The enactment of the Trust (Amendment 6) (Jersey) Law 2013 saw Jersey introduce a statutory basis for relief to be granted for mistake in the form of Article 47E of the Trusts (Jersey) Law 1984. Although there have been a number of Royal Court decisions in this area since then, until the decision in In the Matter of the D, E and F Trusts those cases were decided on the basis of the pre-existing law. While the court had previously considered the potential application of Article 47E (eg, in Strathmullen Trust and Robinson Annuity Investment Trust) and the interplay between the pre-existing law – particularly Article 11 of the 1984 law – largely concluding on the facts of earlier cases that the pre-existing provisions of the law applied, the decision in In the Matter of the D, E and F Trusts represents the first time that the court has granted relief for mistake squarely within Article 47E.
The statutory framework for mistake in the law following the enactment of the amendment law is contained in Articles 47B to J. Article 47E provides as follows:
"(2) The Court may on the application of any person specified in Article 47I(1), and in the circumstances set out in paragraph (3), declare that a transfer or other disposition of property to a trust –
a. By a settlor acting in person (whether along or with any other settlor); or
b. Through a person exercising a power,
Is voidable and –
i. has such effect as the court may determine, or
ii. Is of no effect from the time of its exercise.
(3) The circumstances are where the settlor or person exercising a power –
a. Made a mistake in relation to the transfer or other disposition of property to a trust; and
b. Would not have made that transfer or other disposition but for that mistake, and
The mistake is of so serious a character as to render it just for the court to make a declaration under this Article."
The meaning of 'mistake' for the purposes of Article 47E is set out in Article 47B(2) of the law, which provides as follows:
"(a) a mistake as to –
(i) the effect of,
(ii) any consequences of, or
(iii) any of the advantages to be gained by,
a transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property;
(b) a mistake as to a fact existing either before or at the time of, a transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property; or
(c) a mistake of law including a law of a foreign jurisdiction."
Article 11 of the law provides in more simple terms at Subparagraph 2 that "a trust shall be invalid – (b) to the extent that the court declares that – (i) the trust was established by… mistake".
Since the enactment of Amendment 6, the Royal Court has considered on several occasions the legal basis for an order seeking a transfer of property onto a trust to be set aside on grounds of mistake and declared void.
The first was the decision in In the matter of Strathmullen Trust, in which the then-deputy bailiff considered the interplay between Articles 11 and 47E. He noted that relief under Articles 47B to 47H of the amendment required the pre-existence of a trust in order for the court's discretion to declare a transaction voidable to be successfully invoked, whereas relief under Article 11 could be applied for where the creation, validity and duration of a trust was at stake. On that basis, he concluded that:
- the provisions were distinct from one another;
- Article 11 still stood and was not now subsumed by Article 47E; and
- he would approach the application before the court under Article 11 of the law.
The following year, in In the Matter of the S Trust and In the Matter T Trust, the court outlined the following points of broad application building on the analysis in Strathmullen:
- Article 11 of the law related to the invalidity of a trust as a whole;
- Insofar as transfers included the transfer which immediately constituted the trust, Article 11 would apply;
- Where a transfer was made to an existing trust, Article 47E would apply; and
- For the purposes of Article 11 or 47E, it did not matter whether the asserted mistake was one of fact, law, effect or consequence. As such, a mistake as to the tax consequences of a trust or a transfer to a trust was a mistake for these purposes.
In In the Matter of the S Trust and In the Matter of the T Trust, the court noted the difference between the language of the third limb of the three-stage common law test summarised in Re Lochmore Trust and the language used in the third limb of the statutory test set out in Article 47E(3) of the law. Under the test summarised in Re Lochmore Trust and settled in Re S Settlement, which is applicable to applications brought under Article 11 of the law, the court must ask itself the following questions:
- Was there a mistake on the part of the settlor?
- Would the settlor not have entered into the transaction 'but for' the mistake?
- Was the mistake of so serious a character to render it unjust on the part of the donee to retain the property?
In In the Matter of the Robinson Annuity Investment Trust, having considered the language in the statutory test and the judicial test, the court concluded:
"What is clear, however is that the test to be applied by the Court is identical whether the matter is considered under Article 11 or Article 47E. Thus the statutory test enunciated in Article 47E(3) is for all practical purposes identical to the test established by the Court prior to the Amending Law and encapsulated in a number of cases which were summarised in Re Lochmore…"
In In the Matter of the S Trust and In the Matter of the T Trust the court held that:
"the judicial test, in requiring the court to consider whether it is unjust on the part of the donee to retain the property, seems…to contemplate that the Court is measuring justice by reference to the position of the donee… the focus of the statutory test, by contrast, is whether it is just for the court to make a declaration that a disposition of property to a trust is voidable… because of a mistake made by the donor."
The court clarified that there might be a factual circumstance in which the distinction was relevant, but that "in most cases the result of the statutory and judicial tests will be the same".
In considering the third element of the test, the court went on to identify factors that could militate against the granting of an order to set aside a transfer on the grounds of mistake. In essence, these factors point to a lack of any financial consequences adverse to the beneficiaries.
