Proposed Amendments to the Trusts (Jersey) Law 1984: A Commentary

 

The States of Jersey’s Chief Minister’s Department recently issued a consultation paper on a proposed 7th amendment to the Trusts (Jersey) Law 1984. The consultation paper canvassed views on whether to amend the Trusts (Jersey) Law 1984 in twelve areas in which there were perceived either to be difficulties with the current legislation or where it was thought improvements could be made.

The areas for which views were sought and to which Baker & Partners responded are:

Area 1 – the certainty of objects – specifically whether there needs to be a beneficiary or purpose for whom the trust property is to be managed and applied at all times during the existence of a trust.

Area 2 –  The rights of beneficiaries to information from the trustee

Area 3 – The reservation of powers by a settlor or third party

Area 4 – The arbitration of trust disputes in Jersey

Area 5 – The extension of the statutory provisions for trustees to self-contract

Area 7 – Extension of the trustee’s indemnity provisions

Area 9 – Introducing an express presumption of lifetime effect for Jersey trusts

Area 10 – The powers of the court to effect a variation of Jersey trusts

Area 11 – The application of Jersey’s forced heirship regime (légitime) to trusts

 

Area 1 – The need for a beneficiary at all times during the existence of a trust

The consultation paper identifies the impetus for change as the apparently damaging uncertainty in the law about the circumstances in which a Jersey trust is valid. In our view, there is no such uncertainty though: the circumstance in which a Jersey trust is valid for certainty of objects is, and has been for many years, settled and certain. It is not necessary for the beneficiaries of a trust to be in existence at the time of the trust’s creation, provided they become ascertainable at some point during the trust period.

Article 10(1) and (2) Trusts (Jersey) Law 1984 is a confusingly worded provision, which could be revised to be made clearer. It states that beneficiaries of a trust shall be (a) identifiable by name; or (b) ascertainable by reference to (i) a class, or (ii) a relationship to some person whether or not living at the time of the creation of the trust or at the time which under the terms of the trust is the time by reference to which members of a class are to be determined.  

The principle of the certainty of objects, which any legislative amendment should reflect, is concerned with whether the object (i.e. the beneficiary or purpose) for whom the trust property is held is ascertainable: this is different to the beneficiary being ‘living’ or having ‘a relationship to someone else, living or dead’. Objects are ascertainable by reference to their specific description or identity or by reference to a conceptually certain class during the trust period.

The issue that arose from Re the Exeter Settlement [2010] JRC 012 and Harper v Apex Trust Company Limited [2014] JRC 253 cases, cited in the consultation as the basis for seeking to clarify the legislation, is that the class by which the beneficiaries were to be ascertained was not conceptually certain because the class was unintentionally left blank in the trust instrument. Any amendment to the Trusts Law should  ensure that objects of the trust should be ascertainable from the outset by ensuring the class is certain.

A proposal to reform the law to allow for  a valid trust to be created without having to describe any objects but subject to an overarching power to add objects at any point during the trust period (which in Jersey is potentially indefinitely) is likely to give rise to more uncertainty, not less. There is also a legitimate concern that a trust which does not name beneficiaries but reserves a power of revocation or overriding power of appointment to the settlor may be vulnerable to being used as a vehicle for money laundering.

To the extent that the  proposed amendments seek to avoid the situation that arose in Re the Exeter Settlement [2010] JRC 012 and Harper v Apex Trust Company Limited [2014] JRC 253, they appears to be designed to spare the bluches of professionals involved in the settlement of Jersey trusts in allowing a trust instrument to go forward to execution when it is incomplete.  This is an issue of professional competence, which has little to do with providing more certainty on the requirement for certainty of objects under substantive trust law.

 

Area 2 –  The rights of beneficiaries to information  

Article 29 of Trusts (Jersey) Law 1984 sets out the framework in which trustees should disclose (and are entitled to withhold) documents and information about the trust from the beneficiaries.  It has long been criticised as an unwieldy and difficult provision in need of reform.

While a comprehensive re-drafting of Article 29 of the Trusts (Jersey) Law 1984 in similar terms to those in section 26(1)-(2) Trusts (Guernsey) Law 2007 would be welcome, the element of the Guernsey law stating that the trustee does, or should, owe any obligation to disclose trust information to the settlor is not uncontroversial. On a proper analysis, the trustee owes no duties to the settlor after the settlor has settled the trust. Additionally, the term ‘trust official’ used in the Guernsey law is not a known term in Jersey law and would need to be revised to take account of local circumstances if the Guernsey legislation is to be replicated in Jersey. It might be advisable  for the reference to be ‘a person to whom, under the terms of a trust, a power is granted or reserved under Article 9A’.

In our view, it would not be advisable for a reformulation of Article 29 Trusts (Jersey) Law 1984 to contain any prescriptive provision as to what categories of documents or material the court may order disclosure of and on what principles. It would rather be better for the court to determine what disclosure is appropriate in the circumstance of the case.

In our view, it would  also not be appropriate, as has been proposed, to allow provision for a settlor to nominate a third party to whom the trustee may make disclosure instead of the beneficiaries. Being able to obtain an account of the trustee’s administration of the trust  is a fundamental entitlement of a beneficiary of which disclosure (outside of the context of litigation) is an inseparable part.

 

Area 3 – Reservation of powers by a settlor

The stated purpose behind the proposed amendment to Article 9A(1)(b) is to put beyond all doubt, as a matter of Jersey law, that it is permissible to allow a settlor to reserve to themselves all the powers in Article 9A(2) and for the trust still to be valid.

While we see nothing intrinsically objectionable in that proposal, we observe that the reservation of such powers is likely to raise an eyebrow in courts outside of Jersey as to whether or not the trust is genuine. Settlors should not be given the impression by these amendments that a Jersey trust in which the settlor reserves extensive powers and beneficial interests to themselves will not be capable of challenge outside of Jersey. A settlor that reserves to themselves all of the powers in Article 9A and the entire beneficial interest in the property is in effect very similar to an absolute owner of the trust property.

It has been proposed to extend the powers that may be reserved to a settlor or third party to include a power to nominate a forum in which trust disputes may be conducted. In the Crociani litigation the Privy Council expressly stated that the phrase “forum for the administration” in relation to a trust was an opaque term without a well-established technical significance. This phrase should not be replicated in the proposed amendment, but rather this firm suggested following phraseology should be adopted:

“(g) To change the proper law of the trust, or to change the place in which the trust is administered or to change the courts to the exclusive jurisdiction of which disputes concerning the trust shall be subject.”

In our view, the proposal  of the Working Group not to remove the trustee’s duties in Article 21 in relation to the exercise of a power reserved to the settlor or a third party under 9A(2) appears to be contradicted by the proposed re-drafting of Article 9A(3) which provides that a trustee’s compliance with such an exercise should not render the trustee liable. One may readily imagine a situation where the exercise of a fiduciary or special power by a lay protector or settlor may be vitiated as a fraud on a power or otherwise harmful to the interests of the beneficiaries. It cannot be correct as a matter of principle, that the trustee is under no liability if they are complicit in or otherwise give effect to such an exercise without question.

 

Area 4 – Arbitration provisions

In our view, legislation should not be enacted to render an arbitration clause in a trust instrument binding on a beneficiary. In our view the introduction of the arbitration of trust disputes in Jersey is neither necessary nor desirable, this is because:

  • The court has adequate mechanisms to ensure that trust proceedings may be conducted in private;
  • Arbitration is often at least as expensive as traditional court proceedings, if not more;
  • There is nothing in the terms of Article 9 Trusts (Jersey) Law 1984 to prevent an arbitral tribunal giving effect to the judgment of a foreign court that fails to apply Jersey law in any determination concerning a matter in Article 9(1);
  • There is no particular demand for the arbitration of trust disputes: there is adequate flexibility in the court’s process to achieve many of the benefits of arbitration; and
  • The privacy of arbitration proceedings, and the confidentiality of their results, would be damaging to Jersey’s standing as a leading international finance centre.

The arbitration of trust disputes presents a significant potential for the marginalisation of qualified Jersey legal practitioners from contentious trust disputes with consequent detriment to Jersey’s economy.

 

Area 5 – Trustees self-contracting

While the consultation is directed at whether to amend the terms of Article 31(3) as it currently exists to apply it retrospectively, there are serious misgivings as to whether Article 31(3) should exist as part of Jersey trust law at all.

The existence of Article 31(3) is clearly directed at the convenience of the finance industry at the expense of the interests of beneficiaries. An arrangement whereby a trustee of multiple settlements is able to contract with itself in different capacities is fraught with inherent conflict. This conflict is not adequately reconciled by subjecting a contract or arrangement made under Article 31(3) to the duties of the trustee in Article 21.

Serious thought needs to be given to the interaction between the Article 31(3) and the proposals concerning the disclosure of information by trustees to beneficiaries under a reformed Article 29. There is a serious practical problem for beneficiaries to even know that their trustee has entered a contract with itself in circumstance where there is a strong presumption that the deliberations of the trustee to enter into such an arrangement can legitimately be withheld from the beneficiaries under the principles in Re Londonderry Settlement [1965] Ch 918 and Re Rabaiotti (2000) JLR 173.

