Exercising trustee discretion: getting the decision and the protection right

Discretionary powers sit at the heart of trusteeship, yet they are also where trustees are most exposed. For trustees in Guernsey, exercising these powers means understanding the scope of the discretion, following a sound decision-making process and keeping an appropriate record.

This briefing offers an overview of how trustees should exercise discretion, document their decisions and how they can protect themselves when a decision is finely balanced.

The nature of a trustee’s discretion

Under a discretionary trust, the trust instrument determines who holds the discretion, what their powers are, and how those powers may be exercised, supplemented by the Trusts (Guernsey) Law, 2007.

There is an important distinction between fiduciary and personal powers. A trustee’s powers are fiduciary, which means they must be exercised in the best interests of the beneficiaries and not simply as the trustee might personally prefer. Trustees also operate within a wider legal and regulatory framework, from the Fiduciary Rules and Guidance 2021 through to financial crime and data protection obligations.

What makes a decision “valid”?

A valid exercise of a power depends on several connected requirements. The trustee must:

• comply with the formal requirements of the trust instrument and act within the scope of the power

• give adequate deliberation to whether the power should be exercised at all

• act in good faith and for a proper purpose

• make sure the decision is not undermined by a conflict

Practical questions quickly follow. Trustees must consider who is actually making the decision, where it is being made and how any conflicts are managed, each of which may carry its own regulatory and tax sensitivities. Rules on co-trustees acting together and on delegation add a further layer that always sends the trustee back to the terms of the trust.

Recording the decision

Good process is only half the story – trustees also must be able to demonstrate sound decision-making. When taking a particularly "momentous" or significant decision, it is good practice to build a set of minutes, resolutions, file notes and correspondence. This should be prepared as though preparing for a court application, even if a trustee does not intend to apply for court approval.

Trustees should also consider when a written resolution can be relied on, rather than detailed minutes. They should avoid leaning on templates from previous transactions, as a poorly documented decision leaves room for challenge.

When the stakes justify protection

Some decisions are significant or potentially contentious enough that trustees will want more than good process alone. The principal protections available fall into two broad groups: court-based and non-court-based routes.

Through court, trustees may seek a blessing of a momentous decision (Public Trustee v Cooper), declaratory relief under section 69, a Beddoe order on costs before embarking on litigation, or relief under the Hastings-Bass jurisdiction to unwind a flawed decision. Each has its own purpose and threshold, including the need for full and frank disclosure.

Away from court, trustees can look to exoneration clauses, indemnities, releases and liens, underpinned by the statutory right of reimbursement from trust property.

Each of these tools has limits. Exclusion clauses, indemnities and releases operate at different points in time and in different ways. The statutory lien is non-possessory and comes with important carve-outs. A release is not an automatic right, since its validity depends on factors such as the grantor’s capacity, knowledge and freedom from duress.

Much of the practical value lies in knowing which protection suits a given situation, and in recognising its limits.

A closing thought

Sound decision-making is really a matter of discipline. A trustee needs to understand the power it is using, think the decision through properly and keep a clear contemporaneous record. They should then use the appropriate protection when a decision is momentous or has the potential to be challenged. Each of these areas carries practical considerations and pitfalls that go beyond what a short overview can capture.

How Ogier can help

For trustees considering a significant or potentially contentious decision, a discussion with Ogier can focus on the scope of their powers, the decision-making process and the records needed to demonstrate it, as well as the available protections and their limits.

If your organisation would like to discuss any of the issues raised here, get in touch with Diana Rodriguez or Bryan De Verneuil-Smith.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice