Worldwide: Recent Trust Case Law

During the three past years, a number of interesting cases that were dealing with Trusts have come into surface with attention-grabbing results, which in some cases come to reinforce and strengthen the principles of Trusts while in other cases come to question the courts' approaches to the concept of Trusts. Below we will attempt to analyse some of the most appealing cases of the two past years.

Rybolovlev v Rybolovleva [2012] - Switzerland

This case arose when a couple was taking a divorce and the wife claimed that her payment after the divorce could only be achieved if the husband had access to the property, which he had years before transferred to a Cyprus Trust. The question that the court had to answer was whether the husband was still the beneficial owner of the property or whether he controlled the trust property. The Court held that the husband had control over the trust, had management powers and appeared as the primary beneficiary. This was one of the first decisions taken after the implementation of the Hague Convention on the Law applicable to Trusts and their Recognition, which nevertheless brought more doubt than certainty.

The husband had no proprietary interest in the trust property since it was a discretionary trust, and the decision on the disposal of the assets of the trusts was vested on the trustee's discretion and even though he was the protector of the trust and had powers of appointment, those per se did not give him a proprietary interest.

The doctrine of Durchgriff was used, which is used as the doctrine of piercing the veil of incorporation, which nevertheless, had no application to trusts since they are considered transparent and not similar to companies.

However, the Swiss court did not contest the validity of the Trust and did not question the transfer of the assets to the trust.

Moreover, the Court disregarded some crucial points in making its decision. It did not analyse Cypriot Trust Law, which governed the Trust and was the chosen governing law, while the Trustees, were never brought as third parties to the case, even though their position and power over the property was not questioned. The property was situated and owned outside Switzerland, and so, according to international Law, Swiss courts had no jurisdiction. According to Cyprus Legislation on Trusts, once the property is transferred to a valid trust, which the trust's validity in this case was not questioned, the transferor looses any control over the property and he is not considered as the legal owner of that property.

In conclusion, the decision of the Swiss court is very unlikely to be enforced in the Republic of Cyprus and in fact the decision will have no power at all. Even though, the decision was eagerly anticipated, it let to disappointment and raised more questions instead of providing answers and guidelines. It seems that the Swiss court completely overlooked the principles of trusts and more importantly the Cypriot principles on trusts, when taking its decision.

Whaley v Whaley [2011] – England and Whales

Again, the English Courts here had a case of family law. A couple was divorcing and the wife claimed that the assets to be taken into account were extremely higher than the assets presented by the husband. The wife claimed that the assets belonging to trusts were to taken into account when deciding the division of assets, since they were available to the husband and had an interest in them.

The High Court held that the assets of the first trust should be taken into account in regards to the division, since they were more likely to become available to him, since the instructions of the husband to the trustees related only to the arrangement of the assets while the trustees always provided funds for the husband's needs. The judge took into consideration the attempts of the husband and the trustees to conceal the true use of the trust.

The husband appealed claiming that the decision would force the trustees to ignore the interests of other beneficiaries and that they would have to realise assets when it was not commercially advisable. The husband was not in fact the settlor of the trust and it was in fact stated that the decision would place an "improper pressure" on trustees to deviate from their intentions, since the wife was not a beneficiary to the trust.

Even though, the validity of the Trust was not questioned by the Court, the Court of Appeal, by taking into consideration the functioning of the Trust, its structure and operation up until then, it held that the assets were likely to be made available to the husband if he asked the trustees to do so. The fact that the trustees and protectors of the trust were "trusted family advisors" of the husband and his family also played a significant role to the decision of the court.

In regards to the second trust, the court held that the assets should be taken into account, since, even though the husband was not a beneficiary, the true purpose of the trust was tax optimization and there was never an intention of the actual beneficiaries of the second trust to benefit truly. In fact, the decision read that if the tax regime were to change, the husband would have most probably be appointed as a new beneficiary.

The approach taken by the Court for its decision seems to be unorthodox. The Court did not consider the principle of Trusts and its elements. The Trust was discretionary, and even though, up until that point, the husband was continuingly receiving funds from the trust for his needs, the Trustees had every power to discontinue the payments, since they were given power to pay capital to one or more beneficiaries as they thought fit.

Nevertheless, in regards to the second trust, the intention of the court and its decision clearly point out that the trust was considered as a sham. The court considered the creation of the Trust by the husband, who was the settlor, as merely an action of alienating assets from himself, while in the meantime being aware that his marriage had broken down.

