Contentious Trusts Estates and Family News

Jurate Gulbinas   |   9 Apr 2014   |   11 min read

Costs in Jersey Trusts Proceedings

The Jersey position on costs in trust proceedings has been clarified in two recent decisions.

In Des Pallieres v JP Morgan Chase & Co the Jersey Court of Appeal considered the costs of parties acting in a fiduciary capacity and in Re Dunlop Settlement the Royal Court considered a beneficiary’s position.

In a nutshell, the principle of indemnity is paramount.

Persons exercising fiduciary functions are entitled to an implied equitable indemnity (equivalent to the trustee’s statutory indemnity) in respect of costs reasonably incurred by that person in the exercise of those functions, which provides a prima facie entitlement to recover on a full trustee indemnity basis. It can be lost where the fiduciary is guilty of misconduct or acting unreasonably.

Beneficiaries convened to trust proceedings are also prima facie entitled to their costs from the trust fund, but on the litigation indemnity (as opposed to standard or trustee indemnity) basis, which entitlement again can be lost where the beneficiary acts unreasonably.

The proceedings in des Pallieres involved an application by a beneficiary for disclosure against the settlor of an employee benefit trust – the settlor had certain fiduciary powers (removal and appointment of trustees and the protector).

It was accepted that the beneficiary could seek disclosure against the settlor in relation to the exercise of those fiduciary powers.

The disclosure sought was refused on the basis that the documents were available from the trustee or amounted to an attempt to obtain a pre-action disclosure.

The Court of Appeal upheld the Royal Court’s decision to award the settlor its costs from the trust fund on a full trustee indemnity basis, and rejected the beneficiary’s argument that the application was in reality a hostile one for pre-action disclosure (and not administrative) and therefore costs should have been awarded against him personally on a standard litigation basis.

The question of which category (under Re Buckton) the case fell into was held not to be relevant when looking at a fiduciary’s costs – the entitlement arises out of the right of indemnity, irrespective of the nature of the proceedings.

The important limiting principle is that indemnity can be lost in circumstances where the fiduciary has been found guilty of misconduct or acting unreasonably.

Re Dunlop involved a surrender of discretion by a trustee and the authorisation by the Court of the trustee to settle various claims in respect of the trust and its assets. The costs judgement related to a claim for costs out of the trust by a beneficiary who had opposed the substantive application.

The Royal Court considered the Re Buckton principles and their application to beneficiaries’ costs in trust litigation, and held that the application was an administrative one.

Therefore, the beneficiary had a prima facie right to litigation indemnity costs unless deprived of that right through her own unreasonable conduct.

For numerous reasons (including not taking part in a mediation, breaching filing orders, submitting a “palpably wrong” witness statement) the beneficiary was held to have acted unreasonably and was awarded only half of her costs.

These decisions provide clarity in terms of the approach of the Jersey Courts.

One potential area for debate in future cases will be how high the hurdle is for losing the right of indemnity or entitlement to costs.

Contested Beddoe applications in England and Wales – who should pay the costs?

During the administration of a trust or estate, circumstances may arise that require consideration as to whether trusteed should bring or defend proceedings against third parties or beneficiaries for the benefit of the trust or estate as a whole.

Beneficiaries may not always agree as to how the trustees should proceed and consequently the trustees may decide that they ought to make a Beddoe application seeking the approval of the court to their proposed course of action.

Hitherto, it has generally been thought that a warning by the trustees to beneficiaries as to the potential costs liability they might face if the court find that the beneficiary has acted unreasonably in objecting to the trustees’ proposed course of action (thus forcing the trustees to apply to court) carried little weight and that the beneficiary’s costs, as well as the trustees’ costs of the application would come out of the trust fund.

However, courts are increasingly concerned at the level of costs being incurred by parties and particularly where court time and resources are wasted by the court having to deal with matters it ought not to have had to deal with.

In the recent case of Green v Astor and Others [2013] EWHC 1857 (Ch) an issue arose as to what costs order the court should make following a contested Beddoe hearing.

As a consequence of the judgement more trustees seek an order for costs against beneficiaries who unreasonably oppose their proposed course of action thus resulting in a Beddoe application being made.

