Trust dispute law: Can a trustee transfer trust assets to themselves and what is the rule against self-dealing?
Trust dispute lawyer Naomi Ireson looks at the recent case of Caldicott v Richards which was heard in March 2020 and concerned the actions of a trustee appointed under the terms of a discretionary trust.
The discretionary trust dispute
A discretionary trust is a trust where the beneficiaries and their entitlements are not fixed but are determined by the trustees according to directions set by the person who created the trust.
In the trust dispute case of Caldicott v Richards a declaration of trust was established under a Will. A trust dispute arose following the death of the deceased in November 2012. The discretionary trust provided for the three claimants and one of the defendants to be the beneficiaries of the trust. The defendants were the appointed trustees of the trust.
The deceased’s Will provided for one half of the residuary estate to pass to the first defendant and one half to the discretionary trust. The first defendant therefore inherited one half of the estate and was also a trustee and beneficiary of the trust.
The main asset of the trust was the deceased’s share in a holiday park business.
Broadly speaking, the terms of the Will meant that the first defendant received one half of the deceased’s business shares in the holiday park and the discretionary trust received the remaining one half of the business shares.
The dispute revolved around a transaction where the first defendant (as trustee and beneficiary of the discretionary trust) purchased an additional 15% of the shares in the business, meaning that she then owned 65% and the discretionary trust owned 35% of the business shares.
The claimants, as the remaining beneficiaries of the discretionary trust, applied to set aside the transaction based on the self-dealing rule. They also applied to remove the first defendant as trustee.
What is a self-dealing rule?
When a trustee sells trust property to himself, the sale is voidable by any beneficiary, however fair the transaction. It is part of a wider rule that the trustee cannot place himself in a position where his personal interest conflicts or may conflict with his duty.
Is there a defence to the self-dealing rule?
In this case, the defendants relied on the possible defence that the transaction was entered with the full consent of the beneficiaries and as such, they said there was no self-dealing. However, the claimants said that whilst their consent to the transaction was sought, there was a substantial amount of non-disclosure by the first defendant.
Another potential defence to the self-dealing rule is where exceptional circumstances apply. The judge agreed that there were unusual circumstances in this case (the sale was in fact driven entirely by one of the claimant’s request for loan) but ruled it was not a sort of exceptional case where the self-dealing rule had no application.
The judge concluded that there was a real potential for a conflict of interest, and said that while consent was sought from the beneficiaries, they were not fully informed.
What are the implications if a trustee has transferred trust property to themselves?
In this case, the judge ruled that the self-dealing rule applied. He therefore rescinded the sale.
Can a trustee be removed for self-dealing?
While it is possible to remove a trustee for self-dealing, the judge in this case concluded that it was not required. He noted that the defendant had been specifically chosen for the role. She knew the family well and had an appropriate professional background and her appointment was a deliberate choice. Again, the same applied to the second defendant trustee who again, was a professional and required no charge for her time.
How we can help with your trust dispute
This case shows what the consequences of a trustee who engages in self-dealing can be, even where consent is obtained. If you are involved in a trust dispute, or are daeling with a trust where self-dealing has been alleged then call the experts for a free case assessment and details of funding options. We represent both trsutees and beneficiaries and can often work on a No Win, No Fee basis.