Why it is unwise for a Protector to mediate between beneficiaries

There is no statutory definition of the role of a trust Protector [‘P’]. What P’s role is called is much less important than the powers the trust deed confers on the Protector. P can be given the right to settle disputes between the trustee and the beneficiaries. Therefore, P can e.g. mediate between two different classes of beneficiaries such as income and residuary beneficiaries in the event of a dispute or disagreement. P can also be set up as the ‘decision-maker’ rather than a mediator. 

The HMRC internal Trusts Settlements and Estates Manual states – TSEM10050 – Non-resident trusts: residence rules: professional trustees not resident in the UK – introduction and background states, ‘The rules that came into force on 6 April 2007 treat the trustees of a settlement as a single person, as distinct from the persons who may be trustees from time to time. The residence status of that single person (referred to below as the “body of trustees”) at any given time is determined in the first instance by the residence status of the persons who are trustees at that time:
·        If all the trustees are either resident in the UK or not resident in the UK, the residence status of the body of trustees follows that outcome.
·        If at any time at least one trustee is resident in the UK and at least one is not, the body of trustees is resident in the UK only if any settlor of the trust was resident, ordinarily resident or domiciled in the UK at any time when he or she introduced property into the trust.’

Therefore, could an offshore trust be treated as being resident in the UK for both income tax and CGT, where by virtue of the powers conferred on P under the terms of the trust, P is a ‘de facto’ trustee, and is resident in the UK, i.e. because P is a decision maker?

What concerns me, is whether a judge may one day conclude that where P behaves like a mediator, that even though mediators do not make decisions for parties in dispute, that by becoming actively involved in the dispute resolution process, P has stepped out of his conventional role as a Protector, and stepped into a role which has as its objective the making of a decision about the administration of the trust. In which case depending upon what P says and does, the boundary between P being either a decision maker or a mediator is blurred.

As Lewin on Trusts states in paragraphs 28-045 & 28-047 “A protector … is typically the holder of a group of powers or requirements of consent. The word is not a term of art … If the protector holds an office under the trust, it will ordinarily be impossible to construe the power or powers as beneficial: the protector will be there for the protection of the beneficiaries and his powers will be fiduciary. … The scope of the protector’s functions depends on the provisions, express and implied, of the trust instrument.”

While protection may involve advising mediation, it does not require a protector to be a mediator, and in sharp contrast to a mediator, P owes fiduciary duties toward beneficiaries in dispute who participate in mediation.

As far as I am aware, few trust administration professionals, i.e. TEP’s, have trained and become accredited as mediators. I have, and think there is a risk that if P is not a trained and accredited mediator, that he/she is not likely to know what they are doing. In which case if the court finds that P has crossed the line and become a decision maker (i.e. by in effect imposing a decision on the beneficiaries and/or trustees), then HMRC can conclude that the trust is UK resident i.e. if P is resident in the UK and the other connecting factors exist, because P has behaved as a de facto trustee. This is purely musing on my part. However, if I am right, this could bring billions into the UK tax net, which I think politically, would be popular.

‘[Even] trusts with powers exercised through a protector may be challenged as shams, particularly where they are exercised for the personal benefit of the settlors. … [With] respect to the taxation of offshore trusts by onshore jurisdictions – If the protector’s power is such that the trust is deemed to be managed and controlled by the protector and not the trustee, it is the protector’s residence that will determine the trust residence for purposes of taxation. This would jeopardize the trust where the protector is a resident of the onshore jurisdiction.’ Trusts and Related Tax Issues in Offshore Financial Law (2005), OUP, by Dr Rose-Marie Antoine. If the trust is challenged in litigation as being either a sham or an onshore trust, what planning rationale can a defendant provide to the court to explain why the settlor [‘S’] went to such lengths to give powers to a protector which S could legitimately have reserved to himself or herself, provided that S did not retain control over the trust?

