13 Dec 2020

No Reasonable Trustee

Introduction

The absolute discretion of trustees is often emphasised when discussing competing interests of beneficiaries. This is particularly so as, although the court has jurisdiction under Jersey law to intervene in the exercise of the trustee’s discretion, it will not do so lightly.

The trustee of a Jersey trust was recently faced with the decision of whether it should add the settlor’s spouse as a beneficiary to the settlement in her own right. In the interesting judgement of B v Erinvale PTC [2020] JRC 213, the court found that the decision made by the trustee not to add the settlor’s spouse as a beneficiary in her own right, was a decision that no reasonable trustee would have made.

The considerations of the court shed some light on a very relevant and current issue – the trustee’s power and duties when considering the interests of the settlor’s spouse, particularly concerning a person who will cease to be the settlor’s spouse.

Background

The case arose against the background of matrimonial proceedings between the settlor, C, and the settlor’s spouse, B. They have been married for 23 years, and now have one adult child. Each of B and C have two children from previous marriages.

Fifteen years into their marriage, C created the A Settlement and settled the whole of his free estate into the settlement. The settlement is governed by Jersey law, and the beneficial class is described as the settlor, the settlor’s spouse, and the settlor’s children and remoter issue.

C’s letter of wishes expresses his wish for the trustees to provide for B, in particular by setting aside an amount of £4m for her, of which £1m was to be made available to her and the balance invested to provide B with a monthly income. The property in which B lived was to be made available to her during her lifetime (although another trust owned this property).

With all C’s free assets being within the settlement, B was concerned as to her status as a beneficiary as C’s spouse. An interim order for the divorce between B and C had been issued, and the parties agreed that the final order would not be issued until B’s ancillary application was finalised. If C were to die before the divorce order was made final (C was diagnosed with a brain disease in 2012), or if C were to die after the divorce order was made final, but before orders for ancillary relief (a maintenance claim to be paid by the settlement) were made, B would cease to be a beneficiary of the settlement before she could obtain relief under the matrimonial proceedings.

For this reason, B applied to the court to be appointed as a beneficiary in her own right.

Trustee’s decision

The trustee considered appointing B as a beneficiary in January 2020, resolving not to add her as a beneficiary at that time. As the court essentially reviews this decision, its details are crucial to the case.

The court summarised the trustee’s decision as follows:

From the perspective of the A Settlement, there are competing interests as between the beneficiaries which have to be balanced and [the trustee] submits that it has done that impartially and reached a reasonable conclusion for the reasons set out in the minute, but in particular:

  • B is currently a beneficiary;
  • She is currently receiving substantial financial support;
  • [The Trustee] had given the clear indication that she would be appointed a beneficiary in her own right should C die before the [divorce] decree was made absolute and this without fettering the future exercise of [the trustee’s] discretion as trustee. It was essentially a question of timing with [the trustee] not being prepared to appoint her “at this time”…”

The trustee could not confirm the settlor’s wishes in respect of this decision, due to his lack of capacity. Not surprisingly, C’s children and grandchildren were opposed to the addition of B as a beneficiary. The trustee also considered that B is likely to receive substantial relief under the matrimonial proceedings, and that, seeing as the settlement would abide by any order of the court in that sense, it would likely be inappropriate thereafter for B to remain a beneficiary in her own right on an ongoing basis, partly because any resolution under the matrimonial proceeding was likely to be on a ‘clean break’ basis.

Court’s considerations and finding

The court was asked to exercise its jurisdiction under Article 51 of the Trusts (Jersey) Law 1984 (the ‘Law’), under which the court may make an order concerning, amongst other things, the trustee’s exercise of any power or discretion.

The court remarked that, whilst its jurisdiction under Article 51 is wide, it must be exercised on a sensible and principled basis. Referring to the principle of non-intervention by the courts, and the judgment in S v Bedell Cristin [2005] JRC 109, the court concluded that it fell upon B to challenge the decision of the trustee not to add her as a beneficiary in her own right, by showing –

  1. That the decision was one which no reasonable trustee could have arrived at, or
  2. In taking the decision it failed to take into account a relevant consideration or took into account an irrelevant consideration.

It was noted by the court that, procedurally, it was seized only with the application under Article 51 and that it was sitting in its supervisory role in respect of trusts. As such, the court was not concerned with doing justice between C and B, but instead, it was only concerned with the interests of the settlement’s beneficiaries.

The court found that the considerations taken into account by the trustee were relevant, and that it had in fact considered the matters which B alleged it did not (namely that the Matrimonial Court would be disempowered upon C’s death and the effect on B if she were to lose rights under the settlement). However, the court found that the trustee had not truly taken B’s position and concerns into account or given them sufficient weight.

