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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> Rep of G and in the matter of the D Trust E Trust and the F Trust [2016] JRC 166C (19 September 2016) URL: https://www.bailii.org/je/cases/UR/2016/2016_166C.html Cite as: [2016] JRC 166C |
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Trusts - application to have transfers set aside on grounds of
mistake and be declared
void and
for
declaration
that shares have been held on
bare trust on behalf of the Representor.
Before : |
|
IN THE MATTER OF THE REPRESENTATION OF G
AND IN THE MATTER OF THE D
TRUST, THE E
TRUST AND THE
F
TRUST
AND IN THE MATTER OF ARTICLES 47E, 51 AND 53 OF THE TRUSTS (JERSEY) LAW 1984
Advocate N. M. Sanders for
the Representor.
judgment
the bailiff:
1.
On 23rd
December,
2011, the Representor entered into three transfer agreements
with
retention of a usufruct pursuant to
which
he transferred to trustees his shares
in A ("A") and ("B") (the "Transfers"). His
current
application is to have the
transfers set aside on the grounds of mistake and be
declared
void ab initio pursuant to Article 47E of the
Trusts (Jersey) Law 1984 (the "Law") and
for
a
declaration
that the shares have been held on bare trust on behalf of the Representor at
all times.
2.
The
circumstances
underlying the application are these. On 20th March, 2009, the
Representor established three trusts, the
C
Trust, the H Trust and the J
Trust. Each of the three trusts
was
constituted
by the settlement of
cash
in the sum of US$100 upon the three
trustees of each trust - an independent trustee, a
family
trustee and an
administrative trustee. The
principal trusts
were
for
the Representor
during
his lifetime as to both
capital
and income, and
from
and after his
death
for
such of the beneficiaries
as the independent trustee might in her unreviewable
discretion
determine.
The
family
trustee had
certain
reserved
powers in
connection
with
the appointment of trustees after the
death
of the
settlor (the Representor), but these are not very material
for
the purposes of
the present application. The third
trust, namely the J Trust acted as a
form
of "
feeder
trust" into
the other two trusts in respect of any income and principal of the trust
arising after the Representor's
death.
3.
Although
these trusts were
established in 2009, no assets
were
added to them
for
over
two years. Towards the autumn of
2011, the Representor became aware of the potential enactment of a 20% estate
tax in Switzerland ("the Swiss Tax Issue"),
where
he is
resident. This
was
of particular
concern
because his assets included a major shareholding in a very substantial
corporation
whose
shares are publically listed on an international stock
exchange. His
family's
interest in that
company
had been long-standing, as it had originally been
started by his
father
before subsequently it
went
public. Indeed the Representor had received over
half of his
current
shareholding
from
his
father
by inter vivos or testamentary gifts. The Representor
deposes
that the original
structure
was
designed
to provide him
with
the right to benefit
during
his
lifetime, to
determine
who
would
be trustees and
whether
the trusts might be
amended, varied or revoked, but
fundamentally
the trusts
were
intended to be
tax efficient vehicles
for
succession planning
for
his
family.
4.
The two
sons of the Representor, K and L, are both resident in the United States of
America. The trust deeds
are
governed by the proper law of Jersey, but they are in a
form
which
clearly
reflects that a good
deal
of US advice has been obtained in the
way
in
which
they have been
drafted.
The
Representor
deposes
that the trusts
were
originally established to achieve
four
US tax objectives:-
(i)
To ensure
that any distributions
to L or K
were
not subject to US tax.
(ii) If L or K predeceased him, to ensure that no
part of the assets held by the trusts would
be subject to US estate tax.
(iii) If he predeceased L or K, to ensure that no
part of the assets held by the Trusts would
be subject to US estate tax.
(iv) To ensure that L and K received a stepped up
basis in the assets held by the trusts upon his death
without
the imposition of
US tax.
5.
Securing
these objectives became even more challenging
when
the Swiss tax issue arose in
2011, because the basis
for
the original trusts
was
to ensure as
far
as
possible that the trusts
were
revocable by the Representor
without
the
consent
of any other person, but such a provision might
well
have led to an assessment
of all those assets
for
Swiss estate tax on his
death.
6.
