| Return to Contents Shorter Articles And Notes In The Land Of The Blind, The One-Eyed Salesman Is King Paul Matthews Introduction The concept of the "blind" trust has been long known in the offshore world, in Jersey as elsewhere. It is not clear where the term first originated. One possibility is that it arose because a the blind [1] was nearly always included in the class of beneficiaries at the outset. This explanation is consistent with the other name for such trusts, which is "Red Cross" trusts, and which certainly derives its name from that phenomenon. Another possibility is that such trusts are called "blind" because the identities of those who are genuinely intended to benefit (in the "sham" version, at least) are not made available at the outset. Advantages of blind trusts What, then, is a blind trust? Essentially it is a discretionary trust in which the class of beneficiaries at the outset contains a limited number of persons who are either not intended to benefit at all, or, although they are intended to benefit, are not intended to be the only persons to benefit. There is invariably a power, to be exercised by the trustees, protector or other third party, to add additional persons or objects to the class of beneficiaries. Although these powers were originally seen as a means of supplementing a class which was already mostly complete, i.e., in case somebody had been forgotten, fairly soon draftsmen saw them as a means of actually limiting or concealing the information that would otherwise be given about the beneficiaries, and also about limiting the information to which beneficiaries might be entitled. As to the first point, until a person was appointed into the class of beneficiaries, there would be no legal status accorded to that person as a beneficiary of the trust. Hence at the outset the document would not reveal that such a person was indeed ever intended to benefit from the trust (so connecting it with a particular settlor or with a particular class of beneficiaries), and moreover it would mean that questions addressed to the trustees (e.g. by a court) as to who the beneficiaries were could be answered truthfully by pointing simply to those who were aready in the class. [2] Secondly, an additional benefit of using this d be that the settlor could create a trust which would be capable of benefitting persons, without those persons from the outset having the right to obtain information about the trust, on the grounds that they were not yet members of the class of beneficiaries [3] . Only once the person had been added to the class of the beneficiaries could that person claim all the rights attaching to the status o a beneficiary [4] . (Of course, the terms of the trusts themselves might also cut down the rights of the beneficiaries to inform proper law permitted this [5], but this was an additional hurdle for persons to have to surmount before they became entitled to information.) Thirdly, a selling-point with such trusts in the past, at least in some offshore jurisdictions, has been the lower cost of having a blind trust in utterly standard, completely discretionary form, coupled with a letter of wishes tailored to the client’s needs, as compared with an individually drafted trust complying with all the client’s requirements. It was obviously much easier and quicker to tailor a letter of wishes than a forty-page discretionary trust. At all events, such trusts became common in offsictions in the 1980s. In one Jersey case [6], where the trustees of a discretionary trust had power to add to the class of objects, Tomes DB, showing a nice appreciation of the reality of the situation, said: "The beneficiaries of the settlement are, by the third schedule to the settlement, stated to be "Save the Children, RNLI, RSPCA". Of course, these are the ultimate beneficiaries of the trust and, in practice, the charities will receive nothing, because letters of wishes referred to hereafter will be implemented by the trustees for the time being and will dispose of the whole of the trust fund. For this reason the Court has not considered it necessary to convene HM Attorney General to represent the charities." Problems of blind trusts But these trusts can cause problems. The primary problem would be that the settlor would create a so-called blind trust by picking one or two charities as beneficiaries but (as Tomes DB recognised in Re Gea Settlement) he would have no genuine intention that they should ever benefit at all. The only purpose of stating such charities would be so that the class did indeed contain beneficiaries at the outset and there was not automatically a resulting trust with the settlor. Yet if there was no genuine intention on the part of the settlor to benefit the stated persons, or hem, then effectively the document was a sham. It did not record the genuine intention of the settlor [7] . But the consequence of a sham of this kind is not that the whole trust is void, but that the genuine intention of the settlor, as proved to the satisfaction of the Court, takes effect instead of the document. In a case therefore where the settlor never had the genuine intention to benefit the charities, it would be as if the charities were not written into the document. The consequences of that would be that (1) the interest otherwise given to the charities would be held on resulting trust for the settlor as in the meantime undisposed of, but also that (2) the power to add further persons into the class (assuming that to be genuinely intended) would nonetheless have effect, so that (3) the resulting trust would last only unless and until the power to add further pe the class were exercised, and the power to appoint to members of the class were exercised in favour of one of those persons . [8] The case would then resemble Vavell v IRC [9], where Mr. Vandervell was held to have created a trust of an option to buy shares, which option was held on resulting trust for him subject to a power to appoint being exercised in favour of third parties. No-one suggested that the whole trust was void and that the power of appointment in favour of others could not be exercised. On the contrary, the Court of Appeal in Re Vandrusts (No.2) [10] held that the exercise of that power put an end to the interest of Mr. Vandervell himself. Consequently they must have held that power to be valid. Ieele v Paz Ltd [11] the High Court of the Isle of Man concluded however that in such a case the who was void for uncertainty. This cannot be right. [12] The second problem may also arise at the same time, or may arise separately. This is that the settlor’s genuine intention is to benefit other persons who are not stated. This also is a form of sham. Suppose, for example, that the settlor apparently creates a fully discretionary trust, but signs a letter of wishes, which in very precise terms explains exactly how the settlor wishes the trustees to hold, manage and distribute the assets. If the settlor’s real intention is that the letter of wishes must be precisely followed, then it overrides the discretionary trust (on the face of the document) to that