NOT SET IN STONE:
Varying, restructuring and/or re-writing
the foreign settlor’s trust
Andrew De La Rosa
Barrister and Attorney-at-Law
ICT Chambers
Cayman – London
[email protected]
Starting points:
•
Can I introduce you please to . . . the concept
•
A widespread notion in the Far Southeast
•
This is probably not the norm. Something else
is perhaps more usual
of the “Disposable Trust”
Some other “legacy” issues
•
“US-style trusts” often contain fixed trusts of income down
through generations before capital (including accumulated
income) is divided at end of trust period, sometimes coupled
with very limited powers to advance, appoint or appropriate
assets and partition fund
•
Many of these will be so-called “Freeston” trusts, as in Re
Freeston’s
Charity [1979] 1 All ER 51 per Goff LJ:
“ It is manifest that an interest in half the income of an
undivided fund is quite different from the whole income of a
divided part of
that fund “
More general reasons for restructuring:
• Fiscal imperatives – not merely changes in the established tax
treatment of trusts but falling within one or more highly adverse
anti-deferral regimes
• The problems of “Accidental Americans” with (a) the “throwback”
accumulation regime and (b) the (even more) penal “PFIC”
provisions
• Families that become too big/diverse for the settlor’s original
scheme of distribution
• Deferring the vesting of large capital sums
Constructive Restructuring - basic tools
•
Saunders v Vautier (1841) Cr & Ph 240
•
The inherent jurisdiction of the court:
- Maintenance: Re Collins (1886) 32 Ch 229
- Emergency: Re New [1901] 2 Ch 544
•
Section 57, Trustee Act 1925 (sanctioning new trustee powers without altering
the underlying beneficial interests - other than incidentally)
•
Compromise: Chapman v Chapman [1954] 1 All ER 708
•
The “VTA” 1958 and foreign equivalents (s.) - variation by consent of all those
able to give it with court approval on behalf of those such as
minor/unborn/unascertained persons who cannot, subject to the requirement
that the variation is shown to be for their “benefit”
Constructive Restructuring:
more modern (and better?) tools
• Express powers of advancement, often extending
beyond any applicable statutory power
• Express powers of appointment
• Express powers to amend or vary the trusts
• Others?
In the absence of express powers:
•
Under the VTA approach, need consent from those
able to give it and have to show suitable “benefit” for
those on whose behalf the court is asked to approve
•
“Benefit” need not be strictly financial but in most
cases (a) it is and (b) is the product of bargaining
between different camps of beneficiaries
•
Section 57 and cognate offshore provisions don’t
envisage re-writing beneficial interests
Jersey (and other established trust OFCs):
47 Variation of terms of a Jersey trust by the court and approval
of particular transactions
(3)
Where in the management or administration of a trust, any
sale, lease, pledge, charge, surrender, release or other
disposition, or any purchase, investment, acquisition,
expenditure or other transaction is in the opinion of the
court expedient but the same cannot be effected by reason
of the absence of any power for that purpose vested in the
trustee by the terms of the trust or by law the court may
confer upon the trustee either generally or in any particular
circumstances a power for that purpose on such terms and
subject to such provisions and conditions, if any, as the court
thinks fit . . .
Bermuda’s section 47, Trustee Act 1975
47 (1) Where any transaction affecting or concerning any property vested
in trustees, is in the opinion of the court expedient, but the same
cannot be effected by reason of the absence of any power for that
purpose vested in the trustees by the instrument, if any, creating the
trust, or by any provision of law, the court may by order confer upon
the trustees, either generally or in any particular instance, the
necessary power for the purpose, on such terms and subject to such
provisions and conditions, if any, as the court may think fit and may
direct in what manner any money authorised to be expended, and the
costs of any transaction, are to be paid or borne as between capital
and income.
Bermuda’s section 47, Trustee Act 1975
(4) In this section, “transaction” includes any sale,
exchange, assurance, grant, lease, partition,
surrender, reconveyance, release, reservation, or
other disposition, and any purchase or other
acquisition, and any covenant, contract, or option,
and any investment or application of capital, and
any compromise or other dealing, or
arrangement.
Scope of the jurisdiction:
“That provision appears to be an amalgam of two
English provisions, being section 57 of the Trustee Act
1925 and section 64 of the Settled Land Act 1925, one
effect of which is to remove the limitation to
administrative matters contained in the former. I have
no doubt, and in any event it must be presumed, that
this was deliberate on the part of the legislature.”
(Per Ground CJ, GH v KL [2011] SC (Bda) 23 Civ (2
December 2010)
11
Advantages of Bermuda’s section 47
• No need for consent by any beneficiaries, nor by the
court on behalf of any interested parties who cannot
consent themselves.
• No need to show “ benefit ” for certain beneficiaries;
instead, the question is whether the proposed
modification is “expedient” meaning in the interests of
the trust as a whole.
• Substantially streamlined procedure in terms of the
interested parties who need to be joined and
represented in court. (Query this; see further below.)
12
Other considerations:
• Less expensive than a full-scale variation
• That’s in terms of legal costs; however, what are the
tax implications?
• Cannot view this in isolation; what about the perils of
publicity and/or changing the trust’s governing law?
13
The experience to date:
• Only two reported cases; GH v KL and Re ABC Trusts
[2012] SC (Bda) 65 Civ (13 November 2012)
• First use of section 47 for purpose of altering beneficial
interests may have been as recently as 2005; Re S J
Trusts, The Lawyer 13 June 2005
• “There is considerable scope for creative thinking here.”
14
Is this a useful jurisdiction?
• Yes. But possibly lurking behind this is an issue . . .
• Suppose one tried starting from scratch? Is that
worthwhile?
• Is there a need for a specific procedural regime to deal
with cases of this kind?
• Is it better not to to try and prescribe the boundaries?
15
Looking further afield at
“Decanting” - 1:
• Means “do[ing] over”
• At state common law and by statute trustee authority to invade
the corpus of a trust authorises not only distribution to
beneficiary but to another/new trust – several state law variants
• Uses may include converting trust from grantor to non-grantor
(and vice versa) and altering character of beneficiary’s interest –
the list of possible applications is very extensive
16
Decanting - 2:
•
Possible US income, gift, estate and GST implications (see Blattmachr,
Horn & Zeydel, An Analysis of the Tax Effects of Decanting, ABA 2012)
•
Two schools of thought: absence of beneficiary consent enough or
must be absence of consent and no alteration in beneficial interest
•
IRS notice 2011-101: asked for comments, especially whether a
transfer to another trust is an income tax gain or loss realization event
to T or B and what are potential US GT/ET consequences
•
NYSBA “safe harbor” recommendations – a simple partition is safe?
17
Watch this space:
• No IRS guidance yet and nothing specific on the horizon
• None of these exercises takes place in a vacuum where the
beneficiaries are sidelined; there may be a large element of
bargaining between interested parties
• Are risk-averse institutional trustees stymied/unwilling to decant
anything?
• Difficult judgment calls for family-run trusts in the typical presentday PTC structure
18
Contact
[email protected]
London:
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Lincoln’s Inn
London WC2A 4XT
United Kingdom
Tel +44 (0) 207 242 6201
Cayman:
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Grand Pavilion Commercial Centre
P.O. Box 10100
KY1-1001
George Town
Grand Cayman
Tel +1 345 926 5214