Ogier breaks new ground in the matter of the B Trust

Ogier in Jersey has successfully acted for IQ-EQ (Jersey) Limited in the first combined application to the Royal Court of Jersey, which sought to vary the terms of a trust and bless the trustee’s decision to distribute the trust’s assets.

The team, led by Dispute Resolution partner James Angus and senior associate Matthew Davies, submitted the application on behalf of IQ-EQ (Jersey) Limited) (the Trustee), who were appointed trustee of the B Trust (the Trust).   

The application sought the approval of a variation of the terms of the Trust to undo an earlier irrevocable exclusion of the settlor as a beneficiary. Consequent to the approval of the variation, the application also sought a blessing of the Trustee’s decision to appoint the entirety of the assets of the Trust to the settlor. 

The case sets a precedent for future combined applications involving trust variations and trustee decisions and highlights the Court’s careful scrutiny of applications seeking to reverse irrevocable decisions for tax purposes. 

Case background

The Trust was established by the settlor in 2012, in anticipation of his relocation to the United Kingdom and in conjunction with related UK tax advice. The initial beneficial class included the settlor, his spouse and his children and remoter issue.  

The Trust was intended to operate as a vehicle for wealth preservation and succession planning.  

In response to tax reforms in the United Kingdom in 2017 (which effectively brought the assets of the Trust within the settlor's estate for UK inheritance tax purposes) the settlor and his wife were irrevocably excluded as beneficiaries. These exclusions were effected following the receipt of UK tax advice to the effect that an irrevocable exclusion would mitigate the most severe effects of the tax reforms being introduced.  

At the time of the application, the Trust was subject to a 10-year recurring inheritance tax charge as well as attracting UK income tax and capital gains tax on distributions from the Trust. Additionally, there would be further inheritance tax on distributions from the Trust.  

Since the establishment of the Trust there had been several changes in the circumstances of the settlor's family. These included: 

• The settlor and his wife relocated to their home country as a result of changes to the UK tax resident non-domicile regime announced by the UK government

• All of the settlor's children had started families and settled in the UK, becoming UK tax residents for the foreseeable future - something which had not been anticipated when the Trust was settled

• The assets of the Trust had grown significantly as a result of successful investments made

• The extent of the growth exposed the Trust and its beneficiaries (who were all UK tax resident) to substantial tax on distributions 

Considering the changes in circumstances and tax advice received, the settlor asked the Trustee to consider taking steps to have him re-admitted as a beneficiary of the Trust, and thereafter making a distribution to him of the entirety of the assets of the Trust. The rationale for this request that: 

• The settlor's relocation meant that his receipt of the trust assets would "wash out" the stockpiled capital gains in the structure, with no attendant capital gains tax charges, as well as seriously mitigating the other incidences of UK tax as compared to the position were the assets to remain in the trust 

• Having received the assets, the settlor could safely invest them and make lifetime gifts for the benefit of his children and grandchildren in a manner consistent with prior conduct of him and his wife

The Trustee decided to seek a variation of the Trust to readmit the settlor as a beneficiary and, subject to that variation's approval, make the requested distribution to the settlor (subject to the Court blessing that decision).

The Trusts Law

As the application was made under both Article 47 and Article 51 of the Trusts Law, the Court had to consider both provisions and their respective tests.  

Article 47 of the Trusts Law  

Under Article 47 of the Trusts Law, the Court may, if it thinks fit to do so, approve "any arrangement, by whomsoever proposed and whether or not there is any other person beneficially interested who is capable of assenting thereto, varying or revoking all or any of the terms of the trust or enlarging the powers of the trustee of managing or administering any of the trust property."  

The Court can approve arrangements on behalf of a number of categories of persons, but it is most frequently asked to approve variations in respect of trusts which have minor and unborn children amongst the beneficial class. 

In considering whether to give its approval to an arrangement, the Court must be satisfied that the arrangement in question is for the benefit of the persons on behalf of whom the Court is giving its approval.  

