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Court’s U-turn changes 35 years of trust law

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 and beneficiaries, and it will impact the legal and other professionals whose job it 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 legal advice from their solicitors, and financial and other advice from other professional advisors. If the investment decision turns out to be bad, the only recourse the trustee will have to recover the losses will be to sue the professionals for professional negligence.

Trustees and advisors alike will no doubt be slightly panicking after the Court’s judgement has effectively taken away their safety blanket.

The judgement will see the costs involved in 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 find its way to the client, the trustee, who will pay for it from the trust funds.

In addition, trustees will seek a higher level of legal advice to ensure they make the right decision in the first place. If they get it wrong, the costs of suing professionals will damage the trust as well.

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

A trustee’s bad investment decision will now only be void if they act outside the scope of their powers; that is, if they make a decision they are not authorised to do so by the trust document. 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.

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