Recent litigation which Baker & Partners has been involved in concerned multiple egregious examples of a corporate trustee borrowing money from trusts of which it is a trustee at interest and then lending that money, at a higher rate of interest, to companies held in a different trust for which it was also the trustee. The trustee secured such lending in favour of itself and with the trustee taking the spread (undisclosed to the beneficiaries) on the interest. Dick v Pantrust International SA & Ors [2016] JRC 021 was an example, par excellence, of the danger inherent in Article 31(3) and its interaction with the extent to which a trustee is accountable to beneficiaries for the substance of its decision making. In the Pantrust litigation, as it was only by happenstance that the beneficiaries discovered that their trustee had been engaged in inter-trust lending with itself.

 

Area 7 – Extension of indemnity provisions 

Difficulties with the nature and extent of the trustee’s indemnity for costs and expenses reasonably incurred in the course of administration appears to be a perennial issue for Jersey trustees.  The consultation asks whether the existing statutory provisions governing the trustee’s indemnity should be augmented to make clear what is thought to otherwise to be in doubt.

In our view, it is not necessary for Article 34(2A) Trusts (Jersey) Law 1984 to be amended to expressly include (1) the rights of former trustee’s officers and employees to enforce an indemnity in their own right, (2) express provision that former trustees hold the benefit of such an indemnity for themselves and for their officers and employees (3) provision to include within the scope of the indemnity, distributions made during the life of the trust. Such provision can be  adequately provided for by those with the skills and knowledge to do it by appropriate drafting into the terms of an instrument of appointment, retirement and indemnity and the Royal Court has already approved such provision as reasonable.  Baker & Partners is frequently asked to advise on the appropriate scope of indemnity provisions in trust documents and to undertake the necessary drafting.

 

Area 9 – Presumption of lifetime effect

It has been proposed to introduce into the Trusts (Jersey) Law 1984 a statutory presumption that a trust takes effect when executed so as to avoid the risk that it might be considered as testamentary instrument. In our response, Baker & Partners was of the view that statutory intervention in this area is not necessary, as any statutory presumption of lifetime effect would do no more or less than the current position at customary law.

 

Area 10 – Variation of trusts

The consultation also asks whether it would be of utility to introduce a power for the court to vary the terms of a trust without the consent of all beneficiaries. In our view, it was neither  necessary nor desirable for the court to have a jurisdiction to vary the terms of a Jersey trust in circumstances beyond the powers it already has in article 47 Trusts (Jersey) Law 1984.

Many of the proposed amendments in the consultation paper are directed at providing certainty where there is a perception (whether accurate or not) that uncertainty exists. In line with this, it is difficult to see the desirability of a measure that enables the court to amend the terms of a trust as it sees fit. While it is desirable for the court to approve the variation of the terms of a trust on behalf of minors and unborn beneficiaries in the event of unforeseen changes in circumstance, the States should not seek to undermine the principle that adult beneficiaries must consent to any variation that affects their rights or interests. A power to vary the terms of a Jersey law is likely to engage Article 1, protocol 1 of the ECHR (the protection of the right to property), particularly in so far as beneficiaries have vested interests in the trust property.

An overriding power for the court to vary the terms of a Jersey trust might provide a release valve on the tension that currently exists in circumstances where a foreign court has made an order affecting a Jersey trust that cannot be given effect to in Jersey because of the firewall provisions in Article 9 and the beneficiaries of the trust do not all consent to the variation, as was possible in the decision in In re IMK Family Trust 2008 JLR 250. However, this issue was not part of the the terms in which the consultation on the introduction of such a power was framed.

 

Area 11 – Légitime 

There are currently restrictions, existing as part of Jersey’s inheritance law, for Jersey domiciled testators as to what moveable property they may give away by will, known as légitime. The consultation proposes abolishing the principle of légitime as a basis upon which to challenge a testamentary dispositions by will to trustees.

The proposed amendment will operate to severely undermine the principle of légitime in Jersey succession law. The abolition of légitime in relation to testamentary dispositions to trusts should be considered as a part of a wider consultation as to whether Jersey wishes to abolish the principle altogether. To proceed with the proposed amendments in relation to trusts in isolation would lead to a strange anomaly which is difficult to justify whereby testators may avoid the effect of légitime when leaving their movable estate to trustees but remain subject to the principle where they do not.

 

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