Retirement, Replacement & Removal Of Trustees: Guidance Note

This Guidance Note will cover a host of practical issues for trustees seeking to step down from office and the practical implications of some recent court decisions on applications to remove a trustee. It will also cover legal issues for both outgoing and incoming trustees and their beneficiaries; such as knowing when a trustee should jump before being pushed if it is experiencing friction with beneficiaries, practical points to consider when facing a court application for removal - parallel claims for breach of trust, conflicts of interest, costs, and the importance of tying up loose ends - and also trickier points in negotiating and structuring appropriate indemnities.

RETIREMENT & REPLACEMENT

Retirement usually takes two forms: either accompanying a final distribution of trust assets to beneficiaries, or retirement in favour of a new incoming trustee (a replacement). The transition between the outgoing and incoming trustee is usually a consensual process. However, a sole outgoing trustee cannot retire (and leave the trust without a trustee) without either making a final distribution to beneficiaries (so as to end the trust) or appointing an incoming trustee to replace them (Art. 19 Trusts (Jersey) Law ("TJL") 1984). On the termination of a trust the trustee is entitled to seek reasonable security for its liabilities incurred as trustee and may also seek (but is not entitled to) a release from liability or breach of trust.

A warning from recent history about the risks of an oversight if the power to appoint trustees is vested in someone other than the outgoing trustee was BB A & C [2011] JRC 148. This case involved an employee benefit trust. A succession of trustees were appointed in 1992, 1997 and 1998. The power to appoint new trustees was vested in the employer company, which had been dissolved in 1996; no one appeared to have noticed this until 1999. This made the appointments of the trustees in 1997 and 1998 invalid.

The solution from the Royal Court was to bless the first trustee's application under Article 45; i) relieving it from any fault in having retired in favour of the improperly appointed trustee in 1997 and ii) validating all the acts of trustees 2 and 3 in the intervening years. This case, however, is not a precedent to be comforted by or relied upon. The first and subsequent trustees were fortunate that all parties supported the application. It may have been more complicated had the parties been more hostile. The first trustee would still have been the actual trustee with a duty to recover trust assets and consider the reasonableness of the second and third trustee's entitlement to their professional fees, their conduct while trustees de son tort and decide whether to pay. Trustee 1 would be under a duty to recover the losses caused by any breaches of trust by Trustees 2 and 3. There would have been issues as to whether the second and third trustees' exercise of powers were valid.

TRUSTEE'S LIABILITIES

A trustee is liable to third parties to the trust as principal rather than the agent of the beneficiaries. Liability may arise by virtue of entering into contracts, leases, guarantees, indemnities, to which the trustee is a party, tortious claims for which the trustee can be fixed with liability and of course fiscal liabilities. While in office, a trustee is entitled to reimburse itself from the trust assets for costs it reasonably incurs in the trust's administration (Article 26 TJL 1984). The trustee may retain and realize assets sufficient in order to ensure it is not left out of pocket.

A trustee who transfers trust assets to a new trustee (and thereby deprives itself of the right to reimburse itself from assets under its control) puts itself at personal risk if it is sued by a third party. However, under Jersey law, the trustee's liability to a third party who transacts with the trustee knowing him to be a trustee...