Article 10(2) of the Trusts (Jersey) Law 1984, as amended, states that "[t]he terms of a trust may provide for the addition of a person as a beneficiary or the exclusion of a beneficiary from benefit". Indeed, most trust instruments will contain such provisions in one form or another.
Alongside the power to add beneficiaries, the power to exclude beneficiaries is a vital weapon in a trustee's armoury, giving them flexibility to consider future developments and address potential mishaps.
Frequently, this power is exercised because it is in the beneficiary's fiscal interests, but there are occasions when being excluded is not in that beneficiary's interests or it is against their wishes.
In the recent case of Representation of GB Trustees Limited [(2021) JRC048], the trustee of two Jersey law trusts asked the Court to bless the decision to exclude a beneficiary from both trusts.
The rationale for excluding the beneficiary stemmed from her ongoing "hostile conduct" (including launching numerous proceedings in relation to the trusts). The trustee was concerned that the value of the assets held in the trusts would be exhausted by the costs of litigation.
The Court decided to bless the decision of the trustee to exclude the hostile beneficiary.
In its judgment, the Court considered the powers available to the trustee pursuant to the terms of the two trusts. As is commonly seen in Jersey law trust instruments, there were three options:
- to exclude the beneficiary wholly or partially from future benefit (option 1);
- to declare that the beneficiary will cease to be a beneficiary (option 2); or
- to declare that the beneficiary will be an "excluded person" (option 3).
The court opined that:
- under option 1, the beneficiary would be excluded from future benefit under the trusts but she would appear to retain the beneficiary status;
- under option 2, the beneficiary would be excluded from being a beneficiary (thus losing both future benefit and beneficiary status) but the trustee could reinstate her as a beneficiary in exercise of its separate power of addition (or by revoking the exclusion if it was stated to be revocable); and
- under option 3, if the trustee declared the beneficiary an excluded person, she could not be reinstated as a beneficiary and therefore "her exclusion would be total and final".
It was noted that the trustee had "not focused on which of the three options . . . it intended to apply". The trustee wished to exclude the beneficiary permanently but it was acknowledged that circumstances could change such that the beneficiary should, once again, form part of the beneficial class.
Accordingly, it was concluded that the most appropriate action was to irrevocably declare that the beneficiary ceased to be a beneficiary, as under option 2.
This is a useful example of the Royal Court's jurisdiction to bless momentous decisions of a trustee, but it also serves to highlight key considerations for trustees when it comes to excluding beneficiaries. If there are various options available under a trust instrument in order to exclude a beneficiary, careful thought should be applied to the effects of each option; choosing the wrong one may result in a "total and final" exclusion that cannot be reversed.
For further information on this topic please contact Richard Laignel at Ogier by telephone (+44 1534 504 000) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.