Effective Trusts

Acknowledgements 7

I. Introduction 9

1. Trends in trust disputes 10
1.1 Deep fakes and the metaverse 10
1.2 Family office conflicts 10
1.3 Compliance-driven conflict, litigation and court activity 11

2. Common causes of trust disputes 12
2.1 Poor drafting 12
2.2 Communication failures 14
2.3 Lack of education 15
2.4 Disenfranchisement 16
2.5 Appointment of the wrong trust officials 16
2.6 Diminished capacity (including undue influence) 19
2.7 Challenges of recollection 22

3. Our approach 22

II. Trust dispute avoidance through design 23

1. Managing the settlor’s expectations 23

2. Good drafting 24

3. Creating the appropriate governance structure 27
3.1 Checks and balances 27
3.2 Selecting the right person for each role 30
3.3 Beneficiary committees 36
3.4 Qualifications 36
3.5 Fiduciary versus non-fiduciary capacity 39
3.6 Term limits 39
3.7 Age limits 40
3.8 Designing the right process for succession (appointment and removal) 41
3.9 Compensation 41
3.10 Sharing information 44
3.11 Avoiding co-trustee dysfunction 44

4. Communicating with the beneficiaries (or not): the duty to inform and the use of quiet trusts 47

5. Incorporating flexibility and adaptability into the trust 50
5.1 Power to add and remove beneficiaries 51
5.2 Variation or modification 53
5.3 Decanting 53
5.4 Changing situs 54
5.5 Changing governing law 54
5.6 Termination 55

6. Selecting appropriate liability and evidentiary standards 55

7. Using no-contest or forfeiture provisions to discourage disputes 56

8. Incorporating processes for non-judicial dispute resolution 57

9. Getting the litigator’s perspective during the drafting process 59

10. ‘Failure mode and effects analysis’: early detection of potential issues and warning signs 66

III. Minimising trust disputes through thoughtful execution 69

1. Family dynamics redux 69
2. Witnesses 70
3. Presence of individuals other than the settlor and witnesses 72
4. Self-imposed formalities 72
5. Lifetime approval of trusts 73

IV. Administration: deploying best practice and procedures 75

1. Follow the terms of the trust 76

2. Engage proactively 76

3. Communicate with the beneficiaries 77
3.1 Ongoing due diligence 77
3.2 Proactive trust accounting 79

4. Maintain good records 80
4.1 Retention practices and policies – the ‘hit by a bus’ scenario 80
4.2 Trustees and other trust officials 80
4.3 Distributions 81
4.4 Investments 82
4.5 Conflict transactions 83
4.6 Compensation 83
4.7 Taxes 84

5. Evaluate the trust and administration regularly 84
5.1 What has changed? 85
5.2 Would a change of situs be better for the trust? 86
5.3 Is modification (variation) or decanting warranted? 87
5.4 Should the trust be divided into separate trusts? 87
5.5 Are the right people (still) in the right roles? 89
5.6 Is your reliance on outside guidance (still) reasonable? 89
5.7 Are the trust officials working together effectively? 91

6. Evaluate the trust and administration when an issue arises (or maybe not) 92

7. Utilise experienced litigators outside of litigation 92
7.1 The devil’s advocate: having a litigator review proposed changes 95

V. Reducing the risk of disputes at termination 97

1. Releases, judicial accountings and indemnification 98

2. Providing information 102

3. Termination fees 104

4. Transferring assets 104

VI. Managing trust disputes 107

1. Avoid exacerbating the problem 107

2. Maintain open lines of communication 110

3. Taking a thoughtful position 111

4. Preserving lawyer–client privilege 115

5. Litigation management 116

6. Advice for beneficiaries when a dispute arises 118

VII. Conclusion 121

Notes 122

About the authors 129

About Globe Law and Business 131