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Jersey Unreported Judgments |
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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> Representation of The Grundy Trust [2020] JRC 071 (27 April 2020) URL: http://www.bailii.org/je/cases/UR/2020/2020_071.html Cite as: [2020] JRC 71, [2020] JRC 071 |
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Trust - application to set aside an instrument of exclusion
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Before : |
R. J. MacRae, Esq., Deputy Bailiff, and Jurats Olsen and Austin-Vautier |
IN THE MATTER OF THE REPRESENTATION OF THE GRUNDY TRUST
AND IN THE MATTER OF ARTICLES 47G AND 47H OF THE TRUSTS (JERSEY) LAW 1984
Advocate A Kistler for the Representor.
judgment
the deputy bailiff:
1. On 1st April 2020 we heard argument in this case. We now give our decision.
2. The Current Trustee is trustee of The Grundy Trust, a Jersey law discretionary trust ("the Trust") established on 9th April 1986 between Mr S as settlor and the Original Trustee.
3. The Current Trustee was appointed pursuant to a deed of retirement and appointment dated 29th May, 2019 made between Mr S, the Former Trustee, which had become trustee of the Trust pursuant to a deed of retirement and appointment dated 3rd September 2003, and the Current Trustee, in which Mr S exercised his power as appointor to appoint the Current Trustee in place of the Former Trustee.
4. The beneficiaries are set out at Clause 2.1 of the Trust as being the persons specified in the Third Schedule to the Trust who are not excluded, namely Mr S, the wife of the settlor ("Mrs S"), the children and remoter issue of the settlor whether now or thereafter born during the trust period and any person or persons the Trustee shall add to the class of beneficiaries under the powers given to them in Clause 3 of the Trust.
5. Clause 4 of the Trust confers upon the trustees of the Trust the power to remove from the class of beneficiaries such person or class of persons as they shall in their absolute discretion determine. Clause 5 confers on the trustees of the Trust the power to declare that any person or class of persons shall forthwith be an excluded person. It is necessary to set out the terms of Clause 5.1 and 5.2 and 8.8:
"5. Power of Exclusion
5.1 The Trustees may at any time or times during the Trust Period declare that any person (or class of persons) shall forthwith be an Excluded Person in addition to any person named in the Eighth Schedule hereto.
5.2 Any such declaration shall be in writing and signed by the Trustees and:
5.2.1 name or describe the person to be thereby made an Excluded Person and
5.2.2 specify the date (not being earlier than the date of the declaration or later than the end of the Trust Period) from which such person shall be an Excluded Person or Excluded Persons.
8.8 Notwithstanding the foregoing provisions of this Clause no part of the capital or income of the Trust Fund shall be paid or applied to or for the benefit of an Excluded Person and any appointment in favour of an Excluded Person shall take effect as if he were dead and so that any share or interest whether in the income or the capital of the Trust Fund to which he would or might have been entitled (not being a fixed share or interest otherwise assigned or disposed of by the Beneficiary) shall go and be held upon trust for the other Beneficiaries from time to time living in such shares as the Trustees shall think fit."
6. The effect of being an Excluded Person is further considered in Clause 23 of the Trust, which provides:
"23. Excluded Persons
No Excluded Person shall be capable of taking directly or indirectly any benefit of any kind by virtue or in consequence of this Settlement and without affecting the generality of the foregoing restriction no part of the capital or income of the Trust Fund shall be paid or lent to or applied for the benefit of an Excluded Person and no power or discretion conferred upon the Trustees shall be capable of being exercised for the benefit of an Excluded Person."
7. This is an application to set aside wholly or in part an instrument of exclusion dated 5th April 2017 ("the Exclusion") made by the Former Trustee under Clause 5.1 of the Trust pursuant to which the Former Trustee irrevocably declared that Mr S and his wife shall each from the date of the exclusion be an excluded person in respect of the entirety of the trust fund.
8. Accordingly the current beneficiaries of the Trust are the children and remoter issue of Mr S of whom there are now seven - the settlor's daughter and her three children and the settlor's son and his two children.
9. In February 2017 it came to the attention of the Former Trustee that certain changes were to be made to the United Kingdom inheritance tax regime. These would have the effect that all UK residential property would be within the scope of United Kingdom Inheritance Tax ("UK IHT"), regardless of whether the property was owned by a non-UK resident company or trust and that interests in foreign companies were to be made transparent for UK IHT purposes insofar as their value was attributable to UK residential property.
10. This gave rise to a potential difficulty for the Trust because Mr S, as settlor, was also a beneficiary and because he could still benefit under the Trust, the gift with reservation of benefit rules would apply to him so that the value of any UK residential property owned by the Trust would be included in his estate on his death for UK IHT purposes at the rate of 40%.
11. The Trust at the time held and continues to hold shares in a number of companies. One of those companies owns a UK residential property in London now valued at approximately £1.8m. By email dated 21st February 2017, the Former Trustee drew the matter to the attention of Mr S, recommending that UK tax advice was sought. They also said, "one might have to consider amending the trust deed to ensure that you are excluded from benefitting (and from occupying the property) prior to 5th April 2017 in order to ensure the property does not form part of your estate for UK inheritance tax purposes...".
12. Mr S replied asking the Former Trustee to seek UK tax advice and to resolve the situation urgently.
13. In none of the communications prior to the Exclusion was the possibility of Mrs S also being excluded referred to.
14. The Former Trustee instructed Smith and Williamson for the purpose of seeking tax advice. Their advice was received on 3rd April 2017. Smith and Williamson advised that as Mr S was both settlor and a beneficiary the gift with reservation of benefit rules needed to be considered. Previously the fact that the property held by the Trust was held by an offshore company sheltered it from UK IHT. However, from 6th April 2017 this would cease to be the case and, inter alia, the value of such property would be included in a settlor's estate for UK IHT purposes, chargeable at 40%. Smith and Williamson advised that it would be possible to rectify this position by both Mr and Mrs S being excluded from benefit, thereby releasing the gift with reservation of benefit. If this was to occur after 6th April 2017 it would be a potentially exempt transfer for UK IHT proposes, that is to say not immediately chargeable to tax, though if Mr S were to die within seven years of the exclusion there would be a reducing charge to UK IHT on his death on a sliding scale.
15. The two options suggested by Smith and Williamson to avoid the charge to tax were as follows:
(i) Mr S could exclude himself and his spouse from benefit under the Trust. (In fact the power of exclusion lay in the hands of the Trustee.) Smith and Williamson warned that once they had been excluded they would be unable to be added back in as beneficiaries in the future. Smith and Williamson noted that, "As the Trust comprises significant assets, in addition to the UK residential property, this may not be a desirable outcome."
(ii) Alternatively the company holding the UK property and the property could be transferred to a new trust from which Mr and Mrs S would excluded from benefitting - they would remain beneficiaries of the Trust and be capable of benefitting from the rest of the Trust assets. Most of the Trust assets are outside this company. Such a step would eliminate the potential 40% UK IHT charge and would allow Mr and Mrs S to benefit from the other assets of the Trust.
Either step needed to be taken prior to 6th April 2017.
16. It is clear from the contemporaneous documentation that in-house counsel at the Former Trustee fully understood that there were these two options available, both of which would need to be implemented before the following evening. An internal email sent on 4th April 2017, the morning after the tax advice was received, contained and the following passage; "Option 1 - exclude [Mr and Mrs S] from Grundy Trust" and "Option 2 - transfer [the company] to a new trust from which [Mr and Mrs S] are excluded. The advantage of this is that [Mr and Mrs S] could remain as beneficiaries of the Grundy Trust. When I spoke to [Mr S] I only presented Option 1 and he was ok with this. Option 2 would require some hard work to implement before tomorrow night, but should be achievable."
17. Accordingly, Mr S was never told of Option 2. This is consistent with his recollection. He swore an affidavit to support this application, as has the director of the Current Trustee. Mr S also says that he never became aware prior to the Exclusion that Mrs S would also be excluded and that Mrs S was not herself consulted about the proposed exclusion at all and had no contact with the Former Trustee in relation to it. Mr S now has no recollection of the telephone call on 4th April 2017 referred to in the Former Trustee's note referred to above.
18. The Former Trustee was invited to swear an affidavit, but has not done so. However the same in-house counsel who advised in 2017 has sent an email to the Advocate for the Trustee in which he accepts he did not make a file note of the call with Mr S on 4th April 2017, but does claim that he did explain to Mr S that both he and Mrs S would need to be irrevocably excluded. However, he also goes on to say, "One thing that stuck in my mind is that [Mr S] commented that he had a strong and close family and if needs be distributions could be made to his children who he trusted to do the right thing."
