Originally published in the STEP Journal, Guernsey Supplement, November/December 2007

A Brief Review Of The Key Changes To The Island's Trust Legislation

Much of Guernsey's economic success over past decades has been largely due to its adaptability and flexibility to react to changing market situations and conditions. This adaptability is no better illustrated than by the Island's willingness to amend and review legislation to ensure that it retains its position within the increasingly competitive market place of international finance and over recent years there have been many examples of this.

The proposed new trust legislation (the Trusts (Guernsey) Law, 2007) which was approved by our parliament, the States of Deliberation, in July 2007 is one of the most recent innovations within the Island's legislative framework. The legislation is currently with the Privy Council.

The changes overall are designed to create a more flexible framework for the local trust industry and to ensure that Guernsey, as a jurisdiction for the establishment and administration of fiduciary structures, remains competitive.

Some of the key major changes incorporated in the new law are set out below.

Non-Charitable Purpose Trusts

One of the most significant changes is the introduction of non-charitable purpose trusts. Under the new legislation it is made perfectly clear that trusts established to hold property or to exercise functions without conferring benefit on any person are valid. Rather than bringing in a completely separate regime for purpose trusts - a route preferred by certain other jurisdictions such as Cayman and the BVI - Guernsey has simply revised the law to remove the requirement for there to be beneficiaries to a trust.

Purpose Trusts are commonly employed to incorporate private trust companies which in turn act as trustees to specific trusts (or group of trusts). Private Trust Companies in Guernsey may apply to the Guernsey Financial Services Commission for a discretionary exemption from licensing. As part of the exemption process the Commission will normally impose restrictions on the activities of the company to prevent it providing services to the public.

Removal Of Limits On The Length Of A Ttrust's Duration

It was never really clear why in 1989 the draftsman limited the duration of Guernsey trusts to 100 years as the rules against perpetuities have never formed part of Guernsey law. Perpetual obligations were well known to Guernsey's customary law and formed the bedrock of our land law and Conveyancing system.

Instead of extending the period during which a trust can exist, as was suggested to the Working Party during the consultation period, the new law reverts to the status quo ante and removes the previous 100 year time limit for Guernsey trusts allowing perpetual trusts to be created.

It will of course be possible for the draftsman of a trust to provide for a limited trust period where, for example, it is necessary to consider the application of a foreign rule against perpetuities in relation to the transfer of assets from a foreign trust to a Guernsey trust.

The revised legislation also permits assets to be decanted from one trust to another even where the second trust is of a longer duration than the first – putting an end to the ongoing debate amongst local practitioners as to whether this was allowed under the original 1989 law.

Clarification Of The Position Of Retiring Trustees

The new law creates a non-possessory lien over trust assets in favour of the retiring trustees and simplifies the ability of a previous trustee to enforce an indemnity given in its favour where it is not a party to the document by which the indemnity is given. This should facilitate speedy changes of trustee and will minimise the need to revert to the occasionally complex chains of indemnities that are often required at present in cases where there have been successive changes in trustee. The process of negotiating indemnities of this nature has, at times, become laborious and occasionally slows down the whole transfer process.

Coupled with the recent STEP initiative on the transfer of trusteeship which has been endorsed by most of the island's leading trust practitioners it is hoped that the new law will make the transfer process more efficient and streamlined for all concerned.

Clarification Of The Circumstances Under Which Information Has To Be Given To Beneficiaries

Under the new regime it is recognised that there can often be good reasons for some beneficiaries to be denied information relating to the trust. A good example of this is where there are young children and grandchildren who are beneficiaries of a family discretionary trust and for whom knowledge of the existence or the quantum of the trust could be damaging. Equally in the case of an Employee Benefit Trust, co-workers who are beneficiaries of the structure should be able to expect privacy in relation to their own benefit or interest under the trust.

The 2007 law has been redrafted in such a way that the terms of the trust may expressly exclude discretionary beneficiaries' rights to information, but without denying the overriding right of any beneficiary to apply to the court for information. The person seeking the information which the settlor has taken the trouble to deny him would have the burden of proving why disclosure was necessary. It should be stressed that the objective of this change is not to routinely deny beneficiaries information, but where a settlor is genuinely concerned that certain information should be kept confidential from beneficiaries until, for example, they have demonstrated an ability to provide for themselves, the facility is available. It remains the case that the trustee must be accountable for his trusteeship.

Abolishment Of Liability Of Directors Of Corporate Trustees

Under the 1989 law, directors of corporate trustees based in Guernsey or acting as trustees of Guernsey law trusts are personally liable as guarantors in respect of damages or costs awarded against the corporate trustee for a breach of trust. The 2007 law repeals this clause in its entirety.

There was evidence that advisers were steering private trust companies to other jurisdictions since family members and advisers, invited to sit on the Board of such companies, were understandably not prepared to accept liability imposed under the 1989 legislation.

Directors will remain personally exposed in relation to any breach of trust claim initiated before the Royal Court prior to the date when the new law comes into effect.

Limitation Periods And Alternative Dispute Resolution

As currently drafted the period within which an action founded on a non-fraudulent breach of trust may be brought against a trustee by a beneficiary is three years from delivery of the final accounts of the trust to the beneficiary or three years from the date on which the beneficiary first has knowledge of the breach of trust whichever period first begins to run. Where a beneficiary is a minor or a person under legal disability the period of three years does not start to run until his minority or disability, as the case may be, ceases.

It was recognised that the current law imposes an unfair burden on trustees where a trust may have a wide class of beneficiaries, some of whom may not even have been born at the time of the breach of trust. Adult beneficiaries or parents of minor beneficiaries may be fully aware of the breach of trust but may chose to delay seeking redress until a minor comes of age, long after the three year limitation period has expired.

The 2007 Law imputes the knowledge of the guardian to any minor beneficiary and also introduces a longstop period after which no action founded on breach of trust could be pursued. Accordingly, it is intended that no action founded on breach of trust may be brought against the trustee after the expiration of 18 years immediately following the date of the breach.

In addition, as well as any order, judgment or finding of law or fact of the Court in an action against a trustee founded on breach of trust being binding on all beneficiaries of the trust whether or not yet ascertained or in existence provided they were represented either personally or as a member of a class there are similar provisions for ADR procedures. If there is a mediation, arbitration or similar process regarding a breach of trust which results in a conclusion, that result will bind unborn and minor beneficiaries if they were represented in the proceedings. It is hoped that this will encourage the use of alternatives to litigation.

In Summary

There are a number of other improvements that have been made to the law in order to clarify certain matters under the existing legislation.

In general terms however, the key changes that have been made should certainly benefit the industry and create an even higher level of flexibility in an area of business where the Island already thrives. I am sure that the fiduciary sector will continue to develop and prosper and that the new legislation will create an even stronger foundation for its future continued growth.

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