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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.

Also see In the Matter of the C Trust where grandchildren removed as beneficiaries of a family trust for a crucial time in their lives by trustees following a marriage breakdown were reinstated by the Jersey Royal Court.

By way of background the Court noted at [142]:

“Thus, the grandchildren were at a crucial stage in their development and in need. It was in these circumstances that they asked for assistance. The trustee decided that far from assisting them, it would do the precise opposite and actually exclude them from the Trust; to cut them off from a reliable source of potential funding for their maintenance and education; to prevent them from even being considered by the trustee for financial assistance during the lifetime of the widow. It is true that they could still benefit from the trust indirectly through the widow if she so wished but she was estranged from them and hostile to their mother. Would the settlor ever have contemplated such a drastic step being taken at such a time in their lives? What, one might ask, had they done to deserve such treatment? It would seem that they had simply asked for assistance; a bare right of any discretionary beneficiary.”

The reasoning behind the reinstatement is summarised as follows:

  • The onus is upon the grandchildren to show that the discretion of the trustee has been improperly exercised. As stated in Lewin on Trusts 18th edition at paragraph 29-304, the Court does not sit to entertain appeals from trustees’ decisions. The mere fact that the Court would not have acted as the trustee has done is no ground for interference. The settlor has chosen to entrust the power to the trustee, not to the Court.[105]
  • … if the Court’s supervisory role is to have any meaning at all, there must be circumstances in which it can intervene in the exercise of a trustee’s discretion. It clearly cannot substitute itself as trustee, because as Birt, Bailiff said in S, L and E-v-Bedell Cristin Trustees [2005] JRC 109 at paragraph 21 that would lead to every beneficiary disappointed by a trustee’s decision coming to Court in the hope of an alternative decision. In our view the “no rational trustee” test is now well established in this jurisdiction, namely that an exercise of a discretion by a trustee will not be set aside unless it can be shown that it was such that no reasonable trustee would have acted or decided in the same way, and that, in our view, provides an appropriate boundary which respects the choice of the settlor to confer the discretion upon the trustee not the Court and at which the Court can intervene. It is a stringent test.[109]

Also see Rusnano Capital AG (in liquidation) v Molard International (PTC)
Limited and Pullborough International Corp where the Guernsey Court of Appeal upheld the Guernsey Royal Court decision, which held that beneficiaries of a discretionary trust can require trustees to terminate a trust and distribute the trust property, even in circumstances where a
broad power to add further (unspecified) beneficiaries exists.

References:

  • In the Matter of the Representation of the Grundy Trust [2020] JRC 071
  • Mettoy Pension Trustees Limited v Evans [1990] 1 WLR 1587
  • In Re Hastings-Bass [1975] Ch 25, [1974] 2 All ER 193
  • In the Matter of the C Trust [2012] JRC 086B
  • Rusnano Capital AG (in liquidation) v Molard International (PTC)
    Limited and Pullborough International Corp [2019] GRC 011

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