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Settlor’s intent beyond borders.
Families wishing to pass down wealth to future generations are increasingly turning to long-term trusts as a way to protect their assets and serve the needs of their heirs. In establishing such trusts, wise settlors realize that, despite the initial appeal of controlling the funds through strict provisions in the trust document, the trusts must be flexible enough to give their trustees the ability to adapt to changing times.
However, settlors may still wish to ensure that decisions are made in accordance with the values and practices behind their own success as wealth creators. When family members are spread throughout multiple countries, settlors have even greater challenges in incorporating their wishes and objectives into their estate plans. For tax and other reasons,1 they often establish trusts based in countries other than their own. Trustees are provided with broad discretion, because with multinational families, it’s especially important to be able to take into account and provide for the increasing mobility of family members who may be living in different cultures and/or have various tax residencies. At the same time, settlors struggle to articulate their wishes so that future trustees and beneficiaries understand and embrace their intentions.
There’s no magic bullet to guarantee success. Whatever actions one takes, myriad legal obstacles and family dynamics may intervene. Let’s explore varying views across jurisdictions as to the relative importance of adhering to the settlor’s intent versus administering a trust primarily for the benefit of the beneficiaries.
Offshore Trusts
Global families often favor offshore trusts as a way to maintain and protect the family’s nest egg for the benefit of future generations who will long outlive them. However, offshore trusts have historically been shrouded in secrecy. Beneficiaries may not become aware of their interests in such trusts until the settlor has passed away, and they’re contacted by the trustee. For instance, countries following the conventions of English law, such as the Cayman Islands, don’t generally require trustees to notify beneficiaries of traditional trusts until their interests are vested, unless there’s a demand for documents or the trust deed provides otherwise. And, under the newer types of trusts in many of these offshore jurisdictions, beneficiaries may not even have standing to enforce the trust.2 Although the current global movement to transparency at all levels may change this, trustees don’t always have the opportunity to meet with beneficiaries while the settlors are alive and aren’t able to ensure that everyone is on the same page in terms of the purpose of the trust fund. There’s often nothing linking future trustees or trust beneficiaries to the settlor’s objectives in establishing the trusts.
A Global Overview
One of the key challenges facing trustees of trusts for multinational families is the possibility of significant differences between how settlors envisioned their trust funds being handled and the needs and desires of their beneficiaries. In balancing these potentially competing objectives, trustees are guided by the laws and practices of the jurisdictions where the trusts are located, by provisions in the trust documents and, to varying degrees, by external input, both written and oral. The degree to which settlors’ wishes trump or are subservient to the beneficiaries’ requests varies among trust jurisdictions. There are continuing shifts in the balance between upholding the settlor’s intent and acting in the best interests of the beneficiaries.
For instance, as noted in Lewin on Trusts, a seminal treatise by British jurists, “in a conventional family trust, the funds comprised in the settlement are the settlor’s bounty… So far as the trustees are given dispositive powers, they are to make choices which the settlor could have made himself.”3 However, this guidance notwithstanding, in the United Kingdom, thinking has evolved to give an equal and sometimes even greater weight to the rights of the beneficiaries. This may even extend to allowing a trust to terminate or be resettled in a manner completely at odds with the settlor’s intention after the settlor’s death, provided all the adult beneficiaries agree.4
Courts and practitioners in the British Crown Dependencies, British Overseas Territories and in countries that are members of the British Commonwealth tend to have a less consistent approach. On the one hand, they generally consider settlors’ wishes to be relevant in the administration of a trust.5 This is evident in a Canadian case in which the clarity of the settlor’s wishes supported the court’s decision to uphold the settlor’s controversial dispositive provisions despite challenges by a disappointed daughter.6 Further, the weight given to the settlor’s intent may even extend to modifying the trust, as in a recent case in which the Supreme Court of Bermuda varied a trust to eliminate the rule against perpetuities and extend the duration of the trust. This decision was based on the belief that the settlor wanted this $2 billion trust to be dynastic and didn’t want succeeding generations of beneficiaries to be spoiled by large personal inheritances.7
On the other hand, practitioners and courts in these same countries are also quick to opine that fiduciaries are charged with administering the trust in the best interests of the beneficiaries. This is evidenced by a 1993 case in which the court in the Isle of Man opined that a fiduciary’s duty “was in this instance owed not to the settlor but to the beneficiaries,”8 and according to leading Guernsey lawyers, “a protector’s role should always involve consideration of whether or not an action is in the best interest of the beneficiaries.”9 So, while any of these countries may appear to be a jurisdiction where the settlor’s intent is primary, in some cases, the interests of the beneficiaries may prevail. The Cayman Islands provide an insightful illustration of this dichotomy. Beneficiaries of Cayman trusts may get together to terminate a trust after the settlor’s death (unless there are minor beneficiaries who may not be “virtually represented” by anyone else). However, the beneficiaries may generally not vary the trust terms unless the changes are in keeping with the settlor’s intent.10
In keeping with the long-standing importance of individuals’ property rights, the United States historically gave greater deference to settlors’ intent for the trust. This is sometimes expressed in the trust document as the “material purpose” of the trust. However, courts in the United States stop far short of allowing trustees to blindly follow input from settlors if doing so would result in a violation of public policy or would harm people or property. More recently, in some parts of the United States, the balance has shifted to giving greater weight to beneficiaries’ best interests, even if possibly contrary to settlor’s intent.11 However, the current trend in some states is to repudiate the benefit of beneficiary rule in favor of respecting settlor’s wishes.12 Such states are enacting legislation to clarify this trend and eliminate statutes that appear to support the “benefit-of-the-beneficiary rule.”
