To Be or Not To Be a Trustee…
About Jane Collis
Jane Collis is a member of the property and private client practice group, specializing in estate planning, wills, international and domestic trusts and probate.
Jane Collis’s full profile on mjm.bm.
Recently tabled in the House of Assembly, the Proceeds of Crime Amendment (No.3) Act 2017 (“PCA3”) will have the effect of extending regulatory reach to lay trustees.
Some of you already act as a trustee for a friend or family member. Others will be asked to do so in future. The playing field is changing for lay trustees and it is important to fully understand the responsibilities of the position.
A “trust” has historically been conceptualised as a “personal relationship” between trustee and settlor. Trustees were trusted friends, advisors or business associates of the settlor, at least familiar, if not intimately acquainted, with the settlor’s personal circumstances, who took on the noble responsibility of holding and administering a trust fund for the benefit of the settlor’s chosen class of beneficiaries. There was then, and remains to this day, tremendous value in a trustee being personally knowledgeable about the settlor’s concerns and objectives as regards the trust fund and the complexities of the settlor’s life, family and fortune. The arrangement operated in a very satisfactory fashion for centuries, until the introduction of a type of company dedicated to the provision of trustee services.
The development of the “trust company” can be seen as a response to the commercial demands of its time and place. In its earliest form and function, the trust company was difficult to distinguish from a regular bank or insurance company, where many of the fiduciary services now carried on by trust companies were first offered. The rise of companies incorporated specifically to carry on trust business was largely a development of the 19th century. Possibly the earliest incarnation of the trust company in the United States was borne out of a Private Act of the Legislature of New York on the 17th April, 1822, when additional powers were conferred upon the Farmers Fire Insurance and Loan Company, namely:
“…authority to receive and take by deed or devise any effects and property, both real and personal, which may be left or conveyed to them in trust; and to assume, perform and execute any trust which has been or which may be created or declared by any deed or devise as aforesaid; and the said corporation are authorized to receive, take, possess, and stand seized of, and to execute any and all such trust or trusts in their corporate capacity and name, in the same manner and to the same extent as trustee or trustees might or could lawfully do, and no further.”*
Over the years, as the number of trust companies grew, so too did the nature of services offered, with a lack of regulation heightening the ability of the trust company to evolve nimbly to fit the needs of the community it served. The fact that the initial focus of the trust company was on trusts of a business nature, explains why the concept developed within a banking framework, as all the other necessary business and lending services were available in that environment. At the same time however, there was a vast accumulation of private wealth that accompanied industrial development in the days before the introduction of income taxes and so the utility of the trust company for private trusts was quick to catch on.
Offering perpetual life and therefore the avoidance of succession issues that plagued individual trustees, regular business hours, established offices, manpower, procedures, expertise, cont-effectiveness, objectivity, insurance and accountability, the advantages of a trust company began to be seen as far outweighing the personal relationship associated with individual trustees. And in the early days, trust companies even managed to preserve a personal element by the long and loyal service of their employees, staff turnover being largely unheard of. With breadth, continuity and expertise of service as chief drivers of the success of the trust company concept, trust business thrived. By the late 19th century, there was a perceived need for greater supervision and regulation of the industry.
Today, those of us who work in the trust industry are challenged to keep up with the shifting goalposts of global regulatory requirements. Not just bound by domestic legislation, trust companies, particularly in the offshore world, must deal with the compliance burden and reporting obligations imposed by FATCA, the Common Reporting Standard and a global network of information exchange agreements, protocols and treaties. Driving up costs at a time when, arguably, professionalism and continuity of service are waning in the industry, all of this regulation is causing many settlors and beneficiaries to question the utility and desirability of maintaining a family trust.
In many cases, the value a trust adds to an estate plan remains significant, whether because of the nature or location of the trust assets or because of the particular idiosyncrasies of the settlor’s personal circumstances. In such cases, increasingly, settlors and beneficiaries are rethinking the relative merits of a licensed trust company over individual trustees. Many settlors feel they are now paying principally for compliance overheads and that meeting their needs and achieving their objectives are being placed way down the list of the trustees’ priorities. So we have seen a resurgence of interest in lay trustees, which helps considerably with a restoration of the personal element to the trust equation, but has left many trusts inadequately administered, if administered at all, and often poorly documented.
From the perspective of the settlor, a return to the appointment of lay trustees may seem a charming tilt of the hat to history, but what about for the lay trustees? How charming is the responsibility in the modern era? Lay trustees are rarely given an education in the responsibilities of the position of trusteeship before assuming it. They take it on as a favour and are often promised that it will take up no time at all. However, every trustee (individual or corporate) is subject to a broad spectrum of common law duties. So, a trustee must exercise his, her or its fiduciary duties with diligence, care and prudence, having due regard to the terms of the trust and the law. A trustee must properly exercise his, her or its discretion within the context of the trust deed as an active mental process and with honesty of intention; a trustee must act impartially; protect the trust assets; avoid conflicts of interest and duty and so on. Furthermore, decisions of trustees and all major activities undertaken within the context of the trust should be recorded.