To sum up, the court here took a good look on the essence of the Trust and not merely to its legal structure. The time of creation of the second trust, simply provided the basis of a sham, while the fact that the trustees of the first trust, were not independent and were guided by the husband over-shadowed the legal concept and applicability of Trust. The decision affirmed the notion that the creation of a trust would not by itself be evidence of the actual presence of a Trust.

Re the AQ Revocable Trust [2010] – Bermuda

The case was concerned with testamentary trusts (created after the death of the settlor, as specified in his will). The plaintiffs were two of the sons of the Settlor and Beneficiaries of the Trusts, while the defendants were a third son of the Settlor and a beneficiary to the Trusts, a grandchild of the Settlor and two Trustees of the Trusts.

The plaintiffs here were claiming that certain Trusts that were created were invalid on the basis that they were revoked due to the revocation of his previous wills by the will of 1978. As a result all the property Trust would have fallen only under one Trust that was established by his will of 1978.

The Settlor was also the Trustee of the Trust up until his wife was eventually appointed as a second Trustee. The Trust Deed provided that the Settlor may revoke the Trust, that the income may be paid to the Settlor, upon the discretion of the Trustees and that the Settlor had powers to remove and appoint Trustees. In addition, the Trust Deed also included provisions in which the Trustees' liability was absolved. In fact the plaintiffs focused on a provision which released from liability the Trustees or the Settlor from any liability on any transactions, which required the written approval of the Settlor.

The judges, by citing a number of other cases from different jurisdictions but by keeping in mind the local trust provisions of Bermuda, held that the Trust was illusory during the lifetime of the Settlor. Their decision was based primarily on the concatenation of the Settlor's powers and rights as well as the fact that he was also the Trustee. The fact that one of the articles of the Trust absolved the Trustees from any breaches of the Trust was not the decisive role for the decision of the case; the fact that the Settlor was also the Trustee and the presence of that provision rendered the Trust illusory. It was furthermore concluded that the Trusts that he had created during his lifetime were invalid, as the actions of the Settlor resulted to the retention of the legal ownership of the assets in the Trust, which defeats the main conditions of a Trust. It was finally held that his intentions were for the Trust to take effect after his death and not to create a Trust during his lifetime.

The above judgement provides some guidance on the worldwide provisions included in many legislations on Settlors' reserved powers; that were also recently extended in Cyprus. Even though, the legislation may provide the ability of reserving powers, the combination of those powers may cross the fine line between creating a valid Trust or creating an illusion. As the judges in this case very distinctively observed "... in this case it is the combination which pushes it over the top". This case re-confirms the careful selection of reserved powers that a Settlor may choose to reserve otherwise he faces the risk of a non-effective Trust.

In the Matter of the Shirnovic Trust [2012] – Jersey

The Settlor had established a Deed of Settlement in 1988 and in the following years he exercised his power to add to the beneficiaries more people, including his girlfriend. The new Trustees that took over after the death of the Settlor sought the court's directions as the deed of declaration that added his girlfriend as a beneficiary was not witnessed and so failed to follow the procedure as described in the Trust Deed.

In this case the Court was facing the question of whether the equitable doctrine that equity can aid the defective execution of a power had an application or not. It was argued by one of the beneficiaries that the doctrine could not include the girlfriend since she did not fall into the categories recognised in the doctrine and confirmed by the courts and could not be expanded to include a girlfriend. The Trustees from the other side claimed that the doctrine would need to be examined in the modern days that we live in and take into consideration the modern family relationships recognised in our society today, which are not merely restricted to wives and children but also to girlfriends, step children and same-sex partners.

The Court concluded that the equitable doctrine was of application on this case. The Settlor had the intention and it was evidenced from his actions that he felt the moral obligation that he wanted to provide for his girlfriend after his death, just like a husband would want to provide for his wife. It was stated that "... the general principle is an entirely beneficial one and prevents errors in formality leading to real hardship for those to whom the donee of the power owes a moral or natural obligation and resulting in the clear intention of the donee being defeated for no good reason".

The decision of the Court is significant in the fact that it shows that the Courts will not hesitate to go beyond formalities and interfere in a Trust Deed when this is necessary. The Court also observed that a different argument could also be used in this case; that of imputed intention to overcome the defective Deed. In certain circumstances where there is an intention to bring a particular result and that could only be concluded by the exercise of a certain power, the Courts may hold that the power may be exercised by implication. It is interesting here also to compare this case with the Re the AQ Revocable Trust. In the Shirnovic case the reserved power of the Settlor did not create any concerns or raise any arguments as to the validity of the Trust, which comes to confirm the conclusion that reserved powers of Settlors are not by themselves indications of a void Trust but it is their combination that may trigger such claims.

