The Barrister Series S5E4 | Kerby Lau on Trust & Estate Administration Disputes

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TRANSCRIPT

Tune in for Series 5 of the HIP talks, a podcast series of discussions on legal issues hosted by Hugill & Ip Solicitors, an independent boutique law firm in Hong Kong providing bespoke legal services and exceptional client service to individuals, families, entrepreneurs and businesses, both locally and internationally. The forthcoming podcasts are The Barrister Series. Over six episodes, the team sits down with preeminent Hong Kong barristers to discuss contentious issues related to civil litigation, employment, family, trusts and estates as well as increasing awareness about the importance of the role of barristers in court proceedings and the relationship between solicitors and barristers when acting for clients.

Hugill & Ip provide expert advice across a variety of dedicated practice areas both contentious and non contentious and outstanding team of solicitors who have achieved exceptional results and recognition in the areas of dispute resolution, probate & trusts, family & matrimonial, corporate & commercial and employment & immigration. Hugill & Ip applies modern thinking to legal services, uses technology in a contemporary office environment and is fully committed to giving back to the community.

Alfred Ip  01:16
Hello, everyone. Thank you for tuning into this podcast. I’m Alfred Ip, a founding partner of Hugill & ip, and today we have Kerby Lau, a barrister who is very very experienced in civil practice, in particular, trusts & estate practice. And a barrister that we have been using, are we working together quite often. Hello, Kerby. Hi. Hi, Alfred. Hi, everyone. Thank you very much for coming to us today. Yeah, today we talk about trusts & estate administration, a topic that is always described as narrow, but wide – in the sense that a lot of people, when they talk about trust & estate litigation, they always fought about, oh, I’m going to challenge the will. Why am I being disinherited? What can I do something like that. But actually, estate & trust administration is a relatively long process entail a lot of things that the trust & estate administrator, be a professional trustee, or family members who get the grant or as we call it a grantee in a course of their decision making sometimes they don’t know what to do, or they have been during it not so regularly, not taking into account the interest of the beneficiaries, and this is the topic that we’ll be talking about today. But before we start, can you remind me how long we’ve been knowing each other?

Kerby Lau  02:49
Oh, I think it’s been more than 10 years. It’s my 10th year of practice this year. And I’ve known you, I think, a right around when I was just starting off as a pupil. Yes, yeah.

Alfred Ip  03:06
So why did you become a pupil and then become a barrister?

Kerby Lau  03:09
Yes, I think for me, the profession of being a barrister was really attractive for I think, two main reasons, right? Versus obviously, advocacy, I like debating, I like making points to an audience. And I like also to think about how best to present ideas in a persuasive manner. And the second aspect, which I think drawn me to the profession of being a barrister, is the task of real problem solving. Right? I really like the idea of that: problem solving, especially in a contentious setting where you have disputes, disagreements amongst the parties. And oftentimes, each party may have his or her own view, which are not entirely unreasonable. So, the question then is how do you resolve conflict and solve problems between them so as to achieve the best outcome for involve and that, I think was quite an attractive aspect of the profession.

Alfred Ip  04:18
I think this is the reason why we work together so well, because both you and I love problem solving. But I’m not a particularly strong advocate, because I simply don’t have as much exposure as you as a barrister who goes in and out of court and being recognized by all the judges that are hearing trust & estate cases. And that’s probably the reason why we can work together as a team, I always emphasize on working together as a team, and that is involving team members since day one and talk together, but bouncing ideas to bring the maximum benefit to our clients. I think this is something that involve chemistry as well. And this is, I have to say we enjoy working with you very well.

Kerby Lau  05:17
Yes, yes, I think the pleasure, certainly mutual, I enjoy working with, you know, Alfred and your team as well. You know, over the years, we’ve built up really a very, you know, sort of harmonious and a working relationship, where we obviously can trust each other to, you know, carry out our tasks properly. But I think, Alfred, you’re just being too humble. When you say, you know, you don’t know much about advocacy, you know, there are always different types of advocacy. And it’s true, of course, the advocacy that I do, barristers in general do, is the type where you get, you know, called advocacy making speeches in courts. But there’s obviously other aspects of advocacy as well, and trying to deal with your clients and to deal with different parties, and dealing with, you know, different stakeholders. And that is very important as well.

Alfred Ip  06:15
I think, the different roles that we have actually works very well, because we are not particularly on top with the recent development of the laws, or the cases that have been frequently cited in front of judges. I always emphasize the importance of prehearing preparation. And this is something that I believe that you have much more experience than me, because opening submission is something that the judges will be relying upon, when deciding the outcome of a case. And having a strong, powerful and well analysed submission is most important. I believe that you will agree with me that in most cases judges have already formed their mind before the hearing.

Kerby Lau  07:06
Yeah, yeah, I definitely agree with that. And I definitely agree that, you know, we do have to put in a lot of time and effort in preparing and obviously tailoring a set of submissions, whether it’s opening submissions or whatnot, for the particular case for the particular facts, and also for the particular judge. It is, of course, very important in the entire process in preparing submissions and preparing case and evidence in general, that we have a team right, as we were discussing, as such as you and I were we are able to work without sort of any conflicts and without any sort of doubt that we’ll be able to carry out the client’s wishes and protect clients interests to the best that they can be.

