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Beneficiaries, Beneficiary rights, Right to trust information, Trusts, Trusts Act

Bye bye beneficiary?

Given the new presumption in the Trusts Act 2019 that, with effect from 30 January 2021, trustees will give basic trust information to every beneficiary, it can be presumed that many trustees will be looking to cull trust beneficiaries to ensure trusts comply with the settlor or settlors’ intentions, whether or not these are expressed in the trust deed or otherwise.

The difficulty where trustees hold the power to remove beneficiaries is to balance the trustees’ fiduciary obligations to all of the trust’s beneficiaries, duties (if any) owed to the settlor and the trustees’ own interests when confronting what may, for some, be a somewhat onerous task.

For these reasons the decision in the Jersey case In the Matter of the Representation of the Grundy Trust may on first blush appear as mana from above given the decision of the court that the settlor’s wife was properly removed as a beneficiary by the trustees.

However, as always, the devil is in the detail.  And for the law students reading this, always read the whole case and don’t let the headnotes bewitch you.

Some facts.  The beneficiaries of the Grundy Trust were the settlor, his wife, their children and remoter issue.  The power to remove beneficiaries was vested in the trustees.  This power was exercised to remove the settlor and his wife as beneficiaries.

The reason for doing so was entirely tax driven to avoid the consequences of changes to UK inheritance tax rules that would come into effect on 6 April 2017.  There was evidence before the court in the form of an e-mail dated 4 April 2017 providing two courses of action, one leaving the settlor and his wife as beneficiaries of the trust, but with significant assets resettled onto a new trust; or remove the settlor and his wife as beneficiaries.  However, only the removal option was discussed and, significantly, it transpired, this was discussed with settlor but not his wife.   While the power was a trustee power, weight was given to this omission.  As noted at [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:

“40. The power to exclude a person as a beneficiary is an unusual power. Normally, powers are exercisable in the interests of the object or objects of the power. A power to exclude is different. Save in the case where there may be tax advantages in a person being excluded as a beneficiary, the exercise of the power is likely not to be for the benefit of the person to be excluded, but instead be for the benefit of the remaining beneficiaries. Where a trustee proposes to exercise such a power, it is incumbent upon it to consider the position very carefully, to take into account the position of the person to be excluded and whether therefore it is a reasonable decision in the interests of the other beneficiaries.”

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.”

The matter proceeded under the Trusts (Jersey) Law 1984, which codifies the Rule in Hastings-Bass, whereby the court has the power to set aside the exercise of trustee powers due to mistake.    See Hastings-Bass revisited.

Relevant considerations the court found that had not taken into account included:

  • the wishes and needs of the settlor’s wife
  • alternative courses of action available to the trustees
  • the effect for the settlor and his wive to be excluded as beneficiaries
  • the fact that the exclusion was expressed as having been requested by the settlor and his wife, when this was not the case.  As noted at [30] “… there was simply, at most, one telephone call between the Former Trustee and the settlor.”

The end result was that the removal of the settlor’s wife was set aside with effect following the settlor’s death, which provided the most favourable tax outcome.

This decision is in accord with a tax and legislative provision that does not have a New Zealand equivalent.  However, the reasoning may require further attention given the entirely orthodox focus on the need to consider the impact on a beneficiary of their removal.

References:

 

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