When should a trustee retire?

Under the trust laws in most jurisdictions, trustees are permitted to retire voluntarily. But what about the situation where the beneficiaries want, and have asked, a trustee to retire but they are reluctant to do so? This would often, but not always, arise where there are disputes over the trustee’s fees or the terms of their retirement. In such circumstances, what should a trustee do?

Is it appropriate for the trustee to refrain from retiring until those disputes are resolved? Can the court intervene and direct a trustee in such circumstances to retire? The landmark decision of the Royal Court of Jersey (the Court) in In the Matter of the Velloz Settlement provides important clarification on these issues.¹

Retirement

It will often be obvious to a trustee when to retire. It may be their own choice, for example, where they no longer feel equipped to carry out the role. Or perhaps one or more of the beneficiaries has asked them to retire and wishes to change trustees. In either scenario, it is important to remember that a trustee remains under an ongoing duty to act in the best interests of the beneficiaries, and the trustee should have central regard to this factor when considering retirement.

On a retirement or removal, a trustee will usually be required to surrender trust property in their possession or control (subject to prohibitions imposed on such transfer by other legislation, such as that concerned with anti‑money laundering) and, if relevant, assist in the transfer of trusteeship to another trustee.

Retiring trustee’s protections

A trustee has the right to indemnity from the trust fund for liabilities reasonably incurred. This usually provides appropriate comfort for a trustee while in office. However, a retiring trustee is more exposed. Once the trust property is passed to the continuing or new trustees, the property will be placed outside the outgoing trustee’s immediate control. Furthermore, if the new trustees are based outside the jurisdiction, the trustee will no longer be under the effective control of that trustee’s domestic courts and they may have to resort to a foreign court in order to obtain an effective indemnity or reimbursement.

For these reasons, under the trust laws in most jurisdictions, the duty to surrender trust property is subject to the right to reasonable security. In practice, it is common for trust instruments to make provision expressly for this particular situation. What constitutes reasonable security? As has been stated by the Court on several occasions, what is reasonable security will turn on the particular facts of the case.² In some instances, monies held in escrow may be appropriate. In other cases, the indemnification alone may be sufficient. In addition to the right to require security, a retiring trustee has the benefit of a non‑possessory lien over the trust fund.³

Disagreements on fees

One common scenario on retirement is that there is a disagreement over outstanding fees due to the retiring trustee. What happens if the retiring trustee and the beneficiaries cannot agree on how to deal with the issue? A retiring trustee is usually not permitted to allow resolution of its fee position to delay its retirement, providing adequate arrangements are in place to provide security for any such fees.⁴ This principle is an extension of the retiring trustee’s ongoing obligation to act in the best interests of the beneficiaries. By putting their personal interests in settling their fee position first, they are at risk of failing to exercise those obligations properly.

How and when can the courts intervene in this scenario? In particular, can courts direct a retiring trustee to execute reasonable terms of retirement that make provision for reasonable security? Despite the clarity of the principles concerning a trustee’s obligations when faced with a request to retire, up until the Velloz decision there was limited jurisprudence on this point.

Velloz settlement

The Velloz settlement (the Trust) was governed by Jersey law. The beneficiaries of the Trust were the settlor, his wife and his four sons and their issue. The assets of the Trust were held mainly in property in various jurisdictions and exceeded GBP1 billion in value.

There were two trustees of the Trust, VT and ST; both Jersey private trust companies. The sole director and beneficial owner of VT was the eldest son of the settlor. ST was owned by a family purpose trust and its board of directors included the two middle sons. VT was the sole trustee at the date of the creation of the Trust (before ST was later appointed as co‑trustee) and it was envisaged by the settlor and the family that VT would, in due course, relinquish sole control of the Trust to a trustee more widely representative of the family.

Following inception of the Trust, all adult beneficiaries requested that VT cease to be trustee of the Trust, in accordance with the above wishes of the settlor. After protracted correspondence, VT agreed, in principle, to retire, subject to agreeing appropriate terms of retirement and reasonable security for disputed fees. VT’s co‑trustee, ST, provided VT with draft retirement terms and security, which included indemnification provisions and an undertaking with regards to the ring‑fencing of assets sufficient to meet the disputed fee liability. The retirement terms were agreed; however, VT was not satisfied with the security offered and negotiations between the parties could not result in any agreement.

In light of this deadlock and the detrimental effect on the Trust, ST applied to the Court for directions approving the retirement terms, requiring VT to execute the same and, in the absence of doing so, that VT be removed as trustee. VT opposed the application, arguing that the Court could only order the removal of the trustee and removal, in such circumstances, was inappropriate. However, the Court ruled, having principal regard to the interests of the beneficiaries, that it did have jurisdiction to direct a retiring trustee to execute an instrument of retirement. Here, it felt appropriate to direct VT to execute the terms proposed by ST, failing which it would be removed as trustee. Following retirement or removal, VT would also be required to surrender all Trust property in its possession or control to ST.

In reaching this decision, the Court held that VT had reasonable security owing to its equitable lien, its contractual indemnity upon retirement (as referred to above) and the undertaking given by ST that it would hold in a ring‑fenced fund a sum necessary to resolve VT’s claim for its fees.

What are the risks for a retiring trustee in unreasonably refusing to retire?

A trustee will often lose the right to an indemnity for its costs from the trust fund (or be ordered to pay the parties’ costs) by reason of their unreasonable conduct in forcing the continuing trustee to bring unnecessary trust proceedings or their conduct in the proceedings themselves.⁵ The risk for a trustee in unreasonably refusing to retire, which results in unnecessary court proceedings, is that they may be deprived of indemnity and ordered to pay the parties’ costs.

In Velloz, ST requested that the Court order VT be deprived of its indemnity and ordered to pay the parties’ costs on the basis that its inappropriate conduct occasioned these proceedings. The Court adjourned the decision, pending determination of the fee dispute.

What are the lessons for trustees?

First, in the usual course, a trustee will be acting appropriately in retiring at the wishes of the beneficiaries. In deciding to retire, the touchstone for the trustee should always be what is in the best interests of the beneficiaries.

Second, it is essential that a retiring trustee understands that their interests in being paid outstanding fees and agreeing on appropriate retirement terms should not take precedence over what is in the interests of the beneficiaries. As the Court stated in Velloz:

‘Delay in retirement cannot be used by a trustee as a means of a leverage in respect of its fees. For a trustee to adopt such a stance is putting its own interests above and in conflict with the best interests of the beneficiaries.’⁶

Finally, a retiring trustee should seek to agree with the incoming or continuing trustee reasonable retirement terms and reasonable security. If there is controversy and disagreement, it will often turn on the security. What is reasonable security will depend on the facts of the particular case. A retiring trustee acting unreasonably may be exposed to costs risks.