Settlors and unseen vulnerabilities

This article explores the issues that can arise when dealing with vulnerable settlors and what steps can be taken to assist them.

Families and their dynamics are complex and often pressure to please, impress or conform to expectations can mean true feelings are masked. Trustees will be used to navigating these delicate relationships.

But as settlors and beneficiaries age, questions about mental capacity make it more difficult for Trustees to administer their trusts. This is not helped by the fact that there is no clear case law on the test for mental capacity in a trust context. Further, even when looking at the law that does exist, there are often jurisdictional issues when a settlor or beneficiary is resident in one place, but the trust governed by the law on another.

Vulnerabilities in a trust context do not always have to extend as far as someone who lacks mental capacity in a legal sense. The “Twilight Zone” is the name we have given to the period of time when a person has mental capacity in the legal sense, but some impairment, such as dementia, affects their cognitive abilities. The law may treat these individuals as if they have full capacity (and can therefore make decisions), whereas the reality may not be quite as black and white. See more on The Twilight Zone here.

Trustees are likely to come across people entering this stage in their life in the context of settlors whose trusts set up many years ago for dynastic purposes.

What to look out for

Often, settlors will be confident and intelligent entrepreneurs or businesspeople. They will be used to holding the floor and this means they can be very skilled at masking their own cognitive decline. Trustees and other professionals should be alive to this. There may be cause for concern if a someone exhibits certain signs, for example:

• Departures from previously stated intentions, especially if abrupt and / or without good reason,
• Decisions that would lead to a negative outcome without good explanation,
• Rambling, unsure and / or incoherent instructions,
• Heightened or erratic emotions,
• Instructions suddenly given through a third party,
• Changes in friendships or affection.
  
  

What are the issues?

The risk to settlors in the twilight zone comes from being taken advantage of by someone, often sadly another beneficiary and family member, but sometimes also by a third party. This does not always have to be by force: charm and emotional manipulation can be an effective tool. This makes it harder to detect an issue as the settlor, if asked, will often seem very happy with their decision.

The views of the settlor will, generally, be an important factor that trustees take into account in their decision making. Settlors in the twilight zone are open to pressure to change their wishes to unduly favour someone else: either with outright distributions or even just with investments more favourable to the person exerting the pressure such as “investing” in a project they are running.

The issue for trustees is that they will want to be able to take the settlor’s views into account but may not be able to rely on what they are being told as truly representing the wishes of the settlor. This would then mean they were making their decision based on an inaccurate, and therefore irrelevant consideration, which can expose their decision making to challenge.

Settlors often also have reserved powers in a trust: for example to appoint or remove trustees, or to veto distributions. This can mean settlors can be pressured to have direct impact on the trust administration itself. For fiduciary powers they hold, a settlor can only exercise their power for a proper purpose, or it is not valid.

The problem for trustees is that if they suspect the settlor may have capacity issues such that they could not exercise their power, or that the exercise of their powers might not have been valid as they are not exercised for a proper purpose, they may have fundamental doubt about how the settlement should be administered.

Erratic or shifting alliances of the settlor can also start to open family rifts and lead to a breakdown of relationships between beneficiaries and trustees if one beneficiary feels they are being overlooked in favour or another, or the aging settlor.

What can be done?

Navigating these kinds of issues is not easy. Trustees need to tread the line between a robust approach which protects the interests of the beneficiaries while respecting the privacy and dignity of the family, particularly when there are vulnerable people involved.

It is harder for someone to be taken advantage of if there is already a framework in place to protect them, and trustees can implement practical steps to help:

• Building close relationships with the Settlor’s other advisers: often, doctors do not have long term relationships with their patients, whereas professional advisers may be well placed to assess patterns of behaviour,
• arranging an in-person meeting without other beneficiaries or family members present, and
• recording fully the vulnerable person’s wishes and intentions and referring back to previously expressed wishes for consistency.
  
  

These steps can be implemented for all beneficiaries who need to be consulted, not just the settlor. This means trustees can get to know their beneficiaries, to be aware of any changes in their personalities to guard against any issues they may have in the future.

The wishes of the settlor are, of course, only one factor to take into account. Older settlors should not simply be ignored if their wishes change with time. However, it might be that trustees feel they should place less weight on the wishes of settlors in these circumstances, particularly if new wishes are inconsistent with previous clear intentions and the usual ethos of the trust.

If there is a question regarding an individual’s mental capacity, it is best practice to obtain (with the client’s consent) a formal capacity assessment. This also protects against the risk of future challenges.

This is often an arena that is fraught with difficulties, and when families become particularly entrenched the right course of action can be for trustees to seek the assistance of the courts to tread a middle way for the overall benefit of the beneficiaries as a whole.

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

© Farrer & Co LLP, January 2024