If the reason for appointing P is that S decided to err on the side of caution and not tempt the court into finding that the trust was a sham, but that insufficient thought was given to the powers conferred on P and the tax residence of P, then while the court may find that the trust is not a sham, or an illusory trust, it could find that the trust is resident for income tax and CGT in the UK, provided all the connecting factors I have previously mentioned existed when S constituted the trust with cash or an asset, e.g. a luxury yacht or art collection.

Therefore, it is unwise for a Protector of an Offshore Trust to become involved in the mediation of an internal trust dispute.

I have been commissioned by Trusts & Trustees (Oxford University Press), to write an in-depth article about the ‘Mediation of International Trust Disputes’ which I am planning to write in July/August.

In the article I will also discuss:

(i) Common challenges to offshore trusts.

(ii) Connecting factors for tax.

(iii) The framework of applicable conflict of laws principles in litigation.

(iv) The opportunity that mediation presents to re-draft a trust deed that is no longer fit for purpose – which is a time-bomb waiting to go off when, e.g. the patriarchs of wealthy families in the gulf either lose capacity or die, and a succession battle results in litigation.

(v) The application of these issues to the mediation of disputes involving Islamic Finance, wealth planning, and family trusts.

If there are any particular issues you would like me to discuss, please send an email to carl@ihtbar.com.

Likewise, if you would like to receive PDF copies of my recent articles published in Taxation (Tolley) about the mediation of probate disputes, and the use of mediation as an estate and business succession planning process to enable an international family to put their house in order before a monumental event occurs.

‘Expert Mediation’ of Tax disputes?

‘Expert Mediation’ of Tax disputes? – Paragraph 16 of the HMRC Litigation and Settlement Strategy (the ‘LSS’) states, ‘Alternative Dispute Resolution (ADR), and more specifically facilitation or mediation, is a flexible dispute resolution tool available to HMRC which, in appropriate cases, can help HMRC and its customers resolve disputes (or reach key decision points) in a cost effective and efficient manner. The LSS applies to the resolution of all disputes through civil procedures. Therefore, any resolution of a dispute between HMRC and a customer, whether it’s resolution involved ADR or not, must accord with the terms of the LSS and specifically be a resolution which HMRC considers could reasonably be reached by a tribunal.’ While in principle any tax dispute may be resolved by either agreement or litigation, on its face, the LSS will not permit HRMC officers ‘to do deals.’ However, as Keith Gordon observes in paragraph 2.2.2 of the 5th edition of ‘Tax Appeals – Law and Practice at the FTT’ (2022), ‘In practice, deals can still be done, although it is usually necessary to show that the ultimate result can be reconciled with a possible outcome from the litigation (even if the justification for the outcome is not particularly logical).’ This is a question of mathematics. I.E if ‘A’ and ‘B’ are in dispute and A = 5 and B = 10, while a settlement for 7.5 is not possible (because that would be splitting the difference) a settlement for either 5 or 10, plus a proportion of costs would appear to be possible. What the Mediator needs to understand, is that the extent of flexibility depends upon the attitude of the officer and his/her willingness to reach an amicable settlement. In other words, these constraints are an opportunity for creative structuring of terms of settlement. Where there is a range of possible figures for tax due, HMRC will not settle by agreement for an amount which is less than it would reasonably expect to obtain from litigation, (the LSS paragraph 17). Therefore, the key to settlement is understanding the basis of that expectation. This is where an expert can assist the mediator and parties – see ‘Expert Mediation’ on the Mediation of ‘Probate & Trust Disputes’ page at www.ihtbar.com. Taking into account the decision in Wired Orthodontics Ltd v HMRC [2020] UKFTT 290 (TC), is it possible and practical to agree upon the appointment of an independent single-joint expert for the purposes of both Mediation and Litigation, i.e. provided the expert remains bound by mediation confidentiality following the Mediation?
I have been commissioned by Taxation (Tolley) to write an article in 2023 about the ‘Mediation of Tax Disputes’ and would be interested in hearing the views of tax partitioners about the Mediation of Tax Disputes. My contact details are set out on the ‘Consultation’ page at www.ihtbar.com.

