Capacity, control and cover-ups: the problem of an ageing settlor

Settlor, founder, principal, matriarch, patriarch… the wealth creator and settlor of a significant trust structure is an important figure in terms of trust law, family dynamics and trustee relationships. A settlor losing capacity presents a complex and potentially challenging situation for trustees. 

The issues that arise when a powerful head of a family ages are not new and have been the subject of dramas throughout history, from Shakespeare’s King Lear to HBO’s Succession, which details a family’s fight for power and control as patriarch Logan Roy’s health declines.

In this article, we introduce the challenges of recognising and understanding a settlor losing capacity, the issues that can arise when the settlor is a powerholder within the trust, how trustees should engage with a settlor’s changing wishes, and the risk of family disputes triggered by the settlor’s declining capacity.

Settlor losing capacity: is it always obvious?

Of course, wealth creators, founders and entrepreneurs can be as diverse as any other part of the population. However, in our experience, those who generate significant wealth often share certain character traits that mean that spotting declining capacity is harder. While these are generalisations, we find that many hold true.

The advice to trustees is always to maintain close contact with all family members connected with the trust, both settlor and beneficiaries. The settlor can pose a particular challenge as they are usually intelligent, used to being in control and often surrounded by a team, particularly where there is a family office in place, whose career role has been to enable and assist that settlor.

The 2024 US election brought moments of mumbling and freezes during key speeches by the then-sitting President Joe Biden, as well as images of him stumbling as he walked on a local beach, supported at the elbow by his wife. While his health may have been intact, from afar, the impression was of a powerful man in sharp decline, with the support of those around him appearing to enable him to continue in post past the point when, perhaps, he should have been supported into a less prominent role.

The settlor’s likely ability to successfully “mask” and their reluctance to be in a position of less control, combined with a team or family members who are able to cover up or smooth over signs of decline and distress, make trustees’ jobs especially hard. We talk more about the settlor as powerholder below, but this difficulty is amplified if, as is common, the settlor also has the ability to appoint and remove trustees. The challenges of starting a conversation about declining capacity with a settlor who has the power to remove the trustee, was the source of the structure’s wealth, can – at least at times and in the right environment – maintain a façade of power and control, and whose wishes are a key factor in trustee decision making are not to be underestimated.

Regular communication and creating a culture where capacity is a topic which can be openly discussed is key. We almost always advise trustees to meet regularly with the settlor (and all powerholders, and ideally beneficiaries) in person at least once a year. 

Which test?

More technical issues arise around which test should be applied to assessing a settlor’s capacity. Is the relevant test as to whether a settlor has capacity to create the trust the English law test established in Re Beaney [1]’? We know that this is the correct common law test under English law on assessing capacity at the creation of a trust, as opposed to the Mental Capacity Act 2005 test but could a different test apply in the jurisdiction of the trust’s governing law? Likewise, would a different standard be used when considering a decision made as powerholder (see below), or in expressing wishes to the trustee, or in their ability to manage a very significant distribution?

The answer, unfortunately, is that much of this is unclear and untested in many jurisdictions.

The international nature of many trusts and families creates further confusion: which is the correct jurisdiction in which to assess capacity? Again, the position is unclear.

Settlor’s wishes

A challenge that can arise in a situation where a settlor is, or may be, losing capacity is how trustees should interpret and respond to their changing wishes over time. 

Going back to basics, the settlor’s wishes are a key relevant factor that trustees should consider when making decisions about exercising their powers. In practice, special weight tends to be given to a settlor’s wishes, often captured in a Letter of Wishes, which are often updated during the settlor’s lifetime. A red flag for trustees that a settlor may be losing capacity may be a sudden (or harder to spot, gradual) shift in the settlor’s wishes for the trust.

The recent case of Grand View PTC and another v Wong and others (Bermuda)[2] has shone light on when the settlor expresses their wishes, and whether particular or special weight should be given to the settlor’s wishes at the creation of the trust. The current view is that the settlor’s wishes at the outset of the trust (ie when the trustees were given their powers by the settlor) have special meaning as they will form part of the assessment of the proper purpose for the powers which have been given to the trustees. Although later wishes expressed by the settlor are important as a (highly) relevant factor which the trustees should take into account in their decision-making, the settlor’s original wishes will still be important in relation to the proper purpose test.

