The Trustees' Perspective: When The Trust Doesn't Work!

This article first published in the October issue of Tax Planning International Review published by BNA International.

The following article looks at the trustees role in administering a trust, looking at practical tax and other legal issues that can arise where trustees do not have sufficient powers or face unforeseen circumstances, with a focus on the Cayman Islands and UK case law and legislation.

1. Introduction

   The Trustees of a trust owe fiduciary duties and obligations to the beneficiaries of the trust, or in the case of a STAR Trust, to ensure that they meet the objectives of the trust. During the term of the trust, it is important that the trustees have sufficient powers and that the terms of the trust sufficiently empower the trustees to meet their obligations. But what happens if the trust doesn't have such powers? What happens when the trustees face difficulties in the management or administration of the trust? For instance, what should trustees do in circumstances where the current structure of the trust, or other unforeseen circumstances, may have devastating tax consequences for the beneficiaries of the trust? Or worst of all, where the decision of the trustee in administering the trust to make it more tax efficient has dire consequences?

2. Varying a trust

   1. Case law

      It is interesting to note that the most common reason for varying a trust is to mitigate the potential liability of beneficiaries to pay taxes. Case law still suggests that the fiduciary duties of the trustees to the beneficiaries include mitigation of their tax liabilities. Applications to the courts to restructure the trust accordingly, even where the impact of taxation is due to a few of the beneficiaries of the trust, have been found to be "expedient in the interests of the trust as a whole..."1 As the trustees duty to take relevant matters into account is a fiduciary duty, fiscal considerations will often be among the relevant matters which ought to be taken into account in making decisions affecting the trust. In this area of law the idea of mitigating tax implications is understood and expected and viewed as a relevant consideration of the trustees, at least in so far as the Courts in England are concerned. (This view is in contrast to the debate in the United States of what constitutes tax avoidance versus tax evasion, where there seems to be no distinction and both avoidance and evasion may be viewed as "unpatriotic" and illegal).

      The trustees' first course of action would be to identify the particular mischief that they are trying to remedy. This will determine what remedy is available to them, whether under the terms of the trust deed or by court order.

      The trust deed itself might provide the trustees with a power to vary the terms of the trust. However, case law makes it clear that such a power to vary the terms of a trust must be exercised for the purposes for which it was granted and not beyond the reasonable expectations of the parties2 and more importantly, the settlor. Making such a decision could prove difficult for the trustees and they would be forgiven if they chose not to exercise such a discretionary power without first seeking appropriate counsel.

      Where there is doubt or where the variation appears to not sufficiently fall within the variation power set out in the trust deed, seeking a court order may be an appropriate remedy. The courts have an inherent jurisdiction to vary the terms of trust but will generally only exercise this when it is absolutely necessary and will avoid interfering with the intentions of the settlor in establishing the trust in the first place. The circumstances under which a court might exercise such jurisdiction have been narrowly defined, such as clarifying the settlor's intention as to beneficial interests.3

   2. Trust law in the UK and Cayman Islands

      Fortunately, trust law has sufficiently evolved over the many years to further assist trustees by enabling them to address a predicament encountered in the "management and administration" of the trust, by virtue of the Variation of Trusts Act 1958 and the Trustee Act 1925 in the UK . Cayman Islands Law has corresponding provisions in the Trusts Law (2009 Revision).

      In the recent case of Christopher Southgate & Anor v Peter Sutton & Ors4. the UK Court of Appeal examined an application by the trustees under Section 57 (1) of the Trustee Act 1925 (the corresponding provision is Section 63 (1) of the Trusts Law (2009 Revision) under Cayman Islands law).

      In this...