This Global Elite Panels focussed on attacks on trusts – how to avoid them, and what to do when they happen. With thanks to Rachael Reynolds, Ogier, Dawn Goodman, Withersworldwide, and Scott Rahn, RMO, for their excellent conversation.

‘The Great Wealth Transfer’.

We are at the beginning of what has been described as a ‘wealth-transfer tsunami’. This has been fed, in part, by the proliferation of estate planning both domestically and internationally – but also by the increasing age of the Baby Boomer generation, and their passing. Their death rates are predicted to peak in 2044, by which point the current death rate of that generation will have quadrupled. This is the reason why there is the expectation that the volume of work will increase exponentially. 

The result is that, in the next couple of decades, we expect a great amount of wealth transfer – the figure has been estimated to be between $15 trillion and $68 trillion. More than ever, therefore, we expect to see contested trusts and estates, inheritance rights disputes, and other attacks on trusts, trustees and estates. 

How can we prepare our clients for these issues before they arise?

If advisors in advising on estate planning don’t take into account possible conflicts relating  to different succession regimes, they will inevitably cause a  rise in dispute and difficulty, even if the planning has the benefit of firewall protection n the relevant jurisdiction.

One of the most common cases that shows this issues,  is where a matriarch or patriarch has kept their trust firmly within their own control until their death. The next generation could be unprepared for their passing, and may expect to receive assets outright in accordance with local laws, which gives them inalienable rights – while the settlor may have tied up these assets (such as, for example, a family business for which the next generation work or manage) into the trust without their knowledge. 

In these circumstances, where the patriarch or matriarch is determined to keep everything to themselves during their lifetime, it can be very difficult to begin conversations around succession planning. However, in a more ‘normal’ situation it is always a good idea to be in touch with the next generation to ensure everyone is on the same page from the outset in relation to the future of the family’s wealth and assets and their devolution. In this case, if there is a sudden death – whether the settlor themselves, or the chosen heir, then there will be  a ‘Plan B’ known to all and avoiding a free-for-all litigation crisis.

It is very important in the advice and conversations with the family to think about the succession or ownership of any family businesses within a trust structure, and to determine who would be the principal beneficiary, the succession of the role of protector, the Investment Advisor, and more – the trustee will not want to be catapulted into dealing with these issues.

A few changes post-pandemic to consider:

1 – People are moving more, or are blocked in a jurisdiction they do not want to be in. This gives rise to taxation considerations, investment considerations, and practical difficulties that need to be resolved.

2 – Economic impact on businesses. If the family have a business, particularly in hospitality, the trustee will be forced to decide whether to bail it out in the hopes of a resurgence after the pandemic, or be accused of throwing good money after bad.

3 – Family relations post-lockdown. Families  have been forced to be together much more than usual, which is giving rise to a significant increase in divorces, which can radically affect trust assets, and difficulties in parental/sibling relationships too. Trustees need to try to see the issues as they develop, and see what they can do to mitigate a crisis, before they’re stuck with a situation where it’s too late for avoidance action. 

As well as planning for these issues, and making sure there are open means of communication with the client and their successors, it is also key to have thought of an exit strategy. If there are competing claims, or a trust becomes insolvent, they need to be mindful of mechanisms to find a replacement, or it will lead to court and increased costs and delays. 

And when you find yourself in court, anyway?

The transfer of wealth does not always go to plan. This may be because of the issues outlined above, or it is worth noting that the best structure in the world can go awry when the patriarch or matriarch dies – often, they are the lynchpin in a family structure, and their passing away prematurely or without having properly communicated their objectives can lead to litigation and family disputes. 

The complication arises when the structure is multinational, as many of them are. The structure is unlikely to be in the same jurisdiction as the beneficiaries or all of the assets, and so litigation may commence outside of the home jurisdiction. Here, the home jurisdiction will be defined as the jurisdiction of the trust, and the foreign court is where the litigation is brought by the beneficiaries. 

Case Study: a wealthy patriarch, who is a Greek national and has built a successful shipping business. He has placed the shares in the business into a Cayman discretionary trust, which is administered from Cayman. He and his wife are the primary beneficiaries. Their son is also a beneficiary, and is involved in the family business – but the settlor is very much in control and runs the management. The son is unaware that the business is held in trust, and is not fully aware of the planning arrangements – they would expect to inherit the business outright. When the settlor dies unexpectedly, the son decides to take action arising out of his inheritance rights. 

It is worth noting that another very common situation is in the case of foreign divorcing spouses.

In these cases, the risk is that the foreign court will have little familiarity with offshore trusts, and they are being asked to adjudicate questions which require a sophisticated knowledge of offshore trusts. 

The foreign court will usually deal with this in one of three ways:

1 – They may not recognise the concept of a trust, and refuse to acknowledge Cayman law in this scenario

2 – They may accept that Cayman law applies, but will ask for evidence of Cayman law. This can still cause issues, as the complex legal issues and meaning may be lost in translation – and those experts giving evidence may not agree, leading to the risk of th wrong conclusions being drawn. 

3 – They may completely accept that Cayman law is the relevant law to be applied. However, they may decide they don’t need experts to determine the questions, and may investigate themselves.

There may be a new fourth way. It came from a report by James Spigelman, the Chief Justice of New South Wales, who pointed out the inadequacies of proving foreign law by means of conflicting opinions. Experts are expensive, can be difficult to procure, can vary in expertise and ability, and are frequently partisan, he argued. There is a real chance of loss in meaning through translation when a judge is determining a question of law that arises from a legal system with which they are not that familiar. This has lead to:

4 – Judicial cooperation. 

This is, simply, where the question is referred to the local court as it is more appropriate that they determine the answer given that they are more familiar with the legal system. However, this still leaves the problem of misapplication by a foreign court.

This has evolved. The new system recognised by Cayman is a second form of judicial cooperation. It uses the home court as an ancillary court. 

The key, regardless of the attitude of the foreign court, is to be proactive and get in front of the home court as quickly as possible. They may be willing to assist to provide advice to that foreign court, and, more crucially, they should offer Beddoe relief to protect the trustee and ensure they are still indemnified out of the trust assets. It may also be helpful to get declaratory relief from the home court to resolve the question – even if the foreign court do not heed it, it would certainly help in persuasion. They may also offer advice as to whether you should be participating in defending those foreign proceedings anyway, which is largely dependant on where the assets are located – it may not be in the trust’s best interest to participate in proceedings, and fall under enforcement. 

Conclusion?

There will be a huge wealth-transfer in the next couple of decades, which will lead to an increase in litigation. Try to open communication early, and spot issues as they arise, to avoid ending up in court. Seek advice at an early stage if there is any hint of trouble. If things do go wrong, you will want to get in front of your home court with people who are familiar with the laws and know how they work, rather than leaving an important question to a court that may not appreciate the history, background, and how the cases develop and how they are decided.