Family context is key in blessing applications (Re Z Trust (Jersey))

Private Client analysis: In a 'Public Trustee v Cooper'—style blessing application, the Royal Court of Jersey gave its sanction to the in-principle decision of J Trustee Ltd (the 'Trustee') to 'account to the Fourth and Fifth Respondents for certain forgone 2014/2015 capital distributions, paying them amounts equal to the sums forgone, and thereafter to distribute, gross of any tax payable, the assets of the Z Trust' (the 'Trust').

The application was brought under Article 51 of the Trusts (Jersey) Law 1984. Article 51(1) of the Law reads, 'A trustee may apply to the court for direction concerning the manner in which the trustee may or should act in connection with any matter concerning the trust and the court may make such order, if any, as it thinks fit'. This decision is of wider relevance as: (i) the Settlors were not convened to the hearing; (ii) the Trustee was minded to split the assets of the Trust equally among the six sibling-Beneficiaries (four sisters and two brothers), despite the brothers having, historically, received more from the Trust than the sisters; and (iii) the court considered whether the Trustee’s concerns regarding potential transaction costs arising from the Trustee’s change in management policy, might indicate a conflict of interest. Written by Andreas Kistler, partner and Christopher Tan, associate at Carey Olsen.

Representation of J Trustee Limited re Z Trust [2023] JRC 006

What was the background, and what are the practical implications of this case?

The implications of Re Z Trust are threefold—the first two relate to the importance of considering (inter-generational and intra-generational) family dynamics in blessing applications for archetypal discretionary family trusts, whilst the third concerns conflicts of interest and the Trustee.

Perhaps unusually, the Settlors/parents were not convened to the hearing. This was due to strained relationships between the parents and most of their children—it was hypothesised that the daughters, in particular, would not express their true wishes regarding the Trustee’s ‘in-principle’ decision were their parents convened to the hearing (at para [13]). As a matter of law, the court noted that, under the terms of the Trust Instrument, the Settlors had ‘lost control of the property’ (ibid). It was, however, considered proper that the Settlors be informed, after the hearing and after judgment was given, that the Trust was to be dissolved—accordingly, an appropriate paragraph from the judgment was ordered to be disclosed to them (at para [15]).

Regarding the decision to split the assets equally, it is trite law (in England and Jersey) that the relevant question for the court is (in short) whether the decision proposed by the Trustee: (i) was made in good faith; (ii) is a reasonable one in all the circumstances; and (iii) has not been affected by any actual or potential conflict of interest.

Applying this test to the Trustee’s proposed one-sixth split of the assets, it was held ‘unnecessary’ to ‘have regard to non-Trust assets’, as all of the Beneficiaries ‘have at least some non-Trust assets’; it was not for the Trustee to ensure they had equal wealth—and prior larger distributions in favour of the brothers were consistent with the Settlors’ then-wishes (at para [21]). The sisters felt a one-quarter each split among them, to the exclusion of their brothers, to be more reasonable in the circumstances—albeit they did not contest the one-sixth split proposed at the hearing (at para [8]). The court noted that any split other than an equal distribution would likely result in ‘full scale trust litigation’(at para [22]). Thus, an even split was reasonable in the circumstances.

As for the question mark relating to limb (iii) of the test outlined above, the Trustee stated that an additional reason why the Trust ought to be wound up (at para [17(iv)]) was that the Trustee had phased out Advisory Managed Portfolio-type arrangements to manage clients' assets. Historically, the Trust fund had been held in this way; hence were the Trust to continue, the assets would need to be reinvested on a ‘discretionary’ basis. This would result in additional transaction costs (noting the size of the Trust fund was such that, such transaction costs would be non-negligible—see para [17(i)]).

Adding colour to these terms, an ‘Advisory Managed Portfolio’ means the Trust fund is invested in securities at the recommendation of an investment professional, subject to the ultimate approval of each transaction by the Trustee. Contrastingly, when a fund is invested on a ‘discretionary’ basis, the investment professional, under their delegated powers of investment, can execute trades without reference to the Trustee, conditional on those transactions being consistent with the predetermined investment strategy.

As a matter of internal policy, the Trustee was no longer willing to manage the Trust fund on an ‘advisory’ basis—thus this fourth reason cited by the Trustee the Court thought might be considered to indicate a conflict of interest; the ‘in-principle’ decision might appear ‘convenient’ for the Trustee. However, as pointed out by Commissioner Sir William Bailhache (at para [22]), an investment professional investing the fund on a discretionary basis could be said to have a ‘much better handle’ on investment matters than a trust officer who focusses on ‘trust administration’ more generally. Financial markets can move fast—consequently, involving the Trustee in every transaction could be impractical and the change of the Trustee's policy was understandable. Ultimately, it was considered ‘not such a conflict’ (ibid) to vitiate the Trustee’s proposed decision. When the Trust was set up, it must have been implicitly accepted that the Trustee, a multinational financial services business, might impose such policy changes (ibid). Had the court held there was a conflict of interest, ‘the nature of that conflict would go to the question of whether the Trust should be terminated and, in those circumstances, we would have taken the same decision as the Trustee on that narrow point’ (ibid).

What did the court decide?

Accordingly, the Court blessed the Trustee’s ‘in-principle’ decision—the Trust was wound up without the Settlors being convened to the proceedings, and the Trust fund was split equally among the Beneficiaries. While Re Z Trust does not change the law, it is a useful illustration of the importance of family dynamics (in this case, between parents and adult children, and among the siblings) in typical discretionary family trusts. Additionally, while the Court took a pragmatic approach concerning the potential conflict of interest issue, the old adage “to be forewarned is to be forearmed” holds true. Potential issues such as conflicts should be clearly considered in any advice to trustee clients and in the minutes of any trustee meetings.

Case details

Court: Royal Court of Jersey
Judge: Sir William Bailhache, Commissioner, and Jurats Averty and Le Cornu
Date of judgment: 16 January 2023

Andreas Kistler, partner and Christopher Tan, associate at Carey Olsen. If you have any questions about membership of LexisPSL’s Case Analysis Expert Panels, please contact [email protected].

An original version of this article was first published by LexisPSL Private Client on 28 February 2023.

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