Guernsey: Settlor Control Over Fiduciary Structures

Last Updated: 6 February 2014
Article by Mark Biddlecombe

Most Read Contributor in Guernsey, September 2018

Mark Biddlecombe of Nerine in Guernsey looks at what control and power a settlor has over fiduciary structures they have set up.

In promoting and administering trusts, practitioners always have to strike a balance between the settlor's desire to exercise a degree of influence over the trust, and trust law that states that the control of the trust is the trustees' responsibility. It is arguable that settlors held too much sway over trustees in the early years of the offshore trust industry, and trust companies were perhaps too easily persuaded to act in accordance with settlor instructions.

All of this changed in 1991 after the Rahman case in which it was held that a trust was in fact a sham.

Trustees had to reappraise their relationship with settlors and beneficiaries. Overnight, the word "client" in a trust arrangement became taboo - finding the word in a trust file gave lawyers, defending trustee claims, palpitations and many trusts were "busted" without even getting to court. This was particularly concerning in matrimonial cases. Trustees were under constant pressure to make generous settlements in favour of vengeful spouses for fear of falling foul of the Rahman case. It was not uncommon at that time for trustees to be directed, and it was advisable from time to time for them to find some way of saying "no" to a request from the settlor/beneficiary regardless of the merits of that request.

In 2003, order was restored in the Jersey case of the Esteem Settlement. The then Deputy Bailiff held that Rahman had essentially been wrongly decided and that the law of sham in respect of trusts had not changed - a trust could only be a sham if all parties to it agreed at the outset that the trust document was not going to be adhered to.

Trustees might follow settlor instructions, but if they did the remedy was not to set the trust aside, but to sue the trustees for breach of trust. The Deputy Bailiff also poured judicial scorn on the notion that trustees should manufacture the occasional refusal of a settlor's request. Categorically the test was not how many times a trustee said yes, but did the trustee actually engage his intellect before making a decision to do so. It was affirmed that the quality of the decision mattered most of all, and that remains the case today. A final legacy of the Esteem decision was that it confirmed that there is nothing untoward in a settlor continuing to exercise a degree of influence on trust matters, whether actively through engaging with the trustee or passively through the letter of wishes. After all, the trust fund was settled by him, the trust deed reflected his express intentions and it was established for the purposes or for the beneficiaries that he had chosen. Why should a father create a trust for his wife and children and then be excluded from having any say in what the trustees did?

This reflects good trust practice today and usually settlors and trustees enjoy a collaborative relationship where both parties recognise and respect their roles. Of course, due to human nature, that is not always the case. Sometimes settlors, particularly in the early stages of a relationship, need a greater degree of comfort that their wishes will be heard. The traditional approach offshore has been to use a protector who can veto the trustees wish to exercise powers that are contrary to the settlor's wishes.

This negative power is often enough to put the nervous settlor's mind at ease but, sometimes, they may want extra protection in case they fall out with their trustee. They achieve this by giving themselves a right to appoint new or additional trustees, or include a power to remove a trustee in the unlikely scenario where a trustee refuses to resign. Given the experience of Spread Trustees, one cannot help but wonder if resisting the inevitable for anything other than genuine and compelling fiduciary reasons is a prudent course.

What if this negative power isn't enough even when it extends to hiring and firing trustees? There are number of options available to the client (it's safe to call him that before he has become a settlor). First, in most offshore jurisdictions the settlor now has the ability under the trust law to reserve certain powers to himself. In Jersey and Guernsey, the range of powers that can be reserved without jeopardising the validity of the trust are as broad as any settlor could wish. Where the trustee has a power then it must exercise that power in good faith and with the utmost care and skill, but the power reserved to the settlor can be a personal one without the requirement to consider the interests of the beneficiaries beforehand. To what extent could a trustee be criticised for not stepping in to save the settlor from himself has yet to be tested in court. In theory the trustees are not liable if the settlor exercises a power and does so in a way that causes a loss to the trust fund. Settlors need to think carefully before they reserve power to themselves. Are they happy to hold that responsibility or would they rather hold a professional trustee to account?

Arguably the Cayman STAR legislation and the BVI VISTA legislation go further. They both aim to divorce the trustees completely from any involvement with, and liability for, underlying companies. Taking VISTA as an example, the trust will own a BVI company and the trustees have no obligation to intervene in the management of that company until the person who does have that responsibility (usually the settlor) is no longer able to. While Cayman and BVI practitioners strongly believe this legislation is robust, it has not yet been fully tested in the courts. The consensus is that STAR and VISTA would be upheld in their respective jurisdictions' courts, but would an English family division judge take the same view?

There will be times when settlors reserving powers will count against them, such as if they are resident in a high tax jurisdiction or are involved in litigation in a foreign court. If the settlor has a power over trust distributions, what would prevent a foreign court from ordering him to exercise that power in favour of his wife, a creditor or even a revenue authority? Refusal may result in imprisonment for contempt of court, as already demonstrated by the US courts, and it is not hard to see it being an issue in English divorce proceedings. A final option for the client to consider is the private trust company (PTC) available in most offshore jurisdictions.

In a PTC the client can effectively choose the board of directors, and he can sit on the board with family members, professional trustees, or other advisers. Absent any tax considerations this is a powerful option particularly for high net worth clients It could be argued that many of these refinements of the trust structure are a distortion of the trust concept; a dilution of the "irreducible core of obligations" trustees owe to their beneficiaries. In a sense they are attempts to make it OK for a trust to go beyond the limitations and strictures of trust law.

Provided the client takes the appropriate advice then one of these options should provide him an appropriate degree of control and influence without foregoing the principal benefits. We have come a long way since Rahman and, as long as we stick to the road, there's no turning back now.

Originally published in Private Client Practitioner's 2014 Guernsey Special Review, January 2014.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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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