Considerable
advice
was
taken
during
the latter part of 2011, and on 23rd
December,
2011, the Representor executed amendment indentures in relation to the three
trusts. As a result, the
C
Trust
became known as the M Trust, the H Trust became the N Trust and the J Trust
became the
F
Trust. The
changes
introduced
were
however
wider
than this, and each of the trusts became a Jersey
law governed non-
discretionary
irrevocable trust. K and L
collectively
are the
family
trustees
for
the
F
Trust, K the
family
trustee
for
the M Trust and L the
family
trustee
for
the N Trust. Their
sister P became the independent trustee
for
each of the three trusts,
while
Sempersen Trustee Limited (Jersey) remained as the administrative trustee.
7. The recitals to the M Trust and L Trust 2011 indentures set out the intentions:-
"Whereas,
the Settlor
wishes
to amend the trust to become a
fixed
interest non-
discretionary
trust,
renounce his right of revocation and limit a number of the broad existing
powers of the trustees, including their power to amend the terms of the trust
and to use trust property to establish new trusts. This reflects the
Settlor's intention that the trust
comprise
a
completed
gift to specific
ultimate beneficiaries, and in
case
his son
dies
before the trust terminates,
his
children
named in this Indenture,
who
are the Settlor's
grandchildren;
Whereas,
the trust having
heretofore been a
discretionary
trust
with
trust
corpus
of only USD100, the
Settlor now
desires
to
fund
the trust
during
his lifetime by transferring
shares of A, a Luxembourg holding
company
that indirectly holds approximately
32% of the ordinary shares of Q ("Q"), to the trust, subject to a
usufruct ... under Luxembourg law under
which
the usufructuary enjoys
voting rights
during
his lifetime."
The recital to the 2011 F
Trust indenture
was
in similar terms save that the specific ultimate beneficiaries
were
described
as the Representor's two sons and that the reference
was
to the
transfer of shares in B in respect of
which
the usufructuary
did
not enjoy
voting rights.
8.
Thus it
was
that the Settlor tried to address the Swiss tax issue
whilst
not losing
sight of the original US tax objectives.
9.
We
should
mention that each of the trusts terminates on 1st
December,
2041.
10. Following
the amendment of the trusts and as
part of the restructuring process to achieve the various objectives, the
Representor transferred his interests in Q ("Q") the publically
traded
Dutch
company,
into the amended trusts. The Representor held his shares in Q
through two Luxembourg holding
companies
- A,
which
holds 32% of the
shares in Q and B,
which
holds 49% of the shares in Q. On 23rd
December,
2011, the
day
on
which
the amendment indentures
were
executed, the Representor entered
into three transfer agreements
with
the retention of a usufruct, pursuant to
which
he transferred to the trusts his shares in A and B, and it is these
transfers
which
are the subject of the
current
application.
11. Unfortunately the amending trust instruments
executed on 23rd December,
2011,
contained
one particular amendment
which
has given rise to a potentially serious US tax problem.
Clause
2b of the M Trust Indenture
provided as
follows:-
"The Trust Protector may,
from
time to time, remove and appoint the Independent Trustee and the
Family
Trustee. The
Family
Trustee shall have all powers not reserved to the
Independent Trustee or the Trust Protector or K, his
widow
and the
Beneficiaries hereunder, in particular, powers as to management of the trust
corpus
and voting any shares held by the trust."
12. A similar provision appears in the N Trust and
in the F
Trust. The advice
from
US
lawyers now received is that
with
the amended trusts as
drafted,
if either of
the Representor's sons
were
to
die
holding the general power of appointment
prior to the expiration of the term of the trusts in
December
2041, US estate
tax, at a rate of up to 40% plus possible additional state tax,
could
be
imposed on the value of the assets held by the trusts of
which
the son is a
beneficiary. The advice is that the
US estate tax risk arises even if the Representor survives either or both his
sons, and the imposition of US estate tax
could
lead to a very substantial
charge
on the respective estates of K or L - indeed such is the amount of
the prospective
charge
that their beneficial interest in the shares in the
family
company
might mean the shares had to be sold in order to
discharge
the
taxes
due.
13. Ironically, not only was
the relevant provision
which
created
this risk unnecessary
for
the purposes of the Swiss tax issue,
but indeed the
whole
Swiss tax issue appears to have gone away in that no Swiss
estate
duty
has been introduced.
