Grey matters ethical dilemma: Trust in conflict – the verdict

Read the CISI's verdict and readers' comments on the ethical dilemma that appears in the Q4 2017 edition of The Review

grey matters

Read 'Grey matters ethical dilemma: Trust in conflict' from the Q4 2017 print edition of The ReviewThis ‘Grey matter’, published in the Q4 2017 print edition of The Review, raises a relatable dilemma which highlights conflicts created when the interests of an aging relative and younger generations collide. There were many in depth and well-considered comments, for which we thank you. A selection of these are published here, along with the results from the survey and the CISI verdict.
Options offered and results from surveyA. This is now a family matter. He has drawn their attention to the situation and it is now up to them to decide on a course of action. (12 responses)
B. Regardless of the actual legal relationship between Philip and the trustees (Eileen’s children), he has a moral responsibility to protect Eileen’s interests. (22 responses)
C. His duty of care to the trustees means he should consider the position of the remaindermen as well as Eileen, the life tenant, even though the remaindermen are also trustees. (88 responses)
D. He should step down as a trustee. (11 responses)
The CISI verdictWhile C is the most popular option (88/133 votes), respondents in the comments are evenly split over whether Philip’s moral duty to Eileen should outweigh his duties to the trustees. Roughly half the respondents argue that care for Eileen is paramount, while others note that his role as trustee means he has a duty of care to all beneficiaries from the trust.

What is likely to be the key determinant of Philip’s role is the terms of the trust. Philip’s duty of care is to uphold the purpose of the trust, and should the trust dictate that the interests of Eileen are paramount, Philip should face the difficult conversation with her children about the need to diminish the value of the fund to pay for Eileen’s ongoing care.

Respondents are also split about whether Philip should step down as trustee. For some, his role as adviser and trustee represents an insurmountable conflict, yet others say that he was appointed as a trustee by virtue of his independence and expertise. In fact, he is the least conflicted as the remaining trustees are also family members. He is the only trustee that is likely to fully understand the responsibilities that come with that position. Principle 5 of the CISI Code of Conduct requires Philip to manage a conflict of interest fairly and effectively, and so long as he declares any conflict and is honest, open, transparent and fair with all parties, there is no reason why Philip needs to step down as trustee.

He should consider the position of the remaindermen as well as Eileen, but abide by the terms of the trust and the spirit in which it was set up. For this reason, option C is the CISI’s preferred option.
Some reader comments"My view on this is for Philip to explain in detail to the parties the implications of spending £40,000 for Eileen's care and to explain to the trustees what the financial implications of other options are."

"B seems best, but does not seem to recognise that Philip is a trustee too, so it goes beyond moral responsibility and he also has a fiduciary duty to act in her best interests as the current beneficiary."

"Three of the potential answers could be understood and explained. It is now a family matter as the children are the trustees and they are aware of the costs to be incurred, which in turn will have an impact on their futures in some financial ways, and he does have a duty of care to the trustees.  However I do not feel that he should step down as a trustee. He was asked to act as a trustee; one assumes that this decision by the deceased father was taken in order to provide an element of independence and expertise in financial matters. Philip is also in a position to be able to make decisions or suggestions to the other trustees on a factual and non-emotional basis.  Therefore, while Eileen is alive, the trust should be used to provide her with as comfortable a life as she would like and can afford. Her children should be encouraged to accept that they cannot fund expenditure based on the expectation that they will receive certain funds that are not yet theirs to use."

"There is a very strong moral issue here. As trustee he has an obligation to protect Eileen which is implicit in the instructions from Brian. The other trustees seem to be acting out of self-interest, especially if they have gone ahead and undertaken commitments expecting that they would be covered with the provisions of the estate. Care for Eileen is paramount."

"Somebody needs to have an unbiased view on Eileen's situation, to have her best interests at heart. The children are likely to make a decision influenced by the grandchildren."

"None of the above options clearly describes Philip's position.
Philip is a trustee. He has taken on responsibilities, which are not just moral or ethical. They are legal. He is obliged by law to act as per the trusts'  written documents. What the trust pays out is not a family matter. His duty of care is to uphold what the purpose of the trust is. If the trust was created to take care of Eileen, then his job is to protect her interests, even if the other trustees have ulterior motives. The expectations of family members for an inheritance should not change his actions. Only if the trust actually was created to treat all potential  beneficiaries in an equal manner – then Philip will need to balance the inheritance needs of the children and the mother. He can not just resign or run away from his duties just because he has to have an 'uncomfortable' conversation with the younger generation."

"As a trustee, his duty is to fulfil the terms of the trust agreement. If the funds are there primarily for the benefit of Eileen, then his advice should be on how he can ensure the capital lasts for the rest of Eileen's life; not to maximise the funds for the benefit of the children. It seems to me that the interests of the children are in alignment with this (ensuring the best for Eileen's welfare); albeit they need the advice of what is financially achievable."

