The power of equality in trustee decisions

In many walks of life people are protected from direct and indirect discrimination on the basis of factors such gender, race, age or religion through rights enshrined in law. Though there is no general statutory provision against discrimination when it comes to the terms of a trust or its governance [1], this does not mean trustees can ignore the principles of non-discrimination.

Firstly, professional trustees may be required by rules or codes of conduct governing their own profession not to discriminate unlawfully and to promote equality, and should be mindful of how this also applies to actions they take in their trustee role.

Secondly, a beneficiary who feels they have been discriminated against could try to argue that a trustee’s decision was not reasonable in an attempt to get it overturned or, if they have suffered loss, to make a claim on that basis.

This article explores how discrimination could make trustees’ decisions void or voidable, in particular in the context of the decision to make, or not make, distributions. However, discrimination could come into play in various other scenarios within a trust (for example, adding or removing beneficiaries or investment decisions) and trustees should always be mindful of their reasons for acting.

Of course, avoiding discrimination does not mean that trustees must treat every beneficiary identically. The circumstances of two beneficiaries may genuinely be very different regardless of any differences of age, gender or race. Instead, as explored below, trustees need to identify and understand when their decisions may be motivated by a factor that is not, in actual fact, a relevant consideration and discrimination, direct or indirect, can play a part in that.

Trustee decision making

Trustees can only exercise fiduciary powers for a proper purpose, in good faith and not capriciously, and having taken into account relevant considerations only. This also includes ensuring the reasons relied on are accurate.

As explored further below, relevant considerations include matters such as the terms of the trust; the identity and personal circumstances of the beneficiaries; the value of the trust fund and the assets constituting it; legal, financial or tax considerations of a decision;  the views of the Settlor and the purposes for which the trust was set up.

Some obvious examples of improper decisions would be: preferring one beneficiary over another because the trustee simply liked that beneficiary more; or refusing to make a distribution because it would trigger an adverse tax charge when, in fact, no tax charge would arise.

Discrimination, consciously or unconsciously, can also lead to faulty decision making.

1. Capricious decision making

A trustee has acted capriciously if they act for reasons that are irrational, perverse or irrelevant. Judicial guidance has confirmed this would include, for example, “if they chose a beneficiary by height or complexion.” [2]

Lord Templeman gave these examples almost 50 years ago. In 2021, we may well find explicit references to “race” instead of “complexion” and by extension, one could easily imagine a beneficiary’s sex being considered as arbitrary a characteristic as their height.

It certainly seems dangerous, based on precedent, for a trustee to base a decision purely on characteristics such as a beneficiary’s gender or race. Although it seems unlikely many trustees would make a decision based purely on these kinds of factors, trustees should take care to ensure beneficiaries do not feel they have done so as this perception by their beneficiaries could lead to problems.

2. Decision making motivated by personal views

A trustee is not permitted to allow their own moral or political views to colour their judgment when making decisions.

For example, if a beneficiary is gay or transgender and the trustee has some personal aversion to that fact, that cannot be allowed to influence their decision making.

It is not only “negative” personal views that can cause issues. A trustee also cannot attempt to promote some personal “noble aim”, for example they could not resolve,  without regard to the personal circumstances of the individual beneficiaries themselves, to have a general rule to make larger distributions to female beneficiaries in an attempt to “support” women.

3. Relying on incorrect assumptions or stereotypes

A trustee who relies on an assumption, which turns out to be false, will find him/herself in the position of having relied on an irrelevant consideration. This can happen as a result of unconscious bias. 

The issue of gender gives rise to plenty of assumptions which a trustee may be in danger of relying on wrongly. For instance that a female beneficiary will not want to work in the family business (or will lack the business acumen to do so), that a male beneficiary will have a greater financial need as he needs to support a family (whereas his sister’s husband will fulfil that role for her) or that girls can be trusted with more funds at a younger age than boys.

Trustees must take care not to fall back on stereotypes in substitution for actual fact finding.

That is not to say that stereotypes are always false: it may well be the case that a male beneficiary is the main breadwinner in his family unit and therefore requires more regular or higher distributions than his sister.  Trustees must make proper enquiries of their beneficiaries to find out the facts, not rely on stereotypes.

Trustees should also be mindful of relying on stereotypes when consulting with beneficiaries. Trustees must not only consider all relevant factors but give each factor appropriate weight. This is regularly applied – for example a trustee should not allow a distant, theoretical tax risk to override a pressing need for a distribution.

Stereotypes could potentially cause issues here too. A beneficiary who feels ignored or overlooked could try to challenge a decision on the basis that their views were not given due weight and consideration. For example, an experienced, professional trustee may unconsciously brush off an unorthodox financial suggestion from a young beneficiary but youth does not necessarily equate to folly.

Settlor’s wishes: a complicating factor

There are circumstances where the situation is more nuanced because it is not the trustee’s own views or bias which are potentially in play, but rather the Settlor’s.

Take for example a large, traditional English estate comprising a manor house and grounds. It has passed from father to son for generations and, as part of a tax planning exercise, was settled into trust a few generations ago by the male owner at the time for the benefit of his issue. Under the trust, the trustees have the power, at their complete discretion, to appoint the trust funds to any of the beneficiaries (male or female). On settling the trust 70 years ago, the Settlor left a letter of wishes expressing his view that the estate should continue to pass down the male line. The trustees, for tax efficiency, are now looking to appoint the estate out of the trust but want to keep it whole, under one owner, as it is more valuable and easier to manage when kept together. The trust’s present existing beneficiaries are the Settlor’s twin 25-year-old grandchildren – one male and one female. The trustees in this situation are considering to which of them the estate should pass.

