Originally published in Private Client Practitioner, December 2008
In the recent case of Re X, Guernsey has clarified the circumstances in which the court will grant authority for a guardian to settle a patient's assets if they are unable, writes Patrick Palmer of Collas Day.
Guernsey does not have a statutory regime in relation to curatelle (guardianship) matters. Instead the law in this area, like many other, is based on Norman customary law, which has evolved throughout centuries of use.
Earlier this year, the Royal Court of Guernsey was asked to consider whether the assets of a patient under curatelle could be placed into a settlement in order to minimise the potential future inheritance tax liability. On dealing with this application the court had to consider a number of issues not least, whether they had sufficient jurisdiction and power in their supervisory role in curatelle matters to be able to give such direction to a guardian. To assist the court the H.M Procureur (whose role is similar to the Solicitor General in England) was appointed as amicus curiae to advise the court in matters of Guernsey law and an advocate from the law officers department was appointed to consider the interests of the patient.
At a preliminary hearing the court held as a matter of law that it had sufficient jurisdiction to be able to grant authority to a guardian to create a settlement of a patient's assets. The judge felt that this approach reflected the social changes in Guernsey and that it would help to ensure the development of Guernsey's customary laws in a way that was most appropriate for the island.
Following on from this earlier hearing the ordinary division of the Royal Court of Guernsey has now revisited this matter to consider the application for authority to place a patient's assets into two settlements in order to maximise the potential inheritance tax saving.
Facts of the case.
In accordance with Guernsey's guardianship procedures, a curateur (guardian) had been appointed in the Royal Court some years before the hearing to deal with the affairs of the patient, the court being satisfied on the basis of the medical evidence that the patient had become "unable to manage his own affairs for reasons of infirmity of mind." This appointment was made and has continued under the supervision of the Royal Court and the family council (which comprises three relatives or close friends).
The patient had been a very successful businessman and had amassed considerable wealth. It was understood, following witness evidence, that the patient had moved to Guernsey some years ago (where he has been domiciled since) in order to avoid paying UK capital gains tax after selling a business for a substantial sum in the late 1980s. His former wife (whom he remains on good terms with) and his two sons continue to live in the UK, all of whom were beneficiaries under the patient's will and therefore subject to UK inheritance tax laws.
Unfortunately the patient now suffers from a degenerative disease of the brain which has caused his memory to become increasingly impaired. The H.M. Procureur confirmed that the patient would not recover, even temporarily, and therefore would not be able to manage his affairs in the future. This view was also supported by medical reports and correspondence between medical professionals.
A reputable firm of chartered accountants had prepared a report in 2007 in relation to the patient's assets. The report recommended that from a taxation perspective, the patient, acting by his guardian, should settle his assets into a discretionary trust as this could result in substantial inheritance tax savings for future generations of the patient's family.
The content of the report and the subsequent application made by the guardian were supported by the members of the family council. In addition, Counsel for the Patient, subject to certain reservations, supported the application.
The evidence all indicated that the patient was generous, both financially and otherwise, to his family. Further to this, he had previously demonstrated a determination to pay as little UK tax as necessary evidenced by, amongst other things, moving to Guernsey to avoid capital gains tax.
The evidence also demonstrated that the patient had previously sought tax advice from the same chartered accounts who had prepared the report for this matter. When he had previously sought such advice the patient had accepted and followed it to the extent that he had placed the majority of his assets into a discretionary settlement many years earlier, although that settlement had since been wound up.
It must be noted that the patient had a valid will, which was made in Guernsey while he still had the mental capacity to do so. In his will he had left considerable legacies to his two sons and to his former wife, amongst others (legacies which may have conflicted with Guernsey's forced heirship rules depending on the value of his estate at the date of his death).
In summing up, the Lieutenant Bailiff gave a number of directions to the Jurats (the Guernsey equivalent of a non-stipendiary magistrate) namely that:
- They could, if they wished, take into account the witness evidence regarding the patient
- They should consider whether the patient would make the settlements if he were to briefly recover from his illness, receive all of the competent legal, accountancy and tax advice, and then relapse into his illness.
- They should consider the evidence as to the Patient's reasons for moving to Guernsey including whether, as suggested, he did so for tax efficiency purposes. They should also question how they believe that patient would have reacted to a scheme that could save a considerable amount of money for his family.
- As a fallback, they may consider what a reasonable and prudent man would do if he were in the patient's position.
The proposed settlements would transfer the patient's assets into two trusts, of which the patient would become a life tenant. This would clearly place the patient's assets outside of the direct control of the curateur and would beside appear to hold no additional direct benefit for the patient. However, counsel argued that the proposed settlements were in fact in the patient's best interests in the widest sense, including what were described as his emotional and health interests.
It appears highly likely from the facts of the case and the detailed reasons for the decision that, had the patient had the capacity to do so, he would have adopted the course of action outlined in the application. The court concluded that the making of the two settlements (the second settlement providing comfort for the specific beneficiaries under his will) would be in the best interests of the patient and the Guardian was therefore authorised to make the settlements as soon as possible.
The earlier clarification by the Royal Court of Guernsey and its subsequent ruling has significantly developed the law in relation to Guernsey's customary law of curatelle. This further evolution of the law is noteworthy as the customary laws of the island, which have been observed for centuries, are certainly not changed on a whim.
A guardian has always had the role of enhancing and protecting a patient's assets. Clearly, placing those assets into a trust which puts them outside of the direct control of both the patient and their guardian can be said neither to enhance nor protect the patient's assets. Disposing of a patient's assets in such a way also has the potential to bypass Guernsey's forced heirship rules.
Nevertheless, the judgement must be welcome as it helps to clarify the circumstances in which the court will grant authority for a guardian to settle a patient's assets. However, this case appears to be somewhat more straightforward than others may prove to be, given the previous conduct of the patient and the evidence which was put before the court.
We are still left with the question of how far the court will go in exercising their powers and in what circumstances it will be considered outside of the patient's best interests to avoid inheritance tax liability.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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