21 July 2023
Before : |
M. J. Thompson, Esq., Commissioner, and Jurats Dulake and Opfermann |
IN THE MATTER OF THE REPRESENTATION OF PAICOLEX TRUST MANAGEMENT AG AND
PAICOLEX TRUST COMPANY (BVI) LIMITED
AND IN THE MATTER OF THE R TRUST, THE Q TRUST AND THE P TRUST.
AND IN THE MATTER OF ARTICLES 47, 51 AND 53 OF THE TRUSTS (JERSEY) LAW 1984
Advocate N. L. M. Langlois for the Representors
Advocate G. C. Staal for Minor and Unborn Beneficiaries
judgment
in private
the commissioner:
1. This judgment contains our detailed reasons for adjourning an application by Paicolex Trust Management AG and Paicolex Trust Company (BVI) Limited (the "Representors") to vary three trusts on behalf of minor and unborn beneficiaries pursuant to Article 47 of the Trusts (Jersey) Law 1984 as amended pending the provision of further information from the Representors.
2. The Representors are the current and original co-trustees of three trusts known as R Trust, The Q Trust, and The P Trust (together the "Trusts"). For the purposes of the application before us, there was no material difference between the provisions of each of the Trusts.
3. All of the Trusts were settled by settlements made between ("B") ("the Settlor") and the Representors. Each of the Trusts is governed by Jersey law.
4. B, as well as being Settlor, is the current and original Protector of each of the Trusts. As Protector his consent is required to make any distributions of income or capital and for the exercise of powers of addition and exclusion of beneficiaries. His consent is also required to invest trust assets and to employ an investment adviser or manager. We have referred to these latter powers because, in the evidence provided to us, it was not explained how trust assets had been invested. Nor was the role of the Settlor in relation to the investments of trust assets made clear beyond Advocate Langlois informing us that he was involved in managing the investments of the Trusts.
5. Originally, the class of "primary beneficiaries" of each of the R, Q and P Trusts comprised the Settlor's late wife, ("N") and one of the three minor children of the Settlor and N, namely R, Q and P and their respective descendants.
6. Sadly, at the time the Trusts were settled in July 2013, N had been diagnosed with a serious illness. The reason for establishing the Trusts, as set out at paragraph 15 of the Representor's Skeleton Argument, was to provide N with the comfort of knowing that her children would always be well provided for during their respective lifetimes. Sadly, N passed away at the end of 2014. As we said, when we announced our decision and set out what further information we were looking for, we recognised that both the Settlor and his three children have had to face a horrendous situation. We also accepted unreservedly the evidence of the Representors about how the Settlor has cared for his children since their mother passed away.
7. In relation to the children, they were born in the United Kingdom. [Redacted]. R and Q attend boarding school in the UK and P is to join them from this September. Until 2021 they and the Settlor and his current wife all resided in the UK. The Settlor and his current wife however moved to Country 1 in 2021. One of the reasons for the Settlor moving to Country 1 was that the basis upon which his income was taxable in the UK was becoming less favourable.
8. To complete the picture, the Settlor has two children from a previous marriage; N also had another son, ("M"), from a previous marriage.
9. It is also right to record that the terms of the Trusts refer to secondary beneficiaries. Included in each deed is a schedule of individuals who may benefit should the class of primary beneficiaries for that trust cease to have any members. There have been various modifications to the classes of individuals named as secondary beneficiaries within each of the Trusts, but it is not necessary for the purposes of this judgment to set out those changes save to note that in 2017, the Settlor's two children from his first marriage were added to the class of secondary beneficiaries for each of the Trusts.
10. The other relevant provision of the terms of each of the Trusts concerns the fact that the Settlor from the outset was described as an Excluded Person together with any future spouse and civil partner of the Settlor, as well as a long-standing financial adviser. In 2019, the definition of Excluded Persons was expanded to include the Settlor's brother and sister and a niece and their descendants, and descendants of the financial adviser and M.
