Knowledge

This briefing explores the principal ways in which Jersey trusts may be "attacked" through civil claims. A successful attack could have resounding consequences for a settlor, potentially leaving their assets exposed to creditors and tax authorities alike.

Note that the interaction of the following issues is beyond the scope of this briefing:

• Jersey trusts and their variation by overseas family courts, including issues relating to the enforcement of foreign judgments; and
• Jersey trust law and the Island's proceeds of crime provisions.

With Bedell Cristin's wide-ranging expertise, we can assist would-be settlors to create watertight trusts as well as advise on how trusts can later be attacked (or how such actions can be defended).

Overview

In assessing whether a trust is vulnerable to attack, a starting point would be a thorough analysis of the trust deed, and the circumstances of the trust's creation and management. This may include a review of:

• whether the trust is revocable or irrevocable;
• whether the settlor has any reserved powers over the trust;
• the relationship between the settlor and the trustee; and
• the circumstances in which assets were settled into the trust.

As a general policy point, whilst the courts of Jersey are keen to uphold the integrity of Jersey trusts, in appropriate circumstances they do not look favourably on the use of Jersey trusts to avoid paying creditors. When it comes to the use of Jersey trusts to launder the proceeds of suspected crime, the Government of Jersey has, over the past 25 to 30 years, implemented increasingly tough legislation to maintain the jurisdiction's clean reputation.

Article 9 of the Trusts (Jersey) Law 1984 (as amended) (the "Trusts Law") is evidence of this approach. In summary, Article 9 of the Trusts Law (also known as the "firewall provisions") broadly provides that questions relating to a Jersey law trust will be determined in accordance with Jersey law, that no rule of foreign law affects 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 of the Trusts Law. Accordingly, it is important for settlors of Jersey trusts to appreciate that Article 9 of the Trusts Law provides a Jersey law trust with some protection from interference by foreign courts. On a separate but related point, trustees of Jersey law trusts will need to consider very carefully whether or not to submit to the jurisdiction of a foreign court in which the validity of a Jersey trust, or transactions affecting such a trust, are being challenged in some way.

Sham

In a sham trust, the terms of a trust appear to create rights in others, but in fact the terms do not represent the true nature of the relationship of the parties to the trust, leading to an improper trust.

To make a finding that there is a sham trust, there must first be proof of the settlor’s intention (a) that the assets are held upon terms otherwise than those set out in the trust deed; and (b) to give a false impression to third parties or to the court.

As to (a), the parties to the trust instrument other than the settlor (i.e. the trustee) must either share the settlor’s intention or go along with the settlor’s intention without knowing or caring what they had signed at the time the trust was created. As to (b), there must be evidence that all parties to the trust intended to give a false impression to third parties or the court. Evidence of a party's intention could postdate the execution of the trust instrument, but a trust which was validly executed could not become a sham trust merely because of subsequent slovenly conduct by the trustee or a state of affairs where the settlor dominates the actions of the trustee. Similarly, a trust which was a sham at the outset could not be properly constituted thereafter, save perhaps by the appointment of new trustees.

Assets transferred into a valid trust, where the true intention is that they are not held on the terms of the trust, may also be a sham.

Generally, evidence of sham can be demonstrated by the trust property being in the de facto control and ownership of the settlor whilst the trustee exercises no independent discretion or acts inconsistently with the terms of trust deed. The more powers reserved to the settlor, the more credibility there is in an argument of sham.

If the court finds a trust is a sham, then the trust will be regarded as void, and the settlor and trustee will not be able to rely upon the trust deed as representing the rights between the parties. This will leave the settlor with absolute beneficial interest in the trust property, which is capable of being taxed, inherited or claimed (by creditors of the settlor or otherwise).

Generally, shams are very unlikely to arise where a trust has a professional, independent trustee.

Recently, an English decision of HHJ Matthews has cast doubt on the bilateral concept of sham and the need for dishonesty (see Taylor v Savik [2024] 5 WLUK 296). Time will tell whether this decision to relax the requirements for sham in this way is followed in England, Jersey and elsewhere.

