These are some of the key issues that Trustees should consider when meeting their fiduciary duties against the backdrop of the COVID-19 pandemic.
Trustee protection during global lockdown
We are concerned as trustees that these difficult times will lead to criticisms (or potentially even litigation) by our beneficiaries. How can we look to protect ourselves?
In periods of economic uncertainty and disruption, it is not uncommon for beneficiaries to direct criticism at their trustees. This can manifest itself in complaints in relation to the financial performance of the trust assets, complaints about excessive trustee fees, complaints about reduced distributions being made, and so on.
During these times, prudent trustees will go the extra mile to communicate with their beneficiaries, to persuade them that the crisis is not unique to the beneficiary's interests, and that the trustees are reacting appropriately to protect the overall interests of the beneficiaries. Trustees should also consider the extent to which they should be involving themselves in the administration of the underlying assets; they should certainly be in regular contact with their investment managers where the trust holds stocks and shares; if the trust holds operating businesses, they will wish to revisit any anti-Bartlett provisions in the trust instrument to determine what steps, if any, they should be taking. They should not make any rash decisions. Where decisions are taken, it will, as usual, be crucial to record the decision making process and the reasons behind decisions.
Can I seek the Court's approval to a particular action?
Trustees can seek the approval of particular decisions under the Court's Public Trustee v Cooper jurisdiction. Such decisions should, however, normally be 'momentous'. In testing economic times, it is unlikely that trustees will be taking momentous decisions such that they warrant approval by the Court. The Courts are likely to be critical of trustees who apply for the blessing of routine decisions, even where the consequences of those decisions are potentially significant because of the economic climate. Trustees are required to carry out their duties in the good times and the bad, and should not simply head off to court when things get difficult. There is also the practical difficulty that many of the courts are closed or are having to operate remotely and grapple with new technology that they are not familiar with.
Am I personally exposed as a trustee to any potential reduction in the value of the trust fund?
As a general principle, trustees have a duty to manage and preserve the trust assets. However, it is well recognised that assets both increase and decrease in value, and any decrease in value does not, of course, necessarily suggest wrongdoing by the trustee. Whether the trustee is personally exposed will depend on the scope of the trustee's duties, which will vary from trust to trust, and what steps the trustee has taken to comply with those duties and mitigate any decrease in the value of the trust assets. Whilst trustees should not rely on them, many trust instruments will contain exemption clauses, which should be an additional source of comfort. If the trustee has acted proactively, in good faith and in the interests of the beneficiaries, they should have a reasonable defence to any allegation of breach of trust in relation to decrease in the value of the trust assets.
We have insurance in place for a number of the business assets we hold, will the policy pay out in the event of a loss caused by the lockdown?
The terms of the policy should be considered. We have seen a number of responsive clauses that may assist in the event of a loss. It is generally the business interruption ("BI") sections of policies that will be most relevant, with issues such as Government advice, actions and ordered closure, unspecified notifiable diseases, and prevention/denial of access to premises to the fore. Other specific policies may be relevant to other businesses, such as event cancellation/loss of attraction cover.
A number of our staff have been unable to return to their normal office locations due to border closures, will this impact upon the tax residence of trusts of which they are trustees or the companies where they act as directors?
If any of the trustees/directors find themselves unable to leave the UK for a range of reasons (quarantine, closure of international borders etc.) but they need to continue to manage and run their clients' affairs, careful thought needs to be given about the tax residence status of the trust company itself, each separate trust for which the corporate trustee acts and any underlying companies.
Offshore corporate trustees need only be concerned about being treated as UK resident if they carry on a business through a permanent establishment in the UK. It is very unlikely that many staff (if at all) will be required to self-isolate in the UK but, in the event that this were to happen, there is a risk that decisions made in the UK during this period may have an impact on the tax status of the trustee. Broadly, a corporate trustee will be resident if it has a permanent establishment in the UK and it undertakes its core activities here. Core activities include the general trust administration, decisions around investments, decisions around distributions of income or capital and the day to day management of its affairs. If senior trustees are not making the usual key trustee decisions from their usual country of tax residence, this could have significant tax repercussions as it could expose the trust to UK taxes.
