Trustee Briefing - Meaning of Benefit & the case of the Somalian Mule

Comment
In a recent judgement, the Royal Court considered whether an appointment of funds was a benefit to a beneficiary. It held that a statement of English trust law which could limit the circumstances when trust funds can be appointed does not apply in Jersey. Instead, the court proclaimed the flexibility of the Jersey trust by reference to Somalian Mules.

Trust law is often unnecessarily complicated. In the matter of the May Trust heard on 14 May 2021, the Royal Court took a pragmatic approach. It blessed the decision of the trustees to appoint funds to a beneficiary expressly so that they could donate the funds to a charitable foundation in a manner that would deliberately maximise the amount of tax paid in the UK. The test for the court included considering whether there was a benefit to a beneficiary by appointing the funds.

While some may think that what a beneficiary choses to do with funds appointed by a trust should not be a relevant consideration for the trustees, the UK court has sometimes tied itself in a knot over such issues. Different judges have considered whether there is a benefit to a beneficiary because such a person has satisfied their moral obligation to pay money to charity. There are contradicting statements in trust cases which are often fact specific. In this case, Jersey’s Royal Court strongly affirmed the flexibility of the Jersey trust. It respected the trustees’ decision that there was benefit to the beneficiary as a result of their voluntary choice to pay UK tax using the proceeds of the trust assets. Benefit has a wide definition and includes social or moral benefits as well as financial benefit.

For a lay person deciding where to place their assets, the take away message is the pragmaticism shown by the Jersey court in reaching a conclusion.

Facts

The trustees IQ EQ, a leading trust company in Jersey, wished to make a payment to a beneficiary of around 50% of the assets of a trust. The family and other beneficiaries consulted supported such a payment. However, the beneficiary wished to then pay the funds to another beneficiary, a charitable foundation in such a manner so that it would result in tax being paid to the UK government of 25%. This was described as a wholly voluntary act.

Fraud upon a power

Complication have arisen in cases because of the principle of trust law called a fraud upon a power. This strand of jurisprudence has arisen because of circumstances where trustees have made distributions in accordance with certain beneficiaries wishes, but in a manner which resulted in the aims of the settlor being denied. Such cases are often very fact specific.

Discussion of Benefit to Beneficiary

The Court considered that in determining the issue whether there is a benefit to a beneficiary and the fairness of appointing trust funds, “trustees should identify who those beneficial owners should realistically be and look at the broader interests of those beneficiaries which must be viewed both from an objective and a subjective standard.” Benefit was stated to have a wide definition and includes social or moral benefit, educational benefit, as well as financial benefit.

Overall Legal test

The Royal Court considered the following test was the correct approach:

(i) is the proposed distribution for the benefit of the proposed appointee?

(ii) is the quantum of the proposed distribution such that it would be an unreasonable exercise of the power, even given the power to ignore interests and the full and unfettered discretion afforded to the trustees, such that it would be inappropriate having regard to the obligations of the trustees towards the other beneficiaries?

In considering these questions, the jurisdiction of the Court followed the well established summary of Deputy Bailiff Birt in the matter of the S Settlement (2001/154) where the trustees wished to obtain the blessing of the Court for the action on which they have resolved and which is within their powers:

(i) Are we satisfied that the trustees have in fact formed the opinion in good faith that the circumstances of the case render it desirable and proper for it to make the appointment which is under consideration? (ii) Are we satisfied that the opinion which the trustees have formed is one which a reasonable trustee, properly instructed, could have formed?

(iii) Are we satisfied that the opinion of which the trustees have arrived has not been vitiated by any actual or potential conflict of interest which has or might have affected its decision?

Judgement

The court found that the trustees had reached their decision in good faith, demonstrated by extensive consultation with beneficiaries, and that there was no question that there was no conflict of interest. The court considered that the trustees did not seek to make an unreasonable exercise of their power to appoint the funds, bearing in mind the extensive donations to charity, the assets remaining in the trust fund, the means of the beneficiaries and the future funds likely to be made into the trust fund.

Benefits of helping Somalian Mules

This note cannot be considered complete without mentioning the example posed by the Royal Court. The judgement stated, “Let us suppose a trust fund is held on discretionary trusts for the benefit of A during his lifetime and thereafter for the benefit of B absolutely. A, in adulthood, has made a good enough living that he does not require all the income from the trust. However, A is obsessively concerned about the welfare of mules in Somalia. It has reached the point where, if he does not feel he has done everything he can to alleviate their hardship, he is likely to suffer mental health difficulties. In our judgment, a trustee could perfectly legitimately reach the conclusion that a payment to a charity for the protection of mules in Somalia was a payment for A’s benefit. Given A’s subjective views, objectively, such a payment can be justified.” The court appeared to be alluding to the fact that the proper construction of benefit should include actions that create health benefits for the beneficiary. It is not known whether the plight of the Somalian Mule is a particular concern of the Royal Court.

Conclusion

Jersey’s Royal Court strongly affirmed the flexibility of the Jersey trust. It respected the trustees’ view that there was benefit to the beneficiary even if the assets of the trust were going to be used voluntarily to pay UK tax where no tax was due. The court determined that benefit has a wide definition and includes social or moral benefits as well as financial benefit. It took a pragmatic view to respect the wishes of the family. Such judgements are naturally very fact specific. This judgement demonstrated the pragmatic nature of the Jersey court in construing Jersey trust law. And let us not forget the Somalian mule.

Amati Law - Experts in Jersey Trust Law

Amati Law has considerable experience in trust law matters representing trustees and beneficiaries in respect of issues arising under Jersey law. Managing Partner James Mews chaired trust law working parties in Jersey for 10 years considering and making recommendations for change to the Trusts (Jersey) Law 1984. He was instrumental in determining governmental policy including bringing in Jersey’s Foundations Law as well as two major amendments to the trusts law. For further enquiries please contact Advocate James Mews at jm@amatilaw.com or by calling T: 01534 761761.