Feltham v Freer Bouskell [2013] EWHC 1952 (Ch)

A solicitor who is instructed to prepare and execute a new will has an obligation to carry out those instructions within a reasonable period of time particularly where the testator is elderly and it is foreseeable that he may not continue to live long.

Freer Bouskell were instructed by Mrs Feltham’s step-grandmother, Mrs Charlton to prepare a new will under which Mrs Feltham would become the main beneficiary. They failed to do so in a timely manner and so Mrs Charlton asked Mrs Feltham to make a new will for her instead.

Mrs Charlton died 8 days after signing her new will which was then challenged by the two main beneficiaries under her previous will.

Mrs Feltham paid £650,000 to settle that claim and subsequently brought an action in negligence against Freer Bouskell alleging that they had drafted the will as instructed it was unlikely to have been challenged.

Mr Ward, the solicitor who was instructed to draft the new will for Mrs Charlton had known her for a number of years and knew the contents of her will.

The Judge noted that Mr Ward was an honest and meticulous witness who “must have had a genuine concern that Mrs Feltham, having come on the scene at the last minute, was now seeking to take advantage of a vulnerable old lady by securing a change in her will in her own favour”.

Nevertheless, it was “entirely inadequate for a solicitor instructed by a 90 years old client to alter her will to take the view that, because he was concerned that she might be taken advantage of by the potential beneficiary under the new will, and because she did not mention the will to him when they spoke on the phone, he would take the matter no further until they spoke again”.

The Judge was satisfied that it would have been clear that Mrs Charlton had the requisite capacity to make a will at the relevant time and that her instructions could have been fulfilled in a timely manner.

He found that Mr Ward was negligent in failing to deal with the instructions to prepare a will and that he had failed to chase up the medical report he had requested so that he could satisfy himself as to her capacity before visiting her in person to discuss the proposed changes.

Mrs Feltham was awarded damages to reflect the sums she had pay by way of settlement to those challenging the will as well as the legal costs she incurred in relation to those proceedings.

The decision in Feltham v Freer Bouskell is a timely reminder of the need to act swiftly when dealing with the affairs of elderly clients, particularly where they are giving instructions for a new will.

Even where a solicitor has concerns about capacity and/or undue influence he should not delay in preparing a will on that basis.

Where there are concerns about testamentary capacity the solicitor taking instructions should either refuse the instructions or take prompt steps to obtain a medical opinion and satisfy himself of the position.

M v M [2013] EWHC 2534 (Fam)

The financial provision award of almost £54m in M v M exceeds the previous record of £48m set by Charman v Charman in 2006. The wife’s claim to a number of properties held within offshore companies was considerably strengthened by the recent Supreme Court decision in Prest v Petrodel Resources Limited [2013] UKSC34.

The parties to the marriage were both Russian nationals who had lived in England since 2005.

The couple were divorced in Russia and the wife then made an application for financial relief in the English High Court. The marital assets were held in a complex network of offshore corporate structures created by the husband.

Mrs Justice King was extremely critical of the husband’s conduct throughout the litigation saying that he had failed to comply with orders of the Court and was in contempt “many times over”.

The husband repeatedly failed to disclose his assets and did not attend the final hearing.

Nevertheless, the wife’s legal advisers had “at fabulous cost (£1.4m and counting)” been able to trace assets of £1O7m, all of which had been acquired during the course of the marriage.

Notwithstanding the husband’s failure to engage with the proceedings the Judge noted that he “remained active behind the scenes, moving company structures from offshore haven to offshore haven when the net…closed in”.

Orders were obtained in Cyprus, the BVI and the Seychelles, but the husband managed to stay one step ahead and transfer the assets into a Belize structure using a Panamanian intermediary.

At the time of the hearing the husband’s companies held the legal title to various English properties worth approximately £14m.

The issue that the Court had to determine was whether the husband had intended to retain the beneficial interest in those properties, making him entitled to them (and hence able to transfer them to the wife by way of financial provision), or whether the companies were the true legal and beneficial owners of the properties so that they were beyond his reach.

