NOT SET IN STONE: Varying, restructuring and/or re-writing the foreign settlor s trust

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Joella Kelley
6 years ago
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1 NOT SET IN STONE: Varying, restructuring and/or re-writing the foreign settlor s trust Andrew De La Rosa Barrister and Attorney-at-Law ICT Chambers Cayman London adlr@ictchambers.com

2 Starting points: Can I introduce you please to... the concept of the Disposable Trust A widespread notion in the Far Southeast This is probably not the norm. Something else is perhaps more usual

3 Some other legacy issues US-style trusts often contain fixed trusts of income down through generations before capital (including accumulated income) is divided at end of trust period, sometimes coupled with very limited powers to advance, appoint or appropriate assets and partition fund Many of these will be so-called Freeston trusts, as in Re Freeston s Charity [1979] 1 All ER 51 per Goff LJ: It is manifest that an interest in half the income of an undivided fund is quite different from the whole income of a divided part of that fund

4 More general reasons for restructuring: Fiscal imperatives not merely changes in the established tax treatment of trusts but falling within one or more highly adverse anti-deferral regimes The problems of Accidental Americans with (a) the throwback accumulation regime and (b) the (even more) penal PFIC provisions Families that become too big/diverse for the settlor s original scheme of distribution Deferring the vesting of large capital sums

5 Constructive Restructuring - basic tools Saunders v Vautier (1841) Cr & Ph 240 The inherent jurisdiction of the court: - Maintenance: Re Collins (1886) 32 Ch Emergency: Re New [1901] 2 Ch 544 Section 57, Trustee Act 1925 (sanctioning new trustee powers without altering the underlying beneficial interests - other than incidentally) Compromise: Chapman v Chapman [1954] 1 All ER 708 The VTA 1958 and foreign equivalents (s.) - variation by consent of all those able to give it with court approval on behalf of those such as minor/unborn/unascertained persons who cannot, subject to the requirement that the variation is shown to be for their benefit

6 Constructive Restructuring: more modern (and better?) tools Express powers of advancement, often extending beyond any applicable statutory power Express powers of appointment Express powers to amend or vary the trusts Others?

7 In the absence of express powers: Under the VTA approach, need consent from those able to give it and have to show suitable benefit for those on whose behalf the court is asked to approve Benefit need not be strictly financial but in most cases (a) it is and (b) is the product of bargaining between different camps of beneficiaries Section 57 and cognate offshore provisions don t envisage re-writing beneficial interests

8 Jersey (and other established trust OFCs): 47 Variation of terms of a Jersey trust by the court and approval of particular transactions (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...

9 Bermuda s section 47, Trustee Act (1) Where any transaction affecting or concerning any property vested in trustees, 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 trustees by the instrument, if any, creating the trust, or by any provision of law, the court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms and subject to such provisions and conditions, if any, as the court may think fit and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.

10 Bermuda s section 47, Trustee Act 1975 (4) In this section, transaction includes any sale, exchange, assurance, grant, lease, partition, surrender, reconveyance, release, reservation, or other disposition, and any purchase or other acquisition, and any covenant, contract, or option, and any investment or application of capital, and any compromise or other dealing, or arrangement.

11 Scope of the jurisdiction: That provision appears to be an amalgam of two English provisions, being section 57 of the Trustee Act 1925 and section 64 of the Settled Land Act 1925, one effect of which is to remove the limitation to administrative matters contained in the former. I have no doubt, and in any event it must be presumed, that this was deliberate on the part of the legislature. (Per Ground CJ, GH v KL [2011] SC (Bda) 23 Civ (2 December 2010) 11

12 Advantages of Bermuda s section 47 No need for consent by any beneficiaries, nor by the court on behalf of any interested parties who cannot consent themselves. No need to show benefit for certain beneficiaries; instead, the question is whether the proposed modification is expedient meaning in the interests of the trust as a whole. Substantially streamlined procedure in terms of the interested parties who need to be joined and represented in court. (Query this; see further below.) 12

13 Other considerations: Less expensive than a full-scale variation That s in terms of legal costs; however, what are the tax implications? Cannot view this in isolation; what about the perils of publicity and/or changing the trust s governing law? 13

14 The experience to date: Only two reported cases; GH v KL and Re ABC Trusts [2012] SC (Bda) 65 Civ (13 November 2012) First use of section 47 for purpose of altering beneficial interests may have been as recently as 2005; Re S J Trusts, The Lawyer 13 June 2005 There is considerable scope for creative thinking here. 14

15 Is this a useful jurisdiction? Yes. But possibly lurking behind this is an issue... Suppose one tried starting from scratch? Is that worthwhile? Is there a need for a specific procedural regime to deal with cases of this kind? Is it better not to to try and prescribe the boundaries? 15

16 Looking further afield at Means do[ing] over Decanting - 1: At state common law and by statute trustee authority to invade the corpus of a trust authorises not only distribution to beneficiary but to another/new trust several state law variants Uses may include converting trust from grantor to non-grantor (and vice versa) and altering character of beneficiary s interest the list of possible applications is very extensive 16

17 Decanting - 2: Possible US income, gift, estate and GST implications (see Blattmachr, Horn & Zeydel, An Analysis of the Tax Effects of Decanting, ABA 2012) Two schools of thought: absence of beneficiary consent enough or must be absence of consent and no alteration in beneficial interest IRS notice : asked for comments, especially whether a transfer to another trust is an income tax gain or loss realization event to T or B and what are potential US GT/ET consequences NYSBA safe harbor recommendations a simple partition is safe? 17

18 Watch this space: No IRS guidance yet and nothing specific on the horizon None of these exercises takes place in a vacuum where the beneficiaries are sidelined; there may be a large element of bargaining between interested parties Are risk-averse institutional trustees stymied/unwilling to decant anything? Difficult judgment calls for family-run trusts in the typical presentday PTC structure 18

19 Contact London: 5 Stone Buildings Lincoln s Inn London WC2A 4XT United Kingdom Tel +44 (0) Cayman: Suite 25 Grand Pavilion Commercial Centre P.O. Box KY George Town Grand Cayman Tel

The Court s power to add powers to the terms of express trusts: two recent decisions of the Grand Court of the Cayman Islands

BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS CYPRUS DUBAI HONG KONG LONDON MAURITIUS MOSCOW SÃO PAULO SINGAPORE conyersdill.com June 2010 The Court s power to add powers to the terms of express trusts: