Trusts (Amendment No.5) (Jersey) Law 201202 Nov 2012
The Trusts (Jersey) Law 1984, as amended (the "1984 Law") has been the backbone of Jersey's success story as one of the private wealth jurisdictions of choice. Indeed, the 1984 Law has been used as the model for similar laws in other jurisdictions. The latest amendments to the 1984 Law are contained in the Trusts (Amendment No. 5) (Jersey) Law 2012 ("Amendment No. 5").
Amendment No. 5 adopts the conclusions of the Trusts Law Working Group following a period of consultation with the trusts industry. In keeping with the rationale for previous amendments, the main driver for Amendment No. 5 was to make Jersey more attractive for private wealth business and to maintain the Island's position as a leading trusts jurisdiction. To this end, Amendment No. 5 builds upon the landmark judgment of Mubarak v Mubarak  JLR 250 in strengthening the requirement for questions relating to a Jersey law trust to be determined in accordance with Jersey law and not foreign law. In addition, Amendment No. 5 brings clarity in a number of other key areas.
Ownership only purpose trusts are valid
The 1984 Law was amended in 1996 to make it possible to create a valid trust for non-charitable purposes of which there is no beneficiary. Such trusts operate as an exception to the "beneficiary principle" which requires a trust to have beneficiaries in order to be valid. In place of beneficiaries, a non-charitable purpose trust must have an enforcer, whose duty it is to enforce the trust in relation to its non-charitable purposes.
Since 1996, purpose trusts have been widely used to hold the shares in private trust companies or for quasi-charitable purposes which do not fall within the definition of charity under Jersey law. They have also been used in a commercial context, to hold the shares in special purpose vehicles.
However, some commentators have questioned whether it is possible to establish a non-charitable purpose trust to hold particular assets, such as the shares in a designated company. To counter any possible concerns that such an internal or self-serving purpose might not be sufficient, the practice has developed of drafting purposes more broadly than simply that of holding the relevant assets.
Amendment No. 5 provides statutory confirmation that a non-charitable purpose trust can be created for any purpose whatsoever, including that of acquiring, holding or owning property. Amendment No. 5 also confirms that chosen purposes need not involve the conferral of benefit on any person nor consume the income or capital of the trust assets.
Article 9 - Trust issues to be determined by Jersey law and protection from foreign courts
Article 9 of the 1984 Law was amended in 2006 to extend the scope of the protection provided to Jersey law trusts from attack by foreign courts. This was particularly a matter of potential concern with regard to foreign court orders, issued in the context of matrimonial proceedings, which purported to vary Jersey law trusts.
Article 9 broadly provides that questions relating to a Jersey law trust are to be determined in accordance with the law of Jersey, that no rule of foreign law is to affect such questions, and that no foreign judgment with respect to a Jersey law trust will be enforceable to the extent that it is inconsistent with Article 9. Accordingly, Article 9 provides a Jersey law trust with protection from interference by foreign courts.
Following the introduction of the amendments to Article 9 in 2006, there was a certain amount of academic comment as to their scope, much of which was resolved by the Mubarak judgment (referred to above). Amendment No. 5 provides additional clarity and enhances the level of protection provided to Jersey law trusts.
The key changes can be summarised as follows:
- The list of matters set out in Article 9(1) which must be determined in accordance with Jersey law has been extended to include questions concerning the exercise by a foreign court of any power to vary a Jersey law trust or the nature and extent of beneficial rights or interests in trust property. Both of these issues were central to the judgment in Mubarak and the extension of matters to be determined by Jersey law is to be welcomed.
- Article 9(2)(b) provides confirmation that issues relating to a Jersey law trust are to be determined without consideration of whether or not the trust avoids or defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship to the settlor. Amendment No. 5 extends the scope of this provision so that it is no longer confined to personal relationships with the settlor.
- A new Article 9(2A) makes clear the scope of protection afforded by Article 9(1) and confirms that it:
- does not validate a disposal of property if the settlor does not either own the property or have the power of disposal;
- does not affect the recognition of the law of any other jurisdiction in determining whether the settlor owns property or has the power to dispose of it;
- can be overridden by the express terms of a trust or disposition;
- does not, in determining the capacity of a corporation, affect the recognition of the law of its place of incorporation;
- does not affect the recognition of the law of any other jurisdiction prescribing the formalities for the disposition of property;
- does not validate any trust or disposition of immovable property situate in a jurisdiction other than Jersey which is invalid under the law of that jurisdiction; and
- does not validate any testamentary disposition which is invalid under the law of the testator's domicile at the time of his death.
- Article 9(4) was a key article referred to in the Mubarak judgment: it provides that no judgment with respect to a Jersey law trust will be enforceable to the extent that it is inconsistent with Article 9, irrespective of any applicable law relating to conflicts of law. Amendment No. 5 extends the scope of Article 9(4) so that it includes decisions of foreign tribunals (such as arbitration awards) as well as judgments of foreign courts, and also applies to the giving of effect in Jersey to, as well as the enforcement in the Island of, such decisions.
- The definition of "personal relationship" in Article 9(6) is widened by Amendment No. 5 to include (i) a relationship between a person and the settlor or a beneficiary and (ii) a relationship between someone who has a relationship with the settlor or a beneficiary and someone else who does not have such a relationship. This dovetails with revised Article 9(2)(b), referred to above, in clarifying that questions relating to a Jersey law trust are to be determined without consideration of whether or not the trust avoids or defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship.