19. If this was accurate, it hardly helps the Former Trustee as, on any view, there was no conversation with Mrs S and furthermore, if Mr S had made this comment then the Former Trustee should have immediately advised Mr S that what he was suggesting was impossible. To make distributions to one of the settlor's children for the purpose of benefitting the settlor or his wife would be itself a breach of trust and clearly contrary to the provisions of Clause 23 of the Trust.
20. Furthermore, Mr S was not told of Option 2, which clearly has significant advantages over Option 1.
21. As indicated above, on 5th April 2017, just two days following receipt of the advice from Smith and Williamson and one day prior to the anticipated change in the UK IHT regime, the Former Trustee executed the Exclusion by which Mr and Mrs S were each declared to be an excluded person in respect of the entirety of the Trust. The Former Trustee's resolution also dated 5th April 2017 says that Mr and Mrs S had, "requested that the exclusion be in relation to the whole of the income and capital of the trust fund." Mr S denies making such a request.
22. In fact, the proposed UK IHT changes were not brought into force at the time (we were told that they were introduced subsequently and backdated to 6 April 2017) and on 7th June 2017 the Former Trustee advised Mr S that this was a consequence of the timing of a General Election in the United Kingdom and that it was likely that the changes would be legislated for and possibly backdated to 6th April 2017. It was clear from the note dated 7th June 2017 that Mr S was then advised that he and Mrs S were now excluded from benefit under the Trust and could no longer use the property rent free and would need to pay rent if they occupied it. Mr and Mrs S are concerned that there is now, as matters currently stand, no possibility of Mrs S being added back in as a beneficiary of the Trust in the event of the death of Mr S. In the event of Mr S's death Mrs S would wish to reside in the property if it was still owned by the Trust at that time, at least in the short term, and in any event it is important that she should be able to benefit from the trust funds in order to buy a property for herself elsewhere and if necessary to provide for her living expenses.
23. It is clear from the evidence that neither Mr or Mrs S at any stage made a written request that Mrs S be excluded in relation to the whole of income and capital of the trust fund. Further, this possibility was not explained to Mrs S in the detail with which a Trustee ought to afford to a beneficiary affected by such a significant change. As the Royal Court said in Rep of Otto Poon Trust [2014] JRC 254A at paragraph 40:
Accordingly, even if, as in this case, there are said to be tax advantages for the Exclusion it is still necessary for the trustee proposing to exercise such a power to consider the decision very carefully.
24. There was also another avenue available to the Former Trustee, which is explained in the opinion received from English counsel, Oliver Marre dated 5th April 2020. This alternative, not advised upon the time by Smith and Williamson, was that the Former Trustee could have executed what has been described as a, "more nuanced form of instrument of exclusion".
25. In these circumstances the power under Clause 5 of the Trust would have been exercised so as to exclude:
(i) the settlor irrevocably for life; and
(ii) the wife of the settlor irrevocably during the lifetime of the settlor but not thereafter.
26. In this scenario the settlor would not have reserved a benefit in the trust fund. During his own life he could not be said to have reserved a benefit as a consequence of the possible benefit to his wife as she also could not benefit. Therefore there would have been no inheritance tax charged on the death of the settlor.
27. If it is possible for the Court to exercise its powers so as to leave the effect of the "Exclusion" as limited as suggested in this way, then that would have clearer UK tax consequences than simply setting aside the Exclusion insofar as it relates to Mrs S only. If this was achieved and nothing else was done, there would be a risk that the settlor would be regarded as having retained a benefit in the Trust via his wife, particularly if she were to benefit from the Trust in a form which provided collateral benefit to the settlor himself. The alternative, if the Court is empowered so to order, namely that the Exclusion had effect as though it were executed in terms of paragraph 25 above, would have effect as if executed in those terms in the first place.