A similar example could be a trust holding shares in a family business, set up generations ago, whose founder then settled his shares into trust and intended that only his sons would manage and enjoy the profits of the business. Trustees may find themselves in the situation where they need to appoint out all the shares to only one beneficiary to ensure the value of majority shareholding is preserved.

The Settlor’s wishes are always a material consideration in the exercise of fiduciary discretions but the extent that the Settlor’s wishes should be followed is a delicate line to tread.

It is common for trustees to be guided by a Settlor’s wishes and a trustee who regularly follows the Settlor’s wishes cannot be criticised purely on that basis, as long as they have given due consideration to other relevant factors. Trustees may even properly be led by the Settlor’s wishes to take a decision which they would not otherwise have taken. However, trustees should always bear in mind that they must not blindly follow the Settlor’s wishes and these cannot displace all independent judgment on the part of a trustee.

Trustees must therefore consider the Settlor’s views but, taking all relevant factors into account, must decide how much weight to put on those wishes.  If trustees simply follow the Settlor’s wishes, they must make a conscious decision to do so for good reason, rather than drifting absentmindedly into doing so.

Bearing in mind those principles, looking again at the examples above, there are a range of possible decisions the trustee could take and the answer would also depend on the views, capabilities and personal circumstances of the beneficiaries or, in the examples above, even whether the tax imperative forcing a distribution is worth leaving one beneficiary with nothing at all.

On the one hand, the trustees may choose to place little weight on the Settlor’s views given they were expressed many years ago when society had a very different attitude to the roles of men and women. However, on the other hand, the trustees could reasonably decide to follow the Settlor’s wishes and appoint the estate / shares to the male beneficiary given the strength of the Settlor’s views, the history of the trust and the nature of the trust’s assets (which, of course, came from the Settlor himself).

The situation becomes even more finely balanced if we assume the Settlor is still living and in the context of this appointment expressing the preference that the assets should be appointed to his grandson and not his granddaughter. There is, of course, no requirement for Settlors or beneficiaries to hold rational or unbiased views. Perversely, it could be said that a Settlor’s contemporaneous discriminatory views should be given even more weight than any similar views contained in a letter of wishes from many years ago as, even being aware of the general attitude to prefer equality of the genders in society, the Settlor is still showing a preference for the male line.

Ultimately, there seems to be no one “right” answer. All a trustee can do in these situations is to weigh the competing considerations carefully and find a fair and reasonable balance.

What practical steps should trustees take?

Before making any decisions, trustees should gather relevant information, consult with beneficiaries and take appropriate advice (for example legal, tax or financial advice depending on the decisions being taken).

Then, when taking the decision, trustees should consider the information they have gathered and weigh up relevant considerations to reach a fair conclusion.

In order to reach a reasonable decision, at both of these stages, trustees should consider their own possible biases and assumptions and, if any are identified, probe whether those assumptions are based in fact or whether they are actually irrelevant considerations. For example, if a trustee identifies that they have assumed a young beneficiary cannot manage large distributions, they should go into discussions with that beneficiary with an open mind to establish their actual competence.

It is also at this stage that consideration should be given to the Settlor’s wishes, including whether the Settlor is likely to have been motivated by some kind of bias or prejudice. If so, trustees may want to give less weight to the Settlor’s wishes than they would have done otherwise.

Although trustees are not generally required to give reasons for their decisions or disclose documents containing reasons for their decisions, this is not a reason to forgo a proper decision making process, or  to not make a proper record of the decision and reasons. It is useful for the trust file to have this and if a trustee’s decision were challenged in Court, it could be helpful to have contemporaneous documents setting out the reasons for the decision. In the absence of any such document, a beneficiary making a challenge might seek to argue there were no good reasons at the time (and the trustee is inventing them now) or that the trustee did rely on irrelevant considerations and that is why they did not record them.

In addition, if the trustees were making a momentous decision (such as distributing the entire trust fund) it could be prudent to seek the Court’s blessing of the decision. This is particularly so in situations where the Settlor’s wishes are potentially discriminatory or controversial but the trustees decide to follow them.

Beneficiaries do need to be joined to a blessing application, and if a beneficiary opposes the decision, such applications have the potential to become contentious. However, the Court’s role is not to substitute its own decision in place of that of the trustee. Instead, the Court’s remit is limited to considering whether the decision is one the trustees could properly have arrived at. This means that if the Court decides that the trustees have taken relevant matters into account, giving them due weight and consideration, it will not withhold its blessing even if there were other possible decisions that could have reasonably been taken.

Therefore, even in the face of opposition, trustees can have their decisions approved. In fact, if a beneficiary is potentially hostile, seeking a blessing can be a useful tool as the Court’s decisions will bind the beneficiaries of the trust, meaning that trustees can be confident that their decisions cannot be challenged at a later date. This provides certainty for both trustees and beneficiaries.

Footnotes:

[1] Difference considerations can apply to pension trustees, this article consider the “family trust” model

[2] Re Manisty's Settlement, [1974] Ch. 17

If you require further information about anything covered in this briefing, please contact Melody Munro, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, April 2021