Alfred Ip  07:59
Yeah, I’m talking about preparation. In a lot of cases, when we’re talking about prehearing preparation, sometimes it’s about expectation management, not only managing the client expectation, but also managing to judges expectation, and going in and out of court frequently, coming across so many different judges, so many times to sort of understand what they’re looking for how they approach a particular issue. And what is it that we need to answer to the question that he or she may have, in particular, some of these questions are particularly difficult.

Kerby Lau  08:46
Oh, that’s a very good question, Alfred. I think that’s a very important question, which sometimes we even we as practitioners may lose sight of. Now, obviously, each individual judge is unique, right? He or she will have his or her own preference as to how written submissions or oral submissions should be done. But they all have one point in common, which is that as judges, ultimately it’s their duty to make decisions, right. So, amongst all the various, you know, clever or interesting arguments and evidence could be dealt with be placed before them and no matter how many pages of documents or witnesses they are, ultimately, it’s their job, to cut through everything, analyse everything, but in such a manner that will enable them to come to a decision. So that is one thing which is very important to bear in mind that ultimately, they are trying to make a decision that is considering all the facts and law will be the fairest and the most just outcome and doing so I think as practitioners and especially as advocate, always find it very useful if we can, you know, when we are approaching a case, before we even jump in, right, because that’s the tendency we jump in, to analyse the various issues we jump in to, you know, think about what the best arguments would be on various issues. But before doing all that, what should be done is, we should take a step back, and we should look at really the overall picture, right, we need to ask ourselves, what exactly is going on here, and try to put ourselves in the shoes of a judge, or really just any, we can say, you know, sometimes a legal term reasonable bystander, or what a third party looking at the case, completely impartial, will think is really going on. And I find that exercise to be extremely useful, because that actually allows us to really not, you know, as it were, lose the woods for the trees, and for one or two trees, in particular, it allows us to really have a grasp of the overall picture, it allows us to assess what are the points that will actually be effective, you know, what are the good arguments that will actually get us through? And generally, usually, you don’t need that many arguments, you just need a couple that will really feature in the judges mind as a decision maker, and not really get ourselves lost in some other interesting, but ultimately, peripheral point. So, I find that to be something which is quite important, especially in terms of court advocacy.

Alfred Ip  11:39
Don’t let a bad argument compromise your good argument. Yes. Yeah, don’t let your bad point compromise your good point. That’s what I learned since the very beginning when I started my legal career. And I think another thing that puts you in a better position to give a more impartial viewpoint is that you can keep a certain distance with the client, we are the person who worked very closely with our client, taking instructions, understanding the case, giving them some ideas and solutions, but keeping a close distance of a client, make us compromising our ability to look at the case, sometimes from a more impartial point of view, because we have very strong empathy towards our clients. And is the reason why working with you help us put things into perspective, and helping clients to understand the risk that will be moved in going down this path of litigation, and a lot of times, it is something that they should think twice before going to court thinking that the judge, they must be on their side, there are good points and bad points are good things are stronger for us that things are not to our favour, and we need to navigate it. And talking about this, in terms of estate administration, trust administration, a lot of times people do think, oh, it’s very easy to get a grant, I’ll just get it all out. I’m assessing him, and I can do whatever I want. But actually, it is very, very far from truth. I give you an example. One of the first cases that I come across is a beneficiary basically telling me that “my sister has been the administrator, but she has been refusing to sell my mother’s house, and that’s the mother who passed away, of course, she said, oh, we are going to rent it out. And we’re going to generate rental income. And then we’re going to split it four ways. But I really didn’t want that. I wanted to receive my share of inheritance. So, as I can get on with my life, especially when me and my sister are not in particularly speaking terms. So, what can I do to force my sister to sell?”. In that particular respect, how will we advise our client?

Kerby Lau  14:13
Well, there’s obviously different ways to you know, approaching a scenario as just you mentioned, right. So, we are faced with a problem, like you said that a beneficiary of an estate or trust, wishes to sell the property, but then obviously, others disagree, all right. So, of course, there are ways we can first of all consider ways you know, out of court how we can deal with those, if possible, obviously, there could be some sort of arrangement that could be arrived at with the other beneficiaries. So in your case with the sister to try to see if some sort of compromise could be reached right to see if what is the problem what what is actually preventing her from wanting to sell the property. Is it a matter of concern over valuation? Because sometimes people are concerned they want to wait a bit more they want the property prices to appreciate before they’re willing to sell, or is it just because they like the you know, the home in terms of convenience, they want to live there? And if so, whether alternative accommodation could be arranged, right?

Alfred Ip  15:23
How about sentimental value? It’s from my own mother? I don’t want to sell it…

Kerby Lau  15:28
Yes. So, some yeah, so that is, of course, an off cited and often seen reason as well, because of sentimental value, someone doesn’t want to. And that brings us into some sort of deadlock, right? Because obviously, sentimental value is by definition, rather subjective, it is quite emotional. And it’s difficult to really try to, you know, reason, one’s way out into a compromise now, in that sort of situations, then one would probably have to consider going to court and making an application so that the court can actually make an order for the property to be sold. And under such terms, that will of course, protect the interests of all the beneficiaries.

Alfred Ip  16:14
But I think the first thing is for the administrator or the trustee to understand that when they are conferred with a power vested by the court, they have a duty to administer the estate or the trust properly by exercising their discretionary power, with reason, protecting the interests of the beneficiary. In that respect, I think one of the things that most people don’t understand is fiduciary power or fiduciary duties. Can you describe a little bit more about that?

Kerby Lau  16:54
Certainly, certainly not, if I do have to put it in laymen and very, very simple terms, is someone who is a in a relationship of trust and confidence with you, all right. So, the usual sort of relationship that we will get, which are considered to be fiduciary would include, for example, a lawyer and a lay client, right. So that is, of course, a paradigm example of what is a fiduciary, in some cases, employer/employee that could be considered a fiduciary, and then directors and companies etc. What is the core duty of being a fiduciary? Now the core duty of being a fiduciary is what we call the duty of loyalty and the duty to act in the best interests of the principal or the one whom you actually are in the trust, in a position of trust and confidence with. So it is that being called duty, that it sort of is that umbrella, that covers and guides, everything that a fiduciary should do or in terms of when making decisions he or she ought to consider which is being loyal in the sense of, you know, acting only for the interests of the principal without consideration to his or her own selfish interests or the interests of third parties, and really to take positive steps to protect best interests of the principal.

Alfred Ip  18:29
And in, in, in particular, when we talk about estate, a lot of time is a family member who is some appointed as the executor or – in the case of intestacy – administrator. That actually places them with a burden of protecting the interests of the beneficiaries, which often are family members. But a lot of time, they are caught in the middle, because, for example, when they’re living in their own home, and that belongs to the deceased mother, they have been rented. I’m living there rent free. And the last thing they want you to sell the place and even though they got their own shares as beneficiaries, they need to find another alternative place to live. It could be expensive, especially in Hong Kong. Also, that could be in conflict with the interests of the other beneficiaries, to get their shares that are just I just described and will follow their life. So, in this kind of circumstances, what will be the advice that you will be giving them when they’re placed in such a conflict?

Kerby Lau  19:45
Dealing with conflict of interest and duties is obviously a rather tricky situation, right? The easiest and the most straightforward way to deal with a position of conflict of interest is of course to remove oneself from the conflict, or by resigning one’s position, which would otherwise you know, give rise to conflict. So in this case, we’re talking about an administrator of an estate, who also happens to be a beneficiary then the administrator may want to consider, you know, if there are different views among beneficiaries, and if he or hers interests or views, actually conflicts with those other beneficiaries, then he or she should really consider stepping down as administrator. Now, there are, of course, also other alternative, less drastic measures. But of course, that will require quite a bit of legal analysis and technical thinking in terms of planning and execution, because one would have perhaps, to think about what are the sorts of detailed terms so that even though there might be a sort of conflict of interest or conflict of duties, how that conflict could be managed, right. So, for example, if that conflict relates to a certain property, could certain terms being posed regarding the selling and distribution of the property, so as to remove any potential harms arising from the conflict and this would, of course, require quite a bit of, you know, legal and technical analysis,

Alfred Ip  21:24
Or simply to agree with other family members on the terms or conditions to remain in the property. Let’s say that the beneficiaries understand your situation, and you want to continue living there, I think it would be only fair, if you pay at least a certain amount, close to the market value as rent, so that you can continue living there. Otherwise, other family members would be waiting for the property to be sold, so that they can get their fair share. A lot of times, conflicts arise when trust property, estate property being locked up in terms of value, that it cannot be converted into cash and distributed so that the beneficiaries can do whatever they want, they could be waiting for it for a very long time. And this is the reason why whenever there is a potential conflict, it is always advisable to nip it in the butt with good communication, good communication among beneficiaries, as the utmost important (point) to resolve any dispute. Because ultimately, family members have a long history of dealing with a shudder, there could be a lot of love, there could be a lot of hate, there could be a lot of grievances, too, they want to use it as an opportunity to get even with each other. The only way to prevent any litigation from the administration point of view is to try to manage the expectations of the other beneficiaries. And if necessary, as you just said, remove yourself from that situation, and allow other people even professional to help. This when we talk about real properties sometimes it is easier to what we call it, evaluate, because, for example, real property residential property, especially in big estate, it’s very easy to go up to HSBC or other banks websites, they have valuation tools, that could be a very good reference point or benchmark in terms of how much the property should be sold. And if this, we cannot sell it at that price, how much less this can be sold. But this, of course, has to be agreed, again among beneficiaries, even if the property is sold as undervalue. I believe that the most important part would be the administrator should not be benefiting himself or herself with such an undervalue.

