Jersey: Reasserts Control Over Its Trusts

New Jersey Court decision protects trusts against English divorce orders

On 15 August, the Deputy Bailiff (the second most senior Judge) handed down judgment in the landmark case of Mubarak v. Mubarak. In recent years there have been a number of cases in Jersey where a spouse has sought to enforce a divorce order of the English High Court's Family Division purporting to vary a Jersey trust. There has been considerable doubt about the precise circumstances in which the Jersey Royal Court will enforce such an order and in previous decisions the Royal Jersey Court seemed always willing to do so.

This judgment provides some welcome clarification. The Deputy Bailiff distinguished between the "variation of a trust" and its "alteration". The Court characterised the latter as a change which cannot be carried out within the existing powers of the trustees. A "variation" however is a change to the trust which the trustees can effect without reference to the Court, for example using powers already contained in the trust deed.

In 2006 a new Jersey Trusts Law included provisions similar to legislation already in force in, for instance, Bermuda and Cayman, and designed to limit the circumstances in which Jersey trusts could be attacked. The new law also sought to limit the circumstances in which the judgment of a foreign court could be enforced by the Jersey Court. The Deputy Bailiff's decision that, in the light of these new provisions, the order of the English Court varying the Mubarak family trust, could not be enforced by the Jersey Court gives some indication of the Jersey Court's willingness and intention to uphold the integrity of trusts established under Jersey law.

The Jersey Court will not normally therefore give effect to an alteration in the trust which the trustees themselves have no power to make. The Court noted that it enjoys no overriding power to change the terms of a trust. The Court's jurisdiction over trusts is essentially supervisory and concerned to ensure that a trust is given effect, not its wholesale variation. The powers that the Court does possess to change a trust are strictly limited for example where it is seen to be in the interests of minor or unborn children to do so.

In Mubarak the husband had exercised his powers under the trust as settlor to exclude the wife as a beneficiary. The English Court's order directed that various sums be paid out of the trust to the wife. To give effect of such an order in Jersey would amount to an alteration of the trust and the Court has no power to do this in the light of Article 9 of Jersey Trust law.

However in this case the Court found all the adult beneficiaries had consented to the English judgment being given effect to in Jersey. The case therefore follows the same path as the Jersey Court took in the Turino Consolidated Limited Retirement Trust case, decided earlier this year, in the importance it was prepared to attach to written expressions of wishes in relation to the trust, and in its broad interpretative approach to the rule in Saunders v Vautier in allowing the beneficiaries of a trust, acting together, to alter its terms.

The husband had been required to write to the trustees consenting to any order of the English Court being enforced, as a precondition of continued involvement in the English litigation.

The Jersey Court therefore, while refusing to implement the order of the English Court directly, did approve on behalf of the minor and unborn beneficiaries the wife receiving the payment specified in the English order on the basis that all the beneficiaries had consented. The Court also appointed KPMG as receivers for the purpose of gathering in trust assets around the world.

The case does not refer to the tax position of the parties concerned, but it should be borne in mind that any change to a trust that varies its terms or can be seen as a resettlement can have significant tax consequences for the trust itself and for settlors and beneficiaries subject to UK taxation. This is particularly the case following the UK changes to the taxation of trusts in 2006, and this year's changes to the taxation of UK resident non-domiciliaries.

This decision reinforces the independence of the Jersey Court, which can no longer be assumed to enforce English divorce orders against Jersey trusts. Only if the terms of the trust permit it, if the trustees have submitted to the English Court's jurisdiction or all beneficiaries consent, will the Jersey Court give effect to an English divorce order.

This underlines the dangers of foreign trustees participating in English divorce cases. The decision is likely to be followed in other offshore jurisdictions.

It is a warning to those seeking orders against assets held by Jersey trusts. Much more careful consideration of the terms of trusts will be required in matrimonial cases to establish what powers the trustees have and what orders can be made by reference to those powers within the trust structure.

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This document was not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax law practice.)

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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Claire Blakemore
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