The Supreme Court of Bermuda’s decision regarding In the Matter of the R Trust [2019] SC (Bda) 36 Civ considers a contested blessing application to appoint assets out of one trust to another trust when faced with conflicting wishes expressed by the late settlor. This judgment also clarifies the extent to which a trustee is obliged to justify its decisions. Partner Geoff Kertesz and Paralegal Marek Ejmont review two particular aspects of the Supreme Court of Bermuda’s decision.

The case concerned consolidated proceedings involving the trustee (the Trustee) of the R Trust (the Trust), and the wife (W) and daughter (D) of the late settlor (S).

The proceedings commenced when W issued a claim seeking declarations that:

• Two clauses in S’s Will dated 19 April 2011 (the Will) represented his last wishes in respect of a property in the US (the Property) owned by a Bermudan company (the Holding Company), which in turn was owned and held by the Trustee of the Trust;
• On a true construction of those two clauses, S had wished that the Property or alternatively the shares in the Holding Company be given to W outright and that W would in her last will and testament leave the Property to D; and
• The Trustee was bound to take into account the wishes of S as expressed in two clauses of his will.

The Trustee disagreed and subsequently issued its own claim, seeking the court’s approval to appoint the Property to a new trust on terms that the Property is held for W for her lifetime and then for D and D’s issue.

Background

The Trust was settled in December 1995, and its original beneficiaries were D and her issue, a university and “any other charity”. By the time the matter came before the Bermuda court, the beneficial class had been expanded to include both W and S.

The Trust owned shares in a number of companies, which in turn owned various portfolio investments and the Property, all of which originated directly or indirectly from the settlor. The court was told that the Trustee had always considered that the Trust was a family trust for the benefit of S’s wife (in the present case, W) and his children.

At the heart of this conflict were two documents: S’s letter of wishes provided to the Trustee dated 28 October 2008 (the Letter of Wishes), and his later will (the Will). Although these documents communicated similar wishes concerning the use and occupation of the Property during W’s life, they differed as regards whether ownership should remain with the Trustee or pass to W.

The Letter of Wishes stated:

“With regard to [the Property] (held by the Trust through the company) it is my expressed desire that:

…

Should my wife… survive me then after my death, I would wish [W] to have sole use and occupation of [the Property];

After [W’s] death, I would wish my daughter…to be solely entitled to [the Property], to be utilized both as to capital and income as she desires.”

Conversely, the Will stated:

At Clause 6: “I give [W] free of any taxes or duties [the Property]… In the event the [Property] is at the time of my death in the name of [the Company], then I give and request that all shares in the Company are to be owned by [W]. It is my wish that the [Property] should not be subdivided during [W’s] lifetime and that when [W] dies the property should pass to [D]…”

At Clause 7: “I request that [W] have a will that bequests [the Property]…to [D] after both my [W] and I are dead.”

It was common ground that the Will was drafted on the assumption that S owned or would own the property (directly or indirectly) at the time of his death. As it transpired, S did not; at the relevant time, the Property was an asset of the Trust.

W’s attack on the Trustee’s decision to appoint the Property to another trust

W attacked the Trustee’s decision to appoint the Property to a new trust on the basis that it was “opaque, illogical, flawed, irrational and one which no reasonable trustee could have made”.

W argued that the Trustee was bound to take into account S’s wishes, and if it was going to depart from these, it was under an obligation to explain rationally why it had done so. No such explanation had been provided.

W also argued that the Trustee had failed to consider the reason for the change in S’s wishes as between the Letter of Wishes and the Will. In summary, she alleged that at some stage S realised and feared that after his death D was likely to be wholly unreasonable and litigious towards W. To temper this anticipated behaviour, S decided to give the Property outright to W with a legally unenforceable wish that W pass the Property after her death on to D. As the decision to gift the Property would lie with W, D would be keen to develop a friendly and harmonious relationship with W.

The judgment

In his judgment, Chief Justice Hargun found against W in relation to both issues.

Was the Trustee bound to take into account S’s wishes?

The judge referred to Lord Walker’s judgment in Pitt v Holt [2013] 2 AC108 at paragraphs 66-67, which provides that trustees are under no obligation to follow settlor wishes in preference to other relevant considerations. The settlor’s wishes could not displace all independent judgment on the part of the trustees.

The judge found there was no obligation on trustees to explain specifically why a particular wish of the settlor had not been not followed; it was sufficient for them to explain the relevant factors they took into account in coming to the decision and that the decision made was reasonable in the sense that it was a decision which could be made by a reasonable body of trustees.

In any event, the Trustee had explained why it had not followed the wishes of S: if the Property was conveyed to W absolutely, there was a risk that W might not, contrary to S’s wishes, leave the Property to D under her will. Indeed, the Trustee had acknowledged that W and D had a poor relationship. The Trustee did not consider it would be fair to D and her issue or in the best interests of the Trust as a whole that D should be exposed to that risk.