Pauline action

Jersey law recognises the availability of a Pauline action (a customary law remedy with similarities to section 423 of the UK Insolvency Act 1986) which allows a creditor to unwind transaction(s) made by a debtor with the intention to fraudulently evade creditors. This includes transfers of assets into a trust.

The creditor must also identify the transactions to be set aside, and prove:

• that they were a creditor at the time of each transaction;
• that the debtor was insolvent at the time of each transaction or rendered insolvent by it; and
• that the transaction was carried out with the substantial intent of defeating the creditor (i.e. that the creditor was prejudiced by the transaction).

The court will consider all the evidence and draw inferences in deciding whether a transaction was undertaken with the intention of defeating creditors. Proof of actual prejudice to the creditor as a result of the transaction is important in assessing the debtor's intentions. The weight given to this point will vary according to the circumstances, including the degree of certainty that prejudice will result to creditors. Furthermore, it is not necessary for the defeat of creditors to be the sole or dominant purpose of a transaction. If it is a substantial purpose, that will be sufficient.

Attacking the settlor's powers over the trust

A trust may be attacked by forcing a settlor to exercise their powers of control (if any) over the trust. In Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited and others [2011] UKPC 17 ("TSMF"), an authority of the Turkish state secured a Turkish judgment of US$30 million against Mr Demirel, a banker who had settled substantial assets into two Cayman trusts. The Privy Council ultimately appointed receivers over Mr Demirel’s power to revoke the two trusts.

TSMF is widely understood as a creditor-friendly "policy" judgment aimed at assisting the enforcement of judgments whilst preventing debtors from ringfencing their assets (temporarily or otherwise) via revocable trusts.

The Privy Council considered whether a power to revoke a trust was sufficiently close to the notion of "property" to enable the appointment of a receiver by way of equitable execution over the power, which would ensure that Mr Demirel had not put himself beyond the reach of his creditors. The Privy Council also considered whether the appointment could be made effective by ordering Mr Demirel to transfer or delegate the power of revocation to the receivers.

Although the distinction between a "power" and "property" may be hotly contested, the key point is whether a settlor's rights over a trust can be regarded as being "tantamount to ownership".

The relevance of TSMF applies to trusts on a case-by-case basis. To be useful, a creditor needs to attack a power which enables them to access trust assets, which is unlikely to arise over a revocable trust where the settlor has limited positive powers. It is yet to be seen whether this case would be followed in Jersey.

Attacking a beneficiary's discretionary interest in a trust

Under Jersey law, the beneficiaries of a discretionary trust are not regarded as having any direct legal rights over any part of a trust fund; beneficiaries' rights (in relation to trust assets) only extend to a right to be considered for benefit from such assets when a trustee exercises their discretion.

In Kea Investments v Watson [2021] JRC 009, a creditor attempted to enforce its judgment debts against an individual with a discretionary beneficial interest in a trust, arguing that the latter's interest constituted movable property under the Trusts Law. The creditor accordingly sought to obtain payment of its judgment via an enforcement procedure.

The Royal Court of Jersey accepted that the Trusts Law defined a discretionary interest as movable property and held that a discretionary interest will always be subject to the terms of any given trust.

It was also noted that usually a discretionary beneficiary has no power to assign or transmit their interest to a third party. If a trustee attempted to exercise a discretionary power in favour of a third party, that would be a fraud on a power, and exercised for an improper purpose (i.e. to benefit a non-beneficiary).

Even if a beneficiary's rights were somehow assigned, a judgment creditor (as a non-beneficiary) would not be able to use them in any practical way and any attempt by a trustee to benefit a non-beneficiary judgment creditor would constitute a fraud on a power and would be void.

In short, a beneficiary's beneficial interest (including a settlor's interest, if they are a beneficiary) cannot be attached by a judgment creditor.