28. At the convening hearing on 6th March 2020, the Court ordered that the settlor and Mrs S's adult daughter, adult son, adult grandson and other minor grandchildren, as represented by their son and daughter respectively, be convened to the hearing. The three adults have written letters to the Court in support of the application, and, where appropriate, on behalf of the minors they represent. Mr and Mrs S have also written to the Court supporting the application. Mrs S says that she was not consulted about her exclusion and never agreed to it. Had she been consulted, then she would have said that she anticipated benefitting from the Trust in the event of her husband's death.
29. This application is made under Article 47G and, in the alternative, Article 47H of the Trusts (Jersey) Law 1984 as amended ("the Law"). The relevant provisions of Articles 47G and 47H are as follows:
30. In applying the relevant provisions of the Law to the facts of this case, it is accepted that in certain circumstances the same facts might engage the Court's jurisdiction under both Article 47G and Article 47H. However, in the view of the Court this case was principally an instance of the Former Trustee, pursuant to Article 47H, failing to take into account relevant considerations and had such relevant considerations been taken into account, the Former Trustee would not have exercised the power which it did or would not have exercised the power in the way it was so exercised but for that failure. The relevant considerations that were not taken into account were:
(i) The wishes of the settlor's wife;
(ii) The needs of the settlor's wife;
(iii) The alternative solution suggested by Smith and Williamson, which was not even discussed with the settlor and would have resulted in a partial exclusion from benefitting from the assets of the Trust only;
(iv) The second alternative considered by English counsel, referred to at paragraphs 25 and 26 herein;
(v) The effect of Exclusion upon the settlor and his wife. This was a matter that needed to be considered very carefully and was not.
(vi) The Exclusion itself recited that Mr and Mrs S had "requested" the Exclusion when they had not - there was simply, at most, one telephone call between the Former Trustee and the settlor.
Furthermore the Former Trustee also took into account an irrelevant consideration namely, on the Former Trustee's evidence, that Mr and Mrs S could still benefit via their children, when that was prohibited by the Trust itself. A further irrelevant consideration taken into account was the recording in the Exclusion that Mrs S had requested that she be excluded when she had made no such request.
31. Accordingly the Court's jurisdiction to set aside the Exclusion is plainly engaged. The Court has the power under Article 47H(2)(a) to declare that the Former Trustee's exercise of a power in this case has "such effect as the Court may determine". Is this wide enough to encompass the principal relief which the Trustee seeks today, namely that the exclusion of Mrs S shall have effect, but to a more limited extent, namely that Mrs S is to be an Excluded Person only during the lifetime of the settlor - at which stage she will automatically cease to be an Excluded Person and would return to the class of beneficiaries of the Trust?
32. Two questions arise. First, is the Court empowered to make such an under Article 47H? Secondly, does the Trust permit such an order to be made?
33. First, dealing with the terms of the statute, the Court has been assisted by the decision of the Court of Appeal in BNP Paribas Jersey Trust Corporation Limited -v- Crociani [2018] JCA 136A. The relevant part of the judgment concerned the court's power to set aside a transfer or disposition of property to a trust due to mistake pursuant to Article 47E of the Law, but the same approach applies to setting aside the exercise of powers in relation to a trust or trust property owing to mistake or the setting aside the exercise of fiduciary powers in relation to a trust or trust property under Article 47H. The key paragraphs are as follows, with our emphasis where appropriate:
34. The Court takes the view that similar principles apply to the exercise of the Court's powers under Article 47H. The Court has a discretion as to determining what effects, if any, of the exercise of the trustees' fiduciary powers are to be retained.
35. That is not to say that the Court is entitled to re-write history, or to make a new decision which the trustee wished it had made at the time. That is clear from the statute and from case law. In Representation re The B Trust [2019] JRC 035 the court agreed with the Representor that transfers into trust could be voided on the grounds of mistake under Article 47E. However, the Representor went further and asked the Court to give effect to certain intentions that the Representor had at the time of making the transfers into trust. Merely voiding the transfers into trust meant that the assets would fall back into the Representor's estate and this would not be as tax efficient as he had intended. The court was asked to make a declaration that the transfers were not merely voidable but should take effect as gifts to the Representor's wife. The court refused and at paragraphs 41 and 42 of the judgment said:
36. In this case the Former Trustee intended to exclude Mrs S and did so. However, that decision was flawed and is liable to be set aside ab initio. The Former Trustee had a duty to consider the exclusion of Mrs S very carefully and take into account the relevant considerations listed above and not take into account irrelevant considerations. Had the Former Trustee acted in accordance with its duty there can be no doubt that it would have excluded Mrs S during the settlor's lifetime only. It would have been the obvious course. Accordingly for the Court to order the exclusion of the settlor's wife as a beneficiary to take effect only for the duration of the settlor's life is not to substitute a different transaction for that which was undertaken. To make such an order is squarely within the Court's power to declare that the Former Trustee's exercise of its fiduciary power shall have such effect as the Court may determine.
