Business and trusts trading conflicts

“There have been so many cases, historically involving banks, where a trust exists but is really just a wrapper either for a disparate portfolio of investments or for a patriarch’s trading enterprise.”

In this instance, a wealthy businessman might put a trust and companies over the top of his trading operation, sometimes supported by the trustee’s parent bank. Conflicts may arise as “the different parts of the business need cash, so in order to get paid, may need to squeeze assets out of the trust or it may seek to tie the trust into exclusive agreements by way of loans or investment advice when the trust’s affairs would do much better if arms-length lenders and advisors had been used.”

Perhaps even more worryingly, the trustee and its parents may regard the patriarch as their client, ignoring their legal position and duties to protect the trust assets for the benefit of all the beneficiaries, explained Philip. This can often lead to “Trouble breaking out towards the end of the patriarch’s life when the second generation start taking a good look at what has happened to the trust assets – they often criticise the trustees for being overly indulgent and not adding what the trustees are supposed to add, namely an objective and prudent set of controls, with a view to preserving and enhancing the trust assets”.

He believes that to avoid a groundswell in litigation, there needs to be a return to old-fashioned models of trusteeship, rather than more recent examples where they are more like commercial vehicles.