Ordinarily, for a trust to be valid it must have identifiable beneficiaries. The duties imposed upon trustees are owed to the beneficiaries and without ascertainable beneficiaries who may enforce these duties a trust will not be upheld. Charitable trusts established for one or more charitable purposes are a long held exception to this principle. In such instances, the Attorney General is tasked with the role of enforcing the trustee's duties and obligations. With regard to non-charitable purposes, however, the law has been slow to recognise such trusts.
Many offshore jurisdictions have taken the first steps in permitting the creation and enforcement of purpose trusts, whereby the trustees hold property on trust to carry out specific purposes which do not qualify as charitable purposes. This type of trust is usually referred to simply as a "purpose trust".
The purpose of this briefing is to set out the general principles relating to purpose trusts in Jersey, Guernsey, BVI, Cayman and New Zealand.
PURPOSE TRUSTS IN JERSEY
The Trusts (Jersey) Law 1984 ("the Jersey Trusts Law") provides (at Article 11(2)(a)(iv)):
"...a trust shall be invalid to the extent that it is created for a purpose in relation to which there is no beneficiary, not being a charitable purpose."
Since 1996, however, Article 11(2) has been subject to the following provision, (Article 12):
"A trust shall not be invalid to any extent by reason of Article 11(2)(a)(iv) if the terms of the trust provide for the appointment of an enforcer in relation to its non-charitable purposes, and for the appointment of a new enforcer at any time when there is none."
As such, a trust created for a purpose will now be valid under Jersey law provided that an enforcer is appointed.
An enforcer is a person charged with the duty to ensure that the trustees are carrying out the non-charitable purposes outlined in the trust deed, and the terms of a Jersey purpose trust must provide for the appointment of an enforcer. The enforcer is given the same rights as beneficiaries to receive trust accounts and information. The enforcer must not be a trustee, but may be an individual or a company. Like a trustee, an enforcer cannot profit from his office unless authorised to do so in the trust instrument or by law.
A trustee has a duty at any time where there is no enforcer to take such steps as are necessary to secure the appointment of a new enforcer, and furthermore a duty to apply to the court for the removal of an enforcer if they feel that the enforcer is unwilling or otherwise incapable of acting.
The Jersey Trusts Law deals with retirement of an enforcer at Article 14. An enforcer may resign but his resignation will only be effective once notice has been given to the trustee. A resignation given in order to facilitate a breach of trust shall be of no effect. Article 11 further provides for the removal of an enforcer on his appointment as trustee, on the coming into effect of a provision removing him from office or on his removal by the Court.
Article 47A of the Jersey Trusts Law provides that where trust property is held for a charitable or non-charitable purpose and the purpose ceases to exist, the court may, on the application of a trustee or the Attorney General, declare that the property or the remainder of the property shall be held for such other charitable or non-charitable purpose, as the case may be, as the court considers to be consistent with the original intention of the settlor.
Trustees of purpose trusts who are resident in Jersey are to be taxed on the same basis as trusts whose beneficiaries are resident outside the island. The trustees of purpose trusts will be exempt from tax on non-Jersey income or Jersey bank interest provided that no Jersey resident can benefit from the trust. This is not a statutory exemption but is by concession of the Comptroller of Income Tax.
PURPOSE TRUSTS IN GUERNSEY
In Guernsey new legislation, namely, the Trusts (Guernsey) Law, 2007 (the "Guernsey Trusts Law") has been enacted and is due to come into force on 17 March 2008. This legislation introduces and permits the establishment of purpose trusts. The general legal principles relating to purpose trusts are very similar to those in the Jersey Trusts Law, however, there are some differences.
The Guernsey Trusts Law allows a purpose trust to have a combination of beneficiaries, charitable purposes and non-charitable purposes. This legislation also provides a very wide definition of "purpose" and specifically includes the holding or ownership of property to be a valid purpose. For instance, a trust may be set up for the sole purpose to hold shares in a company.
The Guernsey Trusts Law specifically provides that the enforcer has a fiduciary duty to enforce the purposes of the trust and may apply to the Guernsey Royal Court for an order to be made in relation to that purpose trust or its trustees.
Trustees of purpose trusts who are resident in Guernsey are to be taxed on the same basis as trusts whose beneficiaries are resident outside the island. The trustees of purpose trusts will be exempt from tax on non-Guernsey income provided that no Guernsey resident can benefit from the trust.
PURPOSE TRUSTS IN THE BVI
Section 84 of the Trustee Ordinance Act 1961 (as amended) ("the Act") provides for the existence of purpose trusts in the BVI.
An enforcer must be appointed by the trust deed, and either be a party to the deed or consent in writing to his appointment. Furthermore the trust deed must provide for the appointment of a successor to the enforcer. The enforcer cannot be a trustee. It is the duty and power of the enforcer to enforce the terms of the trust.
