Bermuda and trusts go hand in hand. Not only does Bermuda have a vibrant offshore trust sector, many Bermudians have created their own trusts.

Until recently it was common practice to hold real estate in a trust to minimise stamp duties, and many of these trusts still exist. Trusts are also commonly created in Wills to provide for beneficiaries who are minors or suffering from a disability or to provide for a surviving spouse. Other uses include the avoidance of stamp duty or taxes in other jurisdictions, asset protection, the holding of life insurance policies and the facilitation of pension trusts or executive compensation/benefit plans.

Even those who do not have direct connection with a trust might deal with trusts as part of their employment, for example, in the banking, trust or insurance industries.

From time to time, trustees make bad decisions that result in loss to the beneficiaries or the trust assets. Often these errors arise from simple ignorance of the consequences of their action. For example, the trustee might not have considered that a certain payment or transaction would result in significant stamp duty or taxes for a beneficiary, or the trustee might have misinterpreted instructions given to them.

A string of recent court decisions indicates that, in such cases, trustees will often be allowed to 'take a mulligan' ? in golfing terms, take a second chance at a shot without being penalised.

In a recent English case, the father was a shareholder of a successful company. To avoid inheritance taxes, he transferred some of the shares to a trust established primarily for the benefit of his son. Several years later, the father realised that under the terms of the trust, the son would receive significant dividend income each year following his 18th birthday, far more than his father thought sensible for his son to receive. The father 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 resettled the shares on a new trust. Unfortunately, the lawyers were negligent as they failed to consider that the resettlement resulted in inheritance tax of ?800,000 to ?1,470,000. The father was unhappy.

The trustees went to court claiming that they did not know at the time of the resettlement that taxes would arise ? clearly no sensible person would knowingly engage in conduct that would result in tax of ?1,470,000. The trustees asked the court for a 'mulligan' ? to set aside the transaction so that no taxes would arise. The court agreed and reversed the transaction.

In another case, the trustees took a series of steps that resulted in unexpected capital gains tax of ?1,000,000. Again the trustees asked the court to reverse the actions, thereby eliminating the taxes. Again the court agreed and reversed the transaction.

In both cases the court reached its decision by applying the "Rule in Hastings-Bass". The Rule can be quite complicated but broadly speaking, a court can set aside a trustee's actions where:

trustees failed to take into account considerations that they ought to have considered, e.g. that significant taxes would be payable by the trust or a beneficiary;

trustees are ignorant, they did not have a proper understanding of the effect of their actions;

if the trustees had a proper understanding of the issues, they would (or in some cases might) not have acted as they did.

The courts have also used this approach to fix other problems that arise. Recently, courts have allowed trustees a mulligan where:

they did not have proper regard to the effect that an up to date valuation would have on the decision to transfer assets from one pension fund to another

they discovered the consequences of their decision to amend the provisions of a pension scheme

despite taking tax advice, they were unaware of recent legislative amendments and made certain distributions that resulted in tax. The courts held that the trustees would not have made the distribution if they had been aware of the tax consequences

the trustee's agent misunderstood/mis-communicated the wishes of the settlor. The court applied the Rule to set aside a distribution of 60 per cent of the assets when the settlor only wished to distribute 40 percent

trustees exercised their discretion to resettle assets on another trust. After the resettlement, one of the trustees ceased to be non-resident, resulting in significant tax. The court applied the Rule to reverse the resettlement thereby avoiding the taxes

These cases show that courts will allow mulligans, relieving trustees either wholly or partly from personal liability, in order to avoid losses to beneficiaries of a trust or the trust assets in instances where trustees have acted honestly and reasonably.