What happens when the beneficiaries of a Guernsey discretionary settlement lose trust and confidence in the protector? And what about the validity of protector appointments against the background of deep family division involving hostile litigation between beneficiaries? What remedies are available to trustees and beneficiaries in those circumstances and how should the Court deal with them? These issues were looked at very recently, in the Guernsey case of In the matter of the K Trust (‘K Trust’) and in the Jersey case Representation of Jasmine Trustees Limited (‘Jasmine’) respectively. This article will describe what happened in each case and how these decisions have established principles which the Courts in Guernsey and Jersey will apply in these difficult situations.
In K Trust, 11 of the 14 beneficiaries of the K trust, a Guernsey law discretionary trust, applied for the removal of the trust’s protector, ‘P’. At an initial hearing on 3 October 2014 McMahon DB declined to remove P summarily, whereupon P applied for directions as to whether she could retire on terms. Both P’s application and the full removal application were heard together in December 2014, and both were granted. P was a close personal friend of the settlor, and had been in office since the trust was established in 1990. The first trustee, ‘T1’ was also a friend of the settlor. When the settlor died in 2001, the only beneficiary was his wife, ‘B1’. B1 asked for additional beneficiaries to be added, largely her relatives. At that point T1 retired and was replaced by a Liechtenstein based professional, ‘T2’. T2 subsequently, with P’s consent, added a number of beneficiaries, including B, T1, P and their families and a number of charities. In 2011, however, many of those were excluded, including T1 and P and their families.
When the trust was settled, the settlor gave T1 his handwritten wishes that if B1 survived him, B1 should be the first and only beneficiary. If the settlor survived B1, the assets should be his to deal with, and if he and B1 died, only then should others benefit with the main beneficiaries in that event being B1’s family, with limited provision also being made for T1 and P. Those wishes were largely confirmed in a written memorandum in 1994, so that B1 should be the sole beneficiary. On her death, the assets were to be dealt with as previously. Although the relationship between P and T2 and between P and B1 was initially a friendly one, by 2005 it had deteriorated to the point where it was suggested by B1 that she retire. She refused. She also rejected another proposal that another beneficiary, B4, who was a trust professional, be appointed in her place, as she thought the settlor did not want a family member to hold the office of protector. She did by then acknowledge, however, that her relationship with B1 had been lost, albeit she wanted it to improve. Things got no better between 2005 and 2007 when it seems P had no interaction at all with B1.
In 2011, B2 and B4 suggested the trust be terminated. P did not support this course of action. If the trust was terminated it seemed there was a need to obtain an insurance policy to cover potential tax liabilities. There was clear disagreement about how those liabilities were calculated. That led to what McMahon described as a hardening of P’s position vis-a-vis the trust terminating, and the amount of any retained assets to guard against future liability to tax. B1 asked again, in 2013, that P resign, and that request was followed by a lengthy more formal request from B1’s legal representative on 13 June 2014, setting out in detail why P should resign and referring to the well known case of Letterstedt v Broers, which dealt with when a trustee should resign. P’s own legal representative responded in similarly lengthy and formal terms, concluding that P would be willing to retire if a suitable successor could be found, but subject to a number of assurances principally to do with mitigation over the tax liabilities. T2 shared B1’s view that given P’s stance, the trust was unworkable.
In the period immediately following the settlor’s death, McMahon found P’s attendance at trustee meetings with her own advisers, and the resulting close scrutiny of T2’s every decision, made her all but a de facto trustee. Indeed, that was the root of the problem in his view, as it resulted in everything being picked over with a very fine tooth comb. Things got worse, however, to the point where rather than face making a decision that was then rejected by P, T2 made no decisions at all, something that whilst not paralysing the trust, did frustrate its proper functioning. The final straw seems to have been when P, during the proceedings, decided to take her own advice on the tax point, and secured an opinion on an issue which had been all but finalised. This was seen as potentially damaging to the beneficiaries’ interests, and P had to go. Because the terms of the trust were such that, when construed as a whole, they did not require a successor protector to be appointed, P was removed on terms without any replacement.