Had the Trustee failed to consider the reason for the change in S’s wishes?

The court concluded that there was no reliable factual evidence as to the reason why S changed his wishes between the Letter of Wishes and the Will. In particular, there was no proper evidential basis to support the assertion that S’s reason for the change of wishes was to control the relationship between D and W. W’s arguments on this point had never been presented to the Trustee to consider, they had only been introduced in written arguments before the court.

The judge held that the Trustee was not bound to consider the relevance and/or impact of S’s reasons for his change of wishes. Further, the Trustee’s failure to do so did not affect the reasonableness of its decision to appoint out the Property in the manner intended.

Outcomes of the judgment and considerations for practitioners

Although some of Chief Justice Hargun’s findings are unsurprising, others present welcome clarifications on how trustees should interpret letters of wishes.

Assigning greater “weight” to particular wishes

The finding that Trustees were not obliged to follow a settlor’s particular wish, in the context of two conflicting sets of wishes, may imply that one set of wishes does not necessarily have greater “weight” over another. This has particular significance for many offshore trustees who regularly receive updated wishes (in one form or another) from trust settlors following changes in their circumstances or personal relationships with the trust’s beneficiaries.

Such a finding (and implication) strikes us as correct. Although the settlor’s wishes are a relevant consideration for trustees to take into account, they are not the only consideration, particularly when a later set of wishes (as was the case here) plainly negatively affects the interests of certain members of the beneficial class. To find otherwise could allow settlors an impermissible level of control over key trust powers.

Obligation to explain the Trustee’s decision

As to the finding that trustees are not obligated to explain why they did not follow a particular wish of the settlor, this was unsurprising as this point is a matter of settled law (albeit not addressed in the judge’s legal analysis) – see Lewin 20th Edn, 29-103. As explained in Re Londonderry’s Settlement [1965] Ch. 918, there are compelling reasons for such a rule:

• The trustees are given a confidential role, and they cannot properly exercise that confidential role if at any moment there is likely to be an investigation for the purpose of seeing whether they have exercised their discretion in the best possible manner.
• The trustees’ duty would become impossible, and the execution of the trust would become impossible if the trustees were bound to disclose to any beneficiary any information or other matters in regard to beneficiaries that they had received.

Other issues concerning the settlor’s wishes

Finally, this judgment raises certain other important issues concerning judicial interpretation of the settlor’s wishes. Chief Justice Hargun proceeded on the basis that the settlor’s wishes as expressed in S’s Will were no different than the formal letter of wishes expressed to the Trustee in 2008.

Established jurisprudence supports the view that letters of wishes do not have to have a defined form. However, the case law concerning the permissible forms of letters of wishes is limited to situations where there was no concrete or final letter of wishes: see Re A Trust, Investec Co. Trustees Ltd v Kidd [2012] JRC 066, Slutsker v Haron Investments Ltd [2012] EWHC 2539 (Ch).

What this judgment does is amply demonstrate the problems caused by conflicting wishes expressed in various sources or forms. In that light, it perhaps offers a compelling argument to require wishes from the settlor to be expressed directly to the trustee explicitly in that capacity and in a recognisable form (unless the settlor never expressed their wishes in any other way).

After all, the effect of certain of W’s arguments was to ask the court to order the Trustees to follow the wishes of the settlor where those wishes were not directly expressed to it, and where those wishes misunderstood how those assets were held. It cannot be right that trustees could, when exercising their powers, factor in wishes which are not directly addressed to it. Surely such a decision could be criticised on the grounds that it was based on irrelevant considerations, as it involved the trustee taking into consideration the indirect (and incorrect) views of an individual who fundamentally misunderstood the nature of their rights and ownership of a particular asset.

There must also surely be a limit to what a trustee can reasonably understand as an expression of a settlor’s wishes in relation to the trust settled by them. If all expressions of the settlor’s wishes have equal standing, trustees could potentially be open to a far wider range of disputes where various parties will inevitably assert their interpretation of the settlor’s wishes as the most authoritative or preferred.

Conclusions

Courts relatively rarely consider the nature and effect of wishes expressed by the settlor. The court’s decision in the R Trust case offers useful and potentially persuasive guidance (although it does not bind English and Welsh courts) on how the court should interpret conflicting letters of wishes in relation to a trustee’s consideration to exercise its powers. It is also a reminder for trustees to not unthinkingly act as the settlor’s cypher, and instead guide any decisions by what is best for the beneficiaries as a whole.

You can find further information regarding our expertise, experience and team on our Trust and Probate Litigation pages.

If you require assistance from our team, please contact us or request a call back from one of our lawyers by submitting this form.

Subscribe – In order to receive our news straight to your inbox, subscribe here. Our newsletters are sent no more than once a month.