14. It is evident that instead of the transfers
being made to trusts which
in their amended
form
were
tax efficient, in
fact
the transfers have been made to trusts
which
attract a significant risk to the
Representor's
family
of a substantial US estate tax liability if either
of K or L should
die
before the end of the respective trust periods in 2041. The Representor
deposes
that he
would
not
have effected the transfers onto the trusts in their amended
form
had he known
and appreciated the potential US estate tax
consequences.
15. Before we
turn to the provisions of Article 47E
of the Law, there is one
conflict
of law issue upon
which
we
touch briefly. The transfer agreements by
which
the
shares
were
transferred to the relevant trusts all provide as
follows:-
"Swiss substantive law
applies to the Agreement, unless Luxembourg law is compulsory
or mandatory
pursuant to Paragraph 4 and Paragraph 6.1.
The
courts
in Meggen shall have exclusive jurisdiction
for
all
disputes
arising
from
or in
connection
with
this Agreement."
16. The parties therefore, which
included the
Representor and the trustees of each trust selected the
Courts
of the
Representor's home town in Switzerland as having exclusive jurisdiction,
and selected Swiss law save to the extent that Luxembourg law might be
mandatory having regard to the
fact
that the underlying
companies
in
which
the
shares
were
to be transferred
were
Luxembourg registered
companies.
17. When
this proper law provision
was
put to Advocate
Sanders, he made two primary submissions. The
first
was
that there
was
no
dispute
in this
case,
and therefore nothing under the terms of the transfer agreement
which
was
required to be referred to the
Courts
in Meggen in any event. The second submission
was
that as a
matter of Jersey law, the validity of any transfer to a Jersey trust
fell
to be
determined
solely in accordance
with
Jersey law.
For
that proposition he relied upon
Article 9 of the Law
which
in its material parts is as
follows:-
18. Article 9(2) of the Law expressly requires that
any determination
of the validity or effect of any transfer or other
disposition
of property to a Jersey trust is to be
determined
without
consideration
of
whether
or not the
foreign
law prohibits or
does
not recognise
the
concept
of a trust. However,
Article 9(2A) provides that paragraph (1) of that Article
does
not, in
determining
the
capacity
of a
corporation,
affect the recognition of the law of
its place of incorporation, nor
does
it affect the recognition of the law of
any other jurisdiction prescribing the
formalities
for
the
disposition
of
property.
19. Article 9 was
considered
by this
Court
in
CC
Limited v Apex Trust Limited [2012] (1) JLR 314, a
case
involving one of
the many Baxendale
Walker
Trusts
which
have exercised this
Court
from
time to
time. The
Court
decided
that
although there
was
a material
difference
between English law and Jersey law on
the setting aside of a gift into trust on the grounds of mistake on the part of
the
donor,
that
difference
in law
did
not make any
difference
to the outcome of
the
case
in question because
whichever
system of law
which
was
applied, the
Court
was
satisfied that the two mistakes made by the
company
in question
were
both mistakes as to the effect of the transaction, and relief
would
be given. As a result, the
Court's
conclusions
as to
which
law applied
were
probably obiter. Nonetheless,
although the matter
does
not appear to have been the subject of
dispute
between
the parties, the
Court
reached the
conclusion
that it
was
Jersey law
which
had
to be applied because of the provision in Article 9 to
which
we
have referred
above. This
was
described
as being "
clear
and unambiguous in its
terms." This
conclusion
was
followed
by this
Court
in the matter of the Robinson Annuity Investment
Trust [2014] JRC 133 at paragraph 23. It is not
clear
from
the judgment
whether
it
was
necessary to
determine
whether
Jersey or English law
would
govern the
application in that
case
although as it involved another Baxendale
Walker
trust, it may
well
be that the
Court
would
have reached the same
conclusion
on
the application of either Jersey or English test. However,
we
note that only Jersey
authorities
were
put before the
Court
on that occasion and
we
note also that
the
Court
had no
difficulty
in applying
CC
Limited v Apex Trust Limited
notwithstanding that the underlying estate annuity purchase
deeds
were
expressed to be governed by English law. Advocate Sanders therefore relies upon
the Robinson Annuity Investment Trust
decision
as supporting the
submission that this
Court
should apply Jersey law to the validity of the
transfers, notwithstanding the provisions of the transfer
deed
which
would
suggest that any
dispute
around the transfers should be referred to the Meggen
court
as the
court
of exclusive jurisdiction.