Although there were initial doubts whether it could be done, there are a growing number of cases which look at the circumstances in which a protector will be removed by the court. Such a jurisdiction is clearly desirable, but as McMahon DB recognised, it should not be exercised lightly, but only with caution. Ultimately it was decided it was the welfare of the beneficiaries and the competent administration of the trust, and not exceptionally, whether the trust would otherwise fail, that were the guiding principles that founded the jurisdiction. P’s conduct had all but prevented the trust from functioning, and it was that which mattered above all.
In Jasmine the Jersey Court was asked to consider the question of the validity of protector appointments against a background of hostility amongst beneficiaries and settlor. The case concerned two Jersey law governed discretionary trusts, the ’P Trust’ and the ‘’R Trust’. The trustee of the P Trust was Jasmine Trustees Lmited (JT) and the trustee of the R Trust was Lutea Trustees Limited (Lutea). The beneficial class of both trusts included the children of the settlor (two sons aged 55 and 52 and a daughter aged 50) and remoter issue. Crucially, it was the settlor that was the protector.
In 2010 the settlor became embroiled in a dispute with his daughter over the use of trust funds in respect of a London property. Ultimately this dispute led to hostile litigation in the United States of America. Proceedings (still on-going at the time of writing) were raised by the daughter against her brothers in New York and against her father in Vermont. The daughter did so on discovering that, despite her understanding to the contrary, she did not hold a third share in companies in those jurisdictions.
Events in 2014 took a turn for the worse. The settlor (as protector) removed JT and Lutea and appointed a new trustee, Kairos Trustees (NZ) Limited (Kairos) in their place. From the trustees’ perspective, their removal came as bolt out of the blue. JT questioned the appropriateness of Kairos as trustee and made an application to the court for directions. The sons were then purportedly appointed by the settlor as his replacement protectors of both trusts. Thereafter they sought to remove Kairos as trustee but without appointing replacement trustees.
The daughter made an application to the Jersey court to set aside the appointments of the new trustees and protectors.
The court decided the appointments were invalid. As for Kairos, the settlor had not considered (as he should have done) whether Kairos was fit to act as trustee, and what evidence there was suggested very much it was not. At the time, it was impossible for them “reasonably to be seen to be in a position to act fairly as protector” so their appointment as protectors would “undoubtedly have a seriously detrimental effect on the administration of the Trusts”. Their family dispute with the daughter would resonate in every decision involving the trustee and protectors going forward. Impartiality and independence were the casualties of the dispute. Indeed, given the breakdown in relations and the “potentially serious adverse financial consequences for the younger son and the elder son” should the daughter’s litigation be successful, it was a breach of duty for the father to have appointed the sons as protectors of trusts of which the daughter (and her child) were beneficiaries.
The appointments were therefore “irrational” and invalid.
A common theme running through K Trust and Jasmine is the fundamental breakdown of a relationship. However, whilst a matter of degree in every case, to result in removal, invariably the breakdown must be of such significance that it has a seriously detrimental effect on the administration of the trusts. Clearly, the Guernsey and Jersey Courts will not take a decision to remove lightly, however where there is risk to the welfare of beneficiaries the Court will act. These judgments provide helpful guidance that trustees ought to become familiar with should they find themselves in a situation (or anticipate that they may be entering into one), where relationships may be at risk of breakdown.
About the Author
Ewan has over 14 years’ experience. On qualifying as a solicitor in Scotland in 1999 he advised clients on all aspects of court work. Since arriving in Guernsey in 2005, Ewan has taken up various legal roles in Guernsey’s finance sector including with the States of Guernsey initially with the Law Officers and latterly with the Commerce and Employment Finance Sector Development Unit, thereafter another Guernsey law firm and an in-house position within a well established local fiduciary business. These combine to provide Ewan with first class hands on experience of Guernsey fiduciary work and the fiduciary sector.