Poor mediation strategy

‘In order to try to obtain further insights into the challenges that mediators encounter when working with parties and their advisers, we asked about the frequency with which they encountered particular behaviours within client negotiation teams. … This year, the need for more thorough preparation was far and away the most common piece of advice offered. In addition, a number of respondents highlighted the importance of remembering that negotiation in mediation is a process of persuasion. One mediator recommended parties to “think about what you can say or do that will help the other party walk towards you” whilst another made essentially the same point more colourfully: “You are trying to persuade the other side to say yes, not batter them down. No one likes to agree with someone who is punching them in the face. Therefore, you need to think beforehand and during the mediation about how you are going to encourage the other side to say yes and think from their perspective as to what they need, not yours”.’ See: CEDR 9TH Mediation Audit (2021): https://lnkd.in/ewu_s4mv

Mediation works best, where instead of rehearsing their case, participants invest in the process by preparing ‘to do a deal’ instead of going to war by developing a ‘settlement strategy’. Therefore, sufficiently in advance of the mediation, each participant needs to think about:
● The potential settlement zone.
● The known or estimated gap between what each participant wants.
● Their ‘BATNA’ (best alternative to a negotiated agreement, i.e. going to trial).
● How to close the gap and come away with a win/win solution compared to the costs and risks of litigation and proceeding to trial.

A good Mediation Strategy has realistic objectives. Therefore, where a party’s evaluation of merits and quantum is clouded by optimism, anchoring, sunken costs bias, and an attachment to specific e.g. luxury/sentimental estate assets, then specialist mediation counsel (who may be more detached than a party’s solicitor), can add value by educating the party about the merits of their claim/defence, realistic chances of success and the litigation risks. This may result in a critical evaluation of beliefs and expectations. If both parties undertake this exercise early on in their dispute, this increases the opportunities for settlement.

This will be discussed in my next article, for Trusts & Trustees (Oxford University Press) about the ‘Mediation of Probate and Trust Disputes’ which I am aiming to complete and submit in July, for publication later this year.

2nd Edition of the ‘Contentious Probate Handbook’

2nd Edition of the ‘Contentious Probate Handbook’ – I have been invited by the Law Society to submit a Book Proposal for a Second edition of the ‘Contentious Probate Handbook – Practice and Precedents’. I am drafting the outline proposal in November 2022 for submission in December. The first edition, published in 2016, sold out. Over the next three months, I am writing an article for Oxford University Press for publication worldwide later this year in Trusts & Trustees about the ‘Mediation of Probate Disputes.’ In the article I will outline a new theory of co-mediation I have designed specifically for Probate, Trust and Fiduciary Duty Disputes in any jurisdiction worldwide, which I call ‘Expert Mediation.’ For more information, please visit the ‘Mediation of Probate & Trust Disputes’ page at www.ihtbar.com. In March 2022 Taxation (Tolley) published my articles about (i) Mediation as the key to a Tax-Efficient Settlement of a Probate and Trust Dispute; and (ii) the use of Mediation as an Estate Planning and Business Succession planning process for global families and their Family Offices worldwide using Zoom, see the ‘Publications’ page at www.ihtbar.com. To request PDF copies of these articles please send an email to carl@ihtbar.com.

Mediation Advocacy insight – Matching negotiating strategy to the objective

Both sides need to be sufficiently prepared about the expectations of the other.

An effective mediation advocate needs to put the client’s interest first, and match the negotiating strategy to the objective by:

·       keeping an open mind;

·       forming an understanding of the process;

·       learning about the procedure;

·       being prepared in all aspects of his/her client’s case;

·       understanding that the legal framework of the dispute may be only one aspect of the parties’ interests;

·       being receptive to solutions which are outside the legal framework of the dispute (i.e. thinking outside the box); and

·       using the Mediator as a tool with which to obtain a benefit for his/her client, rather than seeing him/her as an obstacle.

‘A lawyer who concentrates on legal questions may miss entirely the important commercial interest, not only of his client, but those of the other side that might prompt an advantageous settlement. Equally dangerous is the lawyer who is too sure of himself. He neglects relevant information. He ridicules good suggestions because they have been made by the other side or by the Mediator. He may consider that his client has already invested too much time and money in the conflict to settle in mediation; or he may have given bullish advice before and be fearful of challenging his own client in a private session to re-adjust the unrealistic expectations held by the client which are likely to be exposed in the process as it continues.’
(Professor Andrew Goodman, Bar Council ADR Committee Mediation Advocacy Training Day, 25 May 2013).

To settle at mediation parties in dispute must compromise. To maximise the opportunity for settlement on mutually satisfactory terms, instead of preparing to go to war (i.e. Trial), each party and their Mediation Advocate (i.e. legal representative) must prepare to do a deal. As I explain in paragraph 12.2 of my book the ‘Contentious Trusts Handbook’ published by the Law Society in 2020, ‘The acme of preparation is development of a “settlement range” based upon:

(a)             a realistic legal risk analysis; and

(b)             an accurate commercial analysis,

so that a concrete opening proposal can be made either to your opponent directly, or through the mediator. This requires a white-board/flip-chart for sketching out the parties respective expectations in order to plot and discover your Client’s potential “settlement range” between:

(a)    the maximum net capital value of his claim; and

(b)    his BATNA (‘best alternative to a negotiated agreement’ – which in litigation is proceeding to trial, i.e. the amount below which he will walk away from the table).’

This methodology rests on the observation that it is always better psychologically to be prepared to advance to a known position than to retreat into the unknown.

A good deal has to provide benefits that satisfy each party’s needs. Without that aspiration, why would any party negotiate. Without assurance of benefit why would anyone sign up to a deal?

See also, the ‘Mediation of Probate & Trust Disputes’ page of my website, www.ihtbar.com.

Recent insight & my next article for ‘Trusts & Trustees’

First the ‘lightbulb moment’ i.e. sudden insight – Underlying ‘Practical Ethics’, i.e. the moral case for the return of lost and stolen art, is a ‘Fiduciary Theory of Art.’ This is a relatively unexplored reservoir of ‘legal’ and universally recognised ‘ethical’ duties which exist under both private and public international law. The bridge between the two, is the ancient doctrine of ‘jus cogens’. This argument in a Mediation therefore appears to have both moral force, and a legal foundation in equity. If it does, then under English Law, the argument may have teeth. I am developing ‘Art & Cultural Heritage Law’ as a niche practice area for advisory work about: ‘Art Loans and Contracts’, ‘Duties of Bailees’, ‘Fiduciary Duties of Trustees’, and the I’HT Heritage Property Regime’. For more information please visit the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.ihtbar.com. I have also been commissioned by ‘Trusts & Trustees’ (Oxford University Press), to write an in-depth article about the ‘Fiduciary Duties of Trustees of Art & Cultural Heritage Assets’, which I am co-writing with a leading academic at Cambridge University and an eminent Art Historian in London, for publication later this year or early in 2023. Work on the article will begin in August.