20. Statutory provisions of the kind which
appear
in Article 9 of the Law are
capable
of
causing
difficulty,
but
we
agree
with
the
conclusion
of the
Court
in
CC
Limited v Apex Trust Limited that the
provisions are
clear
and unambiguous.
The statute requires the
Court
to
consider
the validity of a transfer
into trust solely under Jersey law, because Jersey is the proper law of the
trust. The exceptions in Article
9(2A) show that the legislature
did
not
contemplate
that otherwise invalid
dispositions
or transfers
could
be made valid by the application of Jersey law,
but
we
think that Advocate Sanders
was
also
correct
in his submission that the
consequence
of any order under Jersey law that a transfer
was
invalid
would
merely have the
consequence
that the trustee, as transferee,
would
hold the
asset upon a
different
trust - namely as bare trustee
for
the transferor,
rather than on the trusts of the settlement in question. One
could
therefore technically have the
position
whereby
a transfer of assets to the trustee
was
deemed
to be a valid
transfer in a
foreign
court
under the proper law of the transfer
deed,
whereas
it
was
held to be invalid in Jersey on the application of the law of Jersey;
the
consequence
of
which
would
merely be to vary the trusts upon
which
the
trustee held the asset
which
had been validly transferred to it, according to
the
foreign
law in question. This
is not an inconsistent result, albeit it goes to show that the same argument
might have
different
outcomes
depending
upon the jurisdiction in
which
it takes
place.
21. That may all be academic in the instant case
in
any event, as the
Court
was
shown advice
from
Ogier lawyers, expert in the law
of Luxembourg, to the effect that if the Jersey
Court
were
to set aside the
transfer of the shares, the share registers of the two
companies
would
have to
be rectified to restore the Representor as the registered owner of the
shares. The expert evidence is that
under Luxembourg law it is possible to rectify the share register of a
company
in
circumstances
where
a
change
of ownership has been
determined
to be void
and, in the opinion of the Ogier Luxembourg lawyers, such a rectification
could
be effective on the basis of a
declaration
of a
competent
court
with
regard to
the validity of the transfer of the shares to the
current
registered owners,
and a judgment of the Royal
Court
of Jersey
would
be sufficient to enable that
rectification to take place. It
would
appear therefore that the
consequence
of the application of Jersey law to
the validity of the transfer to trustees of a Jersey trust
could
not result in
a
conflict
which
rendered the establishment of the true legal owner of the
shares in question
different,
according to the jurisdiction in
which
that
conflict
arose.
22. In most of the applications since the Trusts
(Amendment No.6)(Jersey) Law 2013 came
into
force,
the
Court
has been
faced
with
an application brought both under Article 47E and also under Article 11,
and it has not been of any
consequence
as to
whichever
approach
was
taken. In the present
case,
the application
was
made
firmly
under Article 47E, because there is no application to set aside
either the trusts as originally made or as amended by the 2011 instruments.
What
is sought to be set aside are the
transfers of shares in 2011 to the amended trusts.
23. That being so, there are three questions for
this
Court
to address:-
(i)
Was
there
a mistake on the part of the Settlor (also the transferor, beneficially and the
Representor)?
(ii) Would
the Settlor not have made the transfers "but
for"
the mistake?
(iii) Was
the mistake of so serious a
character
as to
render it just
for
the
Court
to make a
declaration?
24. The evidence firmly
establishes that the
Representor's intention
was
to plan
financially
for
his and his
family's
future
in the most tax effective manner. The trusts
were
indeed
fundamental
to
that objective and approach.
We
are
satisfied the Representor believed that the amended trusts
were
in a
form
that
achieved his intended objectives, and that he believed that in making the
transfers to the trusts in that
form
he
was
not only achieving the US tax
objectives but also nullifying any risk
which
arose under the Swiss Tax
Issue. In
fact
he
was
wrong
because
with
the trusts in the
form
they are, there is a risk of a substantial US
estate tax
charge.