11. In relation to the assets of each of the Trusts, the Settlor settled an initial sum [redacted] into each of the Trusts. At paragraph 6 of his witness statement dated 11 May 2023 filed in support of the present application, the Settlor explained that he made subsequent contributions to each of the Trusts in the forms of shares in hedge funds in July 2013, August 2013 and August 2014. The source of these funds appeared to be from the Settlor's career as a banker but this was not completely clear to us. He further explained that the total value of assets settled into each Trust was approximately [redacted]. The current value of each of the Trust's portfolios as at February 2023 was in round figures £[redacted]. There has therefore been a gain of some £[redacted] being a combination of accumulated income and realised and non-realised gains on capital investments.
12. The Settlor also explained in his statement that he had had a seventeen year career in banking, holding leading roles at a number of large and well-known financial institutions. He also explained that he now manages his own private funds and that his personal wealth was in excess of $[redacted], a significant proportion of which was held in liquid assets. He stated that he has used his own personal wealth to provide for R, Q and P and has not sought to draw on Trust assets for their maintenance.
13. However, we were informed that R, Q and P are deemed to be UK residents and income tax would be payable on any distributions of income made to them from the Trusts and capital gains tax would be payable on distributions of capital. The top rate of income tax in the UK applies to income earned over £125,140. Below this value, individuals are entitled to personal allowances and taxes chargeable at rates of 20% or 40% depending on the amount of income they receive or are deemed to have received. We were informed that the rate of capital gains tax that can be payable on distributions of capital can be as high as 32%.
14. The present application is brought to approve, on behalf of minor and unborn beneficiaries, the removal of the reference to the Settlor being an Excluded Person and then to bless the addition of the Settlor as a beneficiary of each of the three Trusts. The rationale for the application was explained as being to give the Trustees flexibility to respond to future events and provide benefits to all or any of R, Q and P in a tax efficient manner.
15. The application was supported by an affidavit of Yayoi Kitana Stadelmann, a director of the Representors and by the statement of B referred to above. In relation to the establishment of the Trusts, B, at paragraphs 11 and 12, stated the following:
"11. As noted above, the [R, Q and P Trusts] were established when [N] was terminally ill. My priority at that time was to provide [N] with reassurance that our very young children would be well provided for throughout their lives, to give her peace of mind that there would always be sufficient resources available for them to be taken care of as she would have wanted. At that time, in what were very distressing circumstances, I did not really fully consider the longer term implications of settling the [R, Q and P], or structuring them in the most tax efficient way - my sole focus was on ensuring that [N] was comfortable with the arrangements. I was under considerable emotional stress given [N's] illness. Of course, it would always have been my intention to provide for the Children in any event, as I currently do from my own personal funds (see below).
12. I know that [N] was concerned about the trust assets being exposed to claims from a new wife in the event that I were to re-marry. Therefore, I agreed that, as well as any future spouses or civil partners of mine being excluded from benefit under the [R, Q and P], I too would be explicitly excluded from benefit. I also briefly spoke to my UK tax adviser, Tony Bunker of Berwin Leighton Paisner LLP, who advised me in a meeting that the most straightforward way to ensure there would not be any UK tax implications for me (given I was UK tax resident at the time the [R, Q and P Trusts] were established) would be for me to be completely excluded from benefit under the [R, Q and P Trusts]."
16. The Settlor also explained in his statement that he increased the contributions to each of the Trusts so that they were equal to the value of certain other trusts that he had previously settled for the benefit of his two older children. This was because he wanted all of his children to be provided for equally. However, these trusts were later terminated "to improve the cost and tax efficiency of providing funds to them and my current intention is to provide for them in accordance with the relevant provisions of my will". We were not provided with any detail about how assets of these trusts were dealt with when they were terminated and whether they were returned to the Settlor. The Settlor also stated that he had separately established a material trust fund for M's benefit.
