Originally published in Private Client Practitioner, Guernsey supplement, November 2008
The Trusts (Guernsey) Law, 2007 made a number of changes to the trust landscape on the island. One of the areas was allowing non-purpose trusts, writes Alison MacKrill of Turcan Connell.
Guernsey law trust under the Trusts (Guernsey) Law, 1989 (the 1989 law), in order to be valid had to have one or more beneficiaries or be created for a charitable purpose.
A beneficiary had to be identifiable by name or ascertainable by reference to a class or a relationship to another person. To the extent that a trust had no beneficiary identifiable or ascertainable, unless it was created for a charitable purpose, it was invalid and unenforceable.
In other words, Guernsey law followed the English law principle that there must be somebody in whose favour the law can decree performance. If there was no declared object there is a resulting trust in favour of the settlor or his representatives.
In some respects, the 1989 law was narrower than English law, which allowed certain exemptions from the beneficiary principle.
Many of the English decisions are concerned with the validity of trusts which were not charitable bequests and were therefore void in English law as being perpetuities.
Prior to the passing of the 1989 law there was no law in Guernsey which prohibited the constitution of a trust under which the trustees remain vested in perpetuity. This mirrored Scottish law where the privilege of creating perpetuities under trust was not limited to charitable bequests. So the restrictions placed by the 1989 law did not form part of a logical whole.
2007 trust law
All this changed with the coming into effect of the Trusts (Guernsey) Law, 2007 (the 2007 law) which took effect on 17 March of this year. The Guernsey legislature examined the rationale behind the invalidity of a non-charitable purpose trust and decided to provide for the validity of such trusts through the mechanism of enforceability. Such enforceability is provided for by the appointment of a person who can enforce the terms of the trust, or otherwise, an enforcer.
An enforcer has a fiduciary duty to enforce the trust in relation to its non-charitable purposes.
If the enforcer is to be remunerated for his services such remuneration must be provided for within the terms of the trust.
The enforcer cannot also be the trustee but there is no prohibition on the enforcer being connected to the trustee. For the avoidance of doubt, the settlor or a corporation can be appointed as an enforcer.
Furthermore, whenever there is no enforcer, the trustee is required to take such steps as are necessary for the appointment of an enforcer. Where the trustee of a non-charitable purpose trust has reason to believe that the enforcer in relation to those purposes (a) is unwilling or is refusing to act, (b) is bankrupt or otherwise unfit to act, or (c) is incapable of acting, the trustee is required to apply to the Royal Court for the removal of the enforcer and the appointment of a replacement.
The requirement for an enforcer follows the Jersey model rather than the Bermuda model. The terms of a trust for non-charitable purposes, may provide for the addition, variation or removal of a non-charitable purpose of the trust or for the exclusion of a non-charitable purpose from the objects of the trust.
In view of this and the requirement for an enforcer, the funding of a non-charitable purpose trust will need some careful consideration.
Moreover, by returning to the position prior to the 1989 law that there is no prohibition against a perpetual trust, any conflict that such trusts are void as being perpetuities was removed.
Unlike a trust for beneficiaries, a non-charitable purpose trust must be created by an instrument in writing. By this means, a conditional gift expressed orally cannot inadvertently create a purpose trust.
Questions have arisen in jurisdictions which have passed legislation providing for non-charitable purpose trusts over what a "purpose" may be. Doubts were raised whether the formation of a trust for the purpose of holding one or more assets was properly a purpose in and of itself. The 2007 law, provides that a purpose includes the holding or ownership of property being "any purpose whatsoever, whether or not involving the conferral of any benefit on any person and includes, without limitation, the holding or ownership of property and the exercise of functions."
This is, of course, qualified to the extent that a trust will be invalid if the purpose purports to be a purpose contrary to Guernsey law, or it confers or imposes any right or function the exercise or discharge of which would be contrary to the law of Guernsey. Similarly, the usual trust rules apply that the trust must not have been formed under duress, fraud, mistake, undue influence or misrepresentation or in breach of fiduciary duty, it cannot be for purposes which are immoral or contrary to public policy, its terms cannot be so uncertain that its performance is rendered impossible and the settlor must be, at the time of its creation, capable of creating such a trust.
Determined by Guernsey law
The 2007 law, also provides that all questions relating to a Guernsey trust are to be determined in accordance with the law of Guernsey, both with respect to validity generally and by making it clear that a trust formed for the purpose of ownership of property is valid. This means Guernsey law non-charitable purpose trusts, do not have to contain artificial purposes in order to satisfy a test of validity.
Although non-charitable purpose trusts will be formed for both commercial and non-commercial reasons the most common use of a non-charitable purpose trust has been that of holding one or more special purpose vehicles. This structure is typically used for holding shares in a private trustee company and also for securitisation purposes.
Commentators have queried whether a non-charitable purpose trust would be enforced in an English court of law. As the UK is a signatory to the 1985 Hague Convention on the Law Applicable to Trusts and on their recognition it is likely that the validity of such a trust would be recognised. If the Hague Convention did not apply for any reason then it is unlikely that an English court would not uphold the validity of the trust under Guernsey law.
The 2007 law, also covers what happens should the situation arise that the purpose for which the trust was formed has come to an end by applying the cy près doctrine to any trust for purposes. It is also worth noting that a non-charitable Guernsey purpose trust, like any other trust, may have a non-resident trustee.
Guernsey law trusts may have any or all of beneficiaries, charitable purposes and non-charitable purposes. If there are beneficiaries, however, then the provisions relating to rights of information will apply, unlike with a Cayman STAR trust.
With these changes brought in by the 2007 law, Guernsey is setting out a clear and simple means of creating purpose trusts, which may be used for both commercial and non-commercial applications, including trusts which would otherwise fail were they not considered to be charitable but philanthropic only.
Where tax is not an issue, the mixed private and non-charitable purpose trust may be of interest for the settlor who wishes to benefit a small group of persons to create a private charitable trust. Upon a failure of the trusts, the funds would be applied cy près. By this means, trusts constituted for wide purposes will be given the liberal treatment given to trusts for charity in the narrower sense.
Whilst it is still early days, the combination of the removal of the guarantees given by directors of trustee companies, the benign regulatory regime applicable to private trustee companies and the holding structure which can be effected through a non-charitable purpose trust, together with the changes to the corporation tax regime where such companies are taxed at zero percent, means there has been a rise in the number of private trustee companies being formed.
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