These legal technicalities do not necessarily make the trustees’ job any easier. Good trustees will ensure that they carefully exercise their discretion in the exercise of their powers, taking into the account the settlor’s wishes – both at the outset and as expressed from time to time – alongside other relevant factors such as the beneficiaries’ wishes and needs. At the same time, they should disregard irrelevant factors, such as threats or pressure from the settlor or other family members. In practice, trustees may need careful guidance through the process of deciding to give less weight to or disregard a settlor’s wishes if they believe the settlor is losing or lacks capacity.

Settlor as powerholder

As mentioned, the settlor of a trust is also frequently a powerholder, and therefore their capacity will be of ongoing relevance beyond simply whether or how they express their wishes to the trustees. 

All the issues highlighted above in relation to “which test?” equally apply where the settlor is powerholder. A further complication is that, where a powerholder may have lacked capacity, actions taken during that period of declining or lost capacity (which may have been exercised by the powerholder themselves or have required their consent) will be brought into question. 

If possible, the point to consider how loss of capacity should be dealt with for powerholders is at the point of drafting. Advisers should consider:

• including express provisions confirming which test should be applied (we frequently draft to expressly include the capacity test in the Mental Capacity Act 2005 because it is comprehensive and well understood by geriatrician and other specialist doctors in the UK);
• introducing/drafting for the concept of powerholders serving a “term” rather than remaining in place for life;
• replacing individual powerholders with a Protector Committee, which can itself see members serving terms and allowing for majority decision making etc; and
• creating a governance structure around the trust, for instance with set, standard agendas followed in twice yearly meetings, which openly address capacity.

Reserved powers of investment

Trustees may feel especially exposed to a settlor losing capacity where the settlor has reserved powers of investment. This is of critical importance to trustees, who may find themselves open to criticisms of breach of trust if the settlor who is losing capacity makes investment decisions that cause trust investments to underperform. Trustees need to take careful advice in relation to the interaction between the settlor’s reserved powers and the trustees’ irreducible duty to act in good faith for the benefit of the beneficiaries (Armitage v Nurse) [3].

The recent case of Ivanishvili v Credit Suisse Trust Ltd [4] should give trustees particular pause for thought. In that case (albeit on facts unrelated to capacity), the Singapore court rejected the trustees’ argument that the settlor’s reservation of investment powers was “an all or nothing concept” and instead held that the settlor’s reserved powers did not mean that the trustee has no liability in respect of investment losses. The case was highly fact-specific but serves as a cautionary lesson for trustees.

Trigger warning

As played out in stories like Succession, the loss of capacity and/or physical decline of the settlor, and ultimately their death, is often a trigger for family disputes. Trustees need to be especially aware of this risk. Psychologists and psychiatrists will explain that the vacuum of power that is left as the patriarch or matriarch declines is fertile ground for new power struggles among siblings, wider family and advisers. Trustees can and should foster a culture of communication, but it is important to recognise that the loss of capacity can trigger broader disputes among family members.  

Conclusions

Capacity is a complex area, and trustees are in an extremely challenging position when issues of settlor capacity arise. For the settlor themselves, losing capacity is a bewildering and frightening experience. As with many difficult client issues, forewarned is forearmed. Addressing, raising and “stress-testing” capacity loss when the settlor is still well is the best way to address and manage a future issue. 

Of course, even with good planning, uncertain and emergency situations can arise. In some older structures or trusts with complex family dynamics, trustees may simply not have the opportunity to stress-test arrangements in advance or ensure correct procedures are in place.  Seeking early advice as soon as trustees think there may be a problem is essential.

[1] [1978] 1 WLR 770

[2] [2022] UKPC 47

[3] [1997] EWCA Civ 1279.

[4] [2023] SGCH(I) 9

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

© Farrer & Co LLP, March 2025