Mourant Ozannes recently acted for the trustee of a Jersey law governed trust which was the subject of a court application in a case known as In the matter of the Y Trust [2015] JRC 059. The case demonstrates the Royal Court's willingness to approve innovative means of settling family disputes concerning trusts.

The Y Trust was established by the patriarch of the family and owned various companies of both a trading and property holding nature. The activities of the various underlying companies over several decades resulted in significant financial success for the trust and the family. It was generally accepted that this success could be attributed to the business acumen of the patriarch's son and as a result the trustee and beneficiaries were all content for day to day management of the underlying companies to be carried out by the son and his various advisors.

There came a watershed moment in about 2010 when the marriage between the son and his wife became severely strained and, eventually, led to divorce proceedings. In an attempt to ensure complete visibility of the trust property, which she claimed to be matrimonial property, the wife procured orders from the Royal Court that the trustee depart from the previously agreed modus operandi and attempt to take complete control of all the underlying companies. In compliance with such orders the trustee took steps around the world to remove and replace directors and regulate the transaction of business by the underlying companies. These steps were opposed aggressively by the son and resulted in various claims being made and proceedings filed (but eventually discontinued) for the removal of the trustee.

It was noted by the guardian ad litem for the minor and unborn beneficiaries that the trustee had done all that was reasonable to discharge its duties in relation to the trust property but a lack of cooperation and tactical games by the son and his wife had made it impossible for them to exert complete control or even determine the true extent and value of such property.

In the events that happened the son and his wife finally agreed to settle their divorce proceedings and an agreement was made between them as to how certain property (including the trust property) would be divided between family members. The trustee was not party to this agreement and nor was  it under any obligation to give effect to its terms. However, it was accepted by all the adult beneficiaries that to do so would be in the best interests of all the beneficiaries of the trust.

The situation was, however, complicated by the fact that the son was an "Excluded Person" under the trust. It was likely that the exclusion was simply the unintended consequence of the son at one stage holding office as "Guardian" (effectively, protector). As far as the trustee was concerned, it was always intended that he benefit from the trust. Nevertheless the situation was never regularised and by giving effect to the settlement agreement the trustee was concerned that it would  be making distributions of trust property to an "Excluded Person". Whilst all the adult beneficiaries were content to release the trustee from any liability for breach of trust or wilful misconduct in this regard there could remain the potential for exposure to the minor and unborn beneficiaries. Given the hostility that had been directed towards the trustee in recent years such concerns were genuine and the risk could not be discounted.

In order to manage this risk to the trustee it was proposed that the class of beneficiaries be "closed" by removing all but the adult beneficiaries so that pursuant to article 43(3) of the Trusts (Jersey) Law, 1984 (which incorporates into Jersey statute law the common law principle commonly known as The Rule in Saunders v Vautier) they could then terminate the trust and direct the trustee to distribute the trust property in accordance with the settlement agreement. Whilst, in principle, these proposals were agreeable to the trustee it was concerned that to exercise the relevant powers to give effect to them might put the trustee in a position of conflict between its own interests (ie the avoidance of future claims) and its duties as trustee. For that reason the trustee sought to surrender its discretion and ask the Royal Court to make the decision on its behalf. This resulted in the analysis of a number of important issues.

The Royal Court will not lightly accept a surrender of discretion by a trustee:

  • the Royal Court will only accept a surrender of discretion by a trustee for a good reason such as where there is deadlock between more than one trustee or a conflict of interest (In re S Settlement [2001] JRC 154);
  • upon surrender of discretion by a trustee the Royal Court will act in its place but must act reasonably and has no greater powers than the trustee (Lewin on Trusts, 18th Edition, paragraph 29-301); and
  • a surrender of discretion should be regarded as a last resort where no sensible alternative exists (In re B Settlement  [2010] JLR 653).

The proposed distribution of trust property to an excluded person could be considered a fraud on a power. It was noted that:

  • a transfer of trust property to a non- beneficiary may be justified where the primary purpose was for the benefit of children caught in the middle of hostile divorce proceedings and which might end upon such transfer being made (In re X Trust [2002] JLR 377); and
  • an exercise of power by a trustee is not vitiated merely because the trustee knows that a beneficiary will use trust property to benefit a person who is not a beneficiary provided that the trustee's purpose is to benefit the beneficiary rather than the person who is not (Lewin on Trusts, paragraph 29-26).

In relation to the issue of the proposed exclusion of beneficiaries it was noted that:

  • a power to exclude a person as a beneficiary is unusual as any exercise of such power by the trustee is unlikely to benefit the person being excluded;
  • where a trustee proposes to exercise such power it must consider the position very carefully to take into account the position of the person to be excluded and the interests of all the other beneficiaries.

In the present circumstances it was agreed by the guardian ad litem that the arrangement proposed was not intended to defeat the interests of the minor and unborn beneficiaries but rather bring to an end the hostile litigation which of itself will benefit the whole family.

In its decision the Royal Court noted that:

  • since 2012 the trust fund has effectively been frozen to the detriment of all the beneficiaries;
  • implementation of the proposed arrangements would end the hostile litigation and enable a clean break;
  • what was proposed was unquestionably for the benefit of the children and there would be no fraud on a power;
  • it was very much minded to do everything it properly could to give effect to the settlement agreement and, in light of the potential conflict of interest, no sensible alternative existed to a surrender of the trustee's discretion.

Accordingly, the Royal Court accepted the surrender and directed the exercise of the relevant powers.

Comment

This case is one of many which have come before the Royal Court involving the complex interplay between trusts and divorce. The relevant principles of law applicable to each do not co-exist happily and trustees are frequently caught in the middle of a tug of war. In many (if not most) cases the trustee will not be party to settlement negotiations between divorcing parties and an agreement may be presented to them at the eleventh hour with an assumption that they will apply a rubber stamp and exercise their powers to give effect to the proposed arrangements. In such situations trustees should be cautious on the one hand but be seen to be willing to assist on the other. In many cases the proposed arrangements will likely be in the best interests of the family concerned. However, this should not be taken as read and expert advice may need to be taken in the relevant jurisdiction to validate the equity of the deal. Similarly, the interests of minor and unborn beneficiaries must be taken into consideration and it is important for trustees to understand how they will be provided for upon distribution of the trust property. Such beneficiaries will need to be represented by an independent lawyer in the event that an application is made to the Royal Court for approval to the proposed arrangements. Such an application may not be necessary in all cases but in any event trustees are entitled to have a healthy and reasonable regard for their own fiduciary risk. In the event that they become aware of divorce proceedings trustees should consult their lawyers to better understand their risk and how that risk can be managed. 

Of course there are other situations in relation to which it may be necessary for a trustee to consider surrendering its discretion to the Royal Court. In practice this is more likely to result from a conflict of interests rather than deadlock between two or more trustees.

This case serves as a reminder that Jersey law provides an established procedure and the Royal Court is willing to assist trustees in complex situations.