Trust Investment – Lessons Learned In Hard Times (1)
In the Matter of the Y Trust | Beneficiaries
When one considers at first glance the trust arrangement in relation inter alia beneficiaries that the Royal Court was being asked to sanction, it is unsurprising that it identified this as an “unusual application”.
The proposal put to the Court would see trust powers exercised so as to exclude minor beneficiaries whom one might otherwise have anticipated would benefit, for the purpose of enabling the remaining adult beneficiaries to terminate the trust and apply a large proportion of the trust assets in favour of a person expressly excluded from benefit by any exercise of the trustees’ powers.
The application was brought by the trustee of a Jersey discretionary trust caught in the midst of protracted U.S. divorce proceedings.
The children and grandchildren of the husband and wife were beneficiaries of the trust, as was the wife. The husband’s sister and her grandchildren were also beneficiaries.
As “Appointor” and “Guardian”, (functions provided for in the trust terms), the husband had inadvertently become an “Excluded Person”, and consequently unable to benefit directly or indirectly in any manner from the exercise of any powers vested in the trustee.
As a consequence of the matrimonial proceedings and disputes relating to the trust, the trust fund had, since 2012, effectively been frozen. The husband and wife had finally agreed to settle, with a divorce hearing imminent, lending urgency to the trustee’s application to the Jersey court.
The divorce settlement, (supported by all the adult beneficiaries), anticipated the termination of the trust, with the bulk of the trust assets being apportioned equally between the husband and wife, and the remainder distributed to their children.
The adult beneficiaries recognised that, in giving effect to the divorce settlement, the trustee would be distributing trust property in the knowledge that the husband, as an Excluded Person, would benefit, and that this could carry some residual exposure for the trustee.
They, therefore, proposed that the class of beneficiaries of the Trust be closed and limited to themselves, enabling them to exercise the power under Article 43(3) of the Trusts (Jersey) Law 1984, whereby all the beneficiaries of a trust acting together can terminate a trust.
As a first step, this would require the Trustee to vary the trust terms to remove certain beneficiaries, extend the class of Excluded Persons, and release its power to add beneficiaries.
The proposal had been formulated specifically to remove any risk to the trustee and so recognised a potential conflict for the trustee, between its personal interests and its duties as trustee. Accordingly, the arrangement also anticipated that the trustee would apply to surrender its discretion to the Court.
The Court considered whether or not the exercise of the trustee’s powers as proposed would constitute a “fraud on a power”, an exercise for the impermissible purpose of benefiting a non-beneficiary. It referred to the following passage from the practitioners’ text, Lewin on Trusts:
“It is open to an appointee, moreover, to apply the property appointed as he wishes and in particular to apply it in favour of persons who are not objects of the power. An exercise of a power is not vitiated merely because the donee [of a power] is aware that the proposed appointee intends to do so, nor even if there is an arrangement that the appointee should do so, as long as the donee’s purpose in making the appointment is the benefit of the appointee and not the benefit of those who are not objects.”.
On the question of excluding a beneficiary, the Court held that it is incumbent on the trustee to consider the position very carefully, to take into account the position of the person to be excluded and whether therefore it is reasonable in the interests of the other beneficiaries.
The Court acknowledged that the proposal was not intended to defeat the grandchildren’s interests. On the contrary, it was framed so that new arrangements could be made for their protection into the future.
The Court was of the view that the primary purpose of the proposal was to benefit the wife and the children, albeit the husband would also indirectly benefit, and was therefore satisfied that the proposal would not amount to a fraud on the relevant powers.
The Court identified that a surrender of discretion should be regarded as a last resort, and considered whether or not the trustee should instead be making the “momentous” decisions itself, and only asking for the Court’s blessing in that regard.
However, the Court accepted that, in this case, the trustee seeking the Court’s blessing to a “momentous” decision presented a difficulty. The relevant test required the Court to be satisfied that the trustee’s decision had not been vitiated by potential conflict of interest, and the proposal recognised that the trustee did have a conflict.
Accordingly, the Court accepted the surrender and directed the exercise of the trustee’s powers so as to give effect to the proposal.
The Court’s judgment does not appear to address whether or not there is any essential difference in character between the exercise of trust powers facilitating, on the one hand, incidental benefit to a person who is simply outside the class of beneficiaries and, on the other hand, such an exercise of powers which benefits a person who, by the trust terms, is expressly excluded from benefitting by any exercise of the trustees’ powers.
The case with which the Court drew an analogy, In re X Trust  JLR 377, involved incidental benefit to a person outside the class of beneficiaries. However, there is no suggestion in that judgment that the non-beneficiary was expressly excluded from benefit. Neither is that distinction addressed by the passage in Lewin to which the Court referred.
The Court acknowledged that the application was an unusual one, so perhaps its decision should not be regarded as establishing any general principle. It does, however, suggests that provided a trustee’s purpose in exercising its powers is to benefit a beneficiary, such exercise of powers will not necessarily be vitiated only because an excluded person receive an incidental benefit as a result.
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