In countries where tax minimization is a significant issue, there may also be a tax-related rationale for adhering to a settlor’s wishes as expressed in some trust documents. Varying the provisions of certain types of irrevocable trusts in the United States and other higher tax countries can lead to major tax liabilities. This is especially true of trusts that benefit charities, either through current distributions and/or as remainder beneficiaries. It also applies to most marital trusts, which typically benefit from estate tax deferral if they meet very specific requirements. Changing provisions in trusts such as these may lead to complicated recapture of tax deductions or exemptions that were realized when the trust was originally funded.
In civil law jurisdictions, where trusts haven’t been recognized in the past, forced heirship laws have historically played a major role in placing the presumed interests of certain beneficiaries above the desires of settlors. However, in some civil law jurisdictions, there’s evidence of a shift to adhere to the wishes of settlors as stated in their common law trust documents, provided there’s no fraudulent intent and the trusts were established in conformity with the laws of common law countries. In May 2016, the Paris Court of Appeal upheld the provisions of a trust that benefited only a spouse and not the settlor’s children, having determined that forced heirship rules don’t defeat the terms of a trust. This decision was followed by two 2017 cases involving French nationals who, as California residents at death, successfully disinherited their adult children in favor of their spouses. These cases are viewed as confirmation of the trend toward placing the freedom of a trust settlor above what were previously viewed as the rights of the legal heirs under French law.13
Communicating Settlors’ Wishes
Giving trustees freedom to administer the trust as they deem appropriate has long been the norm in many offshore jurisdictions. However, while giving trustees broad discretion provides the ultimate flexibility critical to achieving the benefits of a multigenerational trust, trustees will be most effective in carrying out the settlors’ intent when settlors have communicated their objectives for the trusts. They may do so through letters of wishes (LOWs), trust protectors and/or specific provisions in the trust document.
LOWs. LOWs have long been used in many offshore jurisdictions. Often, they conveyed settlors’ specific recommendations for division and distribution of trust assets. As settlors and their advisors in North America and other locations begin to recognize the benefits, the content and focus of LOWs are evolving to include a deeper look into the settlor’s personal aspirations for the trust.
A LOW is a separate document, and because it’s not legally binding like the provisions in an actual trust document, it’s viewed as wishful guidance for the trustee. Some respected practitioners suggest that, at a minimum, trustees should consider the content of LOWs when administering a trust, but opinions as to how much weight they should give them when making discretionary decisions vary among practitioners in different jurisdictions.14
Given the depth of such personal insights, some settlors may intend their LOWs be for the trustees’ eyes only. While trustees will do their best to honor this, and courts will generally support the confidentiality, future privacy isn’t guaranteed.15 Even when the trust instrument provides that beneficiaries have no right to see a LOW or that a court can’t order disclosure, English courts have demonstrated a willingness to override these provisions if they feel such restrictions are contrary to the “irreducible core” features of a trust.16 If the trustee seeks guidance from the courts, judges in the United Kingdom may feel the contents of LOWs are relevant to the issue and require the trustees to disclose them to the beneficiaries.17
In litigation, courts may often order disclosure, as happened in a Channel Islands case in which the court deemed that although the LOWs didn’t bind the trustees, the LOWs could provide important insights into the settlor’s intent and come under a court order for disclosure.18 Similarly, disclosure isn’t uncommon in divorce situations.19 Looking forward, the trend to global transparency may lead to details in estate-planning documents being accessible to various parties, possibly including the general public.
Trust protectors. Settlors wishing to combine future flexibility with recognition of their goals may consider including a trust protector in their trust agreement. As with LOWs, trust protectors have been used in offshore trusts for many decades. As the title of trust protector gains traction, the question of liability becomes more widely discussed. In litigious jurisdictions such as the United States, some states have enacted trust protector statutes that provide that a protector is a fiduciary unless the trust agreement states otherwise. Similarly, the role of trust protector may be viewed as fiduciary in nature in offshore trusts.20
In terrorem clauses. So-called “in terrorem” or “no contest” clauses in trusts and other legal documents are a somewhat crude but potentially effective way for settlors to assure that at least the specific provisions in their documents are upheld. Settlors discourage otherwise litigious beneficiaries from seeking, and possibly obtaining, rights or property that the settlor didn’t intend to pass to them by including language declaring that anyone who contests any of the provisions of the trust is to be considered to have been deceased as of the effective date of the document.