The mistake
was
accordingly one
which
relates to the
fiscal
consequences
or advantages of the
transfer of the shares to the trusts, and
we
are satisfied that it
falls
within
Article 47B(2) and Article 47E(2) of the Law. There is no
doubt
on authority in
relation to the setting aside of Jersey trusts
for
mistake that a mistake as to
fiscal
consequences
can
form
the basis of an application to set aside.
25. We
are also
completely
satisfied that the
Representor
would
not have made the transfers "but
for"
the mistake. That is his evidence on affidavit and it
is indeed
consistent
with
a
comparison
of the original
deeds
of trust in 2009
with
the amended
deeds
in 2011.
We
accept Advocate Sanders'
contention
that the Representor
would
not have
effected the transfers but
for
his mistaken understanding that there
would
be
tax advantages, namely a shielding of the shares
from
a potential Swiss estate
tax and also a
deferral
of US estate tax until at least the
deaths
of his
grandchildren.
26. The third question - was
the mistake of
so serious a
character
as to render it just
for
the
Court
to make a
declaration
- is more problematic. In
most of the
cases
of this kind
which
have
come
before this
Court,
if not in all
of them, the result of the mistake has been that there
was
an existing liability
for
tax. The only
case
in
which
this may not be so is the Robinson Annuity Investment Trust
case,
although it is not entirely
clear
that absent setting aside those
dispositions
for
mistake, there
was
any avoidable
contingency
which
might have resulted in
tax not being payable. In the
instant
case,
that is not so because if L and K
were
to survive until
December
2041
when
the trusts in question
come
to an end, it appears as if the problems
contemplated
in the US tax advice
will
not have
come
to pass and there
will
be
no enormous tax liability of the kind
contemplated
in the present advice.
We
have thus had to
consider
whether
the
mistake
can
be said to be of such a serious
character
as to render it just
for
the
Court
to make a
declaration
when,
quite
feasibly
there are no tax risks of
the kind envisaged in the evidence put before us.
27. Thus the real issue for
us is
whether
the
potential risk of a very significant tax liability if either of L or K should
die
prior to the expiry of the term of the trusts is a
consequence
which
renders the mistake so serious that it is just that the transfers be set
aside. Although this is something
of a
fine
margin,
we
think that it is and that relief ought to be given. Our reasons
for
reaching this
conclusion
are as
follows:-
(i)
Although
the risk may be thought to be far
from
certain
of
coming
to pass (the two sons
are both aged in their 40s, and
would
only have to survive until
December
2041)
the potential tax bill
for
their estates is huge.
We
accept that it
was
never intended that
the shares transferred should
form
part of the sons' estates
for
tax
purposes and that the tax bill
would
have arisen in these
circumstances
without
any
compensating
benefit. Indeed
they might have to
divest
themselves of the
family
business,
formed
by the
Representor's
father.
(ii) It is clear
that the Representor ultimately
wants
the assets to go to his
children
and remoter issue. Accordingly
we
think that no trust
beneficiaries are likely to suffer either immediately or in the long term if
the transfer of the shares is set aside.
(iii) The Representor is not a tax payer in the
United States and the mistake goes to the treatment of his sons' estates
and not to his own. This is not an
artificial scheme or device
as
was
the
case
with
The S Trust and The T Trust
[2015] JRC 259. The arrangements
do
not attract the same
criticism
that the
Court
is asked to
come
to the rescue of
foreign
tax payers,
who,
anxious to avoid meeting their obligations of
citizens
of that jurisdiction, make a scheme
which
ultimately
does
not achieve
what
was
intended. The present arrangements
are made
for
the
disposition
of the Representor's estate in a tax efficient
way
and he has gained no interim advantage by the structures
which
were
adopted,
which
might make it inequitable to
confer
new advantages now.
(iv) Although the trustees and the beneficiaries
were
not required to
consent
to the representation and similarly such
consent
was
not a pre-requisite
for
the exercise of the
court's
jurisdiction to
set aside the transfers, all the trustees and all the beneficiaries have agreed
with
the Representor's prayer
for
relief and accept that it is in their
interests that it should be granted.
28. Accordingly we
order that the Transfers be set
aside on the grounds of mistake and are avoidable pursuant to Article 47E of
the Law.
We
make the
further
declaration
that the shares in A and B
which
have been in the registered ownership of the
trustees, including all profit
derived
from those assets, have been held on
bare trust by the trustees on behalf of the Representor and have been so held
at all times.