War and the Protection of Cultural Heritage

‘War and the Protection of Cultural Heritage’ zoom webinar at IAL’s 6 May at 1pm (see below) – I am attending this talk. My question in advance for the panel is,
‘Could Cultural Heritage diplomacy be a neutral method of mediating a ceasefire to create a network of humanitarian corridors, i.e. by designating certain areas as “Cultural Heritage Safe Zones” and then linking them up?’ 
In any conflict, the humanitarian aim of Cultural Heritage protection always competes with military operations. Since there is no international authority responsible for defining: (i) each country’s cultural property; and (ii) the case of ‘military necessity’/’loss of immunity’ on the ground, is there anything that a State actor engaged in military conflict, or the UN, can do, either unilaterally or multilaterally, to designate cultural sites in a War zone (including cities), as de-militarised ‘Cultural Heritage Safe Zones?’ If these safe zones (which are not policed ‘no-fly’ zones) are linked, I wonder if this could create a matrix of humanitarian corridors, and result in a ceasefire?
I expect that the answer is that while this is theoretically possible, it is not practical, because of the behaviour of Russia’s armed forces, i.e. this would result in confrontation, and escalate the conflict to a potential world and ‘nuclear’ war. Arguably, if Russia invades a NATO member state, uses a chemical weapon in Central Europe, or is the perceived cause of an imminent global evironmental catastrophe, confrontation is inevitable. For some observers, it is therefore not a question of ‘whether’ but of ‘when’.
The language and tools of Cultural Heritage Diplomacy enable a Mediation framework to be jointly developed by those at War by identifying common ground, e.g. a shared cultural heritage (which may include a shared set of religious beliefs and moral values), and the connection between: (i) protecting cultural heritage; and (ii) preserving the environment, e.g. where there is a risk of nuclear contamination because there is a nuclear power plant in the War Zone that could be attacked.
Assuming that one outcome of the War in Ukraine will be reform of the UN Security Council, a subsidiary question is whether it is possible to create a parallel UN council with the power to make decisions about humanitarian intervention in order to prevent e.g. a global environmental, i.e. nuclear catastrophe, by: (i) designating a zone; and (ii) declaring an emergency, in each case by passing an extraordinary UN resolution to be passed by a majority? If it is, then could an international UN ‘environmental’ protection/peace keeping force be sent to the zone to patrol and protect it, e.g. the excluded zone around Chernobyl. If it could, then does this give the UN a legal tool for deploying a military force to a matrix of zones without risking nuclear war through direct confrontation? Note that cultural heritage includes landscape.

Who owns history?

‘The moral case for restitution’ is the title of one of my essays for the Diploma course in Art Law at the Institute of Art & Law in London. Underlying the moral case is a fiduciary theory of art. See the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.ihtbar.com. In relation to both antiquities and cultural heritage (which includes landscape), there is a philosophical and legal nexus between:
(i)    the existence of ethical standards; and
(ii)   norms of behaviour.
Norms are linked to the existence of fiduciary duties. This is an evolving question that is linked to the concept of global fiduciary governance in the form of treaty-making and multi-lateral co-operation. My theory is that when art [‘A’] is of cultural significance, i.e. is recognised as being cultural property [‘CP’], it forms part of a recognised heritage. If then in either a narrow or a broad sense, it becomes part of civilization and a record of human evolution (i.e. part of the consciousness and collective memory of mankind), public duties do or should attach to possession. In particular, the possessor [‘P’] who owns A that is CP, is a custodian of the object [‘CPO’]. In which case, fiduciary duties attach to possession, e.g. a duty to preserve and protect the cultural property [‘DP’] (including an underwater archaeological site). If P is a state, these duties extend to protecting the CP in the event of war. Therefore, DP is a quintessentially fiduciary duty. The underlying premise is that every civilized society is a fiduciary of humanity, and so are their governments. There is also a relationship between the human environment, development and culture. The big question is ‘What ethical standards of behaviour do these duties give rise to?’   This is linked to:
(i)      international humanitarian law;
(ii)     the protection and preservation of cultural property; and
(iii)    illicit trafficking of art and antiquities.
The problem of illicit trafficking is further linked to:
(a)        organised crime;
(b)        money-laundering; and
(c)        terrorist financing.
Cultural heritage is of crucial importance to individuals and communities as part of their identity. Because cultural identity is part of human dignity, it is linked to human rights. Since cultural heritage requires memory, this applies to both tangible and intangible heritage, as material and physical heritage needs to be placed in both a historical and cultural context in order to understand its value.
When art becomes cultural heritage, a bridge reveals itself between public international law claims, and private law claims. The bridge is the ancient fiduciary doctrine of Jus Cogens.
Therefore, this theory is about the fundamental values humanity attaches to Art and Cultural Heritage. Those values translate into norms of behaviour that can become building blocks for reaching agreement in a mediation about art and cultural heritage in disputes which involve the competing interests of private parties and states.

