Creating a Trust requires trust. In accordance with the Law Society of the United Kingdom, the “trustees are the legal owners of the assets held in a trust.” Their role is to:
- deal with the assets according to the settlor’s wishes, as set out in the trust deed or their will.
- manage the trust on a day-to-day basis and pay any tax due.
- decide how to invest or use the trust’s assets”[1]
Entrusting hard-earned assets to a trustee can be intimidating. However, centuries of established laws in the Isle of Man are in place to safeguard the rights of beneficiaries and ensure trustees act responsibly. This trust relationship is built upon a strong legal framework supported by oversight from the Financial Services Authority. Simply put, the trust between the trustee and the client (settlor and beneficiary) is founded on adherence to these laws and regulations.
It is widespread practice in countries that follows common law, like the Isle of Man, to have a corporate entity as the sole Trustee. The corporate entity is normally regulated[2] and the officers that play a role in the corporate entity are subject to regulatory oversight. All the rules, regulation and laws look to protect clients and forms the basis of making the trust sustainable.
A key advantage of appointing a corporate entity as a Trustee is its ability to ensure the trust’s continuity across multiple generations, without the need for a change of Trustee. Corporate entities have an unlimited lifespan, persisting beyond the tenure of their officers. When considering the long-term sustainability of a Trustee, the focus is on ensuring the corporate trustee’s ability to fulfil its obligations to beneficiaries and support the transfer of wealth to future generations. What assurances can be provided to the wealth creator, or settlor, that the structure they show today will remain effective and operational for the next one hundred years or more? Selecting a Trustee is inherently a decision with far-reaching implications.
The sustainability of a corporate trustee depends on several aspects:
- Their quality and standard of its corporate governance framework.
- The succession plan for its directors and officers.
- The family’s investment strategy and the trust’s Investment policy.
Corporate Governance Framework
The corporate governance framework of a trustee refers the “set of rules, practices, and processes that defines how the company is governed” [3] and which, in turn, the Corporate Trustee uses to formulate and execute decisions and thereby govern the trust.
The starting point of each action by the trustee starts with a thorough understanding of the intent of the settlor when they created the trust. The result of each action of the trustee is to ensure that the action taken is in the best interest of the beneficiaries. Positioned in the middle is the governance framework of the corporate entity that dictates the decision-making processes, rules and practices when executing a decision.
The ultimate consideration when considering the sustainability of the trust is whether the trustee’s decision will stand in a court of law if challenged. The quality of the governance framework and how it is applied will either add or distract from the Trust’s sustainability.
When we consider that a trust is designed to transfer wealth at least twice in its lifetime, the quality of the governance framework is essential. The trustee should be able to account for its decision long after the directors and officers that made the decision have been succeeded.
Legal advice is a particularly crucial point in managing the trust. Families sometimes cannot see the benefit of obtaining advice prior to a decision and yet the legal advice aids in ensuring that the trust will withstand a court action, should one occur. A trustee should be skilled in sourcing the right advice from the right legal advisor (with proper levels of knowledge) as well as implementing the advice.
Succession plan for the directors and officers of the trustee
When selecting a corporate trustee to manage the family trust, it is important to evaluate the trustee’s succession plan for its directors and officers. As previously noted, one key advantage of a corporate trustee is its continuity, as it is still operational beyond the tenure of the individuals responsible for overseeing its corporate governance framework.
The trustee should have capable and skilled individuals as directors that will be able to accept the reign from the current directors. In an ideal world, the family should be exposed to multiple individuals in the organisation that functions at various levels of seniority.
Investment strategy of the family
Ensuring the sustainability of the trust requires the family to live within its means, which is primarily a matter of family governance rather than the trustee’s responsibility. However, the trustee can contribute to the success of the wealth strategy by implementing an effective investment policy.
The original intent of the settlor is important in guiding the trustee in its action. The settlor should formulate the trust’s raison d’etre carefully and with thought. It is possible for the settlor to give guidance on how investments should be made. As an example, the settlor can request investments that have a negative impact on environmental sustainability that should be avoided. For example, the Trustee should actively seek investments that promote environmental sustainability. A critical aspect of the Settlor’s guidance should address how the Trustee manages income and capital within the Trust. Ideally, the capital should be reinvested, while the family relies on the income to support their lifestyle.
The Trustee will develop the trust’s investment policy based on the Settlor’s intent. This policy will outline the criteria that investments must meet and may include specific exclusions. The Trustee will regularly evaluate investment performance to ensure alignment with established policy.
Conclusion
A sustainable trust encompasses more than just environmental sustainability. Its longevity also depends significantly on how the trustee approaches decision-making.
For a trust to still be sustainable, the relationship between the Trustee and the family must be founded on mutual trust. A family that is well-prepared in its own planning enables the Trustee to better support the family in thriving and achieving its goals.
[1] https://www.lawsociety.org.uk/public/for-public-visitors/common-legal-issues/trusts, 04/12/2024
[2] Regulated in the Isle of Man by the Financial Services Authority; https://www.iomfsa.im/.
[3] The Corporate Governance Institute, https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-a-corporate-governance-framework/#:~:text=A%20corporate%20governance%20framework%20comprises,%2C%20government%2C%20and%20the%20community., 04/12/2024