How to Change the Trustee of a Discretionary Trust?

A discretionary trust requires the trustee to make decisions based on the prevailing circumstances. But what about the situation in which the assigned trustee fails to fulfill his responsibilities or makes the wrong decision?

Whenever you set up a discretionary trust in another jurisdiction, a trustee who does not reply on time can delay the decisions or lead to issues with local authorities. In such cases, changing the trustee is your go-to option.

If you are a part of a discretionary trust, you can change the trustee in numerous ways. Our blog guides you through the basics of discretionary and the steps to change the trustee.

What is an Offshore Discretionary Trust?

A discretionary trust is a legal arrangement between the settlor (grantor or trustor), the trustee, and the beneficiaries. Unlike other forms of trust, the entitlements from this trust rely solely on the discretion of the trustee.

Thus, the exact percentage of the payout is never defined in the trust deed for this type of trust. Rather, it covers the living expenses of the beneficiaries, such as tuition fees, rent, and more. Additionally, the trust deed gives protective powers to the trustee, allowing them to avoid paying beneficiaries in certain situations, such as divorce.

How to Change the Trustees of a Discretionary Trust?

Changing a trustee is a formal legal process that must follow the rules laid out in your Trust Deed. In jurisdictions like the BVI, Seychelles, and Belize, this is not just an administrative update; it is a legal changing of the guard that requires specific documentation.

Step 1. Identify who has the "Power of Appointment".

The first step is to check the Trust Deed to see who has the power to hire and fire trustees:

  • The Appointor or Protector: In most modern offshore trusts, a specific person (the Appointor or Protector) is given the express power to remove a trustee and appoint a new one.

  • The Settlor: Sometimes this power is reserved for the person who created the trust.

  • Continuing Trustees: If a trustee dies or resigns and there is no Appointor, the remaining trustees usually have the power to fill the vacancy.

  • The Court: If everyone is dead or incapacitated and the deed is silent, you may have to apply to a court in the trust’s home jurisdiction (e.g., the BVI High Court) to appoint a new one.

Step 2:  Draft the Deed of Appointment and Retirement (DORA)

You cannot simply fire a trustee via email. You need a formal legal document called a Deed of Appointment and Retirement (DORA) or a Deed of Appointment, Removal, and Indemnity (DARI).

This deed usually includes three main parts:

  1. Removal/Retirement: Formally states that Trustee A is leaving.

  2. Appointment: Formally states that Trustee B is taking over.

  3. Indemnity: This is the most important part for the outgoing trustee. They will usually refuse to leave until the new trustee (or the beneficiaries) signs an agreement that protects the old trustee from any legal liabilities arising from their time in charge.

Step 3: The Transfer of Assets (Vesting)

Changing the name on the deed doesn't automatically move the money or the assets. You must physically transfer the legal title of all trust assets to the new trustee:

  • Bank Accounts: You must submit the DORA and new KYC (Know Your Customer) documents to the banks.

  • Real Estate: New titles must be filed in the land registry.

  • Company Shares: If the trust owns an offshore company, such as an international business company (IBC), the Register of Members must be updated to show the new trustee as the shareholder.

When Should You Change the Trustee in a Discretionary Trust?

There are numerous reasons when a trustee of a discretionary trust must be changed. Here’s a look at the key scenarios that can lead to transition:

  • The trustee is mismanaging funds, failing to act, or acting dishonestly.

  • The trustee is aging, has health issues, or is unable to fulfill their duties.

  • Death or retirement of the trustee

  • Trustee is undergoing bankruptcy proceedings, involved in a family dispute, or is in the middle of a divorce.

  • Transition from individual to corporate trustee

  • The trustee has a personal interest that conflicts with the beneficiary's interest.

Having the wrong trustee in place can lead to frozen accounts, invalidation of the trust, or other fraudulent activities. Thus, taking steps to change the trustee saves you from myriad legal troubles. However, drafting the legal documents can be tedious, and that’s where we at Business Setup Worldwide (BSW) can help you. Our services also include amendments to the trust. Our experts have in-depth knowledge of legal requirements and enjoy a timely transition of trustee for your trust to function properly. Contact us now to get started with trust formation services.

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