What sorts of disputes are common in the family wealth context?
In the private wealth field, we strive to avoid litigation whenever possible. Family disputes can be extremely divisive and lead to toxic relationships between family members deteriorating even more. People with significant wealth are naturally private about their affairs and want to keep it that way. Litigation is almost always heard in the public domain, so it is almost always a last resort. But sometimes litigation just can't be avoided, and we see a significant range of disputes in the private wealth field.
A lot of family wealth is tied up in trusts, or foundations. Trust and foundation disputes are increasingly common. Often, they occur where there has been a falling out between the beneficiaries and the trustees or the foundation council. These sorts of fallings out occur for a variety of reasons. The trustees are foundation council members were often selected by older generations within the family. The younger generations don't necessarily hold trustees/council members in the same regard because they don't have the historical relationship. The way the younger generations perceive their wealth has also changed – trustees and council members are seen less as conservative stewards of the family wealth and are regarded by the younger generations as needing to be inventive, innovative, modern, ambitious in seeking to grow the family assets. Where this isn't happening, this can lead to fissures. There can be personality issues, and in that scenario, the beneficiaries may seek to forcibly remove the trustee or council members.
The deterioration of those relationships is often exacerbated by beneficiaries misunderstanding their rights. Particularly beneficiaries from jurisdictions unfamiliar with trusts, who may regard a trust as more akin to a bank account, and not fully appreciate that their interest in the trust assets is subject to the discretion of the trustees.
The key question to ask is whether the relationship of trust and confidence between trustee and beneficiary has broken down. If it has, then normally the trustee will need to step down.
What about trustees who have not complied with their duties?
There may be claims by beneficiaries against recalcitrant trustees who haven't done their job properly. Trustees have onerous duties and obligations such as:
- Duty to act in the best interests of beneficiaries
- Duty to administer the trust properly and in accordance with the trust instrument
- Duty to exercise reasonable care and skill
- Duty to act impartially between beneficiaries
- Duty to avoid conflict of interest
It is not uncommon to find that trustees have failed to fulfil their duties. The trustees are required to look after and grow the trust assets – so claims may arise, for instance, where the trust's investment portfolio has not performed as well as to be expected.
Sometimes, trustees may have overcharged in respect of their fees. Trustees are now expected to be fully accountable for their fees and charges. Sometimes, in a more extreme scenario, trustees may have had their hand in the till and the beneficiaries will be seeking to recover assets that the trustees have improperly taken from the trust.
What about claims by non-beneficiaries?
There may also be claims against trusts or foundations by non-beneficiaries. This crops up regularly in the divorce context, where one spouse will argue that the other spouse's beneficial interest in the trust should be considered in dividing up the matrimonial assets. The other spouse will routinely assert that they only have a discretionary interest, and the trustees may never exercise their discretion in the spouse's favour.
Similarly, creditors may also seek to attack a trust where a debtor has a beneficial interest in the trust, arguing that the courts should look through the trust and treat the trust assets as belonging to the debtor and therefore available to the creditors.
All these sorts of claims can become particularly complex where there is a cross-border element to them. The trust may be governed by the law of one jurisdiction; the trustee may be based in another jurisdiction; the trust assets themselves may be spread across numerous other jurisdictions.
What sort of claims might you see in the private wealth field not involving trusts or foundations?
Increasingly, we are seeing issues surrounding mental capacity coming to the fore. Patriarchs and matriarchs are getting older, and more people are suffering from dementia. This can have a major bearing on family dynamics as it can create power struggles. Who is to take over the family wealth? When? Who are the decision-makers? Often these sorts of dispute are litigated in the Court of Protection in London. It really is essential that family members have proper protections in place to mitigate the risk of these sorts of disputes arising, for instance by putting in place Lasting Powers of Attorney that remain operative after a loss of mental capacity.
Can anything be done about the downsides of litigating these issues in the public domain?
Some matters can be litigated privately, such as Court of Protection proceedings. Some particular types of trust proceedings are dealt with in private too. There is an increasing tendency in the English Courts, however, towards hearing matters in public so it's becoming more and more difficult to keep matters out of the public domain where the courts are involved. Where our clients are in that situation, we work closely with our Reputation team to ensure that any media coverage of the matter is managed as much as possible.
There are other ways of resolving disputes which do not involve litigating in the public domain: one is mediation, where the parties try to agree a private settlement with the assistance of a third-party neutral mediator. Another is arbitration, where the parties effectively submit to a private panel of judges who will decide the issues in dispute behind close doors. Both these sorts of dispute resolution require all the parties to voluntarily agree. Arbitration does not always work in the private wealth setting, because of the number of parties involved in the dispute and because, often, some of the parties are children – who are not legally capable of agreeing to arbitrate.
How can these disputes be avoided in the first place?
Disputes can be avoided by ensuring all involved in the family wealth understand their roles, which is down to good governance, and by ensuring there is good communication among all parties. Almost all disputes involve a lack of proper communication somewhere in the mix.