A recent judgment of the Royal Court(1) is noteworthy - and should provide some comfort to Jersey trustees facing potential tax liabilities - for two reasons:
- It re-enforces the position that a trustee is under a duty to assist the court in an application for directions brought either by itself as trustee or by another person and, provided that it is acting in accordance with such duty, it will normally be awarded its costs incurred in doing so.
- It confirms that a trustee is entitled to take reasonable steps to ensure that it does not personally face a tax liability which in fairness ought not to have been imposed on it, and that it should not be penalised in costs for requesting an indemnity on handover of trust assets based on a potential tax liability.
The court found that the trustee concerned was entitled to make use of a potential tax liability when seeking an appropriate indemnity on the handover of trust assets. Therefore, it was not penalised in costs for its approach. The court further stated that even in circumstances where a trustee may not be entitled to request an indemnity to protect itself against a potential tax liability, the court would not be willing to order costs against the trustee that sought such indemnity (at least on the basis of professional advice), because to do so would place a Jersey trustee at the mercy of draconian foreign taxes.
The E family included the late E and his two children (daughter B and son C). A took on the trusteeship of the E Family and Charitable Foundation in 2007. Having taken tax advice, it became apparent to A that the potential for a significant tax liability existed.
The trust fund of the C Foundation comprised four parts, each with a different protector and different trustees. The protector of the first part was E, and that of the third part was C. In August 1985 the trustee of the first part purported to wind up the first part and to resign as trustee. To achieve this, a procedure was designed that required the execution of the following documents:
- a deed of appointment of a new protector of the first part;
- a declaration of an additional beneficiary of the first part;
- a revocable appointment appointing out the whole of the first part of the trust fund to an individual outside the family, M, contingent on her survival on a particular date;
- a sale contract whereby a company, G Services Inc, bought from M the whole of her contingent reversionary interest in the first part (subject to the power of revocation); and
- a release of the power of revocation, making the appointment to M irrevocable.
The apparent intention was for the whole of the first part of the trust fund of the C Foundation to vest in G Services Inc absolutely. The documents were executed. E was a director and treasurer of G Services Inc.
On June 14 1985 G Services Inc made a declaration of trust (the G Trust), and transferred the shares in G Services Inc into the G Trust. The G Trust was later to become known as the E Family and Charitable Foundation.
However, some decades later, an allegation was made that certain of the above documents were backdated, with the ultimate result being that the first part of the trust fund was still in existence, but without trustees. C brought a representation by way of separate proceedings, alleging the backdating of documents and seeking the appointment of new trustees of the first part.
Representation of WW and XX
The court ordered the appointment of two individuals, WW and XX, as joint trustees of the first part. WW and XX brought a representation under Article 51 of the Trusts (Jersey) Law 1984 seeking declarations that:
- the deeds and revocable appointments described above be declared invalid; and
- the sale contract and subsequent release of power of revocation be declared invalid.
The representors alleged a knowing falsification of the relevant documents by the then trustee of the C Foundation and/or by two other respondents and E (the former protector). A was convened to the hearing of that representation on the basis that it was allegedly a trustee de son tort.(2)
A filed an answer to the representation. A did not contend that the declarations of invalidity should not be granted (it had no evidence to counter the specific allegations made). Rather, A took the view that, as trustee of the E Family and Charitable Foundation and as a convened party, it owed the court a duty to bring to its attention all relevant information in its possession to give context to the relief being sought. In complying with this duty, A raised two primary issues, the most noteworthy being that before sanctioning any distributions, the court should look at the potential tax liabilities which A had been advised may be found to exist which needed to be tackled as a priority before any trust funds could be released from the E Family and Charitable Foundation to the C Foundation.
The court gave various orders and directions concerning the filing of pleadings and evidence, and also adjourned the proceedings of its own motion to allow time to resolve the issues using mediation. During this time, further advice was taken from A's tax advisers. C also took up the question of potential tax liabilities with Her Majesty's Revenue and Customs (HMRC). Ultimately the position was reached whereby HMRC confirmed that as far as it was concerned, the matter was closed. The tax advisers therefore concluded that although the risk previously identified still existed, the chances that HMRC would pursue it were minimal.
The matter therefore turned to costs, and the terms of an indemnity to be given to A. The court had already dealt with the question of the second respondent (B) in a separate hearing, in which it was required to consider whether B was reasonable to have supported A in raising the tax issues. The court at that hearing held that it was not unreasonable for A to have raised the issues, and therefore an issue estoppel arose which prevented the court from finding differently in the hearing regarding A's costs. However, the judge stated that if there had been no issue estoppel, the principles to be adopted in similar cases were that:
- a trustee is normally entitled to a full indemnity out of the trust for reasonable legal costs if incurred in a neutral position in litigation; and
- if a trustee has acted unreasonably, it could be denied its indemnity.
It was made clear that in line with the court's judgment in Esteem, in an application for directions regarding a trust the court is entitled to expect the fullest assistance from the trustee. Furthermore, the trustee should ensure that all relevant law is before the court and that all arguments for and against the possible causes of action have been rehearsed. The trustee should usually assist the court by recommending a particular course of action and explaining the reasons for its recommendation. It would not be in the public interest for trustees to be penalised in costs simply because the court did not agree with their recommendations, and therefore trustees will be deprived of their costs out of the trust fund only if they are found to have acted unreasonably.
The court went on to state that:
- WW and XX had not discharged the burden of showing that A had acted unreasonably; and
- if the burden was on A, it had more than satisfied the task of establishing that it had acted reasonably in the proceedings.
A took tax advice over a prolonged period in relation to the possibility of tax being due. A also took advice on the possibility of criminal liability on the part of the trustees.
The court stated that the question was whether A had acted reasonably in approaching the question as to whether any tax liabilities might arise, and if so, against whom they might be enforced. A, as a trustee, was entitled to take reasonable steps to ensure that it did not face personal liability for taxes which, in fairness, should not have been imposed on it. A was also entitled to have regard to any such potential liability for the purposes of framing its request for an appropriate indemnity on passing over the assets to the C Foundation.
Importantly, the judge stated that, even if that last finding was not so:
"I would not be willing to exercise a discretion over costs against a trustee which acted in that way because to do so would place a Jersey trustee at the mercy of draconian liability provisions which might be contained in foreign taxation statutes."
The court did not hear evidence on the facts as to whether there was any inheritance tax liability. However, the court was convinced that on the basis of the documents that it had seen, there was a risk of such a liability. It was therefore not unreasonable for A to put matters before the court which raised this issue.
The comfort provided to trustees in this judgment should be welcomed by the Jersey trust industry. Trustees who find themselves convened to a court application are clearly under a duty to assist the court to the best of their ability and can comply with that duty safe in the knowledge that, provided that they do not act unreasonably, they will be entitled to recover their costs. In addition, trustees who are concerned about foreign taxes in any of their structures should be reassured by this judgment, which confirms that they will not be penalised in costs if they incur costs in investigating potential foreign tax liabilities and acting cautiously on handover of assets due to the risk of such liabilities crystallising.
For further information on this topic please contact Matthew Thompson or Imogen Hardy at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org or email@example.com).