Disputes over trusts soar as slowdown hits assets

Volatile markets blamed for rise in court cases and family splits. By Kate Hughes

Disputes over inherited assets are threatening to tear families and friends apart, lawyers have warned, as the stock market crash and housing slump prompts a 152 per cent increase in the number of beneficiaries suing trustees for mismanagement.

Trusts are widely used in the UK to hold an individual's assets tax-efficiently for the benefit of third parties, usually family members, but the collapsing value of many of those assets, including shares and residential property, means more cases than ever are being brought to the High Court in London, with "potentially ruinous" consequences.

Disputes launched in the High Court over property held in trust jumped to 111 in 2010, up from 44 in 2009 and 13 in 2008. In 2007, before the credit crunch took hold, there were just three such cases. But with many cases settled out of court this is likely to be the tip of the iceberg, according to the City law firm Wedlake Bell.

The trustees being sued are often family friends and relatives who may have taken on the unpaid role as a favour to the family, says Fay Copeland, head of private client team for Wedlake Bell.

"The extreme volatility of the stock markets and other asset classes will have created a lot of big investment losses. Beneficiaries will want torecoup that lost money and suingthe trustees is seen as one solution," she says.

"A lot of trustees are amateurs or 'lay' trustees, possibly a member of the beneficiaries' family, but unfortunately that doesn't provide them with a great deal of legal protection. Trustees have a duty to their beneficiaries which includes ensuring that the trust assets are properly managed."

If the trustees themselves are not qualified investment managers then they must appoint proper advisers and ensure that those advisers are doing a good job. However, even if the fund manager has performed badly, the trustee could still be sued for failing to replace the fund manager or allowing them to pursue an investment strategy that is too risky. If the trustees are found to have been negligent in the management of a trust's assets, they could face a potentially ruinous claim. Indeed, some are even being accused of fraud.

"A lot of lay trustees agree to take on the role without really understanding the legal risks or the fact that they might personally be liable to reimburse the trust fund for losses," Copeland warns. "They never imagine that they could be sued just for failing to keep up with what can turn out to be an incredibly complex job. It is not a role to be taken on lightly."

All trustees, whether for a small personal trust or large charity, are obliged to ensure that their decisions are in the best interests of the beneficiaries, but also that they are safeguarding the assets themselves. They must manage any conflicts of interest and act with care,including using specialist advisers as necessary.

"Becoming a trustee can be an incredibly difficult role and trustees can be put in very difficult positions," acknowledges Ben Kernigham, deputy chief executive for the National Council for Voluntary Organisations. "Anyone considering becoming a trustee should be very clear on their responsibilities and seek legal advice in advance."