In re Heydenrych Testamentary Trust and Others [2012] – South Africa

The case referred to an ex parte application made by the administrator of charitable testamentary trusts. The administrator in its application claimed that the provisions of the trusts were discriminatory on the basis of race and gender. In particular the Trusts' provisions read that scholarships should be allocated only to white boys and that 50% at least should have British descent. The case brought the question as to which extent the courts were allowed to change and vary provisions in a trust instrument. The decision acknowledged that if the legislation provides such intervention by the courts then a trust instrument can be varied, changed, altered etc. as the court's discretion.

In fact, the Court held that the national law on Trusts empowered the court to delete or vary provisions which the founder (settlor) did not contemplate or foresee and which could:

  • hamper the achievements of the objects of the founder;
  • prejudice the interests of the beneficiaries; or
  • are in conflict with the public interest.

The court ruled in favour of the administrator and held that the provisions were in fact discriminatory, since the Trusts were created before the establishment of democracy and the introduction of the Constitution and the founder could not foreseen that those provisions would become unconstitutional and that its objects would be hampered by the discriminatory provisions.

Even though a great freedom is provided to the settlors/founders on many trust legislations in the world, the decision reconfirms that this freedom is not unlimited. Courts are given the power and according to the discretion to intervene wherever they make thing fit, in order to ensure the legal function of the trust and to obey the legal and constitutional terms. According to Cyprus International Trust Law, Courts are given the power to vary, revoke, modify or even enlarge provisions of an international trust if it thinks fit on behalf mainly of persons having or may have directly or indirectly an interest under an international trust.

Rea and Sargison v Russel [2012] – New Zealand

The court here was presented with a case in which payments between a company and a trust were sought be set aside in regards to a provision of the national law which could render the payments void. What is of interest in this case is in fact the comments of the court and the judges as to the nature of trusts. It was noted, through their comments, that the way legislation is drafted may not fully understand the role of a trustee in a trust who is in reality the legal owner but not the beneficial one.

The judges in this case noted that any liability would be difficult to be imposed personally on the trustees, due to their position in trusts, for voidable transactions. The position of a trustee provides him with an indemnity, which has as result any order for payment to come out of the trust assets and not out of his personal property; this of course could raise some complications if the trusts assets are not enough to cover the payments or if the trust is insolvent. The position of the trustee was compared to the position of an agent; that is the middle-man, who receives the funds but is not the beneficial owner of them. This is the approach that the judges thought that should be also taken in the cases of the trustees. If the payments were found to be voidable, then the claim should have been against the trust assets and the beneficiaries would be needed to become part of the legal proceedings.

The judges in this case also considered the cases were powers of a trustee may be delegated to third person. In the delivery of their comments they also considered other case law. It was noted that the trustee may appoint agents or other experts, such as solicitors in the cases where his expertise is not enough, but his powers and his discretion cannot be delegated to a third person. Thus, the weight of each decision is on the trustee and in numerous times point out that trust law distinguishes between appointments of agents and appointments of delegates, as well as that trusteeship is personal and only trustees can exercise the powers, authorities and discretions vested in a trust instrument. For example, a decision to make an investment or not is conferred on a trustee but an agent can be appointed to make that investments and to carryout investment strategies decided by the trustees. The choice of an agent by a trustee may potentially render him liable for losses to the beneficiaries.

To conclude, it is obvious that the decision of a court whether a trustee is liable or not for decisions he has taken is not easy. Each case would need to be examined differently based on its facts but courts seem very conscious in deciding that a trustee has crossed the line and that he has some liability to the beneficiaries.

Conclusion

Overall, recent case law confirms the confusion that surrounds trust law and its application. A trust is a unique legal instrument with different meanings and interpretations around the globe, which in many countries, especially civil-law countries, is not even recognised.

Courts need to be careful and cautious in their decisions, since as it can be seen in the case of Rybolovlev, a judgment can become unenforceable. In the cases of Whaley and In re Heydenrych the courts reconfirmed their powers and their strict approach in regards to that a mere structure of a trust cannot be used for avoidance of responsibilities. Moreover, in Re the AQ Revocable Trust the courts, with their decisions, pointed out that certain combinations of settlors' reserved powers may turned out to be the death stone of a Trust, while in the case of the Shirnovic Trust, the Court used an equitable doctrine to confront formal errors or overlooks.Finally, in Rea and Sargison, the confusion on the application of trusts was acknowledged, which made clear the need for guidance in an international level.

Despite the various case law in place and the puzzling way that trusts are structured, trusts still remain a powerful tool of tax structuring and planning, widely used globally and gaining every day more and more followers.

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.

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