Kerby Lau  24:19
Yes, yes, that’s certainly something to bear in mind. And in fact, while you are talking about this issue, Alfred, I think what comes to mind is actually a case that we did not so long ago, that involves, I think, similar facts as well. And I think in that case, there were disputes between two brothers who were beneficiaries of an estate. The elder brother actually obtained grant as administrator, but he was subsequently removed and replaced by professional administrators at the appointment of his younger brother, and it was discovered, I think, as part of the grounds for removing and replacing him that this elder brother, while he was acting as administrator, actually use various properties in the estate for his own benefit. So, he basically lived in one of the properties from the estate; he was ordinarily residing, I think in the US, but whenever he came back to Hong Kong, for extended stays, he would stay in the estate property, and he would do so without paying rent and without accounting for it at all. So that was obviously frowned upon by the court. Of course, there were other conduct as well. But this was one of the main conducts. And the judge did find that there was a clear conflict of interest, not only potential, but actual. And that there was a duty on this elder brother to account for all the years that he had actually lived and use the estate property free of rent, and ultimately, a professional administrator had to step in, and to take over the situation. Now, of course, this is not a situation to anyone wants to find himself or herself in, you know, because that is obviously, you know, you will be subject to litigation, you will be subject to various claims, and so on. So, it is definitely a good idea, as Alfred has mentioned, to try to nip the conflict in the butt and try to just avoid getting such a messy situation altogether.

Alfred Ip  26:30
And I think the most important deterrent of this kind of situation is costs, the outgoing or exiting trustee or administrator, a lot of time will have to bear cost with this application. And when we talk about costs, that could be hundreds of thousands, if not, are over a million. That is actually personally liable, an administrator cannot get it deducted from the estate. Right? Yes, yeah. So, in that case, potentially the administrator can suffer a huge amount of personal liability. And don’t forget this kind of administrator, where we talk about family members, they cannot charge for the time that is spent on the administration of the estate, and actually a lot of work to do, especially when we’re talking about accounting. Accounting, means not only how much it is a property being sold, how much is it in the account, but also accounting for each and every pieces of expenses, from the big expenses, like legal fees to small expenses, like monthly management fees. Can I ask you this? Is failure to account a proper reason to remove an administrator?

Kerby Lau  27:59
Yes, now failure of account can be a basis for removal administrator. Now, of course, the court will look at the nature and extent of the failure. Right. So just consistent with the court looking at the nature and extent of the conflict. So, you have, for example, some sort of minor situations if, for example, a family member who happens to be the administrator or executor, who perhaps paid for some medical bills, or perhaps took some of the estates money to pay for some unpaid medical or credit card bills of the deceased. Now, of course, one would have thought that in those sort of situations, given that there is a proper explanation, and of course, taking into account the sums that actually involve, the court is unlikely in that situation, to remove or replace the administrator/executor simply because of his failure to account or because of his, you know, conflict of interest because he might have a claim against the estate or that the estate might have a claim against him. But obviously, there will be cases, which I’ve also dealt with and seen before, where you have a failure to account for prolonged period of a sizable estate. And there are numerous assets which have been laying around for, you know, one or two decades without anyone actually moving them or dealing with debt. Now, in those situations, you know, coupled with requests from beneficiaries, to have a proper accounts and inventory of what exactly constitutes the estate, and in if there’s persistent and repeated failure and so-called wall of silence, then the court will in those situations actually quite likely consider removal or replacement as being the appropriate solution and response. So, yeah, it really depends exactly.

Alfred Ip  30:06
I think communication again, is very important when we have, for example, two siblings who are no longer in speaking terms, and one of them is the administrator of the estate, this is understandable that they may not have a very effective communication, so one side will understand the current process of the administration or the other side will be saying that these are all the work or the challenges do they raise it is out of spite. But I think it’s very important as well to understand that as administrator, there’s a huge amount of duties, that are owed to the other beneficiaries with also family members. So for example, when there is a real property sitting around, not being sold, but at the same time not being rented out. And, and not in the proper state of repair, the administrator is actually liable, because they’re not utilizing the will properties to his will value to the interest of the beneficiaries. So, a lot of times by not doing anything, you’re breaching your duties.

Kerby Lau  31:16
Yes, yes. And you know, or missions or failure to actually take extra steps. That is definitely one source or one very heated and common source of complaint and, in fact, tying back to what you were saying earlier, Alfred about the valuation of properties as well, this reminds me of a case, which is, you know, relative that is quite famous that was decided by the Privy Council of the United Kingdom. And it actually involves the estate of a very famous singer called, which we all may know, Bob Marley. And he passed away, obviously, and his estate was of quite a sizable amount, because it constitutes primarily of musical rights to his songs and recordings, and also various real properties in Jamaica, which was his home country. Firm of professional administrators were appointed to manage and administer his estate, given how sizeable and of course complex it was, and just like any other professional administrator, of course, just like what you said, they had a decision to make, and they had a discretion what to do with the estate, and what, exactly how to realize the value of the estate. And what the administrator decided to do there was apparently to sign into a sale, contract of sale to essentially sell all the estate right in one single pot to a single buyer that was located in New York. Now, the beneficiaries disagreed, right. They thought that the price of the sale was at an undervalue. They thought that the method of it being sold in one single pot to a single buyer, that wasn’t really in the best interests of the estate. And the Privy Council agreed, right, which is the highest court in Jamaica, and a lot of ex British colonies. It basically agreed with the beneficiaries to say that the burden was essentially on the firm of administrator to prove and to take active steps to show that they are actually protecting the best interests of the estate. And they noted that there were quite a few, quite a number of steps that the administrators didn’t really do. So, for example, he was found that the administrator didn’t actually obtain a proper assessment of the value of the property. And they did not really obtain any professional or expert assessment as to whether the proposed sale was under the most favourable market conditions. And it did not really say receive legal advice as to whether the terms of the transaction were in the best interest of the estate. And they did not really explore alternatives, and did not really consider the differences between selling all the assets to a single buyer or to different buyers, because sometimes, you know, depending on the nature of the estate, it may be worth more to one buyer certain of the items and you know, and worth less to other buyers, so it may make more sense to actually sell them to different buyers. And so ultimately, the court found that the administrator’s decision ought to be set aside and that the transaction should not proceed. But it’s also however interesting to note that the highest court, the Privy Council, expressly observed that there was actually no basis to say that the professional administrator acted otherwise then in perfect good faith, and in a conscientious effort to obtain what was a fair and reasonable valuation. So in other words, the court did not find that the administrator was actually acting out of spite out of malice or any ill motives, right, it was found that they were actually acting in good faith, it was just that they didn’t take enough active steps as Alfred, you were just mentioning, to guarantee that the sale and distribution process was really in the best interest of the estate and beneficiaries. So that is definitely something to bear in mind.

Alfred Ip  35:42
I think this is a very good example, that when a professional administrator or trustee is exercising the discretion, or consider evaluating the option, what they have done or should have done, will be put into microscopic view being analysed by the highest court in minute details. And everything can be criticized as not doing good enough. And especially when we’re talking about professional trustee or administrator, the expectation is higher, to quote, we expect them to do a better job, given their experience and professional training, they will be able to make better decision to protect the interests of the beneficiaries, especially when we’re talking about the size of the estate is as big as Bob Marley’s estate, and which is the reason why sometimes we always advise clients to come to us early, before taking a decision to do things one thing or another, and make proper record. But you can see from the administrator point of view, they might be professionally trained to do a certain thing for example, the accountant for example, or their lawyers, but they cannot be everything, for example, they cannot be probably they can, but a lot of times they are not, a valuer. For example, if we talk about personal jewellery, how is it going to be evaluated? And the most important point I want to raise is that is it that jewellery multi millions dollars of value? Is it worthwhile to engage valuers to evaluate them? So, in that kind of situation, what you would do in terms of administering these estate?

Kerby Lau  37:45
Well, yes, I think certainly the cost of obtaining a valuation and the ease of obtaining a valuation is something to be taken into consideration and one will have to add proportionately to the items, the nature of the items that are being dealt with and the value like you said, for example, in Hong Kong in terms of real property, there are you know, easily accessible information that one can perhaps find online. Now, those online valuation from banks might not be extremely accurate, but in terms of giving you a relatively accurate sort of assessment of the market value of the real properties. Now, of course, when it comes to dealing with chattels, you know, personal items, such as jewellery and whatnot, then one will have to consider finding professional valuers right, sometimes, we know that, you know, there are ways where, for example, people will go to auction houses, right to try to say, okay, can you give me sort of a free preliminary assessment. And I think some auction houses will be willing to do that, in terms of you know, that there might be a potential sort of transaction that can go on. So, these are obviously ways and depends on you know, the different sort of nature and the size of the items that you’re dealing with. So, you know, regardless of what the value is, there will be, there should generally be a way to ascertain the value.

Alfred Ip  39:26
How about if we’re talking about something that is more abstract, for example, the IP rights that you mentioned of Bob Marley, is it easy to find the value or to evaluate the value?

Kerby Lau  39:41
Yes, I think for you know, IP rights or some sort of more abstract property, then these will obviously be more difficult will not be done assessable because they’re not many that that many comparables and you know, sort of market pressure and in terms of the methodology, that might become an area, which experts may disagree and disputes, so yeah, it becomes more complicated in those situations.

Alfred Ip  40:12
Or perhaps in that situation, another way to address to it is to work on the mode of sale. For example, either by way of auction or another way of tender, these are the real methods that can attract the real unrealistic market value, that is a willing buyer, if the process has been properly advertised, so that the public would know about this, and if they are interested, they are willing to put forward a price and there would be a real price, not something that valuation might based on based on previous transaction with different consideration or comparables, which can be quite arbitrary sometimes. Yeah, so I think that this is another part that professional administrator or any administrator should consider, as well. How about let’s say that there is no dispute over the realisation or conversion of assets into cash, and is in the trust fund to be managed… What is the ambit or power of the administrator or trustee or administrator in making sure that these assets will preserve its value? What would be the point that they need to consider before making a decision?

Kerby Lau  41:36
In terms of you’re talking about the investment? Or are you talking about just in terms of the preservation of value of the…

Alfred Ip  41:46
both… sets…because some people may think that investment is the only way to counter inflation, when we’re talking about a sum of cash sitting in a bank account worth now better fixed deposit rate, interest rate is probably a cash a capital preservation method. That’s the most traditional, but then we just come out of this low interest era. And in the past, interest was minimal, that if you’re not doing anything, you are basically letting the cash um, diminishing its value from inflation. But if one impact point is investment strategy, one has to what is it that they have to consider? What is the what is the expected? What are they expected to do in terms of this investment strategy?

Kerby Lau  42:46
Yes. Now, that is obviously a very good question. But it’s also a very tricky question, because this is the situation where, although the overriding principle is clear, the application is actually not. So, going back to what we were discussing earlier, the overriding principle is very clear that you are to act solely for the best interests of the beneficiaries of the estate, right? So that is the guiding principle, everything we do, but in this situation, of preservation value and investment, which is why I put them to two, as a sort of alternative or contrast you get, you can see that there might be a conflict between the two, on the one hand, there could be complaints to be set that well, you can’t just leave, say, a real property lying down without generating rent, just the same as you can’t just, you know, hold a sum of cash, where you can actually, you know, get better interest by putting them in a fixed deposit. And instead, you just put it in a current account with zero to nil interest. So that in itself wouldn’t be understood as being acting in the best interest of the estate to maximize gains for the estate. But on the other hand, when we’re dealing with investment, of course, we are all well aware that when you do make investment, there are risks involved, right. So, that becomes a very tricky question as well, where there is the potential of loss that actually comes into picture you will have to consider that. So, the general sort of rule on the guiding sort of guideline guiding factor would be that administrators and executives should generally be conservative, they should be cautious. So that the, the, which translates, you know, in practical application to being that they should generally be risk adverse. So in the situations that we’ve just mentioned, if it’s a proper real property, for example, then generally of course, one should be taking steps to rent it out, right, because renting it out the risks that you really get the only real risk is the tenant actually perhaps not paying rent, right, of course, sometimes there might be some sort of wear and tear to the property, but that is relatively minor in amount. And the same goes for putting a sum of money in a bank and to put it in fixed deposit instead of a current account, because the money’s already in the bank, put it by putting it in fixed deposit, there is really very little to none other real risk that is actually involved. But on the other hand, you know, when we’re talking about saying more active investments, for example, buying shares, buying, you know, investment funds and so on. Now, that should be something that should generally unless, of course, the trust document or the will says otherwise that somehow you know, trustees given a power, you know, to, to invest and, and try to maximize gains, then that sort of active investment should be approached quite cautiously instead of being actively taken.

Alfred Ip  45:54
But at the same time, when we come across Family Trusts, professional trustee, a lot of time they’re affiliated with the bank, it will be much easier for them to basically provide a reserve power to settler that is the family so that they can make whatever investment decision that they want, sometimes with or without a reliance of the investment manager of the bank, wouldn’t it solve the duties of the trustee to what you’ve just described, to making sure that, um, trust assets is well preserved, etc?

Kerby Lau  46:33
Well, yes, and no, I think the problem with that is the situation might actually, because the administrator is a bank. And of course, we know that, you know, if you do make investments, that the bank will be in a position to gain that actually complicates matters, because, you know, obviously, the issue is whether or not there could be other motivation of the bank trying to recommend certain investment, in which case, there could potentially be conflict of interest and conflict of duties, etc. Now, reserving the power to of course, to settle or to direct, whether or not investors should pay, yes, perhaps is a way to get around things. But of course, that really depends on the settler being in a position where he is fit and capable of exercising that discretion. And as we know, dealing with a lot of these family disputes cases, that is often not the case. So it is a tricky situation.

Alfred Ip  47:32
Or the family will simply blame you back for failing to pull them back from making those investment decision. You know, when things are good, nobody would complain, yes, when things are not good, people will play a blame game with each other. And that is basically the essence of the DBS trustee case, right? Yeah. Yeah, I think at the end of the Court of Final Appeal, even though ruled in favour of the trustee, that is that there’s no absolute duties to account for the loss of investments suffered by the settlor, even though the settlor has been very active in terms of managing the investment portfolio. And even to the point issue, I think she is a professional investor. But the amount of time and costs, litigating this matter trying to solve this liabilities is actually huge, especially when we are talking about I think, in first round, the court actually ruled that the trustee does have a duty, notwithstanding that there is to that, um, there’s a general what we call anti Bartlett clause exempting the trustee from the liabilities of the investment loss suffered by the trust fund. So, the story is that just because that is all these clauses, to protect a professional trustee against these kind of investment losses it doesn’t mean that they are automatically absolved from these liabilities. Yeah, it’s very important to make proper record, making sure that the client understand the risk, and at the end, not going to be responsible for this kind of risk. Yeah. How about investment manager? What would be the their role and would the trustee be able to rely on their expert knowledge to help managing the trust assets?

Alfred Ip  49:45
Yes, I think investment managers just like other professionals that will be assisting the administrator or executor in administering the estate or trust, those are definitely very useful assistance to actually have if one is considering making a certain investment or making a certain transaction. So that is definitely something that ought to be taken into account as well. Of course, one has to be careful when it comes to expenses and remuneration because you know, to hire an investment manager, of course, that usually doesn’t really come free. So, this is something to take to account as well, you know, what’s the size and nature of the estate, that you’re really talking about to see whether it’s actually worth the additional expense. But of course, generally having that sort of expertise, the gains will generally offset the expenses. So, it’s definitely something to consider.

Alfred Ip  50:44
Apart from the investment, another point I want to discuss is the other discretionary power that professional trustees will have often converted to them by way of the trustee that was signed by the family in the first place. The powers are very wide, usually, especially in terms of managing the trust assets, and also managing the beneficiaries. And a lot of times when we are dealing with problems, either with us a problem head on, or we deal with the person who raised a problem, that is beneficiaries. So, if a beneficiary is particularly troublesome, can the trustee just removed them? Usually this is expressed in the power of the trustee, that they can remove them.