In In the matter of the S Trust and In the Matter of the T Trust the respective settlors of the trusts had settled the trusts on the basis of advice from an English financial adviser with the principal aim of avoiding UK inheritance tax in respect of English properties. The scheme recommended to the settlors involved funds being borrowed to repay existing mortgages on the English properties and the balance invested into gilts and other assets to be held in the Jersey trusts. The lending was secured on the English property and also via guarantees from the trustees, and was repayable only on the settlors' death. However, rather than avoiding inheritance tax, the scheme led to significant inheritance tax charges including an immediate 20% charge, rendering the property subject to 10-yearly charges and potentially leaving the settlors with a deemed entitlement to the trust assets in order to bring those assets within their estates on death.
In terms of principles emerging from the court's judgment, it was confirmed that the first two limbs of the test for mistake are the same whether they are under the pre-existing law or Article 47E. However, the third limb of the test for mistake as provided in Article 47E is inverted, in the sense that the case law test incorporates the question of whether it is unjust on the part of the donee (the trustee recipient) to retain the settled property, whereas under the statute the test is whether it is just for the court to make a declaration (ie, to set aside the disposition into trust). The court considered the margins of this difference to be very fine but noted that depending on the facts of each case, the distinction could be relevant.
Further, in relation to the question of there being a period of time between the settlement of the trusts and the disposition of the assets into the trusts, the court noted that it will typically adopt a "realistic" approach. This means that when considering applications to set aside a trust on the basis of a mistake (most likely under Article 11 of the law), the court will treat the establishment of a trust and the separate disposition of assets onto the trust in the round. However, where there is a more significant distance between the two transfers, Article 47E will be relevant.
The Royal Court's decision in In the Matter of the D, E and F Trusts was handed down in September 2016. In granting relief under Article 47E, the court set aside transfers of shares into three Jersey trusts several years after the trusts were established and in circumstances where the mistake in question gave rise to a contingent rather than a crystalised tax liability. The court also clarified that although foreign law governed the transfers of the shares to the trusts, Jersey's firewall provisions required the validity of those transfers to be determined under Jersey law.
The settlor's application concerned the transfer of shares by him in Luxembourg companies (which in turn held substantial shareholdings in a public company) by a settlor in 2011 to be held on three Jersey law trusts: the D Trust, E Trust and F Trust. The trusts were originally established in 2009 with the settlement of a nominal cash sum, but were amended in 2011. The trusts were settled to benefit the settlor during his lifetime and his family thereafter, but also to achieve certain US tax objectives – the most relevant being to ensure that any distributions to the settlor's two sons were not subject to US tax and to ensure that no part of the assets held by the trusts would be subject to US estate tax on the death of the settlor (a Swiss resident) or either of his sons (both US residents).
The amendments to the trusts in 2011 were made in order to mitigate against a potential change in Swiss estate tax law which would have exposed the settlor's assets (including the valuable shareholdings subsequently transferred to the trusts) to a substantial Swiss estate tax charge. However, on making the amendments, it was also important for the trusts to continue to achieve the original US tax objectives. The provisions of US and Swiss law required different principal features for the trusts, although these were not mutually exclusive – the settlor obtained advice on the proposed amendments in order to adopt changes that would address the competing risks of US tax liability and the potential Swiss tax liability.
The amended trusts were stated to comprise completed gifts to the settlor's sons and – in the event of their death before the expiry of the trusts – to their children. Each trust had three trustees (respectively called the family, administrative and independent trustee, the latter of which held dispositive powers). The settlor's sons were the family trustees of the D Trust and the F Trust respectively, and jointly the family trustees of the E Trust. The sons were also protectors.
The amendments to the trusts introduced an unintended provision that gave rise to a potentially significant US tax liability, by granting to each son – in their respective capacities as protectors of the trusts – the power to remove the independent trustee and instead appoint himself or a person related or subordinate to him. The power as drafted – which had been addressed in an early draft by the US lawyers but was not identified in the final draft, which had changed – amounted, for the purposes of US tax law, to a 'general power of appointment' over the trust assets in favour of the sons. Consequently, if the sons were to die before the expiration of the trusts, the value of the respective trust assets would be deemed to fall within their estates for US estate tax purposes and could attract US estate tax at a rate of up to 40%.
Ultimately the applicable Swiss tax law was not changed and the Swiss tax risk therefore fell away. However, it was only several years later that the settlor's advisers identified the risk of the US estate tax charge by reference to the power of appointment. There were no means under the trusts instruments that could be adopted in an effective way for US tax purposes in order to remedy the issue. Therefore, the settlor applied to have the transfers set aside and declared void on the grounds of mistake pursuant to Article 47E, with the effect that the shares would be declared to have been held at all times on bare trust by the trustees for the settlor.
