A Question of Trust: The Capacity Conundrum in Global Trusts

There is nothing new in the concept of diminishing capacity. Cultural references abound, from Chaucer’s 14th century Miller whose bawdy, drunken story reflects judgement impaired by excessive alcohol consumption, to the 21st century patriarch Logan Roy of Succession, whose declining health is the backdrop to the power struggle between his family members for control of his business empire, Waystar Royco. 

Although concerns about capacity have persisted for generations, we as trust advisers have seen a sharp rise in recent years in disputes where the loss of capacity of a settlor, protector or beneficiary of a trust is central to the emerging conflict. We have launched a video series “A Question of Trust: The Capacity Conundrum in Global Trusts” to explore these issues, the impact of diminishing capacity on decision-making in the context of trusts, and the ways in which fiduciaries and practitioners can assist.

The increase in disputes in this area should come as no surprise. Many international trust structures were set up 30 to 40 years ago by those who were in their peak wealth-building years then, but who will now be approaching the age when cognitive decline becomes increasingly prevalent. 

There is no doubt that we have seen increased focus on and awareness of mental health conditions over the last few years, particularly following the COVID-19 pandemic. However, this awareness is a relatively modern phenomenon. Discussions around settlors, protectors or beneficiaries losing capacity probably was not at the forefront of everyone’s minds 30 or 40 years ago, when these international trust structures were set up. As a result, trust documents may not be drafted to deal with issues arising when a decision-maker has diminished capacity, such as the steps a fiduciary should take, how capacity should be addressed, and which country’s law should apply. Where there are multiple jurisdictions involved, there may be a number of different potentially applicable laws, and the challenge will be to identify which country’s is the appropriate one. 

Of course, capacity covers more than just capacity in the mental acuity sense. Decision-making can be impaired through loss of free will, for example where someone has become frail and vulnerable and may be subject to undue influence or coercive control, or perhaps where someone is ‘incommunicado’ through detention. Our video series examines different types of capacity and considers how fiduciaries can help to mitigate the risk of flawed decision making.

Another major problem is communication. The founders of immense wealth are usually highly sophisticated, intelligent and educated individuals, who are not only extremely adept at masking any diminishing capacity but are also used to influencing and controlling the power dynamic. They are, in a sense, the ‘elder’ of their social and business hierarchy. Diminishing capacity may be difficult to accept and, therefore, to recognise. The individual experiencing it may be unaware of their own decline, or others may help them mask their problems. Any conversations around the issue will require a highly sensitive approach. 

However, if the capacity of the key decision-maker is in question, the administration of a trust can grind to a halt. Crucial, time-sensitive decisions may be put on hold and, in the worst cases, conflict can erupt as stakeholders seek to fill the power vacuum. This situation can be complicated further where there is a company within the structure and the key decision-maker is central to the company. If the company starts to drift, and the trustee allows the situation to continue, it could be said that the trustee failed in its duty to steward the company. Can a trustee rely on an exoneration clause in these circumstances?

These are some of the many issues we address in our seven-part video series. The videos are solutions-focused, recognising that in an increasingly complex economic, political and cultural landscape, it’s incumbent upon us as a sector to look forward, future proofing our trusts. Some practical tips offered in the video series include:

• Be aware that capacity is decision specific and non-linear, fluctuating according to many factors including medication, the time of day, or physical frailty. The best thing a trustee can do is take practical steps to make sure that any decision made is as robust as possible. Face-to-face meetings will be crucial, and decision-makers should be asked open questions about the decision they are taking, to show that they can explain the decision and have thought about its consequences.
• Issues of addiction are particularly delicate. Fiduciaries may note increased financial spend, perhaps coinciding with time spent with new contacts. Where a beneficiary suffers addiction issues and is making unusual financial requests of the trustees, the issue cannot be ignored, although there is no question that raising concerns with the beneficiary can be very difficult indeed. A proportionate response rather than a draconian disempowering of the beneficiary may be advised, combined with sensitive and delicate communication.
• Take a holistic approach. Involving others can provide a lifeline for fiduciaries. A capacity assessment with a medical professional is of course the gold standard, but this may not always be possible. Building relationships with the decision-maker or a beneficiary’s other advisers, such as accountants, lawyers, investment managers, family and friends, will be critical in securing additional support for the decision-maker. However, this must be done in a way that complies with duties of confidentiality.
• Normalise the conversation around capacity. Checking in regularly on specific issues, including capacity, should help to standardise discussion of the issue, so that when concerns do arise they can be more easily addressed.
• Drafting at the outset with capacity in mind is crucial for any modern trust structure. This should include properly setting out what happens when someone in the trust structure loses capacity, what tests should be applied and who should assess capacity, as well as considering which country’s laws will apply.
• Be sensitive and forward thinking about potential conflicts. Plan for generational change and communicate with all stakeholders within the structure in a way that mitigates the risk of conflict as far as possible. Consider the use of protector committees and avoid sole directorships where there are corporate entities within the structure.
• Don’t ignore the issue. Be proactive, trust your instincts, and be prepared to address issues before they escalate.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2025

A Question of Trust - watch the full series now

Loss of capacity of those involved in trusts is an increasingly prevalent legal issue, and a growing cause of disputes.

In this video series, we bring together international experts to explore the issue of capacity, how to mitigate risk, pragmatically address this sensitive topic, and provide practical insights and guidance for fiduciaries.

Watch NOW