Court’s U-Turn Changes 35 Years of Trust Law

23 Feb
A recent Court of Appeal ruling on the ability of trustees to ‘turn back the clock’ has drastically changed the law on trusts, and could have far reaching implications for the beneficiaries of the UK’s 190,000 trusts.

The rule known as ‘Hastings Bass’ allows trustees to reverse poor investment decisions after they have been made. The rule, established in 1975, protects trustees from liability when things go wrong and it protects beneficiaries from bad investments decreasing the value of their trust.

Trusts are set up to protect and manage assets for a beneficiary. The trustee is in charge of managing the trust in accordance with the trust document. Trusts can be set up for a number of different reasons and many people benefit, from charities and students, to accident victims who have received substantial personal injury or medical negligence compensation. The Court of Appeal’s ruling will significantly impact trustees, beneficiaries, and those professionals whose job is to advise trustees in running the trust.

The judgement says that Hastings Bass won’t apply where the trustee has made an investment decision after taking advice from their professional advisors. If the investment decision turns out to be bad, the only recourse the trustee has to recover the losses will be to sue the professionals for professional negligence.

Trustees and advisors alike will no doubt be very concerned after the Court’s judgement.

The judgement will see the costs of running a trust rise dramatically. In order to protect themselves from law suits if an investment decision turns out to be damaging, lawyers and other professionals will increase their professional indemnity insurance. The cost of this increase will be levied on the trust assets.

In addition, trustees will seek a higher level of legal advice to ensure they make the right decision in the first place, so again increasing the costs levied upon the trust assets.

Commentators predict many more professional negligence claims will be started as a result of the Court’s judgement. It will be painfully clear to trustees that litigation does not guarantee full or any compensation.

A trustee’s bad investment decision will now only be void if they act outside the scope of their powers. If a trustee acts within their powers, the investment decision will only be void if they have breached their fiduciary duty whilst making the decision.

The lawyers for the losing side in the Court of Appeal’s judgement have applied for leave to appeal to the Supreme Court. So this may not be the final outcome but currently, leaves a grave area of concern.

If you are a trustee or are associated with trust assets and you require professional investment advice. I can assist in this area.

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