22 October 2018

Jersey trusts: Act of clarity

The Trusts (Amendment No. 7) (Jersey) Law 2018 (the Amendment Law), which came into force on 8 June 2018, refines and further enhances Jersey's trusts legislation, the Trusts (Jersey) Law 1984 (the Law).

Since its introduction in 1984, the Law has been amended and updated periodically, the last changes having been made in 2013. As part of the continuing work to ensure that the legislation both supports the needs of the industry and its clients and leads the way internationally, the Amendment Law further develops certain provisions of the Law.

Disclosure of trust information

Perhaps most significantly, art.29 of the Law, which relates to disclosure of trust information, has been redrafted to bring the provision in line with current judicial sentiment.

Previously, art.29 provided that a trustee shall not be required to disclose to any person any document in connection with the trust, unless the person is a beneficiary and the document sought relates to, or forms part of, the accounts of the trust. The use of a ‘double negative’ (seemingly imposing a positive duty to disclose accounts to beneficiaries, in conflict with the Privy Council's seminal decision in Schmidt v Rosewood Trust Limited that held trustees had no such absolute duty), as well as the potential for ambiguity, had been criticised.

Further, although the ability to hold a trustee to account for the conduct of its trusteeship is fundamental, it may be undesirable or inappropriate for trust information to be disclosed in certain circumstances; for example to a young or spendthrift beneficiary, or where there are genuine concerns as to the effect of disclosing sensitive information.

The newly restated art.29 provides that the terms of a trust can restrict a beneficiary's right to information and expressly provides that a trustee may refuse disclosure where it is satisfied that such disclosure would not be for the benefit of one or more of the beneficiaries, or the beneficiaries as a whole. The court retains ultimate power regarding disclosure, so that it can overrule the trustee's decision and override the terms of the trust concerning disclosure, either in relation to a particular instance or more generally.

This amendment will be appreciated by settlors and trustees alike, because it both brings certainty and limits the need for a trustee to apply to court where it has decided to withhold trust information from a beneficiary.

Reservation or grant of powers by a settlor

Clarifying amendments have been made to art.9A of the Law, which governs the reservation or grant of powers by a settlor. Article 9A sets out a list of powers that can be reserved or granted by a settlor without affecting the validity of the trust or delaying the trust taking effect, and provides that a trustee who acts in accordance with the exercise of any reserved or granted powers does not act in breach of trust.

The amendments to art.9A put beyond doubt that the reservation or grant by a settlor of ‘all’ of the powers listed in that article (as opposed to ‘any’, as before) will not affect the validity of the trust or delay the trust taking effect, and that the grant of such powers does not constitute the power holder as trustee.

Furthermore, it has been made explicit that, in respect of a trust where powers have been reserved or granted, unless otherwise expressed, it shall be presumed that the trust shall take immediate effect. While this was already considered to be the position, it was made clear that the trust instrument signed by the settlor shall be construed as an inter vivos trust taking effect immediately, rather than a form of testamentary disposition.

The amendments to art.9A provide greater certainty and flexibility for settlors and trustees when powers are granted or reserved by the settlor.

Trustee security and indemnities

It is generally accepted industry practice that a trustee parting with trust assets (whether on a change of trusteeship or by distribution) is entitled to seek ‘reasonable security’ before it transfers such assets. Reasonable security typically takes the form of an unsecured indemnity from the recipient trustee or beneficiary (as the case may be). It is also usual for the benefit of such an indemnity to extend to the officers and employees of the trustee, adopting the definition of ‘Indemnified Persons’.

However, while various articles of the Law provided that a trustee was entitled to require reasonable security on ceasing to be a trustee or on the termination of a trust, there was no provision explicitly permitting a trustee to require security on a distribution of trust property during the life of the trust or on revocation of the trust. There was also no specific reference to indemnities, even though (as mentioned above) this is by far the most common form of security taken.

The Amendment Law brings the legislation in line with current industry practice. Articles 34, 40 and 43 of the Law have been amended to cross-refer to a new art.43A, which entitles a trustee to require reasonable security in all scenarios previously provided for and, in addition, specifically includes the scenario where a trustee distributes trust property during the life of the trust. Article 43A also provides that indemnities may be required in favour of a wide range of persons ‘engaged in the management or administration of the trust on behalf of the trustee’, thereby including employees (whether employed by the trustee or another company in the trustee's group), officers and other agents, who can enforce such indemnities whether or not they are contracting parties. Furthermore, such persons will be able to enforce the indemnity if it is later renewed or extended by contract or other arrangement (i.e. on a subsequent change of trustee), even if they are not parties to the said contract or other arrangement. Again, this reflects current practice.

Trust income

The rules in relation to income accruing to a trust fund have also been clarified and widened. Previously, art.38 of the Law permitted the accumulation of trust income, if so authorised by the terms of the trust, but provided that any income not so accumulated ‘shall be distributed’. The use of the mandatory word ‘shall’ and the absence of more detailed provisions created the potential for uncertainty, for example as to the permissible retention period before income was deemed accumulated, and whether accumulated income could remain in its character as income or had to be considered to have been added to the capital.

The Amendment Law has changed the default position so that, unless otherwise provided in the trust instrument or a power to accumulate and add to capital is exercised, income shall now be retained in its character as income. The newly amended art.38 also provides that, subject to the terms of the trust, there shall be no time period within which the power to accumulate income and add it to capital, to retain income in its character as income, or to distribute income, must be exercised.

Separately, the trustee's power of advancement has been clarified so that all (not just part) of a beneficiary's interest may be advanced.

These amendments bring welcome clarity and flexibility for trustees where the terms of a trust do not contain detailed provisions relating to trust income.

The Court's power to vary trusts

The Royal Court of Jersey has the power under art.47(1) of the Law to approve on behalf of certain categories of beneficiaries who cannot consent for themselves (e.g. minors, unborn persons, persons lacking capacity) any arrangement varying or revoking the terms of the trust, provided such variation appears to be for the benefit of such person.

Consideration was given as to whether the Court should have a wider power to vary a trust regardless of whether that variation is supported or opposed by any one or more of the adult beneficiaries. The government ultimately decided against any such change, which would have been a radical departure from the law of most other Crown Dependencies and British Overseas Territories and could have weakened the firewall protection against adverse foreign judgments.

However, the Amendment Law does helpfully widen art.47(1) to permit the Court to provide consent for any person who cannot be found despite reasonable effort, and also any person falling within a large class of beneficiaries where it is unreasonable to contact each member (again, if such variation appears to be for their benefit).

Rather than making any fundamental changes, the Amendment Law brings welcome clarification to the existing legislation and further develops certain existing provisions of the Law.

 

An original version of this article was first published by STEP Journal, October 2018.