Article 9A - Powers reserved by settlor
Article 9A(2) of the 1984 Law provides a list of powers which can be reserved by a settlor or granted to a third party. Amendment No. 5 broadens the scope of one of the items listed in the 1984 Law by removing the word "protector" (which is not defined in the 1984 Law) and replacing it with a reference to a person who holds a power, discretion or right in connection with a trust or in relation to trust property. The reformulated provision reads as follows:
"to appoint or remove any trustee, enforcer or beneficiary, or any other person who holds a power, discretion or right in connection with the trust or in relation to trust property".
Article 26 - Remuneration of professional trustee
Article 26 of the 1984 Law provides that a trustee can only be remunerated for his or her services if so authorised by the terms of the trust, the consent in writing of all the beneficiaries, or by court order. Accordingly, if the trust instrument is silent as to remuneration and it is not possible to obtain the consent of all the beneficiaries (for example, where there are minor or unascertained beneficiaries), trustees may be left with no alternative other than to make a costly application to the Royal Court, requesting a variation to the trust instrument to incorporate a trustee charging clause. In the context of such applications, the court has recognised the importance of trusts being professionally managed and administered by those with appropriate skills, and that it is unrealistic to suggest that professional trustees will provide their services without remuneration.
Amendment No. 5 amends Article 26 so that, where a trust instrument is silent as to remuneration, professional trustees (being trustees who are registered under the Financial Services (Jersey) Law 1998 to carry on trust company business) are entitled to reasonable remuneration for their services. This provision only applies in respect of services carried out after the introduction of Amendment No. 5 and is not available to trustees who do not fulfil the definition of "professional trustees". This amendment is to be welcomed by trustees and beneficiaries alike in providing a safety net for a professional trustee's remuneration, thereby preventing the need for applications to be made to the Royal Court.
Article 31 - Trustee acting in separate capacities
Amendment No. 5 introduces a new Article 31(3) which confirms that a trustee may contract with itself in respect of two or more trusts. Certainty on this issue is to be welcomed. Professional trustees can often find that they need to transact with themselves in their capacities as trustees of two or more different trusts.
Article 34 - Protection for outgoing trustee
Article 34 of the 1984 Law provides that a person, on ceasing to be a trustee, can require to be provided with reasonable security for liabilities before surrendering trust property. In view of this provision, indemnities are often negotiated in order to provide for reasonable security to former trustees. Amendment No. 5 introduces a new Article 34(2A) which gives a former trustee a right to enforce a term of a contract which extends or renews the security (such as an indemnity) provided to him, even though the former trustee is not a party to the contract.
Article 34(2A) provides that the new contract must expressly provide that the former trustee can enforce its terms in the former trustee's own right or must purport to benefit the former trustee and, in either case, the contract must expressly indentify the former trustee.
Article 34(2A) is to be welcomed as it will help to ensure that the retirement and appointment of trustees can be managed in a timely and cost-efficient manner. This improvement to the process builds upon that already seen as a result of the introduction of the STEP model precedents for the retirement and appointment of trustees, with indemnities incorporating "10/10" provisions. Broadly, the STEP "10/10" provisions seek to limit the indemnities or key obligations thereunder to a period of ten years and allow for the distribution of 10% of the trust fund in any one year without a requirement on the new trustee to obtain a reciprocal indemnity from any recipient beneficiary of capital.
Article 57 - Limitation and prescription periods
Amendment No. 5 amends Article 57 of the 1984 Law, which deals with limitation of actions and prescription periods. No period of limitation applies to actions against a trustee (i) in respect of fraud to which the trustee was a party or was privy or (ii) to recover trust property in the trustee's possession or control or previously received by the trustee and converted to the trustee's use. In other cases, Amendment No. 5 provides that:
- the period within which an action founded on breach of trust can be brought against a trustee by a beneficiary or enforcer is three years from the date of delivery of the final accounts to the beneficiary or enforcer or from the date on which the beneficiary or enforcer first has knowledge of the breach of trust, whichever is sooner;
- where the beneficiary is a minor, an interdict or under any other legal disability, the time periods do not begin to run before the beneficiary ceases to be a minor, an interdict or under that other legal disability (as the case may be), or sooner dies;
- the period within which an action founded on breach of trust can be brought against a former trustee by a new trustee is three years from the date on which the former trustee ceased to be a trustee; and
- no action founded on breach of trust can be brought against a trustee by any person after the expiry of the period of 21 years following the occurrence of the breach. The introduction of this 21 year long-stop date, allowing a trustee to draw a line under past events, is to be welcomed.
As outlined above, Amendment No. 5 introduces a number of enhancements to the 1984 Law in several key areas. Of particular note is that Amendment No. 5 introduces certainty with regards to the use of "ownership only" purpose trusts which should result in an increased use in these trusts, both for private wealth planning and in a commercial context.
Additionally, the protection afforded to Jersey law trusts from attack by foreign courts has been clarified and extended: this builds upon the clarification already provided by the Mubarak judgment.
Recognising the importance for beneficiaries of trusts being professionally administered and managed by those with appropriate skills, Amendment No. 5 provides assistance by allowing for professional trustees to be remunerated where the trust instrument itself contains no charging clause. Amendment No. 5 also confirms that trustees can enter into binding arrangements with themselves in their capacity as trustees of two or more trusts and adds to the protection afforded to outgoing trustees.
The importance of ensuring that Jersey continues to be attractive for private wealth business is recognised and the changes introduced by Amendment No. 5 are welcomed.