can be removed if they have breached their duties, are incapable of acting, have a conflict of interest, or where there is sufficient friction with beneficiaries. An application to remove a trustee can be based on statutory powers of removal or the court’s inherent power to remove trustees. Legal advice should be sought before attempting to remove a trustee.

What are my rights as a trust beneficiary?

Beneficiaries can have many rights including:

• the right to information about the trust
• the right to see accounts
• the right to proper trust administration
• the right to hold trustees accountable

The extent of beneficiaries' rights varies depending on the status of the beneficiary. Generally, only residuary beneficiaries have the right to see estate accounts.

How long do I have to bring a claim for breach of trust?

Claims for breach of trust are generally subject to a six-year limitation period from the date the breach occurred or when the beneficiary became aware of it. In some circumstances, no limitation period applies, such as in claims involving fraud or trustee theft, or claims by beneficiaries with a proprietary interest in trust property.

Can a trust be challenged after the settlor has died?

Trusts can be challenged after the settlor’s death on various grounds including lack of capacity, undue influence, fraud, or improper execution. The time limits for bringing such challenges depend on the specific grounds and whether the trust was created during the settlor’s lifetime or in a will.

How much does it cost to resolve a trust dispute?

Costs vary significantly depending on the complexity of the dispute, whether it can be resolved through negotiation/ADR or requires court proceedings, and the amount at stake. In some trust disputes, costs may be payable from the trust fund, depending on the circumstances. It is essential to obtain early legal advice and undertake a cost-benefit analysis before initiating proceedings.

What happens if a trustee has lost or mismanaged trust money?

Trustees who breach their duties can be held personally liable to compensate the trust for losses. Remedies available for beneficiaries include claims for compensation, account of profits where trustees have profited from breaches, and removal of the trustee. In serious cases involving fraud or dishonesty, criminal proceedings may also be relevant.