If there is not an enforcer able and willing to act, it is the duty of the trustee who is a designated person to inform the Attorney General so that a new enforcer can be appointed. It is also the duty of a trustee to provide the enforcer with trust accounts, copies of the trust instrument and supplemental deeds and written instruments, legal and other professional advice received by the trustees and such if any other documents and information as the trust instrument requires to be provided.
The purpose of the trust must be specific, reasonable and not immoral, unlawful or contrary to public policy. At least one of the trustees must be a designated person (as defined in the Act as a barrister or solicitor practising in the territory, an accountant practising in the territory who qualifies as an "auditor" under the Banks and Trust Companies Act 1990, a licensee under the Banks and Trust Companies Act 1990 or such other person as the Minister of Finance may by order designate). The trustee who is a designated person must keep records regarding the trust, including accounts.
A trustee or enforcer may apply to the Court to vary any of the purposes of the trust or any of the powers of the trustees and the Court may do so in such manner as it thinks fit. It must have regard to material factors, including any changes in circumstances since the trust was created as are relevant and such factors and proposals as are set out in the application. The changes in circumstances may include the fact that the execution of the trust has become in whole or part impossible or impracticable, unlawful or contrary to public policy or obsolete in that it now fails to achieve the intention of the settlor and the spirit of the gift. Hence if a purpose ceases to exist the trust instrument can be varied by the Court.
The trust deed may specify an event upon which the trust must terminate and provide for the disposition of surplus assets of the trust on termination, however this is not essential as a BVI purpose trust may be perpetual.
PURPOSE TRUSTS IN THE CAYMAN ISLANDS
Cayman has a unique form of purpose trust known as the 'STAR Trust', named after the Special Trusts (Alternative Regime) Law 1997 (the "STAR legislation") (now Part VIII of the Trusts Law (Revised)) which brought it into effect.
STAR trusts allow both purposes and beneficiaries to be provided for in one trust, and provide for enforcement not by any beneficiaries but by an enforcer of the trust. Thus beneficiaries of STAR trusts do not have standing or enforceable rights in relation to the trust.
A STAR trust is established in the normal way (by written instrument, either inter vivos or testamentary) but must contain a declaration that the STAR legislation is to apply. The purposes of a STAR trust must be lawful and not contrary to public policy, but will not be rendered void by uncertainty due to Article 10(1). The trust may give the trustee or some other person a power to resolve any uncertainty as to the objects of the trust, and if the uncertainty cannot be resolved a power to apply to the Court exists.
There must be at least one trustee that is a trust corporation licensed in the Cayman Islands.
The trust must have enforcers, who may or may not be beneficiaries. A beneficiary enforcer may be appointed without any duty to enforce, so that, just as under traditional trusts, s/he remains free not to enforce the trust should they so choose. As such, it is a requirement that there must at all times be an enforcer with a duty to enforce.
A trustee or enforcer may apply to the Court to appoint an enforcer where an enforcer with a duty is unable unwilling or unfit to act or where there is no enforcer who is of full capacity and who is a beneficiary or has a duty to enforce and is fit and willing to do so.
One restriction on a STAR trust is that it cannot hold land or any interest in land in the Cayman Islands.
A STAR trust can be perpetual. The cy-près doctrine applies where the trust becomes impossible, impracticable, unlawful, contrary to public policy, or obsolete in that it fails to achieve the general intent, meaning that the trust fund will be applied to a similar purpose
There is no tax on STAR trusts in the Cayman Islands, however the settlor should take advice on taxation of STAR trusts in his domicile and any domicile in which he holds assets.
PURPOSE TRUSTS IN NEW ZEALAND
New Zealand law does not at this stage permit the establishment of trusts with non-charitable purposes.
Uses to which Purpose Trusts can be put
Filling the Charity Gap
One use for purpose trusts is to enable purposes which cannot be said to be charitable under the relevant law of the trust to be fulfilled.
Control over Family Assets
When the aim is to benefit persons such as family, but also to ensure the continuance of a business, a purpose trust can make certain that the business is retained without interference from the beneficiaries. The beneficiaries can still receive dividends from the business without the right to interfere or take the trustees to court. This is also relevant for the avoidance of forced heirship rules.
A purpose trust is considered to be useful in commercial transactions such as securitisations and off balance sheet transactions because it has no beneficiaries, with the legal ownership vesting in the trustee and no one who can be considered to be the beneficial owner of the trust assets.
Ownership of a company to act as trustee
A purpose trust could be used in a structure designed to protect professional trustees against possible liability and difficulties which may arise as a result of holding that office. A company would be incorporated to be trustee of one specific private trust. The shares in that company are held by a professional trustee as trustee of a non-charitable purpose trust.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.