Trustees should be thoroughly educated in all aspects of fiduciary responsibility and be willing to implement policies and procedures to minimise fiduciary liability. Trustee services providers may not always have the necessary in-house resources and tools to carry out the job and professionals who do not practise extensively in the trusts and estates field do not enjoy the necessary knowledge and training.

Trusts have been used over centuries as efficient and flexible legal instruments and valid solutions for personal and commercial matters. Ten years on from the enactment of the Trusts and Trustees Act, Maltese families and businesses have started to understand the concept of trusts and the advantages and solutions they could offer. In fact, this area of family estate trusts and business succession planning is now rapidly on the increase.

Ensuring the legitimate uses and purposes of trusts by local corporate trustee service providers and trustee and fiduciary practitioners aims to safeguard the integrity of this sector in Malta.

Trust arrangements and structures are predominantly used in perfectly appropriate and compliant ways by people and companies with legitimate intentions, but obviously can be misused by people with dishonest objectives. The tax treatment of assets held through a trust may at times be wrongly considered to be a central reason for the creation of a trust. In reality, it is more a consequence to be examined on a case by case basis depending on the residence of the settlor and beneficiaries.

Setting up a trust is a legitimate way to manage your assets, especially when you wish to control how your assets are managed after death. You can set up a trust to accomplish any number of goals – such as providing income for your children, grandchildren or other family members, providing income for your favourite charities or to distribute your assets to specific people.

Abusive trusts are a reality and the tax authorities investigate dubious use of trusts particularly for undeclared income. Under local tax legislation the authorities are empowered to oblige trustees to disclose information as part of a tax investigation into a settlor or beneficiaries.

Corporate trustees, on the other hand, operate within an increased risk environment where litigation against trustees and fiduciaries is gradually on the increase. Consequently, the need for specialization in this field of services is mandatory. Attitudes towards trustees are also changing: people are no longer hesitant to question or sue an experienced corporate fiduciary serving as trustee.

Effective risk management requires trustees to carry out fiduciary duties with great diligence and integrity, and to adopt a best practice approach. These efforts result in trustees serving the beneficiaries more effectively. Proper risk management should make for happier beneficiaries and, as a result, minimise fiduciary litigation.

Here are measures and suggestions that can be taken by corporate trustees and fiduciaries to reduce their risk.

The Risk Profile and Profitability Standards are perhaps the greatest risk management tool to avoid trusts with high risk profiles and those that, regardless of the risk, do not meet the trustee’s profitability standards. The trustee should be given adequate opportunity to evaluate the trusteeship at drafting stage or at least, before initial funding.

A detailed analysis of the trust instrument and the law of the trust allows the legal advisors of the corporate trustee to identify ambiguities, inconsistencies, potential tax problems, and potential conflicts of interest. Besides, they should carefully analyse the trustee provisions, including exculpatory clauses.

Such exculpatory clauses in the trust document may not necessarily or adequately protect the trustee. For example, an exculpatory clause is generally not effective to relieve the trustee of liability for breach of a trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary, or of liability for any profits that the trustee has derived from a breach of trust.

Ideally, Maltese trustees should as far as possible accept to act as trustees where the applicable law for the trust instrument would be Maltese law.

The potential corporate trustee must be capable of handling the specific trust assets. For example, being a trustee of a trust that controls a closely held business is very different from being trustee of a trust that is made up solely of marketable securities or immovable properties.

The potential trustee should learn as much as possible about the settlors and the beneficiaries of the trust, including their family history and familial relationships. The same amount of knowledge should apply to the source of wealth, the principal objectives and purposes of the trust and any particular specific circumstance in relation to any of the beneficiaries.

The trustee should review previous accounts and activities of the settlors and obtain enough detail on asset information of the settlors. Where necessary, the trustee should seek the necessary indemnifications of the settlors and beneficiaries. The trustee should also attempt to assess the litigious nature of such beneficiaries.

The trustee should review previous accounts and activities of the settlors and obtain enough detail on their asset information

The potential trustee should consider several factors in identifying possible risks arising from the trust management and administrative duties. These should include the initial value of the trust assets and the expected growth throughout the lifetime of the trust; the nature and the extent of the assets held in trust – and the complexities that may arise in adequately managing and administering these assets; the complexities that may arise in completing the annual financial statements for the settlors and beneficiaries; any extraordinary matters that may be envisaged in retaining complete records of administration, the expected frequency and amounts of distribution to beneficiaries; any complexities that may be envisaged in the nature of communications with the settlors and beneficiaries of the trust; the preparation of tax returns, including timeliness and resolution of tax liabilities and the nature of family relationships and any other dynamics that may increase the burden of the administration and management of the trust.

It is imperative that a potential trustee declines to act as a trustee for a proposed trust where there are doubts about factors including the clarity and principal scope and purpose of the trust, the legitimacy of the trust, whether the client has fully comprehended the legal implications and effects of the constitution of the trust – in particular the transfer of ownership of the trust assets from the client to the trustee, the source and wealth of the settlor, the clarity of the nature of the trust assets, the clarity of the objects and class of beneficiaries of the trust and whether the trustee could effectively manage and administer the trust assets regard being given to the size, nature, jurisdiction and complexity of the trust.

In many cases, trustees are sued because they fail to understand their duties. These duties are both of a general nature (found in the common law and basic principles of trusts and equity) and of a more specific nature (such as duties imposed by the trust instrument and legislation that governs the trust).

As a starting point in the risk management process of such duties, it is imperative to ascertain whether the trustee understands duties emanating from the Trust Deed and from the law and whether the settlor and beneficiaries have an understanding of the trustee’s duties and the beneficiaries’ rights under the trust.

As a prelude to accepting a trusteeship, a potential trustee should analyse and understand the specific terms of the trust and the material surrounding circumstances, including the nature of the trust assets and specific familial information regarding the trust beneficiaries.

The trustee should draw up a written summary and checklist of the trust terms that highlights any special duties and responsibilities imposed on the trustee. This summary should be clipped to the front of the trust instrument and should be reviewed annually.

Unless specifically prohibited by the terms of the trust (such as, during the lifetime of the settlors who may the primary beneficiaries under the trust), the trustee should provide the current beneficiaries (who are of age) with a written summary of their rights under the trust. This will allow them to understand the extent of their beneficial interests and would enable the trustee to manage the beneficiaries’ expectations.

This summary could give an explanation on the standards of distribution of capital and income, whether mandatory or discretionary; an explanation as to the investment strategy and policy the trustee must follow with respect to the management of the trust assets; provisions for removal of the trustee, and who has such removal powers; trustee fees; and identification of any protector or trust counsel or financial advisor with whom the trustee should consult in exercising any of its powers.

The trustee must obtain and maintain basic information about the beneficiaries, such as their identities, ages, locations, financial needs and other circumstances relevant to their status of beneficiaries. For accuracy purposes, this information should be updated at least once a year so that the trustee can make informed decisions.

The trustee should also issue periodic communications to the beneficiaries informing them of the status of the trust, important and material developments, investment performance and other relevant information.

In terms of law, a trustee must administer the trust using the care, skill, prudence and diligence that a person familiar with the job of serving as a trustee would use to carry out the purposes of the trust.

A trustee should not engage in any act which puts the trustee’s personal interests in conflict with those of the beneficiaries. However, it should be noted that in terms of law, the trust instrument may specifically provide for and authorize certain conflicts between the trustee and the beneficiaries, provided however that such conflicts are clearly disclosed in order to avoid any future controversies.

The trustee should not disclose the terms of the trust, the identity of interests of the beneficiaries or the nature of the trust assets to anyone who is not a beneficiary of the trust or who does not need this information to assist in the administration of the trust. Furthermore, the trustee should keep any personal information the trustee has learned about the beneficiaries through serving as trustee confidential.

