Tag: beneficiaries of Trust

Trust Foundations & Private Client

Trust Investment – Lessons Learned In Hard Times (1)

Trust Beneficiaries Parslows InternationalTrust 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 [2002] 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.

For further information contact Mason Birbeck on 00 44 1534 630530 or email mason.birbeck@parslowsinternational.com

Trusts, Foundations & Private Wealth


Main Contact: Mason Birbeck

Head | Trusts & Private Wealth


Please note that the information provided on this website is for general information purposes only and is designed to provide you with an outline of the legal services we offer.  Whilst we endeavour to ensure our information is correct and useful, we make no representations or warranties regarding the accuracy or completeness of the information offered.  Information on our website does not constitute legal advice and Parslows International accepts no liability for any loss or damage arising out of, or in connection with, the information found in this website.  Please consult a lawyer in the event that you require professional assurance that our information, and your interpretation of the same, is correct. 
Cross Border & International Transactions, Trust Foundations & Private Client

4MLD Money Laundering – Still Some Uncertainty!

beneficial ownership

Beneficial ownership registers

The final text of the Fourth Anti-Money Laundering Directive was agreed by the Council of Ministers and EU Parliamentary committee on 27 January 2015.  It is anticipated that the full Parliament will adopt it into law within the next few months.  Member States will then have two years to transpose the Directive into domestic legislation.

But for one unexpected amendment introduced into the draft Directive by the EU Parliament in 2014, the finance industry might have regarded its adoption with the limited interest afforded to many a fourth sequel namely beneficial ownership registers.

In most respects the anti-money laundering measures that 4MLD will require EU Member States to implement will be entirely familiar to anyone involved in financial services locally.

It introduces the concept of a “risk-based” approach, an obligation on businesses to maintain comprehensive due diligence on their clients / customers, and make that available to competent government authorities and investigatory bodies.  Jersey’s AML regime has of course mandated equivalent measures for a number of years.

However, the EU Parliament’s amendment called for the implementation of a pan-European central register of companies, trusts and similar legal arrangements detailing their beneficial ownership, which would be freely accessible to the public at large.

Concerns were voiced internationally as to the disproportionate effect on legitimate privacy and confidentiality of financial structures.  The Council of Ministers itself did not favour public registers.

Inevitably, the Directive’s final text reflects a compromise reached by the EU’s Council, Commission and Parliament.

Each Member State will be obliged to create a central register of companies, other legal entities and trusts.  However, only trusts that “generate tax consequences” need to be registered.

Beneficial ownership registers not open to general public

These registers will not be open to the public at large.  They will be accessible to the Member State’s competent authorities and investigatory bodies, as well as  “obliged entities” (e.g. banks) in the context of fulfilling client due diligence.  Company (but not trusts) registers will also be accessible to persons that can demonstrate “a legitimate interest”, but in a manner consistent with data protection rules.

Who exactly can demonstrate a “legitimate interest” remains undefined.  EU press releases suggest this would include investigative journalists and NGOs.  In what circumstances a trust will “generate tax consequences” is also unclear.  So, even now, some ambiguity remains with this controversial aspect of 4MLD.

Locally, the Chief Minister’s Department pointed out that Jersey is not bound to adopt 4MLD.  However, it seems likely that both the UK and EU will place pressure on Jersey to conform.  David Cameron’s open letter last year encouraging the Crown Dependencies to implement company registers of the type proposed by separate UK legislation is a case in point.

The stance taken by the Chief Minister’s Department is that Jersey’s existing AML regime already conforms to the spirit of 4MLD in any event.  The JFSC maintains central register of company beneficial ownership, (though this may need to be supplemented by an ongoing duty on service providers to ensure information held by the JFSC on their client companies remains up to date).  Local service providers are also obliged to maintain comprehensive records on persons connected to the trusts they administer.

So will it be business as usual for Jersey’s AML regime?  That probably depends on those remaining ambiguities inherent to 4MLD.  If the scope of persons who can demonstrate “a legitimate interest” is narrowly defined and balanced with data protection rights, and (as the Chief Minister’s Department assumes will be the case), the register of trusts need only include trusts which generate tax consequences domestic to the jurisdiction, then complying with 4MLD should have little material impact.

The nature and extent of the central registers contemplated by the Directive may well evolve further over time.  4MLD tasks the Commission with preparing a report on achieving interconnection of each Member State’s registers.  So, ultimately, it appears that automatic pan-European access remains the EU’s longer-term goal.

For further information contact Mason Birbeck on 00 44 1534 630530 or email mason.birbeck@parslowsinternational.com

Trusts, Foundations & Private Wealth

Main Contact: Mason Birbeck

Head | Trusts & Private Wealth

 


Please note that the information provided on this website is for general information purposes only and is designed to provide you with an outline of the legal services we offer.  Whilst we endeavour to ensure our information is correct and useful, we make no representations or warranties regarding the accuracy or completeness of the information offered.  Information on our website does not constitute legal advice and Parslows International accepts no liability for any loss or damage arising out of, or in connection with, the information found in this website.  Please consult a lawyer in the event that you require professional assurance that our information, and your interpretation of the same, is correct.