17. Paragraph 14 of the Settlor's statement is important and is as follows:
"14. [N] and I also discussed at what age and in what circumstances the Children should receive benefits from the [R, Q and P Trusts]. We agreed that distributions to the Children should be very limited until they were mature and had achieved professional success. [N] and I both agreed that I should be appointed as the Protector of the Trust because, as the Children's father, I would be best placed to make decisions in their best interests. Both [N] and I thought it was important that I remained closely involved in decisions relating to the payment of monies to, or for the benefit of, the Children, particularly given that they were very young when the Trusts were settled. We felt (and I still feel) very strongly that the Children should have a very comfortable life and be provided with the benefit of opportunities that wealth can facilitate, but that they should be raised with an understanding of the value of money and hard work, and should not be dissuaded from following their own paths. As Protector, my consent is required to the making of any distributions of income or capital by the Trustees and to the exercise by the Trustees of the powers of addition or exclusion of beneficiaries."
18. We also noted the following statement at paragraph 17:
"17. In addition to this, and as I have stated above, in the period prior to her death, [N] had sought reassurance that the Children would be well provided for throughout their lives, regardless of whether or not I re-married."
19. Finally, we wish to refer to paragraphs 29 and 30 as follows:
"29. Ultimately, my wish is that ["C"] and all five of my children will share in my personal wealth equally in the event of my death. My current testamentary planning is based on the premise that my estate will be divided between my children and [C], but that the amounts held in the [R, Q and P Trusts] (or any other Trust structures) will be taken into account when calculating the value of each child's share. This means, therefore, that the Children will receive a reduced amount from my "free" estate in so far as they are entitled to benefit from the assets settled on the [R, Q and P Trusts]. The size of the reduction will not take into account any possible taxes that the Children may have to pay on the receipt of distributions from the [R, Q and P Trusts]. It is therefore very important to me to achieve tax efficiency for the [R, Q and P Trusts] in order that I can be confident that I am providing equally for the Children.
30. If I were to be added as a beneficiary of the [R. Q and P Trust], I am absolutely sure that I would not myself require financial support from the [R, Q and P Trusts] in the future. As mentioned above, I have significant personal wealth, with liquid assets in excess of USD$130m, and currently have income and assets to comfortably maintain my own lifestyle and provide generous support to the Children. I do not have any debt. I anticipate my wealth will continue to increase through investment and that investment growth is likely to exceed my expenditure. My investment portfolio generates an annual income of over USD$4m. Over the next 12 months, the expected return is between 8 and 10 percent per annum. I am therefore confident that my portfolio's annual growth will exceed my annual expenditure and I will not need to receive financial support from the [R, Q and P Trusts]. As my wealth is completely self-made, I consider that my track record speaks for itself."
20. The law in relation to the ability of the Royal Court to approve variations for minors and unborns is not in dispute. The jurisdiction of the Court to vary a Jersey trust is contained in Article 47 of the Trusts (Jersey) Law 1984 which provides as follows:
"47. Variation of terms of a Jersey trust by the court and approval of particular transactions
(1) Subject to paragraph (2), the court may, if it thinks fit, by order approve on behalf of -
(a) a minor or interdict having, directly or indirectly, an interest, whether vested or contingent, under the trust;
(b) any person, whether ascertained or not, who may become entitled, directly or indirectly, to an interest under the trust as being at a future date or on the happening of a future event a person of any specified description or a member of any specified class of persons;
(ba) any person, if the court is satisfied that despite reasonable effort to find such person, the person cannot be found;
(bb) any person, if the court is satisfied that the person falls within a class of beneficiary and that because of the number of persons falling within that class it is unreasonable for the person to be contacted;
(c) any person unborn; or
(d) any person in respect of any interest of his or hers that may arise by reason of any discretionary power given to anyone on the failure or determination of any existing interest that has not failed or determined,
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.
(2) The court shall not approve an arrangement on behalf of any person coming within paragraph (1)(a), (b), (ba), (bb) or (c) unless the carrying out thereof appears to be for the benefit of that person.
(3) Where in the management or administration of a trust, any sale, lease, pledge, charge, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction is in the opinion of the court expedient but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustee by the terms of the trust or by law the court may confer upon the trustee either generally or in any particular circumstances a power for that purpose on such terms and subject to such provisions and conditions, if any, as the court thinks fit and may direct in what manner and from what property any money authorized to be expended and the costs of any transaction are to be paid or borne.