Over this layer of established common law responsibility rests a layer of statutory regulation. The Trusts (Regulation of Trust Business) Act 2001 (the “Act”), regulates trust companies and individual (professional) trustees in Bermuda. According to the Act, the “provision of the services of a trustee as a business, trade profession or vocation” constitutes “trust business”, and anyone who carries on trust business in or from Bermuda must have a licence, unless covered by an exemption. Both limited and unlimited licences are available under the Act, but only trust companies may hold unlimited licences so as to ensure that more sophisticated and high-value trusts are only administered by trustees that are fully regulated by the Bermuda Monetary Authority. The BMA has enforcement powers and the ability to impose penalties, including the cancellation of the licence of a regulated trust company.
With the growth of financial crime and the use of trusts, bank accounts, law and accounting firms for money laundering, and more recently, terrorist financing, regulation has intensified. Customer due diligence and know-your-client requirements in Bermuda are imposed by the Proceeds of Crime legislation** (for the purposes of this article, all together the “Legislation”) on all regulated entities, whether banks, licenced trust companies, corporate service providers, law firms, accounting firms (with the list of regulated bodies continuing to grow). In the case of a trust, the settlor, trustees, protector and beneficiaries must all be fully and properly identified (by passport and proof of residence) and the source of all funds must be verified, monitored and recorded, with any suspicious activity reported, even in the case of relationships that have been in existence for many years.
Individuals acting gratuitously as trustees are outside the ambit of the Act and the Legislation and consequently, have been free to operate in an unregulated manner, as they have done all through the years. Of course, they have not entirely escaped the reach of regulation, as lay trustees maintaining banking relationships on behalf of the trusts they administer have been required to comply with the know-your customer requirements of the relevant bank, which is itself regulated. While this has become increasingly onerous, it has not been impossible to manage. Unfortunately, the compliance burden for personal trustees is about to increase, or the cost benefit of using lay trustees is about to diminish.
Recently tabled in the House of Assembly, the Proceeds of Crime Amendment (No.3) Act 2017 (“PCA3”) will have the effect of extending the reach of regulation to lay trustees. PCA3 will introduce amendments to the Trustee Act 1975, including definitions of “professional” and “non-professional trustee”. A “professional trustee” is defined as being a natural person or company engaged as a “business, trade, profession or vocation” in the provision of services as a trustee, essentially adopting the language of the Act. A “non-professional trustee”, by comparison, is “a natural person acting without reward in the context of a family situation or a friendship situation”.
PCA3 will impose a duty on a non-professional trustee to keep accurate records, supported by documentation, with respect to the trustee’s “knowledge of proof of the identity, residential address and relevant information” (not defined) about the settlor, protector and the beneficiaries of the trust of which he or she is a trustee and to maintain these records throughout the trust relationship. In addition, a non-professional trustee will be expected to keep records of all transactions in relation to the trust for a minimum of five years from the date of each transaction.
A non-professional trustee may be exempted from both of these record-keeping functions if he has as a co-trustee a trustee licenced under the Act, or appoints a trustee licenced under the Act to maintain the trust records. A non-professional trustee who knowingly and wilfully contravenes the duties imposed by PCA3 will be liable to a civil penalty in the amount of $7,500. It is left to the Chief Justice to make rules for regulating this civil penalty and related matters. The proposed amendments are also silent on the question of who will have oversight of non-professional trustees in relation to the enforcement of these duties, but we can expect that regulations will follow.
Clearly, many non-professional trustees are likely to wish to be exempted from personal record-keeping responsibilities, which, of course, circles back to one of the primary reasons settlors have returned to the appointment of individual trustees, namely a desire to reduce costs by avoiding trust company compliance requirements. While it is likely that trust companies will introduce a lesser fee for performing the function of record-keeping only, acting as co-trustee is viewed by many trust companies as more onerous than acting alone and is therefore unlikely to yield much in the way of cost saving.
It is also worth noting that the Proceeds of Crime Amendment (No.2) Act 2017, which has now been tabled in the Senate, will extend the definition of “relevant offence” under the Proceeds of Crime Act 1997 to matters relating to taxation. Any criminal act or omission in relation to any tax lawfully established in a jurisdiction outside Bermuda, which had it occurred in Bermuda would have constituted an offence under section 37(2) of the Taxes Management Act 1976 will constitute a relevant offence under the Proceeds of Crime Act 1997. Section 37(2) provides that any person, who by any fraud, evades or attempts to evade the payment of tax is guilty of an offence. So, essentially, tax fraud elsewhere will be tax fraud in Bermuda. This is a matter about which non-professional trustees will wish to be cognisant, so as to avoid being unwittingly caught up in something unpleasant. Active trusteeship is required even more acutely in the case of trusts with a foreign element.
It is worth thinking more carefully than perhaps has been done in the past when a friend or family member asks you to be a trustee. The duties of the office are growing while the rewards, if ever there were any, remain unchanged.
*Clay Herrick, Trust Companies; Their Organization, Growth and Management (Bankers Publishing Company New York 1915), at page 3.
**Proceeds of Crime Act 1997, Proceeds of Crime (Anti Money Laundering and Anti Terrorist Financing) Regulations 2008 , Anti-Terrorism (Financial and other Measures) Act 2004, Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008, Financial Intelligence Agency Act 2007 all as amended from time to time.