By Nigel Rotheroe

Whether you are an individual setting up a family trust or a company seeking to establish a trust to benefit your employees one of the key questions that will need to be addressed is “Who is going to be the trustee(s)?”.  A learned barrister friend of mine always says there is a clue in the word Trustee, that being you need to be able to “trust” any person who is going to act as trustee and you should meet him/her or, if the trustee is a corporate entity, representatives of the company. So, being mindful of such good advice, what are the trustee options?

Broadly speaking for a family trust there are two options, appointing:

• An individual who may be a family member or professional adviser; or
• A corporate trustee and usually one that is licensed and regulated by a statutory body.

For a company looking to nominate trustees of a share or share option scheme or employee benefit trust, which this article focuses on, the choice of a trustee is somewhat different in that a Trustee may be a:

• Representative of a company’s employees;
• Director of the Settlor (“founding”) company;
• Subsidiary of the Settlor company or a group company; or
• Professional trustee company.

Unless a corporate professional trustee is appointed then trusts created to benefit a company’s employees usually means that several trustees will be appointed and these will not necessarily all be individuals, i.e. there will be a mixture of individuals and a corporate trustee.

The key factors which usually influence the choice, composition and number of trustee(s) are:

• Statutory requirements, where employee involvement may be a condition of having an approved share or share option scheme;
• The amount of work that is going to be involved in administering the trust and experience of any trustee;
• Unless otherwise provided in a trust deed, trustees are required to act in unison, i.e.;

together, and differences of opinion can therefore lead to stagnation;

• The tax treatment of the trust;
• The cost of having an external trustee(s);
• Employee perception of the independence of the trustee(s);
• Individual exposure to, and requirements of, statutory legislation;
• Conflicts of interest if the sole or the trustees as a whole comprise one or more company directors and/or representatives of another group company; and
• Reporting requirements whether that be to HM Revenue & Customs or through them in respect of the reporting requirements under the Common Reporting Standard (“CRS” of the OECD) or the Financial Accounts Tax Compliance Act (“FATCA” of the US).

Individuals

Whilst from a cost perspective it may seem attractive to appoint an individual to act as a trustee, it is not advisable (unless required by statute) to have as the sole trustee an individual, as:

• Trustees have fiduciary duties which are both onerous and exacting;
• Trustees may incur personal liability for negligence and failing to act properly; especially where beneficiaries may suffer a financial loss;
• Trustees may be liable to fines and found guilty of a criminal act for failing to comply with statutory obligations, e.g. under the reporting requirements of CRS and FATCA;
• Administration of anything other than a small trust can be time consuming;
• When there is a mixture of board members and employees acting as trustees their objectives and perceptions can be “poles apart” and invariably confrontation can result;
• Trustee decisions can be difficult to manage if trustees are absent; and
• The legal ownership of a trust’s assets lies with the trustees and should one of them become ill, incapacitated from acting or die, such that a new trustee needs to be appointed, then time and expense will be incurred in transferring trust assets into the names of the new trustees or a beneficiary.

Company directors

Company directors acting as a trustee(s) would seem an appropriate and logical choice from a company’s perspective, however:

• There is a greater scope for conflicts of interest to arise. Directors have fiduciary duties to the company (see the UK case of Keech v Sandford [1726] EWHC J76), they are accountable to a company’s shareholders and as a trustee they have a duty to the beneficiaries of the trust;
• It can potentially open up or enhance a claim of discrimination and constructive dismissal assertions by employees;
• It may make it difficult for a company to sanction loans or pay dividends to employee benefit trusts, especially where a director is a beneficiary of a trust;
• If a company is listed, there are restrictions on directors’ dealings, and these would apply or potentially apply to dealings that a director undertakes as a trustee;
• Directors may also be party to commercially sensitive information, which (as directors) they should not use in making a decision for (or as) a trustee.

The various fiduciary responsibilities and obligations on company directors puts them in an impossible position; they cannot do right for wrong.  Inevitably, a director may find him/herself in a position that they have to excuse themselves from participating in a particular matter requiring a decision of the trustee(s) or resign as a trustee or as a director of the group company which acts as a trustee.

Subsidiary corporate trustee

In some respects the issues over using a group company as a trustee are similar to the position of individual company directors being a trustee (see above), e.g. as regards conflicts of interest.  However, there are differences:

• The main advantage is that using a corporate trustee limits the liability of it acting as a trustee to the value of its assets and/or issued share capital, save that directors may be liable for breaches of statutory legislation (such as with CRS and FATCA);
• Having a director representative of the corporate trustee being absent from any trustee meeting can be addressed by another director of the corporate trustee attending in their stead and any decision of the corporate trustee is effectively that of a board meeting of the corporate trustee;
• Directors of a corporate trustee can more readily be indemnified by companies within the group for acting in such a capacity;
• If there is a change of director of the corporate trustee, the legal title to trust assets and contracts of the trustee remains with the company. Thus, unlike a director trustee, there is no need to seek to novate contracts or transfer assets. Although there is an automatic vesting of most assets under statute in the case of individual trustees, this does not cover some assets, such as land held on lease and company shares;
• The execution of documents such as deeds of appointment, loan agreements or share transfers are much easier to do as one is not relying on specific individuals to engross a deed, contract, or stock transfer;
• A trust is resident, managed and controlled where its trustees are resident and hold their meetings. At times having a corporate trustee can have a bearing on the tax position of a trust and appointments and benefits it provides to its beneficiaries.  With a corporate trustee, a company’s residence is initially determined by the place of its incorporation and registration; and
• Although there is a general prohibition on a subsidiary being a member of its holding company (section 136 Companies Act 2006) the prohibition does not apply where the subsidiary is acting as a trustee unless the subsidiary is a beneficiary of the trust (section 138 Companies Act 2006).

Professional corporate trustee

Whether a company has one of its own directors or employees acting as a trustee or employs a professional external trustee some form of administration cost is going to be incurred.  So what are the benefits of having a professional trustee?

• Trustees are legally required to act in unison, i.e. together, and so a regulated trustee can, for instance, prevent irrational behaviour;
• An independent trustee gives comfort to both the employee and employer that the scheme will be operated in a professional and independent manner;
• The perception to employees and shareholders and the value of the scheme is enhanced;
• A greater degree of comfort is given to participants and regulatory authorities, in particular the Revenue;
• It ensures that external factors, including legislative and regulatory developments, are identified, and dealt with appropriately, e.g. CRS and FATCA reporting;
• Impartiality and expertise are provided when decisions need to be made;
• Limits the likelihood of a company being accused of bias and conflicts of interest in disputes with scheme members [employees]
• Not having a regulated person acting as a trustee inevitably increases the risk to the lay person of being found guilty of a criminal offence by virtue of the provisions of everchanging statutory legislation.
• Licensed and regulated trustees are required to have professional indemnity insurance, and this can give comfort where potential legal claims are made;
• In certain circumstances it is a regulatory requirement to have an independent trustee; and
• Operating Share plans can be very time consuming.

Whether there is a statutory need or otherwise the continued drive by regulators and those that they regulate to “stamp out” or more practically minimise the risk of AML/CFT activities makes it harder for those seeking to establish a trust to have as the sole trustee(s) a family member(s).  Not having a regulated person acting as a trustee inevitably increases the risk to the lay person of being found guilty of a criminal offence by virtue of the provisions of the Act and other legislation.