37. Further, we needed to be satisfied that to make such an order was within the powers of the Former Trustee under the Trust. Clause 5 does not expressly provide for a person to be excluded temporarily and the effects of exclusion under Clause 23 are radical.
38. The Court can see no reason in principle against exclusion for a limited period only, by which we mean that there is no principle of trust law that would prevent a settlor conferring such a power on the trustees. Turning to the terms of the Trust, Clause 5 says nothing about a time-limited exercise. Clause 8.8 and 23, as referred to above, contain emphatic provisions against benefitting an Excluded Person. However, if a time limited exercise excluding or purporting to exclude a person who would otherwise be a beneficiary is possible then at the end of the period of exclusion such a person might benefit under the Trust. It could be said that that is inconsistent with Clause 8.8 and 23 but those provisions can equally well be read as meaning that no benefit can be taken by someone who is an Excluded Person at the time when the benefit would otherwise accrue.
39. The general proposition is that the greater includes the less; that is to say that a power to exclude permanently would generally encompass a power to exclude for a lesser time unless expressly excluded. In Re de la Bere Marriage Settlement Trusts [1941] Ch. 443 at 448 the Court held:
40. Furthermore, it is not uncommon for persons to be excluded persons for limited periods under trusts, one common example being "for such time as the person is subject to bankruptcy or equivalent proceedings." A further common example is the listing of trustees and/or a protector as excluded persons with the effect that such an individual is no longer excluded when they cease to be a trustee or protector, as the case may be. Neither the researches of the court nor the advocate for the Representor have found a case on all fours, but our attention was drawn to the decision in Representation of BBB Limited re the K Trust [2011] JRC 240 where the trust instrument named as Excluded Persons:
41. The Court had to consider whether a person who at one time had been a Participator in the Founder remained at all times an Excluded Person or whether their exclusion could cease at the point when they ceased to be a Participator, as defined under the relevant English legislation. The facts of the case were that the Founder had since been dissolved, and that "N", who had held the only issued share in the Founder, had died. The further question was whether, even if N remained a Participator after the dissolution of the Founder, the close family of N would remain "connected with" the Participator after his death.
42. The Court received opinions from two Leading Counsel that, as a matter of English law, N would cease to be a Participator in the Founder after its dissolution and that in any event N's family would cease to be "connected with" him after his death. The Court analysed the question of whether they remained Excluded Persons as follows:
43. The Court's reasoning in BBB Limited demonstrates that it is permissible for a trust to exclude a person by reference to a description and that a person may fall within or without that description from time to time. The Trust in this case also provides for exclusion by reference to a description at Clause 5.2.1 and it is accepted that the Former Trustee had the power to exclude Mrs S during her lifetime by describing her as "the settlor's wife, during his lifetime".
44. Accordingly the Court declares that the exercise of the Former Trustee of its powers on 5th April 2017 whereby it declared the wife of the settlor to be an Excluded Person is voidable and shall be set aside on the basis that the Former Trustee failed to take into account one or more relevant considerations and/or took into account one or more irrelevant considerations, and would have not exercised the said power, or would not have exercised it in the way that it was so exercised but for its failure to take into account such relevant considerations and/or its having taken into account irrelevant considerations and:
(i) That the said exclusion of the settlor's wife from benefit under the Trust shall have effect as if the Former Trustee had instead declared that the settlor's wife shall from the date of the said exclusion but only during the lifetime of the settlor be an Excluded Person to the intent that in the event of the death of the settlor, she will automatically cease to be an Excluded Person.
(ii) That the costs of the Trustee of and incidental to the Representation be paid out of the assets of the Trust on the trustee basis.
(iii) That the question of any costs order against the Former Trustee be left over for a period of six months, if the Trustee wishes to pursue the matter; and
(iv) That there be liberty to apply.