Article 51 of the Trusts Law 

Article 51(1) of the Trusts provides that a Trustee may apply to the Court "for direction concerning the manner in which the trustee may or should act in connection with any matter concerning the trust and the court may make such order, if any, as it thinks fit."  

Article 51 is most commonly used by trustees of Jersey law trusts for the purposes of seeking the blessing or approval of decisions of trustees which are considered to be momentous. In these types of applications, the Court asks itself three questions: 

1. Was the decision being sought to be blessed by the Court one which the trustees have made in good faith and were empowered to make?

2. Did the decision fall within the band of reasonable trustee decisions?

3. Was the decision vitiated by any conflict of interest on the part of the trustees? 

When a trustee is considering exercising its powers under a trust it must take into account only relevant considerations and no irrelevant considerations. One such relevant consideration is whether the effect of the decision is to the benefit of the beneficiaries. 

The issues before the Court 

There were two issues before the Royal Court:  

1. Was the variation to readmit the settlor as a beneficiary of the trust, to the minor and unborn beneficiaries benefit? 

2. If so, should the Court bless the Trustee's decision to distribute the entirety of the Trust assets to the settlor? 

The benefit 

The Court acknowledged that the beneficiaries of the Trust had a discretionary interest in a very valuable trust, but that the assets in the Trust included significant stockpiled gains which would be subject to tax in the hands of the beneficiaries (all of whom were UK resident). The effect of the tax would be to render their interest in the Trust worth significantly less.  

The Court equally appreciated that if the totality of the Trustee's application was approved, the beneficiaries would have no interest in anything as the trust would come to an end.  

Having considered all the evidence before it, the Court concluded that the variation to readmit the settlor as a beneficiary was to the benefit of the minors and unborns. In arriving at this conclusion, the Court had regard to several matters, including: 

• The stated intention (backed up by a course of prior conduct) of the settlor to make substantial gifts to his children and grandchildren from assets received by him 

• The significant tax saved by the proposed course of action, which retained greater wealth in the hands of the family 

• The fact that the settlor's adult children all supported the application 

The decision to distribute 

Having decided to approve the variation of the terms of the Trust, the Court went on to consider whether to bless the Trustee's in-principal decision to distribute the assets of the Trust to the settlor. 

The Court concluded that the decision of the Trustee comfortably passed the relevant tests and blessed the Trustee's decision. 

Lessons and insights from the decision of the Court  

The judgment in the matter of the B Trust provides a number of useful insights for trustees, settlors and advisers to trustees. 

The Court's concern of involvement 

The Court expressed concern as to whether it was being drawn too far into approving arrangements to vary trusts or bless decisions for the purposes of obtaining tax benefits, particularly where a trustee seeks to undo the effect of something irrevocable.  

In view of the concern expressed by the Court, increased scrutiny is likely to be given in variation applications concerning the amendment of irrevocable steps previously taken for tax reasons. In the case of the B Trust, the Court was less concerned because no tax advantage had was obtained by the settlor through his earlier exclusion. 

Tests present challenges 

The different tests on variation and blessing applications presented challenges, particularly on the question of benefit. These challenges are especially clear in cases where the Court has before it an application for approval of a variation and an application to approve the steps taken in consequence of the variation. However, the Court noted that such combined applications were logical and preferable, where possible, given the Court's warnings in previous cases against making variation applications where the benefit was only potential and dependent on future decisions that had not yet been made.  

Where the Court is faced with combined variation and blessing applications, the approach to be adopted is that the tests must be applied separately to the different applications, albeit the two are necessarily closely linked. 

In respect of the variation, the Court is only concerned with assessing whether there is benefit for the minor and unborn beneficiaries and whether the Court should exercise its discretion to approve the variation. 

In respect of the blessing, the test is wider and benefit for the beneficiaries is but one matter for the Court to consider. The Court acknowledged however that a decision which is not for the benefit of the beneficiaries is unlikely to be a reasonable trustee decision: as the Court put it, it would be difficult to envision a decision that was not for the benefit of the beneficiaries that could fall within the band of reasonable trustee decisions.  

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