Kerby Lau  51:34
Now, that is, of course, a will… it’s not that frequent, but we do see that in cases as well, where you sometimes have a trust document or will, that allows for removal or at least a discretion with trustee or administrator to not make distribution to certain beneficiaries. Now, of course, the point again, coming back to the overriding principle is that for the administrator or trustee to actually bypass these beneficiaries or not make distribution to them, or in a more drastic way, remove them entirely from the trust, they have to be exercising their powers in a fiduciary capacity, which is in the best interests of all the beneficiaries. So, if example there is huge disruption to the administrator, because of certain beneficiaries actions, then of course, that might be a potential ground to suspend or even remove the beneficiary altogether, but because of the drastic nature of the power, right, effectively, you are disinheriting or excluding the beneficiary altogether, this is certainly a power to be exercised very cautiously, otherwise, you know, that there could be problems. Now, the other thing to also consider is, you know, which is of course, related to the question of, you know, removing someone as beneficiary is to determine, because this is another, you know, area ripe for disagreement disputes as well, is the determination of whether someone is a beneficiary in the first place. Right. So, Alfred, and I we offer especially, you will be quite familiar with a case where we were recently doing as well where similar dispute has arisen. I also recently did another case where there were an estate and was a deceased, who, during his lifetime, had a wife and a concubine under Chinese customary law was we’re dealing with decades ago where they got married. And the issue where no one initially supported was whether or not the concubine was actually entitled to share in the estate because it concubine and actually survive the deceased and under general intestacy law, as we know, concubines are not entitled to share.  The problem, the administrator wanting peace of mind came to me seek advice per se, to try to ensure that everything is in order. And I reminded them that basically, although at the time of marriage, at the time of union, the concubine was the concubine under Chinese customary law, there was actually this added complexity, which is that under Chinese customary law, it was possible after the death of the primary wife for a concubine to be elevated to the status of a wife, which could then mean that that concubine will be entitled to share in half of the estate. So that’s actually a huge change to the objects or to the beneficiaries, who will be entitled to distribution from the trust or from the estate. And it was lucky that we spotted this issue because then we were able to tackle it by obtaining relevant court directions as to how this should be dealt with before substantive or interim distributions were actually made in order to ensure that the distributions are actually made to the right persons. So, this is definitely an issue that an administrator considering the distribution administering the estate will have to have at the forefront of their minds.

Alfred Ip  55:23
This is in relation to whether a person can prove the relationship with the deceased in order to share or have a share of the estate under the existing written law under the intestacy rules. And this kind of cases that we always say, emphasize on the proper estate planning, because a lot of time actually relationship can be very difficult to prove, for example, birth certificate, marriage certificate, if they’re not, if they’re not available, they’re not available. The amount of time that is involved in getting the certificate would be huge and complex. Not to mention when we were talking about our union concubinage. At that time, when the union of concubinage is established, we are talking about things that happened before 1971: there was no registration system that properly involves going through the whole Chinese customary rituals, in particular, the concubine must present to the wife to the kit-fat wife if I if I understand correctly, kit-fat wife, if the kit-fat wife refuses to let her in, she cannot become a concubine. And in that respect, we’ve talked about things to happen so many years ago, it will be difficult to find witnesses to prove that such has taken place and a lot of people who have already passed away cannot come back on earth and testify and confirm, especially the male in the relationship. And that’s exactly the reason why proper planning must be done in the first place to make sure that those relying on him or her has. I continued to rely on them after they die. But okay, if we’re talking about intestacy, sometimes I understand why that’s a mess, but if we’re talking about like professional trustee, with a trustee being in place, properly drafted by lawyers, and being discussed with the settler, these kind of problems should not arise, right? We’re talking about people that are already in the, in a relationship, for example, the settler already designated the son to be a beneficiary. There shouldn’t be a problem.

Kerby Lau  58:01
Well, I wish that was true, Alfred, but unfortunately, as we know, in reality, you know, the word in use are often less than perfect. So, you know, of course, the there’s a balance to be had in terms of drafting of trust and wills document has done, on one hand, they want to be as inclusive as possible in terms of the categories of persons, right, there will be other descendants in the future, and, you know, spouses and whatnot, they want to be inclusive in that sense. So, they use description of categories, right. And of course, on the other hand, we all know that what there has to be the need for certainty, right? So, when but, you know, when you’re trying to achieve a balance, unless, of course, you state those beneficiaries by name, right. So that is one way of achieving, you know, sort of absolute certainty. But once you start describing them by categories, then the room for disputes actually comes into play. So, a properly drafted will and trust document is definitely important because otherwise, one would then be left in a situation where there is ambiguity, right? For example, does a spouse include a widow that that that becomes something which might be disagreement as well, for example, whether sons does that include adopted sons, right? So, these are matters that become you know, areas for disputes.

Alfred Ip  59:35
I remember one case that we’re handling and the testator stated that she wants her grandchildren to share 20% of her estate. It sounds right. Very easy. But the problem is, is it at a time of her death, or including future grandchildren, because that become a race among her children to have more children, they will have a bigger shares. Yes, these are the things that probably the drafter did never had to think about when they were drafting the document. But with such small omission, that could be, I believe, to a such a big dispute. Yeah, these are the things that we come across, not on a daily basis, but quite often. So good drafting is actually very important. Okay, now that we’ve just talked about so many things that a trust or estate could have done wrong, how to ensure that things will be done, right? Yes, the solution for it?

