Guernsey: A Guide To Non-Charitable Purpose Trusts In Jersey

Purpose trusts have become an increasingly important part of the Trusts (Jersey) Law 1984 (as amended) (the "Trusts Law"). Unlike traditional trusts there is no need for a purpose trust to have a living beneficiary. The trust can be established and exist for a purpose, for example holding the shares of a special purpose vehicle in what is commonly known as an "orphan" structure. The uses of a purpose trust are varied and are described in greater detail below.

Validity and duration

A purpose trust, like any other trust, must have trustees.  Unlike traditional trusts however, a purpose trust is also required to have an enforcer whose duty it is to enforce the trust in relation to its stated purposes.  The enforcer calls the trustees to account for the trust fund and ensures that the trustees are acting in accordance with the terms of the trust.  An enforcer of a purpose trust cannot also be the trustee of that trust, although there is nothing to prevent one being a subsidiary of the other if care is taken about the role each is to play in the trust structure.

A purpose trust may also have a protector (a third party with rights of veto and/or powers to do certain things under the terms of the trust) although this is optional and will usually be determined by the settlor given his particular concerns or intentions about the future administration of the trust.  

The trustees, enforcer, protector and settlor can be corporate entities or individuals.

A purpose trust must have the same legal certainties as are required in relation to any Jersey law trust, namely:

  • there must be certainty that the settlor intended to establish such a trust;
  • the property to be held on the trust must be certain; and
  • the objects (in this case the purposes) for which the trust has been established must be clear so that at any time it is possible to state with certainty whether or not a proposed use of trust funds is within the scope of the stated purposes of the trust.  

The purposes for which trusts are established must also be consistent with public policy and not contrary to the law of Jersey.

As with all other Jersey law trusts, a non-charitable purpose trust can continue in existence for an unlimited period of time unless the terms of the trust provide otherwise.

Role and rights of the enforcer

The Trusts Law states that it is the "duty of an enforcer to enforce the trust in relation to its non-charitable purposes".   Such role is likely to involve ensuring that trustees utilise the trust funds for the specified pur­poses and not for other purposes without due authority. This involves mon­itoring the activities of the trustees and being prepared to bring the trustees before the Royal Court of Jersey where there is concern that trust funds are not being used properly.  The duties of the enforcer are usually described in the terms of a purpose trust instrument so that the enforcer is certain about what he is required to do to fulfil his role.

The Trusts Law provides that an enforcer must not profit, directly or indirectly, from his office unless the terms of a trust permit such profit or such profit is sanctioned by the Royal Court of Jersey.  Express provision is usually made in the terms of a purpose trust instrument for payment of a professional enforcer's fees and expenses.

An enforcer's statutory rights to documents and information concern­ing the trust are limited. Under the Trusts Law the enforcer has the same rights as a beneficiary to see documents which relate to or form part of the trust accounts.  It is possible to include express provision in the purpose trust instrument whereby an enforcer has more extensive rights to trust documentation if this is considered to be appropriate or desirable in particular circumstances.

It is interesting to note that under the Trusts Law the resignation of an enforcer given in order to facilitate a breach of trust is of no effect.  This can be problematic for an enforcer where he wishes to resign given disagreement over a particular course of action on the part of the trustees.  Where the actions of the trustees might constitute a breach of trust, the enforcer may be in difficulty in tendering a valid resignation and specific advice should be sought where such circumstances arise.

What are "purposes" and can they be changed?

A "purpose" is defined in the Trust Law and means "any purpose whatsoever, whether or not –

(a) involving the conferral of any benefit on any person; or

(b) consuming or capable of consuming the income or capital of the trust,

 including without limitation the acquisition, holding, ownership, management or disposal of property and the exercise of functions".

Some non-charitable purposes are simple and obvious to identify whilst others are not. Examples of non-charitable purposes permitted under the Trusts Law include maintaining and preserving a historical artefact and holding shares in a company. Subject to any changes authorised by the Royal Court of Jersey, if a purpose trust is created for one specific purpose, for example, to pay certain debts or to purchase a property, such a trust will terminate when the purpose has been fulfilled.  In such circumstances, unless the terms of the purpose trust instrument provide otherwise, the trust fund will be deemed to be held by the trustees on resulting trust for the settlor or his estate. This may give rise to significant tax and/or other consequences.

In the circumstances set out in the Trusts Law, including where "the purpose has so far as reasonably possible, been fulfilled, has ceased to exist or is no longer applicable", the Royal Court of Jersey may make an order for the property in the purpose trust to be held for such other purpose as the court considers is consistent with the settlor's original intention.  It may also approve any arrangement to vary or revoke the purpose of a purpose trust or modify the trustees powers,  providing it is satisfied that such changes are "suitable and expedient" and are "consistent with the original intention of the settlor and the spirit of the gift".   Where such an application is brought, the court must be "satisfied that any person with a material interest in the trust has had an opportunity to be heard."  Applications for these types of orders can be made by a trustee or the Attorney General in Jersey.

Use of purpose trusts

Purpose trusts can be used in a number of ways, including:

  • to hold special purpose vehicles (spvs) used in off-balance sheet transactions where the beneficial interest in an spv may, in certain circumstances, be said to be "ownerless";
  •  to hold the shares of private trust companies which act as trustees of a settlor's family trust.  Such an arrangement provides a greater degree of comfort for the settlor about the composition of the board of directors of that private trustee than would otherwise be the case if an unconnected trust company acts as trustee of such family trust;
  • for investing in family companies where economic performance is likely to be poor or uncertain; and
  • for social benefit projects (both public and private) to enable certain community facilities or areas to be maintained, for the preservation of monuments, to provide financial support to an opera house and to fund particular political purposes.  

Conclusion

The use of purpose trusts has evolved over recent years, aided by recent changes to the Trusts Law  and it is anticipated that the role of such trusts in offshore transactions and arrangements will continue for many years to come. 

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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