The wife argued that the various properties were held by way of a resulting and/or constructive trust for the husband and as he had at all time retained the beneficial interest in the properties it was not necessary or appropriate to seek to “pierce the corporate veil”.

The Judge agreed that the husband’s actions in relation to the properties were at all times those of a beneficial owner and found that he kept “absolute control over his empire”. Following the Supreme Court’s ruling in Prest the Judge found that the English properties were held on resulting trust by the companies for the husband and accordingly she ordered that the properties be transferred to the wife. In addition to the value of the English and Russian residential properties (which were already in the wife’s name) the husband was ordered to pay a lump sum of £38m bringing the total of the award to half of all the ascertainable marital assets.

This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com

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Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.

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What is a Trust?

Jurate Gulbinas   |   21 Jan 2014   |   9 min read

1. What is a trust?

In essence a trust is simply a relationship where one person (the trustee) is under an obligation and holds or uses assets (trust property) for the benefit of another person (a beneficiary) for some object or purpose.
Thus, any trust has four essential elements:

  • Trustee;
  • Trust Property;
  • Equitable Obligation;
  • Beneficiaries;

To restate the above in slightly more legalistic terms “a trust is a fiduciary relationship where one person, a trustee, holds an interest in property but has an equitable obligation to use or keep that property for the benefit of another person(s) (beneficiaries) for some committed object or purpose.

There are many types of trusts, however the common ones are:

  • Express Trusts;
  • Settled Trust;
  • Discretionary Trusts;
  • Unit Trust;
  • Will Trust;

Express Trusts – are trusts created by the express and intentional declaration of the settlor. Trusts dealt with in practice usually evidence this declaration by way of a formal trust deed.

Settled Trust – one form of an express trust is a settled trust created by settlor (or director). The settlor will intentionally create a trust by gifting the initial trust property to be held on trust by a trustee under an equitable obligation.

The most common trusts we implement are a discretionary trust, unit trust and a will trust (or deceased estate).
Discretionary Trust – a common settled trust dealt with in practice is a discretionary trust. A discretionary trust, which may also be known as a family trust, allows the trustee (who is usually the head of the family) to exercise discretion on an annual basis as to which beneficiaries will receive a distribution and to what extent each beneficiary shall benefit.

Unit Trust – Unit trusts are commonly used when arms length parties wish to enter into a commercial undertaking together.

Each party’s entitlement to income and capital from the trust is proportionate to the units held.

Will Trust – A will trust or a deceased estate arises on the death of a person. Upon death, property of the deceased passes to his or her estate.

The fiduciary obligation to administer the estate and the assets therefore falls upon the executor or administrator who assumes the role of trustee in respect of the property of the deceased estate.

The beneficiaries of a deceased are those nominated in the Will of the deceased.

2. Why choose a trust?

Issues to be considered when choosing a trust are as follows;
•    Control
•    Simplicity/complexity
•    Liability limitation
•    Costs – establishment and maintenance
•    Life span
•    Formalities/adherence to rules
•    Reporting and disclosure requirements
•    Acceptability to financiers
•    Admission of new investors
•    Selling out/winding up
•    Family disharmony/asset – sheltering
•    Retirement planning
•    Ease of future restructure

Should the concept of a trust satisfy your commercial objectives, the following taxation issues will need to be considered:
Taxation issues
•    Overall level of tax;
•    Acceptability by authorities;
•    Double taxation;
•    Restructuring tax consequences;
•    Employee on costs;
•    Tax payments/tax rate;
•    Flexibility of distributions;
•    Tax losses trapped;
•    Dividend streaming;
•    Type of business to be carried on;

3. How do you set up a trust?

If you have made the decision that a trust is an appropriate structure the next step is to establish a trust.
Approaching a Solicitor
Prior to approaching a solicitor you should not only have considered the commercial and taxation issues noted previously, but you should also have determined:
•    The purpose and activities of the trust;
•    Nominated beneficiaries and future beneficiaries;
•    Who is to be the trustee and settlor;

Review and Understanding
The solicitor will draft the trust deed in accordance with the client’s requirement and at this stage it is critical that a thorough review is done to ensure that the trust deed (or governing rules) reflects your commercial and legal requirements and allows flexibility for future contingencies.
If a solicitor who specialises in trust law is consulted you will often receive an information booklet setting a basic outline of a trust for administration purposes.
At this stage also it is critical that you read through the draft deed and that questions are addressed prior to creating the trust. In this regard the family or business solicitor (if he or she did not draft the deed) may be used to add his/her comments and to provide a different perspective and extra level of comfort to both the client and accountant.