(4) An application to the court under this Article may be made by any person referred to in Article 51(3)."
21. The scope of the jurisdiction conferred on Article 47 was considered for the first time in Re Osias Settlements [1987/1988] JLR 389 and has been applied many times since by this Court. It is not therefore necessary to set out the details of these well-known principles for the purposes of this judgment but we have applied them.
22. Of more direct relevance is the decision of the Royal Court in the Matter of the Representation of A and B [2011] JRC 243 where the Royal Court had to consider whether to approve a variation which sought to remove a specific person from the class of excluded persons under the trusts in question. In relation to two of the trusts, the settlor had been removed by a subsequent deed of exclusion; in the third, the settlor had been removed from the outset. The reason for the settlor's exclusion was the same, namely that because the settlor was resident and domiciled in Singapore at the time that each of the trusts were established, Singapore had an estate tax and, if the settlor had not been excluded from benefit, the assets of the trusts would have been aggregated with the settlor's other assets thereby resulting in a very substantial estate tax liability. However that position subsequently changed so that under the Singaporean tax regime, estate tax was abolished and so was no longer charged on assets settled into trust; thus the appointment of the settlor in that case as a beneficiary no longer gave rise to any adverse tax consequences in Singapore. His proposed addition as a beneficiary therefore gave the trustee flexibility for tax planning because the settlor was not domiciled or resident in the UK whereas other beneficiaries were UK domiciled or resident.
23. The Court firstly accepted that it had jurisdiction under Article 47 both to remove the settlor as a member of the excluded class of beneficiaries and to revoke the deeds excluding him.
24. This led to the Court stating the following at paragraph 14:
"14. The language of Article 47(1) does however appear to extend to a judicial power to revoke all or any of the terms of the Trust, including those which have arisen from the irrevocable exercise of power by the Trustee. In substance that is not very different from a power to revoke the terms of a Trust which have been accepted by the Trustee in the Settlement Deed itself, again perhaps expressed in irrevocable terms. A Trustee who comes to Court seeking the exercise of the Court's power to revoke a trust provision which arises as a result of an irrevocable exercise of power by the Trustee in the first place can expect to have the motivation for such a request very closely examined by the Court. Nonetheless, we accept that we have jurisdiction pursuant to Article 47 of the Trust Law to make the orders which we are asked to make." [Emphasis added]
25. It is therefore clear that the Royal Court possesses under Article 47 a jurisdiction to approve the variation of a trust removing an individual as an excluded person. It does not matter whether the exclusion was in the original deed creating the trust or came about due to an irrevocable exercise of a power to exclude by a trustee.
26. In order to approve such a step, it is clear from Article 47(2) that the Court is not to approve any arrangement unless the carrying out of the arrangement appears to be for the benefit of the person on whose behalf the arrangement is approved, i.e. in the present case minor and unborn beneficiaries.
27. In the A and B case, three arguments were advanced, two of which were rejected. The argument which was accepted was that there were tax benefits which might be available to the family at large if the settlor was allowed to become a beneficiary again. This led the Court to state the following at the conclusion of paragraph 25:
"25. Advocate Pearmain submitted that if the Court were to give approval to the proposed arrangements, it might be possible for the Trustee to give consideration to mechanisms by which savings might be made in capital gains tax which would otherwise be due by the UK resident beneficiaries......
..... If it is right as we think it is, as a matter of law, to accept the proposition that tax planning is a benefit which the Court can take into account in exercising its discretion on an application of this kind, this is the clearest possible case where the artificial and unduly harsh nature of the basis of taxation would indeed prompt the exercise of discretion."