extent. Consequently, if one had a blind trust in which there were two named charities who were not intended to benefit, and the settlor intended all along that a particular person or persons should in fact be treated as beneficiaries of the trust, even though not yet appointed into the class of beneficiaries, then the worst case scenario would be (if this were proved) that the property was already held on trust for that beneficiary or those beneficiaries in the terms desired by the settlor. It would not mean that the power of appointing further beneficiaries was not valid, unless the settlor had no intention of the power ever being exercised except in order to appoint that particular beneficiary or those particular beneficiaries into the class. A third problem is that the general power to appoint further persons into the class, or a general power to appoint to anyone in the world, might be argued to be void for uncertainty, or for administrative unworkabwever, there is a series of English first instance cases where such powers have been held to be valid and not void for uncertainty [13] . Professor David Hayton has advanced an interesting academic argument to apply the doctrine of administrative unworkability to such powers, based on the fact that the test for certainty of objects is the same for a trust powe a mere power [14] . But this need not mean that the test of administrative workability, which applies to trust powers, should also apply to mere powers. The obvious difference between the two classes of case is that a trust power must be exercised, whereas a mere power need not. So if a power were otherwise unworkable, the solution in the case of a mere power is simple, i.e, that it be not exercised at all. Are they worth it? Do "blind" trusts work? The short answer is that, if they are genuinely intended to take effect according to the tenor of the words used, then they are valid. If there is any part of them which is not genuinely intended to take effect, then that part is to that extent a sham, and is replaced by the genuine intention of the settlor (to the extent that that can be proved). Questions of certainty of objects and of administrative workability do not arise merely because there is no genuine intention to benefit the persons named in the document. They arise because of the nature of the power being conferred, and the difficulty or ease of identifying the persons amongst whom those powers are to be exercised. Generally speaking, if part of the trust is a sham, the worst that can happen is that there is a resulting trust of that part of the trust or interest, and it is still subject otherwise to the other valid terms of the trust. An additional point which must be taken into account is that a blind trust looks inherently suspicious, from a fraud-on-creditors, a money-laundering or a tax-evading point of view. Why does a bona fide settlor need to hide information in this way? But in the nature of things some do, for perfectly lawful (if sometimes embarrassing) reasons, and if a client does not mind the negative image that a blind trust projects, then so be it. Furthermore, blind trusts could lead to disputes between those named and those claiming to be "really" entitled. As already mentioned, "blind" trusts could be cheaper to set up. But this price advantage is obtained only by making the trust document a sham. On this view, the trusts are really in the letter of wishes. Litigation could ensue because parties are misled. And all for the sake of saving a few hundred pounds. But even if a blind trust is utterly genuine, it may nevertheless not be a good idea. This is illustrated by a recent decision of the Isle of Man Staff of Government Division of the High n reality, the appeal court), Ahuja v Scheme Manager, Depositor’s Compensation Scheme [15] . Eight persons, all related, set up a blind trust in 1989. A nominal sum was held on discretionary trusts for a class which, at the date of setting up, contained only one object, namely the International Red Cross, who would also take in default of appointment. One week after the trust was set up, the eight persons were added to the class of objects (so there were then nine), and a trust account was set up at the Isle of Man branch of BCCI. Each of the eight persons then contributed about £20,000, to the trust fund, so the total was £160,000. But it was still a discretionary trust. No appointment out of the trust fund was ever made in favour of any of the objects. Two years later, BCCI collapsed. The Isle of Man bank deposit compensation scheme would pay three-quarters of a maximum loss of £20,000, i.e. £15,000, to a depositor in a Manx bank. Each of the eight persons claimed that maximum of £1e scheme manager, considering the regulations [16] covering the scheme, disallowed their claims. He allowed a single sum of £15,000 to the trustees. If this had been a bare trust for the eight persons, each could have claimed under the regulations in his or her own right. But it was not. Instead, under reg. 9 (3)(e) of the regulations, a deposit by trustees of the trust was to be treated as one account: "unless the beneficiaries of the trust are individuals whose identity and right to benefit can be conclusively established." At first instance, the court said that the beneficiaries’ identities and their right to benefit could be conclusively established. It was not necessary that any appointment out be made in favour of the eight persons. It was sufficient that they had been added to the class. This cannot be right. If the eight individual members of the class were entitled to compensation, why not the ninth member, the International Red Cross? But no one was concerned to argue for them. And, almost certainly, no one ever intended them to benefit anyway. On appeal, the Judge of Appeal, Benet Hytner QC, took a different view. Although the eight persons had been added to the class, no appointment had been made in their favour. The trustees might, at any time, have appointed the whole fund to the International Red Cross, or made no appointment at all, so that it vested in the International Red Cross at the end of the trust period. Thus, it could not be said that the right of the beneficiaries to benefit could be conclusively established. Accordingly, the eight persons who had contributed £160,000 had to be satisfied with compensation paid to the trustees of just £15,000. Conclusion The ‘blind’ trust is a good example of the offshore industry turning a specialised technique, for genuine use only in rare cases, into a standard product for the mass market. The salesmen are not technicians. They see only what they can sell. And the trust technicians are not salesmen. When the prototype leaves the laboratory, they do not see what happens to it thereafter. As a result, there are an enormous number of blind trusts, vulnerable to attack, in existence. And, if they are successfully attacked, an awful lot of trust salesmen at risk as well. Paul Matthews is a solicitor of the Supreme Court of England and Wales and a consultant with the firm of Withers, 12, Gough Square, London EC4A 3DE |