"A tough one, however as the children are also trustees, when raising the issue and discussing – Philip can ensure that the children/remaindermen are aware of what they may be giving up in acting as trustees for their mother. While his duty of care should consider their position, should the remaindermen/children be happy to reduce inheritances to provide for their mother, this doesn't mean Philip can't agree with them. It could be argued that they have a better understanding of how the settlor would wish the change in circumstances to be handled and they can act as trustees in this, using their personal relationships with their father as guides on how best to proceed."

"Philip as a trustee needs to consider both Eileen's needs and the remaindermen. Clearly Eileen's needs should be a priority. Immediate care annuities should be considered for Eileen's care. By taking into account her income and working out the balance of income needed, it should be possible to build an increasing annuity into the plan. This would give peace of mind that the fees would be paid for the rest of her life. It is likely that the house would be sold too and the proceeds of this, not needed to finance the annuity, could be invested in a diversified portfolio to not only provide top-up income for Eileen during her lifetime but also provide for the possibility that there would be something left over for the remaindermen on her death. Care should be taken to make sure that the sale of the property is excluded from the trust so that it doesn't negate the new 'nil rate' band."

"There could be significant benefits for Eileen if she were willing to move into a suitable retirement home before her dementia becomes so severe that she is unable to establish new relationships and friendships.
Could the trust assets be used temporarily to fund the care home fees, pending sale of Eileen's home to provide more substantial funding, if required?"

"The family should seek to find out what help Eileen would qualify for from the state. Depending on how the trust is structured, it may be possible to pay funds to the children rather than directly to Eileen, thereby allowing her to potentially qualify for some care provision. Then the family could top up from family funds to the level they want. Any guidance that the trust has been set up to follow should be adhered to carefully. There would be a potential increase in the trust income if Eileen went into care as that house could be rented or it could be sold and the proceeds used to acquire higher yielding assets if that was felt to be appropriate and within the trust rules. I would not like to be a trustee and the adviser to a trust and would prefer to resign as trustee and engage as an adviser only. A full fact find and trust document would be required to properly examine the situation and ideally a view across the entire family so all options were considered."

"Clearly in this case, his role as a trustee overides his involvment as an adviser. I would have thought his duty of care was to the trust and therefore to the lifetime tenant and remaindermen equally, rather than the trustees, even though they are one and the same. The trustees must act in accordance with the trust and perhaps if Philip feels he cannot act as both trustee and adviser due to the potential conflict and his minority position, this (his reasons) should be noted in writing and perhaps he should allow himself to be replaced as a trustee if the trust deed allows this."

"My choice of C is based on the duty, as I understand it, of trustees to act with a legal and fiduciary duty first and foremost, and while morals, and therefore emotions play a part, they have to be quite forensic in how they discharge their financial responsibilities. Sad though this outcome might be, the trustees must look at all the potential beneficiaries."

"in this case I would take the view that his first responsibility is as a trustee rather than as an adviser. The terms of the trust will determine the extent to which capital can be used and a wide range of options as to how care is funded will need to be examined, considered and recorded, and decisions made."

"Philip has an obligation to take account of the intent of the deceased husband/father and guide the trustees towards a solution which would most closely reflect his likely wishes had he still been alive. Such a solution might involve the sale of the family home at some stage to ensure the ongoing funding of the cost of care for Eileen."

"Missing information relevant to the problem:
Exact number of Trustees
There will be at least two others, as the article states that Philip 'could be outvoted'.
Size of trust
The total value of the family home and invested assets (depleted by work on the house).
Possible conflict of interest
The two residuary beneficiaries with children in 'expensive private education' – is either or both a trustee?
Restraints in the Trust Deed regarding 'unfettered use'
What is excluded, or does the Trust Deed specify exactly what IS permitted?
Analysis of issues
If the Trust Deed has constraints on how the funds may be spent, the trustees have to comply, or seek approval from the court to vary the terms of the trust. Unfortunately, a voluntary agreement from the life tenant and remaindermen is probably no longer possible, as the life tenant suffers from dementia, and may well lack mental capacity in this particular matter.
In addition, the grandchildren in 'expensive private education' will probably still be minors. This, by itself, would prevent a voluntary variation being made.
The cost of applying to the court would be extensive, and might even be ultra-vires depending on the actual restrictions in the Trust Deed if that counts as 'unfettered use' within the restrictions. However, the trustees’ right to apply to the court is statutory, and this ought to override any trust provisions. Indeed, the court can strike down such a provision if it rules that the restriction is unsuitable as against public policy, or for whatever reason the court decides.
Most importantly, if one or more of the trustees who may outvote Philip are those with children in private education they must immediately declare a conflict of interest as well as a direct pecuniary interest in the decision. This may (or should) disqualify them from outvoting Philip since they cannot demonstrate that their decision was made totally impartially.
The option C reflects the actual course of action for Philip, but the additional issues mentioned above modify the action to a considerable degree."

Published: 28 Feb 2018
  • Integrity & Ethics

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