28. The Royal Court further noted at paragraphs 26 to 28 that the law of Jersey was clear. The Court's conclusion was then found at paragraph 29 where it stated the following:
"29. We remind ourselves that this application is to remove the provisions which exclude the Settlor from benefit in relation to the three Trusts. Of itself, no physical charge to tax arises in any jurisdiction as we understand it, as a result of such a change. The result of that change however is, as Advocate Speck helpfully put it for the Trustee, that while the Court cannot assume that the only way of benefitting the beneficiary as a result of the change in arrangements is that there would be an appointment of all or a proportion of the assets to the Settlor, the definable benefit is that the structure is more user friendly and that there will be a better opportunity to plan proper tax mitigation than if the status quo were to be preserved. Against this potential benefit, what is the potential downside? It is that if in fact the Trustee did determine - and nothing has been decided yet - to make an appointment in favour of the Settlor of some or all of the Trust assets, the Settlor might leave the assets by will to the equivalent of the cats' home, or place the assets on a bet on a horse in the Grand National at Aintree and lose it all. Conversely, the Settlor might either make a resettlement or leave the property by will to the same beneficiaries whom she has regularly shown an inclination to benefit, in which case the tax advantages would be significant."
29. In relation to the application before us, we had no difficulty with the submission that we possessed jurisdiction to approve the removal of the Settlor as an Excluded Person under each of the Trusts. The question was rather whether we should exercise our power to do so.
30. The rationale for the application was summarised by the Representors in their Skeleton Argument at paragraphs 31 to 33 as follows:
"31. [B] was resident in the UK for tax purposes at the time he settled the [R, Q and P Trusts]. Having taken advice on his own tax position, he was advised that, in order to mitigate any risk of personal exposure to UK tax arising in relation to assets settled on the [R, Q and P Trusts], he should be expressly excluded from benefit thereunder.
32. As noted above, [B] also wished to reassure his wife, [N], that the Children would be well provided for throughout their lives, regardless of whether or not [B] were to re-marry and have more children.
33. [B] did not, however, appreciate that his exclusion as a beneficiary under the [R, Q and P Trusts] could significantly impact the flexibility for the Trustees to respond to future events and to provide benefits to the Children in a tax efficient manner. His evidence is that, had he done so, he would not have agreed to be excluded in such absolute terms in the first place."
31. In relation to these submissions, however, we were concerned that more emphasis was placed on the Settlor not appreciating that his exclusion as a beneficiary impacted the flexibility for the Trustees to provide for future events and in a tax efficient manner as distinct from his desire to reassure N that each of their children would be well provided for throughout their lives. Based on the material provided to us to date, our view at this stage is that the priority of the Settlor when creating the Trusts was to provide reassurance to N that her children would always be well provided for. We accept that the main focus was on the children always being well-provided for in the event of the Settlor re-marrying and having further children. However, we regard that as but an example of the more general concern that N wished for her children to be provided for whatever occurred in the future. In view of the fact that Article 47 requires us to determine whether the proposed variation is of benefit to the existing minor and unborn beneficiaries, namely each of the children for the Trust created for their benefit and their issue, at this stage we wanted more information about what was proposed for the following reasons.
32. Firstly, the children are still very young. They are either at the beginning of secondary school or at the end of primary school. We therefore are a very long way from knowing what their futures might hold. We refer to this because the application was put before us on the basis that each of the children was likely to remain UK resident and therefore distributions of income and capital out of the Trust would always be subjected to the UK tax regime. We had significant reservations about this submission given the ages of the children. At this stage we consider it too early to conclude whether or not they might remain in the United Kingdom or where they may settle. Options for further education are much broader and more available than they used to be. It is also not clear whether these children will choose to remain in the United Kingdom or whether they might move elsewhere. That is not to say that appropriate tax planning should not occur once their respective positions become clearer, but at this stage we did not regard it as a strong factor pointing towards the necessity for a variation. The situation is therefore very different from the make-up of the beneficiaries in the A and B case, where there were 3 generations of adult beneficiaries and so the need for distributions and appropriate tax mitigation was much more readily apparent.
33. In addition, the Settlor stated, as set out in paragraph 24 above, that it was his and N's wish that, although they wanted the lives of their children to be comfortable, they did not want the children to receive significant benefit from the Trusts until they were mature and had achieved professional success. Given these wishes, it was not clear from the material placed before us of the urgency for tax planning at this stage.
