For Love Nor Money?... A Guide To Trustee Fees, Expenses And Service Agreements

INTRODUCTION

Trust corporations and professional trustees that take on the role of trustees as part of carrying on a business invariably wish to ensure they can:

charge and recover their fees and expenses; and minimise their exposure to claims made against them for breach of trust. Trustees' fees and expenses are frequently a source of disputes with beneficiaries, the settlor or successor trustees.

Trustees' commercial interests in administering the trust efficiently and profitably can, on occasion, conflict with their duty to administer the trust in the best interests of the beneficiaries. In order to manage this conflict it is suggested that trustees should:

ensure that the trust instrument authorises the payment of the trustees' fees and expenses from the trust fund or that the settlor or some other person (with sufficient resources) has agreed to pay and, if necessary, provide security for such fees and expenses; ensure the level and type of fees charged are not precluded by the terms of the trust instrument and are clearly set out in the trustees' fee schedule; ensure their fee schedule has been disclosed to the settlor, protector, enforcer, primary beneficiaries, unit holders or such persons to whom the trustees have a duty to account1; provide sufficient notice (to the persons to whom the trustees have a duty to account) for any changes to the fee schedule; and clearly set out the level of fees and expenses charged to the persons to whom the trustees are required to account to. In most common law jurisdictions, these requirements are reflected in the general law,2 applicable trust and regulatory statutes and codes of practice.

Trustees' terms of engagement often contain provisions which may purport to set out the services the trustees have agreed to provide, indemnify the trustees, release trustees from liability and limit the amount of the damages that the trustees may be required to pay if they become personally liable for any loss. This Guide considers the extent whether trustees' terms of engagement can achieve such objectives. This Guide also considers issues for trustees to consider when negotiating terms of exoneration and indemnification with their (unrelated) delegates.

The purpose of this Guide is to assist trustees in common law jurisdictions to manage the conflict between charging fees and expenses and minimising their personal liability on the one hand, and fulfilling trustee duties, on the other. The Guide is not specific to any particular jurisdiction but includes, by way of examples, reference to various statutes, regulatory requirements and cases from several common law jurisdictions.

PART 1- THE GENERAL LAW, THE TRUST INSTRUMENT & STATUTE

When may a trustee charge fees and recover expenses?

The general law position is that trustees:

may not profit (including by way of fees or commissions) from their position unless they are authorised to do so.3; and are entitled to recover expenses they have properly incurred in connection with their administration of the trust.4 The trustees may be authorised to charge fees by:

the trust instrument (by a charging clause); the sole beneficiary (if the trust is a bare trust such as a nominee arrangement) or all the beneficiaries who are together absolutely entitled to the trust property5; statutes which expressly provide that particular types of trustees may be entitled to charge fees; or the court.6 The Trust Instrument

Often trust instruments limit the ability of trustees to charge fees to the following persons:

trust corporations (which, in a certain number of jurisdictions, refer to trust companies licensed in that jurisdiction and may not extend to trust companies licensed in other jurisdictions or private trust companies7); or lawyers, accountants and certain other professionals. In practice, trust instruments rarely include provisions authorising non-professional individuals to charge trustee fees.

Statute

Despite the absence of an effective charging clause in a trust instrument, certain jurisdictions' trust legislation, (such as England and Wales, Bermuda, Isle of Man and Jersey for example) include provisions authorising certain types of trustees to charge reasonable fees provided the trust instrument does not express a contrary intention.

However, those statutory provisions are often limited to:

trust corporations8 and professional trustees9; or public trustees10. It is important to consider the relevant definition of "trust corporations" or "professional trustees", for the purposes of such provisions to ensure that a trustee may take advantage of the particular statutory provision to charge and deduct its fees from the trust fund.

A number of offshore jurisdictions do not even permit trust corporations to charge fees without permission from the court unless the trust instrument authorises such charges.

Perhaps surprisingly, few if any statutes in common law jurisdictions (such as Barbados, Bahamas and Cayman Islands) authorise lawyers, accountants or other professionals to charge and deduct their fees where the trust instrument is silent regarding the trustees' remuneration.

It is suggested that, under the general law, a court, under its inherent equitable jurisdiction over the administration of trusts, also has a discretionary power to authorise remuneration of any trustee (including a de-facto trustee).11 However, an express statutory provision giving the court the power...