Art restitution & Mediation

‘Practical Ethics’, i.e. the moral case for the return of stolen art, has legitimacy and persuasive force as an argument in Mediation because it is linked to moral hazard, i.e. the reputational risk to a museum of possessing stolen art. Consequently, in Art and Cultural Heritage restitution disputes, Mediation is a norm. To an extent, The same applies to Art Authentication disputes i.e. about a ‘Sleeper’. A sleeper is an artwork or antique that has been undervalued and mislabelled due to an expert oversight, and was therefore undersold at auction. The Auction House’s misattribution is printed in the sale catalogue as well as displayed on its website, communicated to potential clients and to those attending the sale. Consequently, the art object is introduced into the public art market under a wrong label. At trial, the court will apply the preponderance of evidence standard to determine liability. The judicial function is not to find an absolute truth but merely a preponderant truth. Judges generally lack the connoisseurship to endorse an expert’s judgment by eye, i.e. they must rule on questions of art authenticity by relying upon expert evidence, without having the requisite skill and knowledge to evaluate and critically assess scientific and opinion evidence. Consequently, in a misattribution dispute, instead of rendering a judgment based upon the experts’ arguments substantiating a specific attribution, a judge may decide that a specific expert is more eminent and established, and consequently that expert’s attribution will prevail. In a breach of duty claim against an auction house, the diligence test applied by English courts is based upon a fiction – the reasonable auctioneer who uses adequate care in the execution of his duties and obligations. This has two drawbacks. 1st – when no expert consensus existed at the time of a wrong attribution. 2nd – the circularity and contingency of scholarship, exposing attributions to divergences amongst scholars and to continuous change. Unless under the terms of settlement agreed at Mediation the parties in dispute agree upon an attribution that can be made public, the problem of disputed attribution does not go away. Therefore, for the parties in dispute, the issue becomes, ‘What is the price of doing a deal?’

I am studying at the Institute of Art & Law in London for a Diploma in Art Law. The titles of my 3 Diploma essays are:

‘The moral case for restitution.’’ 

‘Fiduciary Duties of Trustees of Art & Cultural Heritage Assets’  

‘A Fiduciary Theory of Art.’

See the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.ihtbar.com.

My Tutor at IAL’s, Alexander Herman (who was recently appointed Director of the Institute), has written an excellent book about ‘Restitution.’ On Saturday I contributed a review – Google – ‘Herman – Resitution – Amazon books.’ If you want to understand the ethics of restitution, I recommend this book.

Expert Mediation for Probate & Trust Disputes

‘Expert Mediation’ (a new model of Co-Mediation for Probate & Trust Disputes) – I am developing a new model of Co-Mediation for Probate & Trust disputes (including International Trust and Breach of Fiduciary Duty disputes), which I call ‘Expert Mediation’.
The Co-Mediation process involves:
Adjudicative evaluation by one Co-Mediator (‘A’) with the conclusion about merits being communicated before the start of the Mediation day to: (i) the other Co-Mediator (‘B’), and to each Participant separately (i.e., about the legal and procedural merits of their own case but not that of their opponent).
Facilitative Mediation on the Mediation day being led by Co-Mediator with Co-Mediator A being available for consultation by Co-Mediator B and each participant in private sessions.
Therefore, the legal and procedural evaluation of each Participant’s case (including litigation and costs risks), is not communicated to their opponent.
I am planning to launch this new Co-Mediation service later in the year.
Where a significant tax issue is associated with what is at stake, then in preparation for settlement the participants also need to prepare for Mediation by obtaining professional tax advice, which is discussed in my forthcoming article for Taxation (Tolley), which will be published in two parts entitled, ‘Back to the Future – Mediation & Estate Planning’.  A process of Expert Mediation could therefore also involve a Chartered Tax Advisor.
To arrange an initial Zoom Consultation to discuss how I can help you, please either send an email to carl@ihtbar.com or contact my Clerk at 1 Essex Court:
Tel: 020 7936 3030 or 020 7832 1010.
Tel out of hours: 07721 866 858.
Email: clerks@1ec.co.uk.
For more information please visit my website, www.ihtbar.com.