34. We also wanted more information about the origin of the assets settled into each of the Trusts and how they are currently being invested. We were told during the hearing that the assets in practice are managed by the Settlor although we were not given the details of the legal structures through which such investment management occurs or the involvement of the Trustees in that investment. We were also not made aware of how the Settlor approaches investment of the significant wealth he has made himself or whether he invests for others. We sought this information because we wanted to understand the risks that might arise should the Settlor be added as a beneficiary leading to distributions of significant assets to him or to different structures under his control.
35. We also wanted to understand what it was proposed should happen if the Settlor became a beneficiary. The implication in paragraph 29 of the Settlor's witness statement set out above is that assets would be distributed to him and that he would leave capital to each of his children and his current wife in equal shares on his death. As we understand it, the Settlor is [redacted]. This could mean that significant assets which are currently held in the Trusts for each of the children could be returned to the Settlor to be under his control for many years. We wanted to understand whether this is what the Trustees and Settlor are contemplating.
36. In raising this issue, we accept unreservedly that the Settlor has provided for his children in relation to their education and upbringing and we have no reason to doubt that he will not do so in the future. However, there is an implication in paragraph 29 of his statement that the addition of the Settlor as a beneficiary would lead to assets in the Trusts being returned to him and being under his control, as appears to have occurred in relation to the trust set up for the children from his first marriage. Before we were prepared to approve the removal of the Settlor as an Excluded Person, we therefore wanted to understand in much more detail what was proposed and how the Trustees might exercise their discretion. Although we were reassured that any decision would be a momentous one and Court approval would be likely to be sought, at this stage there is no guarantee that Court approval would be sought. As we put it to Advocate Langlois, we did not just wish to approve stage 1 without seeing and approving stages 2, 3 and 4. On the facts of this case, it was not enough for us to accept the principle of flexibility for tax planning without understanding how that flexibility would work in practice and blessing the same.
37. We wish to add in that regard in relation to the tax advice that was placed before us, we did not have full tax advice on the position of the children, where they are domiciled or a detailed explanation of how residence rules might apply to them while they are minors and once they become adults.
38. We also noted at paragraph 9.3 of the tax memorandum provided by Maurice Turner Gardner dated 29 July 2022, that to establish further structures which would not have significant stockpiled income or capital gains, in order for there to be tax flexibility it appeared that the Settlor could only take such steps to create new structures more than three years after distributions to him of assets in the Trusts. We wanted to understand whether there were any other possibilities of appropriate and effective tax planning which the Court could be asked to approve, rather than having to appoint a significant proportion of assets to the Settlor for at least 3 years for there to be effective tax planning.
39. When it comes to approving any such steps, we are also conscious that tax planning is only one factor that might be taken into account by Trustees in deciding whether or not to exercise their discretion. In the present case, the current gains are [redacted] less than 5% of the total value of the trust assets. When the matter comes back before the Court, we will need to balance the understandable desire for tax efficiency with the central rationale for which we consider the Trusts were established on the basis of the material before us, namely that the children of N would be provided for whatever might occur in the future. These are not easy judgments to make and require as full a picture as possible for us to approve a significant change to the current definition of Excluded Persons. This includes clarifying what steps have been or will be taken to address possible claims by the Settlor's current wife, not just identifying possible steps that could take place as set out by the Country 1 Lawyers in the opinion provided to us. We should add that there is no hint of any such claims being made and the evidence before us presented the opposite picture. Nevertheless the possibility of such claims has to be evaluated.
40. The above concerns led to the Court concluding that it was premature to approve the removal of the Settlor as an Excluded Person without much more detail addressing the issues and requests for information explored in this judgment and the ex tempore judgment and without the Court being provided with the full plan in relation to how the Trustees intend to exercise their discretion in the future. If that means the Court at the same time as approving any variation also blessing an exercise of discretion, we have no problem with such an approach and we encourage the same.
Authorities
The Trusts (Jersey) Law 1984.
Re Osias Settlements [1987/1988] JLR 389.