News and Insights
28 September 2016
How Jersey’s mature and flexible trust administration sector addresses a problem of concern to many settlors
“Clogs to clogs in three generations” is the saying that sums up the rise and fall of the entrepreneurial family. The enterprise of the grandparents lifted the family out of poverty but their children, pampered by their parents’ wealth or perhaps just missing a commercial gene, let the business drift while spending beyond their means, eventually leaving the grandchildren no better off than their grandparents were decades before.
Confronted by this risk many successful entrepreneurs have sought to keep the family fortune together by putting the business or its proceeds into a family trust, often in Jersey. As a rule the more valuable the trust fund the more anxious settlors are to keep its size confidential. The next generation’s work ethic must be nurtured, and knowing there is a fortune earmarked for them might extinguish it altogether.
Some settlors allow the children to be told the family is rich enough for its members to do anything, but not so rich they can afford to do nothing. Others propose so wide a class of discretionary beneficiaries that most of them need not even know of the trust’s existence at all. Yet others resort to using prominent charities as the only named beneficiaries, with a power to add the real beneficiaries later.
However these requirements raise problems that have hovered unresolved above many a board room table in St Helier - and for good reason. The issue of whether beneficiaries may properly be kept in ignorance of the very existence of a trust has not been the subject of much public discussion in Jersey’s fiduciary services sector. It sits sandwiched between more intensely debated topics: the risk of a sham trust where the documents do not record what is really intended, the subtleties of discretionary trust drafting and what beneficiaries demanding sight of a trust’s paperwork can insist on seeing.
How do these topics impact upon the trust whose beneficiaries have not even been told it exists? They help respectively to define whether a valid trust has been established, who needs to be given information, and how much of it they should receive.
There are three broad categories of beneficiary, often distinguished from one another in the case law dealing with who may call upon trustees to supply information:
- First in line are fixed interest beneficiaries - persons entitled to a benefit upon the happening of some event or, typically, reaching a certain age;
- Second in line are discretionary beneficiaries - persons among whom a benefit must be distributed, but the trustee is able to choose which individuals will receive it;
- Last in line are the objects of powers - persons the trustee is allowed to benefit, or at most must actively think about benefitting.
Previously the courts had held there to be a “bright line” dividing discretionary beneficiaries from the objects of powers. The latter had no right to insist on receiving information, or by implication any right to be told of the trust’s existence either.
However that bright line has flickered and gone dim. It simply did not reflect the realities of how trusts are drafted and how settlors behave.
Nor can the challenges posed by the erosion of this distinction safely be circumvented by resort to named charities with a power to add the real beneficiaries later. Unless the charity is told of its status, its needs frequently canvassed, reviewed and often answered (because what charity could not do with more money?) the whole arrangement will look dangerously like a sham.
In principle therefore, trustees should list their beneficiaries and the objects of their powers and ensure they know of the trust’s existence, even if this is not what the settlor had in mind. It is not for the beneficiary/object to ask, it is for the trustee to volunteer the information.
A beneficiary’s most fundamental rights are to enforce the trust or to correct a breach of it. How can these rights be enforced if a person does not even know they have an interest in so doing? An element of discretion remains where the beneficiary’s prospects are extremely remote (e.g. they have to survive a much younger person or are a member of a very widely defined class) but these examples are very much the exception to the rule.
Once the beneficiary/object knows there is a trust with their name on it, the law governing how much information they should have comes into play. It is here that the settlor must place his faith if he wishes to preserve their work ethic. If that is not sufficient for him there is always… the Jersey foundation. Article 26 of the Foundations Law confirms that its council need not provide any person, whether or not a beneficiary, with any information about it at all.