Retiring trustee – reasonable security and retention of assets

Under section 43(b) of the Trusts (Guernsey) Law, 2007, when a trustee resigns or is removed it may require that it be provided with reasonable security for liabilities before surrendering trust property. 

What is considered 'reasonable security' will depend on a number of factors including: the background of the trust, the identity of the person giving the security, the type of security, whether there is any potential or known liabilities, the assets held by the trustee. 

Usually, security is taken in the form of a contractual indemnity as it is a practical way for an outgoing trustee to obtain security without imposing undue limitations on the incoming trustee and trust fund generally. However, there may be limited circumstances where the retention of assets is also appropriate. 

In this note we examine when the retention of assets may be appropriate and what the trustee needs to consider when doing so. 

Retention of assets

The retention of assets involves an outgoing trustee holding onto trust assets to meet liabilities that it has incurred in the course of acting as a trustee of the trust. 

When considering whether to retain assets, the outgoing trustee needs to carefully balance its own interests (in terms of ensuring liabilities are paid out of the trust fund) with enabling the transfer of assets to the new trustee in a reasonable time and acting in the best interests of the beneficiaries of the trust. 

It will be extremely difficult for an outgoing trustee to retain trust assets where the liabilities of the trustee are either unknown, future or contingent. However, it may be possible in the following limited circumstances:

• The outgoing trustee wants to retain assets for known and quantifiable liabilities, for example, a tax liability.
• The incoming trustee is not a Guernsey trustee company and there are concerns about the ability of the outgoing trustee being able to enforce a contractual indemnity against the incoming trustee. 
• The trust has sufficient liquid assets for the outgoing trustee to retain a part of the trust fund without it disadvantaging the beneficiaries of the trust. 
  

Even if a liability is clearly identifiable, the outgoing trustee may still face difficulties in retaining trust assets and will need to negotiate the terms of any retention with the incoming trustee. For example, in its discussions with the incoming trustee the outgoing trustee will need to agree with the incoming trustee a specific amount to be retained, which should be no more than is necessary to meet the liability and the period of time in which the outgoing trustee is allowed to retain the assets. 

The outgoing trustee cannot unreasonably delay the transfer of trusteeship, so it is essential that it undertake a careful assessment as to what outstanding liabilities there may be and if necessary, enter into discussions about the possibility of retaining trust assets with the incoming trustee as early as possible.

Trustee fees

The outgoing trustee may also wish to retain assets for the payment of its final fees. An outgoing trustee is entitled to be reimbursed for its reasonable fees in attending to the transfer of trusteeship. However, disagreements can arise with the incoming trustee as to what constitutes reasonable fees. 

If such a dispute arises, the outgoing trustee cannot use a dispute over outstanding fees as a reason to delay its resignation as trustee. This is based on the outgoing trustee's ongoing duty, to act in the best interests of the beneficiaries of the trust. Delaying the transfer of trusteeship due to a costs dispute, could be seen as putting the outgoing trustee's personal interests ahead of the beneficiaries and could ultimately result in the outgoing trustee being ordered by the Court to meet their own costs personally.

If an agreement is not forthcoming, an alternative option is to seek to obtain agreement that a limited amount of funds be held in an escrow account or otherwise ringfenced until an agreement can be reached between the outgoing and incoming trustees with respect to the outgoing trustee's fees. 

Conclusion

Once an outgoing trustee becomes aware of the transfer of trusteeship, the outgoing trustee should undertake a thorough review of the liabilities they may face after resigning as trustee. For example:

• Review any tax liabilities that it may be exposed to in the relevant jurisdictions.
• Review any actual or potential liabilities the outgoing trustee may have under any contracts or indemnities, including whether the outgoing trustee has any liability to a former trustee. 
• Review the outgoing trustee's fees and prepare invoices, including arranging for invoices to be prepared for any other professional advisors to the trustee. 
• Consider whether there are any potential claims for breach of trust.
• Consider whether the trust fund has sufficient assets (including whether it has liquid assets) to meet any likely claims.

Depending on the background and assets of the trust, the above may be a time consuming and costly exercise for the outgoing trustee. However, the outgoing trustee needs to have a thorough understanding of any liabilities it may be exposed to as this will guide its position with respect to any security it wishes to take (whether that is via a contractual indemnity or the retention of assets) and guide its negotiation with the incoming trustee.