In the United States, a few states expressly prohibit enforcement of in terrorem clauses. However, in keeping with the trend to consider the settlor’s intent, in terrorem clauses are increasingly being enforced. The position of different offshore jurisdictions varies. In the Bahamas, in terrorem or forfeiture provisions in a trust have been codified to discourage any challenges to the validity of the trust or any of its dispositive provisions and ensure the settlor’s wishes will be carried out in accordance with the terms of the trust instrument.21 However, in the Cayman Islands, case law has set out that while no contest clauses are enforceable, trustees ultimately can’t be exonerated from their core obligations, and public policy allows a beneficiary to justifiably enforce a trust. 22
While it may appear so, we don’t intend to discourage the use of trusts, which are a valuable and powerful planning tool to pass wealth to the next and future generations. We intend, however, to highlight the different positions in various jurisdictions with respect to the upholding of a settlor’s intent for settlors to keep in mind as they work to create trusts and establish a long-term legacy.23
Endnotes
1. Additional motivations behind choosing a trust situs outside a home country include privacy, asset protection, location of other family members and security.
2. Under Section 100(1) of the Trusts Laws, beneficiaries of STAR trusts (Special Trusts (Alternative Regime)) in the Cayman Islands have no right to enforce the trust and no enforceable right against a trustee, enforcer or the trust property. Other new forms of statutory trusts include VISTA (Virgin Islands Special Trusts Act) trusts (British Virgin Islands) and discretionary trusts with designated representatives in various states in the United States.
3 Lewin on Trusts, 18th edition (2008), at pp. 1039-1041.
4. Saunders v. Vautier (1841), 41 Eng. Rep. 482. See also John H. Langbein, “Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments,” 90 B.U.L. Rev. 375 (2010).
5. Timothy Youdan, “Trust Issues,” presented at the Law Society of Upper Canada, 3rd Annual Family Law Summit, June 11-12, 2009, Toronto.
6. Verolin Spence, et al. v. BMO Trust Company, 2016 ONCA 196.
7. In Re the C Trust (2015:473), the first case heard under Section 4 of the Bermudian Perpetuities and Accumulations Act 2009 as amended by the Perpetuities and Accumulations Amendment Act 2015 by the Supreme Court of Bermuda.
8. Rawcliffe v. Steele [1993-1995] Manx LR 426 (Isle of Man).
9. Alasdair Davidson and Rupert Morris, “To Protect & To Serve,” STEP Journal (April 5, 2017).
10. Sophia Harris, “Cayman Islands: The Trustees’ Perspective: When the Trust Doesn’t Work!” Tax Planning Int’l Review (October 2011).
11. Thomas P. Gallanis, “The New Direction of American Trust Law,” 97 Iowa L. Rev. 215 (2011): “In navigating between the extremes of settlor control and beneficiary control, the law of trusts has at times taken a position more favorable to the settlor, and at other times a position more favorable to the beneficiaries…After decades of favoring the settlor, [American trust law] is moving in a new direction, with a reassertion of the interests and rights of the beneficiaries.”
12. Pamela Lucina and John K. Welsh, “Through a Glass Darkly: Determining Settlor’s Intent in Construing Long Term Trusts,” Tax and Estate Planning Forum 2016, at pp. 10-13 – 10-14.
13. Geoffroy Michaux, Patrice Bonduelle and David Fremont, “Statement of Intent,” STEP Trust Quarterly Review (March 2017), Cour de Cassation Michel X (No. C101004) and Michel Y (No. 101005).
14. Shan Warnock-Smith, Q.C., “Letters of Wishes: Use and Abuse,” STEP Caribbean Conference (2009).
15. In re Rabaiotti 1989 Settlement [2000 JLR 173] (leading Jersey case on beneficiaries’ rights to trust documents when the Royal Court ruled there’s a strong presumption that letters of wishes (LOWs) not be disclosed as they’re confidential to the trustee and its decision-making process). See also Schmidt v. Rosewood Trust Ltd. [2003] 3 AII ER 76 (the Privy Council held that beneficiaries don’t have an absolute right to trust documents).
16. Armitage v. Nurse [1998] Ch 241, England.
17. Breakspear v. Ackland, WTLR 777 (2008) (English case in which trust beneficiaries couldn’t force disclosure of the LOWs, but when the trustees themselves sought the court’s blessing with respect to an exercise of their discretion, the court ordered its disclosure as material relevant to such exercise).
18. Bathurst v. Kleinwort Benson (Channel Islands) Trustees Limited.
19. Dillon & Dillon, FamCA 319 (2012) Australia.
20. “Cayman Courts and Resolving International and Trust Disputes” by Hon. Anthony Smellie, Chief Justice, The Cayman Islands, presented to the International Trusts and Private Client Forum: Cayman Islands, Oct. 24-25, 2016; see Jersey case of Mourant v. Magnus, JRC 056 (2004), which held “[a] Protector is in a position of a fiduciary…”
21. Bahamas Trustee (Amendment) Act, 2011 (TAA 2011) Section 87A.
22. AN v. Barclays Private Bank & Trust (Cayman) Limited and Others [2006 CILR 367] confirmed by the ruling in AB Jnr & Another v. MB & Others (Dec. 18, 2012).
23. The statements in this article reflect the views of the authors and don’t reflect the opinion or views of BNY Mellon Wealth Management or The Bank of New York Mellon.