The trustee must take all reasonable steps to ensure that it is in control of the trust property (such as ensuring that it has become the new legal owner of such property) and protect such property. The trustee must not commingle personal funds or other non-trust assets with the trust property.

The trustee should maintain excellent professional and personal relationships with the settlors and beneficiaries

The Trustee must keep proper accounts showing in detail the assets, liabilities, receipts and disbursements of the trust. These accounts must be kept separate and distinct for each trust. Such accounts should be issued at least once a year.

Besides these accounts, the trustee is expected to have sound controls over the trust instrument and other original documents which should ideally be maintained in a centrally controlled location. Original committee minutes, resolutions and related attachments should receive the same level of safeguarding.

Ideally the trustee should consider providing the persons in receipt of such trust accounts with an annual form to be signed and returned by them which will evidence their approval of the Trustee’s accounting and receipting for distributions made during the year. This annual form will give the recipients the chance to inform the trustee of any concerns or objections they may have in a timely manner so that concerns may be dealt with quickly to the benefit of the settlors, beneficiaries and the trustee.

The trustee must take all reasonable steps to enforce claims on behalf of the trust and to defend the trust against adverse claims.

Where the trustee is not a qualified investment advisor or an experienced and successful investor, the trustee should delegate investment functions to one or more qualified professional advisors pursuant to the mechanism provided for in the terms of the trust instrument and in line with the relative provisions of the law. In doing so, the trustee may shift the responsibility for investment decisions or actions to the qualified investment adviser.

However, the trustee must carefully comply with all the requirements emanating from the law in exercising reasonable care, skill and caution in selecting the qualified investment advisor and establishing the scope and specific terms of any delegation; and exercise due diligence in periodically monitoring and reviewing the investment advisor’s actions, performance and compliance with the terms of the delegation.

Many trust deeds provide for powers of delegation by a trustee of certain and specific tasks. A delegation of a fiduciary authority is proper when it is reasonably intended to further enhance the soundness of the administration of the trust. It is important to review the trust deed in order to determine whether the trustee has authority to delegate.

If the trust document does not specifically authorise persons other than the trustee to act, the trustee may be able to delegate functions under a provision of the law – unless of course, the statutory provision is subject to the express terms of the trust instrument and the instrument specifically prohibits delegation, then, in that case, the trustee may not delegate.

When delegating, the trustee must ensure that the person to whom the duty has been delegated is fully capable of performing the delegated functions and has sufficient information to do so on a continuing basis. Besides, the trustee must ensure that the terms and scope of such delegation is clearly defined.

There are instances where a trustee should delegate specific functions particularly in areas in which the trustee does not have expertise. This includes delegating responsibility for the management of unique assets of the trust – since such assets may require special expertise so that the income potential and value of the assets are properly exploited.

Examples of such unique assets include real estate (such as rental real estate, development of land), property management; intellectual property rights; and collections of art, antiques or other valuable items.

When delegating, the trustee should not act blindly on the agent’s advice, and exercise good faith and reasonable care in selecting an appropriate agent and in establishing the scope of the agent’s authority. The trustee should act promptly upon discovery of any wrongdoing on the part of the agent; and require periodic accounting or reports from the agent on the agent’s conduct and performance.

Corporate trustees should have in place operating and procedure manuals, robust governance structures and written policy statements and other guidelines. These should be reviewed periodically to ensure compliance and to reflect changed practices.

The trustee should strive to maintain excellent professional and personal relationships with the settlors and beneficiaries of the Trust. Naturally, being on friendly terms with such persons, to the extent possible, is a key factor in avoiding fiduciary litigation.

To maintain a healthy fiduciary relationship a trustee should be available, responsive, listen, educate, explain, understand client’s needs and make accountings and processes smooth, simple and understandable.

Andrew Chetcuti Ganado is a lawyer in private practice specialising in trusts, estate planning and fiduciary services.