Jersey: Trusts: It's All A Mistake

In its judgment of 19th September 2016 in In the matter of D, E and F Trusts [2016] JRC 166C, the Royal Court applied, for the first time, the statutory mistake provisions embodied in Article 47E of the Trusts (Jersey) Law 1984 (which provisions were introduced in 2013).

Facts

On 20th March 2009, the applicant (the Settlor) established three Jersey law trusts, the C, H and J Trusts, with cash in the sum of US$100. The principal trusts were for the Settlor during his lifetime as to both capital and income, and from and after his death for such of the beneficiaries as the trustee might in her discretion determine. The trusts were intended to be tax efficient vehicles for succession planning for the Settlor's family. The Settlor was resident in Switzerland and his two sons were resident in the United States of America. The structures were intended achieve US tax objectives, in particular to ensure that any distributions to the Settlor's sons were not subject to US tax and to ensure that no part of the assets held by the trustees of the Trusts would be subject to US estate tax.

Although the trusts were established in 2009, no assets were added to them for over two years. In 2011, the Settlor became aware of the potential enactment of a 20% estate tax in Switzerland, where he was resident.

The Settlor took advice during to 2011 to address the Swiss tax issues whilst not losing sight of the original US tax objectives and on 23rd December 2011, the Settlor executed amendment indentures in relation to the three trusts. As a result, each of the trusts became a Jersey law governed non-discretionary irrevocable trust.

Following the amendment of the trusts and as part of the restructuring process, the Settlor transferred his interests in a publically traded Dutch company, into the amended trusts. The Settlor held his shares in that Dutch company through two Luxembourg holding companies. On 23rd December 2011, the day on which the amendment indentures were executed, the Settlor entered into three transfer agreements with the retention of a usufruct, pursuant to which he transferred to the trusts his shares in the two Luxembourg companies. Those transfers were the subject of the application before the Royal Court.

It transpired that the proposed changes to Swiss tax law were not introduced and therefore the contemplated Swiss tax issues did not arise. The amendments made to the Trusts in fact gave rise to unintended and significant potential US estate tax charges. Instead of the transfers being made to trusts which in their amended form would be tax efficient, the transfers were made to trusts which attracted a significant risk to the Settlor's family of a substantial US estate tax liability if either of the Settlor's sons should die before the end of the respective trust periods (which would be in 2041). The Settlor's evidence to the Court was that he would not have made the transfers onto the trusts in their amended form had he known and appreciated the potential US estate tax consequences and he therefore applied that the transfers be set aside and declared void on the grounds of mistake with the effect that the shares in the

Luxembourg companies had been held at all times on bare trust by the trustees for the Settlor.

Mistake

The application was made under Article 47E of he Trusts Law (introduced in 2013), because there was no application to set aside either the trusts as originally made or as amended by the 2011 instruments. What was sought to be set aside were the transfers of the shares in the Luxembourg companies in 2011 to the amended trusts.

The Court was required to address three questions:-

  1. Was there a mistake on the part of the Settlor?
  2. Would the Settlor not have made the transfers "but for" the mistake?
  3. Was the mistake of so serious a character as to render it just for the Court to make a declaration?

The answer to the first two questions was an unequivocal yes. The third question was more problematic. In most of the cases that have come before the Royal Court, the result of the mistake has been that there was an existing tax liability. In this case, if the two sons were to survive until December 2041 when the trusts would come to an end, the US tax disadvantages would not have come to pass and there would be no enormous tax liability of the kind contemplated.

The difficulty facing the Court was that it had to consider whether the mistake could be said to be of such a serious character as to render it just for the Court to make a declaration when, quite feasibly there were no tax risks of the kind envisaged. The issue was whether the potential risk of a very significant tax liability if either son should die prior to the expiry of the term of the trusts was a consequence which renders the mistake so serious that it is just that the transfers be set aside. The Court considered that it was and made the orders/declarations for the following reasons:-

  1. Although the risk may be thought to be far from certain of coming to pass, the potential tax bill for their estates was huge;
  2. It was clear that the Settlor ultimately wanted the assets to go to his children and remoter issue and none of the trust beneficiaries were likely to suffer if the transfer of the shares was set aside;
  3. The Settlor was not a tax payer in the United States and the mistake goes to the treatment of his sons' estates and not to his own. The trusts were not therefore an artificial scheme or device and were made for the disposition of the Settlor's estate in a tax efficient way and he has gained no interim advantage.

Conclusion

The Royal Court's decision provides helpful guidance on its approach to applications to set aside subsequent transfers in to Jersey trusts by reason of mistake. In certain circumstances, the Court will be willing to set aside a transfer in to trust if the mistake gives rise to a contingent (as opposed to actual) tax liability.

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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