Kerby Lau  1:00:51
Yes. So of course, you know, the most direct and easiest way to ensure that things will actually go right is to have proper planning beforehand, have proper drafting beforehand, have proper documents that are actually made up so that everything is really, you know, as certain as they can be. And as little is left to the discretion of trustees and the administrators as can be, that will, of course, be the most ideal solution. But of course, unfortunately, we don’t really live in an ideal world. And the real situation is that a lot of times where there has not been proper planning, so in the absence of that, when you’re dealing with a trustee administrator or sometimes it might be may not be because there’s not a proper planning, but there might be on the on the contrary be it sort of deliberate delegation of huge amounts of discretion and a wide way for the trustee administrator to make up his or her own mind as to what is the appropriate course of action. Now when dealing with those situations, of course, the situation, the sort of problem becomes more tricky, right? One will have to determine whether or not there are grounds in order to replace and to remove the administrator and trustee. But that will oftentimes be a practical and appropriate solution to have someone else generally professional, come into the scene and try to do things in the proper way and try to regulate and distribute the estate in a proper way. Now, of course, that is one solution, there could be also other solutions as well as to how a certain cause of action, you know, if say, the focus is just on one or two pieces of property that perhaps could be easily dealt with by terms such as that the property will be sold by way of auction, and then the sale proceeds would then be paid into court, or some other guardian, and that then would be placed there pending distribution to beneficiaries. So, there are ways to do it. But it will, it will really depend on the nature of the complaint and whether that complaint can be rectified without a wholesale sort of change in the identity of who is acting as the trustee.

Alfred Ip  1:03:26
I think in this respect, I need to add that when we’re talking about family trust, it is very important for the trustee to retain a high discretionary power, so that they can properly separate the assets from the hands of the settler, in order to achieve the initial purpose of setting up a trust be as tax planning or or asset protection. But then, at the same time, how are we going to manage the trustee in exercising the power become very important. And in this respect, first of all, I will say having a properly drafted letter of wishes is very important, so that the trustee will understand the purpose of setting up the trust and when they are exercising the discretion they should be looking into initial purpose and whether such exercise of power would be achieved in line with such purpose. And second part of it would be to insist or to ensure that there’ll be regular meetings with a professional trustee in order to update the trustee over the current family situation. Especially when we are talking about for example, a main character of a family member passed away. They be the patriarch, may be the matriarch when these people passed away how is changing the dynamics among the family members that may give rise to certain problem being arrived, especially when we are talking about a bigger family. There are more family members, especially their members that are not born on it, but marry into it, or there will be more new family members as the next generation. How these people may change the dynamics amongst existing family members, and how to regulate them, not (technically) regulate them but regulate the relationship between the family members and the trustee in order to make sure that the trustee is exercising their power regularly. And the final bit I want to mention is the importance of a protector. The protector is usually the person who has to ultimate veto power in relation to certain exercise of discretionary power by the trustee. And the scope and power of the protector varies very much, um, depending on the terms of the trust deed, how to interpret it. And of course, the selection of the enforcer or the protector is also very important, because the protector is also owning a fiduciary role to roster that beneficiaries under trust, and how to make sure that he would exercise the power judicially or fairly, to, to protect the beneficiaries is also very important. And this is something that the settler should have been properly advised in the first place in order to make sure that none of the family members will be deprived, or the trustee or the trust become like things of his own, that they cannot see the money coming.

Kerby Lau  1:06:58
Yes, that’s right. Especially I think it goes back to what we were saying earlier about the importance for having preplanning, and you know, the stage where we want to ensure that everything is drafted correctly. So that would include thinking about who are the proper candidates to actually act as trustee, to who has to act as the protector, which is pretty much a safety net. And you know, what sorts of other mechanisms that might be in place in the event that actually something goes wrong. So, these are all matters that should be considered in the planning stage. Of course, absent that we will then have to consider how to constraint or guide the administrator or trustee discretion through more formal channels, including by going to court, but that would, of course, involve sort of different principles and in doing so, the outcome may not be entirely unnecessarily be consistent with what the settlor or what the original testator may have intended.

Alfred Ip  1:08:08
I think at the end, how to stage such a challenge would be something that anyone with these kinds of problem should go to a professional lawyer for advice as soon as these problems arise, because any delay will definitely change on the overall result of the situation. Going to the litigation (stage) requires planning, requires careful consideration, requires strategy. Therefore, at the end of this podcast, I want to again emphasize without sounding too much like an advertisement, the importance of seeking professional advice. In that respect, thank you very much for sharing with us so much of your experience today in relation to the trust and estate disputes, especially in terms of administration is a very deep topic that we can carry on for days talking about this, but then, I think a very good highlights of what we encounter in the past in terms of things that can go wrong in the estate administration. Thank you, Kerby.

Kerby Lau  1:09:18
No, no, no. Yes. Thank you for inviting me. It’s a great pleasure to be here and share with all of you. Thank you.

1:09:27
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