ROYAL COURT
(Samedi Division)
25 March 1999
Before: FC Hamon Esq Deputy Bailiff, and
Jurats Myles and Tibbo
BetweenN & NRepresentors
And(1) Spread Trustees Company Limited
(2) Judith
(3) Steven
(4) Elizabeth
(5) Samantha; and
(6) Raphael Respondents
Application under Article 43 of the Trusts (Jersey) Law, 1984 to vary the terms of the Trust
Advocate N F Journeaux for the Plaintiff
Advocate M H D Taylor for the Trustee
Judith was unrepresented
Advocate W J Bailhache for Steven
Advocate J C Martin for Elizabeth, Samantha and Raphael
JUDGMENT
THE DEPUTY BAILIFF: This is an application under Article 43 of the Trusts (Jersey) Law, 1984 which confers power to the Court to give its approval, on behalf of persons unable for one reason or another to consent for themselves, to agreements between beneficiaries to vary terms of a trust. We intend, as requested by Counsel, to give this judgment in a way that will not identify the trust or the persons involved in it. The only purpose in doing that is to protect the identity of the several minor beneficiaries involved in this application.
The settlement before us (we shall call it "The No. 3 Trust") has Jersey as its proper law and Jersey is also its forum for administration. It is a Jersey trust.
All the parties necessary to this application are before us today. The trust was settled by Mr and Mrs N on 13 March 1989, and, in essence, it is a non-resident accumulation and maintenance trust for the benefit of the settlors' five children. Mr N is the Protector of the trust.
The beneficiaries of the trust, in order of seniority, are Judith aged 22, Steven aged 19, Elizabeth aged 17, Samantha aged 15 and Raphael aged 10. Judith is married with a child born last year, the remaining children are unmarried and without issue. The beneficiaries were originally defined as Raphael, any future children of the settlors and the current beneficiaries of a further trust, who are the four remaining children.
The trust property has a complex structure and it comprises some 49 companies. A figure of £450,000,000 has been given as an estimate of the gross value of the underlying properties.
The trust was created before 1991 primarily for UK Capital Gains Tax reasons. The trust owns investment property in the United Kingdom, real estate in Israel and has interests in a Delaware company.
The settlors are excluded from benefiting from the trust. By way of background to this unusual application, this family is a very close orthodox Jewish family and Mr N clearly regards the wealth and welfare of the whole family as of significant value as against their individual interests. It is apparent that the family share their parents views.
It is also apparent from their letter of wishes that the representors always wished that the family fortune should remain intact for the benefit of the family as a whole for many years into the future.
The trustees have the power to bring the trust period to an end at any time.
The problem faced by the trustees lies within clause 4 of the trust. The power there is limited in its effect. It is not flexible and it may well be that the settlors thought (as is implied by the letter of wishes) that they had brought into being a discretionary trust.
"4.The Trustees shall stand possessed of the trust fund and the income thereof upon the trusts following that is to say:-
(a)Upon trust as to capital and income for such of the beneficiaries as attain the age of twenty-five years before the end of the trust period or are living and are under that age at the expiration of the trust period or any one or more of them exclusively of the other or others in such shares as the trustees may by deed or deeds appoint and subject to and in default of any appointment in equal shares absolutely
(b)No appointment under sub-clause (a) above shall be made in favour of any beneficiary who shall have attained the age of twenty-five years or shall increase the share in the trust fund of any beneficiary who shall have attained the age of twenty-five years or shall increase the share in the trust fund of any beneficiary who shall have attained that age
(c)An appointment made under sub-clause (a) above may be made revocably in favour of any beneficiary but shall not be capable of being revoked if the beneficiary in whose favour it shall have been made shall have attained the age of twenty-five years or if upon such revocation the share in the trust fund affected by such revocation shall be held upon trust for a person or persons who shall have attained that age
(d)The provisions of clause 5 below shall apply to the presumptive share or entitlement in or to the trust fund of any of the beneficiaries such presumptive share or entitlement being in that clause called "the share" and that one of the beneficiaries who is primarily interested in the share being called "the primary beneficiary"."
Several senior Counsel have been consulted in England and have generally advised that the property should be transferred to a new and separate settlement distinct from the existing settlement.
One or more of the beneficiaries (depending on the exercise of the trustees powers under clause 4 to vary shares) will become absolutely entitled to the capital of the trust fund at the age of 25. There is no provision for the children of the beneficiaries nor for remoter issue, nor for spouses of the children. The only powers available to the trustees are either to make outright transfers of capital to one or more of the children (under clause 4) or to exercise a power which they have under another clause of the trust so as to create new trusts. These are limited, however, to one half of the beneficiarys presumptive interest.
