Not only does Bermuda have an extremely vibrant offshore trust sector, but many Bermudians have created their own trusts.Trusts are commonly created (sometimes in Wills) to provide for a surviving spouse, for minor beneficiaries or those suffering from a disability, or to provide for charities. Other uses might include the mitigation of taxes in other jurisdictions, asset protection, succession planning for business owners, the holding of life insurance policies and the facilitation of pension trusts or executive compensation/benefit plans.Trustees sometimes make ill-informed decisions that result in unanticipated losses to the beneficiaries or to the trust assets. Often these errors arise from simple ignorance of the consequences of their actions (or the trustee might have unwittingly misinterpreted instructions given to it). For example, a trustee might not have considered that a certain transaction would result in a significant tax liability for a beneficiary.The courts have consistently declared that, in such cases, trustees will often be allowed to undo the unexpected consequences of their actions and to, effectively, take a second bite of the cherry, without having to deal with what would in many cases be quite astonishing losses.In a recent case, the trustees sought to set aside two transactions involving the withdrawal of funds from an Isle of Man company that had resulted in a far greater tax charge for the settlor than had been expected. There had been two alternative methods of withdrawing the funds, the other would have resulted in no tax charge at all. The court set the transaction aside, deciding that the trustees had been under a duty to consider the tax implications of the transfers, which they had failed to do. Had they done so, the court ruled, they would clearly have chosen the route leading to no tax charge.In another case, to avoid an inheritance tax charge, the shareholder of a successful company transferred some of his shares to a trust established primarily for the benefit of his son. Several years later, he realised that under the terms of the trust, the son would receive significant dividend income each year following his 18th birthday, far more than he thought sensible for his son to receive. He consulted his solicitors to see what could be done to prevent his son from receiving the dividend income. Upon the advice of their lawyers, the trustees re-settled the shares on a new trust. Unfortunately, the lawyers were negligent in giving this advice as they failed to consider that the re-settlement would result in an inheritance tax charge of up to approximately £1.5 million. The father was understandably distraught.The trustees went to court claiming that they did not know at the time of the re-settlement that such hefty taxes would arise clearly no sensible person would knowingly engage in conduct that would result in a tax charge of £1.5 million. The trustees asked the court to set aside the transaction so that no taxes would be imposed. The court agreed and reversed the transaction.In these types of cases, the court arrives at its decision by applying a long-established principle of law derived from a case generally known as “Hastings-Bass”. The principle can be quite complicated but, broadly speaking, a court can set aside a trustee's actions where:n the trustees have failed to take into account considerations that they ought to have considered, or they have taken into account some irrelevant factors which they should not have eg resulting in significant taxes being payable by the trust or a beneficiary;n the trustees were ignorant and they did not have a proper understanding of the consequences of their actions; andn if the trustees had had a proper understanding of the relevant issues, they would not have acted as they had done.The courts have also used this approach to rectify other problems that have arisen.Recently, courts have allowed trustees a second bite of the cherry where:n they did not have proper regard to the effect that an up-to-date valuation would have had on their decision to transfer assets from one pension fund to another;n they later discovered the unwanted consequences of their decision to amend the provisions of a pension scheme;n despite taking tax advice, they were unaware of recent legislative amendments and made certain distributions that resulted in an unexpected tax charge;n the trustee's agent misunderstood and thus mis-communicated the wishes of the settlor to the trustee. The court applied Hastings-Bass to set aside a distribution of 60 percent of the trust assets when the settlor had only wished the trustee to distribute 40 percent; andn the trustees exercised their discretion to re-settle assets on another trust. After the re-settlement, the non-resident status of one of the trustees changed, resulting in a significant tax liability.In today's fast-paced and heavily litigious world, trusteeship certainly has its challenges. However, the apparent willingness of the judiciary to come to the aid of trustees in certain prescribed situations provides some welcome relief.Hastings-Bass illustrates that the courts are prepared to give trustees a second chance in instances where they have acted honestly and reasonably but erroneously, in order to avoid losses to the beneficiaries of a trust or to the trust assets, thereby also relieving trustees from potential personal liability.Attorney Naresh Chand is a senior associate in the Private Client and Trusts Department at Appleby. A copy of this column is available on the firm's website at www.applebyglobal.com.This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.