Our private wealth disputes experts look at steps which personal representatives of a deceased’s estate could take if their relationship with beneficiaries of the estate broke down.
Those broad principles apply equally to relationships between trustees and beneficiaries. However, not all of the steps previously explored focus solely on litigation. It is also important to remember that not all litigation involving trustees is a result of deteriorating relationships with beneficiaries. Sometimes personal representatives of estates or trustees are:
- sued by third parties; or
- wish to commence litigation on behalf of the estate or trust, whether against beneficiaries or other people.
In our professional experience it is increasingly common to see litigation involving claims brought by and against estates and trusts. What practical steps should a personal representative or trustee (“Trustees”) take to protect themselves in these situations?
Personal Liability
It is important to remember that an estate or a trust (“a Trust”) does not have its own legal identity. Where, for example, a company wishes to sue someone or is sued, it is the company named in the Court proceedings. That is not the case with a Trust.
When a Trust is involved in litigation, the litigation is brought by or against the Trustees who are named in their personal capacity. This lack of legal identity poses significant risks for Trustees, as they may find they become personally liable for their own or other parties’ litigation costs.
The General Rule
It is a general rule in trust administration that a Trustee is entitled to obtain an indemnity from the Trust for any costs incurred in the administration of the Trust. However, there is often a question as to whether the costs of litigation are “ordinary” administration costs.
When legal costs in fighting claims at Court can run to many tens or hundreds of thousands of pounds it is easy to see why beneficiaries of a Trust may be upset if the Trustee uses the money in the Trust to pay for those costs. Effectively, the Trustee is spending money which the beneficiaries may think is better used being distributed to them, without any litigation taking place. Often, although not always, litigation on behalf of a Trust and the financial effects that has, can lead to a breakdown in relations between the Trustee and the beneficiary.
So, what can a Trustee do to protect themselves?
There are several things which a Trustee can do:
- The first step is always to consider the Trust documents. It may be that a Trustee has powers to bring or defend litigation already conferred on them.
- It is always a good idea for a Trustee to talk to the beneficiaries. If a Trustee proposes litigation on behalf of the Trust and all of the beneficiaries are adults of sound mind who approve the Trustee’s course of action, then the Trustee can take the benefit of the indemnity conferred on them. It is wise to formally record this agreement in writing. Even then, a Trustee may find a beneficiary challenges the costs after the event either by attacking the agreement of the representations.
- If the Trustee does not already have powers in relation to litigation or cannot get the beneficiaries to agree then it is likely that the Trustee will have to ask the Court for what is known as a Beddoe Order.
Beddoe Orders
Beddoe Orders take their name from the case of Re: Beddoe [1893] in which the Court stated that:
"...a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs…”.
In an application for a Beddoe Order the Trustee seeks the direction and approval of the Court to bring, defend or continue legal proceedings, by or against the Trust. The Trustee asks the Court to confirm that properly incurred litigation costs are an administrative cost of the Trust and, therefore, the Trustee can pay litigation costs (including adverse costs orders) from the Trust. Effectively a Beddoe Order application protects the Trustee from claims of maladministration by beneficiaries and allows litigation to proceed with the “rubber stamp” of the Court.
It is advisable for a Trustee to consider applying for a Beddoe Order at an early stage of legal proceedings to avoid accruing personal liability. However, the Beddoe Order may not always give the Trustee free rein in dealing with the proceedings; depending on how the dispute evolves the Court may sanction pursuing or defending proceedings all the way to trial. However, the Court may only make an Order up to a particular stage in the proceedings with a requirement that the Trustee seeks further approval later in time.
Is a Beddoe Order always appropriate?
A Beddoe Order may not be appropriate in all cases. In Alsop Wilkinson v Neary [1996] the Court identified three broad types of trust dispute in which a Trustee may find themselves. These are:
These are disputes between a Trustee and people outside of the trust other than beneficiaries and may take many forms.
These disputes usually centre on the administration of the Trust or a claim by a third party for property comprised in the trust; and
These are disputes between the Trustee and beneficiaries and if it usually wrong for a Trustee to finance their litigation against a beneficiary out of the Trust itself, unless the dispute requires a Trustee to remain neutral.
As a broad rule-of-thumb it is in third-party disputes and trust disputes where it is appropriate for a Trustee to consider their costs position.
As a Trustee, Remember…
As a Trustee it is important to maintain good lines of communication with the beneficiaries. Should trouble appear from a third party, a Trustee ought to consult with both the beneficiaries and legal advisers at an early stage. If a beneficiary is causing significant difficulties, seek legal advice first.
Trustees should always consider whether to apply for a Beddoe Order before significant costs have been incurred. It is unlikely that the Court will provide a retrospective indemnity.