Judith and Steven are resident in Israel. Steven intends to return to the United Kingdom later this year. The other children are domiciled and resident in the United Kingdom. Both Elizabeth and Raphael suffer from a serious hereditary illness. We have seen (amongst the numerous affidavits supplied on affirmation from Mr N) that for medical reasons it is highly unlikely that the parents will (or indeed that Mrs N can) have further children. Adoption seems so unlikely that the trustee (now based in Guernsey having taken over from the original trustee) does not seek formally the consent of the Court to the arrangement on behalf of the unborn and unascertained beneficiaries. We are prepared to accept that decision and endorse it.
Absolute vesting of capital in any of the children other than Judith will apparently result in a very substantial liability to Capital Gains Tax. Recent changes in the United Kingdom Capital Gains Tax legislation introduced by the Finance Act 1998 have created a greater urgency and provoked very detailed consideration by leading tax counsel of the future of the trust.
The offshore status of the trust has so far served the beneficiaries well. The consequences of allowing matters to stand could cause complex problems both financial and family. We do not intend in this judgment to examine the machinations and consequences of the Finance Act 1998. We have the written opinions of three leading Silks on the matter and we are fully satisfied that it would be right to consider the proposed variation but we cannot, in law, approve the arrangement to vary the trust unless we consider that it is for the benefit of the beneficiaries who cannot of course consent. We must be able to say that the purpose of the original trust which was to benefit the beneficiaries will be carried out as effectively by the new proposed trust. As this Court said in the leading case of In re Osias Settlements (1987-88) JLR 389 at 412:-
"In exercising its discretion the function of the Court is to protect those who cannot protect themselves. We must do what is truly for their benefit. We can, in a proper case, give our consent to a scheme to avoid tax."
Again the Court said, at page 403:-
"Both Article 43 of the Law and S.1(1) of the Variation of Trusts Act 1958, empower the Court to approve "any arrangement". Lord Evershed MR in Re Steeds Will Trusts (1960) 1 All ER at 492:-
"I think that the word ... is deliberately used in the widest possible sense so as to cover any proposal which any person may put forward for varying or revoking the trust".
We respectfully agree that a very wide meaning must be given to the word "arrangement"."
We must deal first with a novel problem posed for us by Advocate Bailhache appearing for Steven.
Steven is 19 and has made a statement in Israel. It reads (with appropriate deletions for the express purpose of anonymity):--
"I, the undersigned, Steven Michael N, holder of UK Passport No. --- after having been warned that I must state the truth and that I shall be subject to the penalties prescribed by law if I fail to do so, hereby declare as follows:-
1.I am 19 years of age.
2.I am domiciled in the United Kingdom and temporary (sic] resident in Israel, with an intention to return to the United Kingdom later this year, and am regarded as an adult under the laws of both countries.
3.I have seen a copy of the representation which is to be presented to the Royal Court in Jersey and a copy of the draft Scheme of Arrangement and have had the same thoroughly explained to me by my professional advisors, (sic] including by my lawyer Advocate David T Osborneat a meeting held on the 7 March 1999 in Jerusalem attended by myself, together with Advocate Osborne and others.
4.I understand that the result of the said arrangement will be to remove me from my present entitlement to receive income from the L & SDN No. 3 Trust (the "Trust") from the age of (18) eighteen and capital from the trust from the age of (25) twenty five.
5.I have been advised in connection with this transaction by Advocate Osborne and UK accountants and have not been placed under any pressure or influence by my parents, any other member of my family or by any third party.
6.I am aware that the assets of the trust have been valued at or around eighty five million pounds sterling (£85 million) and that as far as I am aware, no income has been received into the trust.
7.To the best of my knowledge and understanding, if the scheme of arrangement is not made, there will be a very large capital gains tax liability to be assessed on my parents which might or might not give rise to a further claim against the assets in the trust.
8.Whether it does or does not give rise to a further claim as mentioned above, I wish to avoid such assessment being made on my parents in the wider interests of protecting the family wealth and preserving the good relations which exist between myself and other members of my family, including my parents.
9.If I were of age under Jersey law, I would instruct Advocate William J Bailhache of Bailhache Labesse, Advocates and Solicitors, to appear before the Royal Court in Jersey and to consent to the said proposed arrangement on my behalf, notwithstanding that the result is to disentitle me from my present entitlement to the income from the trust and my defeasible contingent interest in the capital from the trust".
Here we have a beneficiary who is an adult in Israel, an adult in the UK but still under Jersey law a minor. Steven of course has no connection with Jersey and has never been here.
By the terms of the trust "infant" is defined in this way:-
" 'infant' wherever the word shall so appear in this settlement and only so far as it shall appear means any individual who has not attained the age of twenty notwithstanding that such individual may by and in accordance with the law of his or her domicile be of full age and the and 'minority' shall be construed accordingly."
Clause 9(b) of the trust gives a power of disclaimer to "any person of full age". This is not in our view a question of disclaimer; it is a question of whether Steven can consent to this arrangement.