4. Parties to a trust

The Settlor

The Settlor is the person who brings the trust into being.

Typically the settlor is a family friend or business associate who will contribute initial capital to settle the trust.

For Australian tax purposes it is important that there is not any reimbursement by the trustee in respect of distributions made for children under 18 years old if a parent, who will usually act as trustee or a director of the trustee company of a family trust, settles or creates the trust.
It is also advisable that the advisers to the trust are not the Settlor, for the reason that many trust deeds contain clauses that the Settlor is excluded from any benefit or income under the trust.

The Trustee

A Trustee is the person who holds an interest in trust property for a committed trust object or purpose.
In a discretionary trust situation the trustee exercises control over trust property so the trustee can deal with it on behalf of beneficiaries.
The choice of a trustee is worth proper consideration for the reason that the trustee’s powers and duties are significant. In that regard the person who is appointed to the position must understand his/her role and responsibilities.
Trustees may be individuals but more commonly will be companies to limit liability.  In a family trust a parent or both parents will usually act as directors of a corporate trustee.

The Appointor or Protector

The Appointor or Protector is the person or persons who have the authority under the trust deed to appoint or remove the trustee of the trust. As such the appointor is often said be the controller of the trust.
Many trust deeds empower the appointer to remove the trustee and appoint a new trustee at any time in writing.
Unless specified in the trust deed or in the will of the Appointer, on the death of the Appointor, the legal personal representative of the deceased Appointer will become the Appointor.

Income Beneficiaries

These are beneficiaries who may at the discretion of the trustee receive entitlement to trust income. Most modern trust deeds are drafted very widely in this area to give the trustee very wide discretionary powers for the advantage of flexibility of distribution for taxation purposes. Common classes of beneficiaries are:
•    Family members, including children;
•    Unborn children of family members such as direct lineal descendants;
•    Eligible entities in which the abovementioned beneficiaries of the trust itself has an interest (such as a corporate beneficiary)

Capital beneficiaries

These are beneficiaries who are entitled to the corpus of the trust or the capital in the trust.
This entitlement does not usually arise until vesting day, or the day the trust is to be wound up, but entitlements to capital or corpus of the trust may occur earlier if permitted by the trust deed or agreed to by all beneficiaries.

Default Beneficiaries

A default beneficiary is simply the beneficiary to whom a distribution may default to in the absence of any other nominated beneficiary.
For example should an amended assessment be raised increasing assessable income that income will be distributed primarily in accordance with the relevant trustee’s distribution minute.

However in the absence of any guidance contained therein or in the event the resolution or minute cannot be located or was not made for the reason there was considered to be no income, the distribution may revert to the default beneficiary rather than be assessed in the hands of the trustee at the top marginal rate.
There are very few restrictions on who may be a beneficiary.  A beneficiary may be a resident or non-resident natural person (such as a company) or any legal entity.
Further, persons who have not yet been born or legal entities that have not yet come into existence may subsequently become beneficiaries.  However it is important to nominate who will be and who can become a beneficiary on drafting of the deed.

A trust, as stated above, is a fiduciary relationship.

The adding of unanticipated beneficiaries at a later stage may, in a worst case scenario, lead to a resettlement of a trust or the ceasing of the former relationship and creation of a new relationship, being the creation of a new trust.
Should there be considered to be cessation of one trust and the creation of a new trust, a myriad of unwelcome income tax, capital tax and stamp duty issues may arise.
Thus, upon reviewing the deed detailed consideration must be given to who and who might potentially become income, capital and/or default beneficiaries.

Contact us

Should you be interested in discussing further how a trust may suit your purposes please do not hesitate to contact us at our offices.

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Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

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