As to the reasonableness of the decision, the court noted that the key reason the trustees put forward for not appointing B as a beneficiary in her own right, was one of timing – it was prepared to appoint her, but not now. The court rightly pointed out that a trustee cannot fetter the future exercise of its discretion, resulting in the possibility that some external event may prevent B’s appointment in the future. If this were to happen, B would be an outsider to the trust and would face the prospect of having to fund an application as an outsider to be readmitted into the beneficial class, the financial implications of which, the court remarked, could not be more serious.

The court questioned why a trustee would allow the wife of the settler of 23 years, and the mother of one of his children, in her late sixties and with no other means of support, to be put in that position of uncertainty when it was the settlor’s clear intention as per his letters of wishes that she should be supported by the trust that holds all the family assets.

Court’s finding

The court could find no good reason for not appointing B immediately as a beneficiary in her own right, and found that the trustee had every good reason to do so, namely, to secure her position within the beneficial class of the settlement. The court further found that B’s need to be in the beneficial class in her own right, far outweighed the interests of the other beneficiaries in allowing the current uncertainty as to her status to continue.

The court considered that test for intervention is high, but even so, it concluded that the decision of the trustee not to appoint B as a beneficiary in her own right was a decision that no reasonable trustee would make. In the court’s view, the only reasonable decision would have been to appoint B as a beneficiary in her own right.

The trustee’s decision was set aside, and, although the court did order the trustee to add B as a beneficiary, it did make it clear that the trustee was expected to do so without delay or the need for the court’s further intervention.

Surrender of discretion

A substantial portion of the judgment deals with the court’s consideration of what decision it would have reached had the trustee surrendered its discretion to the court. The trustee had not surrendered its discretion, and the court noted that the test for intervention is not that it would have reached a different decision to that of the trustee.

Even so, the court considered at length the decision it would have made, and indicated that, had the trustee surrendered its discretion to the court, it would have appointed B as a beneficiary in her own right for the following reasons –

  1. The settlement controlled the means by which B and C were and are supported financially, C having settled all his free assets on the settlement 15 years into the marriage;
  2. B’s status as beneficiary is of vital interest to her as the marriage has broken down, and the settlement is her only means for support or by which any order of the Matrimonial Court against C can be met;
  3. The prospect of C dying before the final divorce order is made is very real in the court’s view, and it is unlikely that the trustee in such a case would cease to support B. The trustee would likely appoint B as a beneficiary in her own right in such a case.
  4. The trustee’s decision unnecessarily leaves B in a state of uncertainty, which, to the court’s mind, is not appropriate treatment of the wife of 23 years and the mother of one of the settlor’s children.
  5. There is no disadvantage to the other beneficiaries in B being appointed as beneficiary in her own right.
  6. The advantage to the other beneficiaries were B not to be appointed as a beneficiary in her own right cannot be properly balanced against B’s interest.
  7. From the other beneficiaries’ perspective, B is being supported by the settlement and will continue to be supported after she ceases to be the settlor’s wife (whether by divorce or death), and for this purpose, she needs to be a beneficiary in her own right. The court could see no good reason not to confirm that status now.

The considerations stated above seemed to have contributed to the court’s finding that no reasonable trustee would have made the decision which the trustee made in this instance.

Comments

It will be interesting to see whether this decision will go on appeal. The court seems to have considered the legal position correctly, referring to the judgment in S v Bedell Cristin (also reflected in Lewin on Trusts), stating that –

the mere fact that the court would not have acted as the trustees have done is no ground for interference’, and ‘the court cannot overturn a decision of a trustee which has not surrendered its discretion to the court, merely because the court would have reached a different decision. It may only intervene where the decision is one which no reasonable trustee could arrive at.’

Although the court starts by setting out this position, it veers off into considering what it would have decided had the trustee surrendered its discretion. One cannot help but wonder to what extent this consideration, which should ostensibly be irrelevant, impacted the court’s finding that no reasonable trustee would have made the decision the trustee had made.

The court also seems to have difficulty in removing the issue of justice between B and C from its mind, even though it expressly stated that it is not concerned therewith. One of the reasons the court seems to give for its decision is that B was the wife of the settlor for 23 years and the mother of one of his children, and therefore she should be treated better by the trustee. (The court did however in the same breath  emphasise that the settlor’s intention that B should be supported by the settlement, was clear.)

Be that as it may, this case does serve as a stark reminder to trustees on the importance of taking all relevant considerations into account when making decisions affecting the beneficiaries’ interests, and to carefully record these considerations as well as the reasons for making the decision it does. Furthermore, it highlights the importance of the settlor’s letter of wishes, and raises interesting questions around the trustee’s duty to consider the wishes of the settlor where those wishes might have changed.