In Representation of Gollop, Tuteur of Fargus (19 March 1997) Jersey Unreported which involved a representation to dissolve a tutelle following the minor reaching the age of majority in England, the Court said this:
"It will readily be seen that the minor child has not yet achieved the age of 21, at which point under Jersey law the tutelle would be dissolved, and no engagement can be made because he has not yet reached the age of 20 years. However, Dicey & Morris, The Conflict of Laws, (12th Ed'n), at 1028 (1993) states: "A legatee has capacity to receive a legacy of movables if he has capacity either by the law of his domicile or by the law of the testator's domicile." The minor child is still resident in England and domiciled there. The provisions of s1 of the Family Law Reform Act 1969 clearly state that a person shall attain full age on attaining the age of 18 years. In In re Hellmanns Will (1), it was held that it was proper to pay a legacy to a beneficiary who, though a minor under the law of England, where the estate was situated, had attained her majority under the law of her domicile. That rule was followed in the case of In re Schnapper (6)."
After reviewing the law, the Court made the order.
We have to remind ourselves that this is not a question for the trustees but for the Court. The Court has power to vary a trust in the interest of any minor beneficiary under Article 43. While noting the expressed views of Steven we shall still regard him with the other three minor children in making this decision.
Judith is not represented at today's hearing but she has written to say that she fully approves the proposed variation.
We were taken in great detail through the opinion of Mr Alistair Norris of Counsel. In that opinion he cites from a Canadian case (Re Irving (1975) 66 DLR (3rd) 387) which in our view poses the question that we have to answer:-
"Would a prudent adult, motivated by intelligent self-interest and after sustained consideration of the expectancies and uses, be likely to accept the proposal".
The word "benefit" in Article 43(2) is to be widely construed.
In Osias (supra) the Court spoke of the "infinite varieties of a fact situations which may arise..." . It is clear however from that case that there is no need for there to be a financial benefit nor is a financial benefit in itself sufficient. The Court should also consider the educational and the social benefit of what is proposed.
When we look at the proposal the financial advantage may be thought to be to the disadvantage of the three youngest children. They would it appears receive £2.5M after tax as compared with £4.97M if the arrangement did not proceed. We can only be guided by Counsel on that point. The position of the settlors is not our concern but in the context of this close-knit family where two of the children are suffering from Gauchers disease it seems to us that the children, if adult, would be mindful of a moral obligation not to exploit the advantage which the Finance Act of 1998 has somewhat fortuitously conferred on them. The parents might well be put into financial disarray by having to meet a substantial and unexpected tax payment: the trust fund has been accumulated only because of the financial acumen of the settlors. If the settlors sought to recover tax liabilities in excess of £2M the children would find themselves in litigation with their parents. The avoidance of such an unnecessary internecine war we view as a significant factor.
The shortfall to the minor children, who are represented by Advocate Martin, should be more than compensated for as more gains are realized in the proposed UK resident settlement.
In our view, apart from the social matters to which we have referred, the proposed arrangement provides flexibility and a framework more suited to such a large trust fund. Under the existing trust the beneficiaries can obtain a life interest at 18 and the capital absolutely at 25. The arrangement for the minor beneficiaries in the new form permits a life interest at 25 and the right to capital could be deferred indefinitely.
The proposed "new trustees" are the parents of the beneficiaries and a chartered accountant who is described by Mr John Rowe one of the directors of the present trustees as "a close associate of the family".
We have some concern on behalf of the beneficiaries as to what the consequences might be if the Settlement is tainted. Mr Rowe does not believe that it is, but if it is then it is a liability of the settlors.
Miss Martin has carefully considered on behalf of the minor beneficiaries the question of tainting and the fact that no accounts were available for the hearing. Mr Rowe of this says in his affidavit at paragraph 3:-
"At paragraph 7 of the Representation it was stated that accounts were in the course of preparation and would be available. When the Trustee took over this Trust and the administration of the forty-five underlying companies (and the one property held directly by the Settlement) the accounts were either not in existence or many years in arrears. The Trustee has had to bring the accounts up to date for all the underlying companies and the Trust and this task is nearly complete. Although accounts are not available for this hearing the Trustee has provided valuations of the assets of the underlying companies which have been prepared by TRZ and REIT Asset Management. I should add that the only asset of the Trust is the shares in the holding companies (together with one property). There is no income at present from the assets and no dividends have been paid on the shares."
We have heard all the parties (apart from Judith). Mr Bailhache did not in any way criticize Miss Martins argument. All counsel are of one mind. We are of the opinion that this variation is of benefit to the minor beneficiaries and we make the order accordingly.
Authorities
Representation of Gollop, Tuteur of Fargus (19 March 1997) Jersey Unreported
Trusts (Jersey) Law, 1984 as amended, Articles 1, 5, 6, 43 and 47
Re Irving (1975) 66 DLR (3rd) 387
In re Osias Settlements (1987-88) JLR 389