The OECD and HMRC have both agreed that any temporary residence in the UK by company directors should not impact upon a company's permanent establishment nor its tax residence, and by extension a corporate trustee. Specifically, the OECD has said that directors forced to work out of a different jurisdiction due to the defensive global lockdowns triggered by the pandemic shall be treated as a "force majeure, not an enterprise's requirement". As such, determining tax residence under a double tax treaty should not take in to account any days reasonably spent by employees or directors in the UK due to travel restrictions, border closures or self-isolation. Likewise, it should not cause a permanent establishment to be created in the UK. HMRC have not issued any specific guidance to companies, unlike the guidance given to individuals. However, they have updated their manuals to confirm that they "do not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time." They have also confirmed their view that occasional UK board meetings, or participation in such meetings from the UK, will not automatically mean that the company's central management and control abides in the UK.
The question of residence for a corporate trustee is complex and we would encourage companies to seek advice before significant decisions or prolonged activity takes place from the UK notwithstanding the comments made by the OECD and HMRC.
As trustees, what do we need to consider when thinking about making distributions to beneficiaries during this period?
Trustees will need to consider their usual fiduciary duties. They may also need to consider any adverse tax repercussions for their beneficiaries and even the settlor, who may have had to spend additional days in the UK due to the closure of international borders or quarantine and who may have accidentally acquired UK tax residence as a result. Careful planning will be needed and decisions well documented.
What investment decisions do we need to be making in the current circumstances?
Trustees will need to consider their usual fiduciary duties when considering investments. They will also need to consider any change in circumstances that could conflict with the settlor's original wishes for the trust while meeting the beneficiaries' current priorities. The focus for trustees may move from wealth generation to wealth preservation in these uncertain times and it will be important for trustees to remain flexible when considering their investments and making the most of opportunities whilst preserving wealth. Good communication with the relevant parties will be vital as well as good trustee governance and taking proper specialist investment advice where appropriate.
Issues for Charitable trustees to consider
How can we organise our budget to cope with the strain of reduced donations?
Like every business, charities are having to revise budgets and draw up contingency plans. The key here is not to delay. Cost savings that can be made today will prolong cash flow and financial certainty for the charity as we continue into indeterminate and uncertain times. Critical to this process is reviewing contracts, leases and funding agreements, to understand what can be exited and what can be relied upon. Force majeure and break clauses in particular merit close examination.
The board may have to consider how long the entity will be able to continue as a going concern, and what steps it should be taking to ensure not only the charity's survival, but more importantly, what it must do in the best interests of the charitable purposes for which the charity exists to support.
What can we do to manage our staff during the defensive COVID-19 measures?
Charities often have a special relationship with their stakeholders. Legally, trustees need to be clear about the differences between employees and contractors, paid staff and volunteers. Not only is this determinative of the worker's rights, but also of the eligibility of the charity to call on the Government's furlough scheme. Dealing with staff in a time like this is a difficult balance to strike, with trustees needing to think clearly about their duties to pursue charitable objectives, to the charity itself and to the people who make it what it is.
There are logistical issues too – for those who can continue to work, do they have sufficient safeguarding structures in place when working from home or, if they are key workers, working from their place(s) of work. Issues surrounding data privacy or the ability to manage trustee meetings in the new homeworking, self-isolating environment for example all need to be assessed to ensure the charity maintains its operational standards.
Can we support causes related to defeating the coronavirus?
All trusts require a clearly defined set of beneficiaries. Charities, whether incorporated trusts or otherwise, must have defined charitable objects for the public benefit, which have been approved by the Charity Commission. At times of crisis, trustees must be particularly mindful of the legal limits on to whom and for what they may apply the charity's funds. While trustees may decide that, personally, they feel supporting a pressing need arising from the current pandemic is of paramount importance, they must consider whether or not they are legally able to do so, with reference to the trust deed or the Charity's constitution.
How should we deploy our current endowment?
Charities lucky enough to have endowment are likely to consider how this may now be deployed – either to support the charity's beneficiaries, or to keep the organisation going through times of financial uncertainty. Trustees will want to take any such decision carefully. Endowment funds invested in equities will inevitably have taken a significant tumble, and trustees will question whether now is the right time to sell investments at depressed valuations. The nature of the endowment may also restrict the trustees in how they may access it, whether only the interest is available or the capital too, and if the latter, on what terms. This might be a critical call, especially if it goes to the financial survival of the Charity or its beneficiaries.