The court noted that where an application based on mistake does not seek to set aside the trust, but rather to set aside the disposition of assets onto the trust, and particularly if such transfers had taken place after the establishment of the trust, the application could squarely be brought under Article 47E of the law. Accordingly, recognising that previous decided applications since the amendment had sought the setting aside of the trust or the original transfer of assets at – or shortly after – the establishment of the trust, the court accepted that this application could not properly be brought under Article 11.
The court applied the following three questions reflected in the 2013 amendments to the law:
- Was there a mistake on the part of the settlor?
- Would the settlor not have made the transfers if it were not for the mistake?
- Was the mistake so serious as to render it just for the court to make a declaration?
The court had no hesitation in answering the first two questions affirmatively based upon the error in the drafting of the trusts instruments at the time of the amendment, the US tax advice subsequently received and the settlor's affidavit evidence that he would not have made the transfers had he known of the tax implications. The third question was more difficult to answer, as while mistake applications have typically been brought in respect of mistakes that gave rise to an existing tax liability, in this case the tax liability was entirely contingent on either of the settlor's sons dying before the expiry of the trusts in 2041. The Royal Court concluded that such a contingent risk could render the mistake so serious that it would be just for the transfers to be set aside. Its reasoning included the following:
- Notwithstanding its contingent nature, the magnitude of the potential liability weighed heavily in favour of granting the relief. In particular, the tax liability may have led to the settlor's sons' respective families having to divest themselves of the shares (the original company having been created by the settlor's father).
- It was the settlor's clear intention that his assets go to the beneficiaries of the trusts, and none of the beneficiaries would be likely to suffer if the transfers were set aside.
- The settlor was not a US taxpayer and the trusts were not artificial schemes but were merely intended to achieve tax-efficient estate planning which gained no interim advantage for the settlor.
In its decision, the Royal Court also considered the potential conflicts of law that might arise in circumstances where the agreements effecting the transfers were governed by Swiss law, except where Luxembourg law was mandatory. With many Jersey law trusts being used for a variety of purposes involving parties and assets in multiple jurisdictions, applications pursuant to the mistake doctrine in Jersey create the potential for conflict between the law governing the asset or the transaction pursuant to which the disposition was effected (with shares in a foreign company being a prime example), and Jersey trust law.
The court therefore asked whether the question of the transfers' validity should be determined pursuant to Swiss or Luxembourg law. The application was premised on the argument that the firewall provisions of Article 9 of the law required that Jersey law be applied to the question of the transfers' validity of. Article 9 provides as follows:
"(1) Subject to paragraph (3), any question concerning –
(b) the validity or effect of any transfer or other disposition of property to a trust…
shall be determined in accordance with the law of Jersey and no rule of foreign law shall affect such question."
The court noted that Article 9(2) of the law expressly requires that any determination of the validity or effect of a transfer or other disposition of property to a Jersey trust is to be determined without consideration of whether the foreign law prohibits or does not recognise the concept of a trust. The court questioned the potential impact of Article 9(2A), which provides that Article 9(1), in determining the capacity of a corporation, not affect recognition of the law of its place of incorporation, nor does it affect recognition of the law of any other jurisdiction prescribing formalities for the disposition of property.
The court considered previous decisions in which the issue of whether the proper law of the transaction subject to the application was English law had been considered. It concluded that while Article 9(2A) demonstrated that the legislature did not seek to use Jersey law to validate what would otherwise be invalid transactions under the applicable law, setting aside those transactions as a disposition onto trust as a matter of Jersey law would vary the trusts on which the assets were held by the Jersey trustee.
The court accordingly agreed with the arguments advanced on behalf of the settlor in that regard; as such, the consequence of any order that the transfers were invalid under Jersey law would merely result in the trustee, as transferee, holding the asset on a different trust – namely as bare trustee for the transferor. In any event, the court heard expert evidence of Luxembourg law to the effect that a Jersey court order setting aside the transfers could be used under Luxembourg law as a basis for rectifying the share registers of the Luxembourg companies.
It has taken three years since the enactment of the amendment for a case to be determined solely on the basis of Article 47E. It is apparent – unsurprisingly given that the drafting of the applicable test was based on the existing common law test – that the court's approach to considering such applications is materially identical to that taken under the pre-existing law. However, in decisions preceding In the Matter of the D, E and F Trusts, the court had identified the subtle difference in the third limb of the test, and it remains to be seen whether that will ultimately prove to be decisive in any future cases on their facts. The court's willingness to take account of contingent prejudice (in this case, potential estate tax liabilities on the settlor's children's estates that might have exceeded $100 million) demonstrates that the court will consider the overall justice of the circumstances when it has first determined that a mistake has been made and that the transfer would not have been made were it not for that mistake. Conversely, in In the Matter of the S Trust and the T Trust, echoing the English judiciary's observations in Pitt v Holt, the Royal Court made it equally clear that it would be mindful of the broader circumstances. It noted that:
"There is something unattractive about the proposition that the Court should come to the rescue of foreign tax payers who, anxious to avoid paying the contribution towards the outgoings of their own jurisdiction's government, and thus meet their own obligations as citizens of that jurisdiction, make schemes of this nature."
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