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Trusting On Purpose: The Trusts (Amendment no: 3) (Jersey) Law 1996

Paul Matthews

Introduction

As originally developed by the English Court of Chancery, the concept of the trust involved a tripartite relationship between a settlor, a trustee and a beneficiary, in relation to particular property. The settlor, as legal and beneficial owner of the property, gave the legal ownership to the trustee, whilst the beneficiary was recognised as being entitled to the use and enjoyment of the property, the so-called ‘beneficial’ or ‘equitable’ ownership [1] . Thus as a general proposition, it was not possible to have a trust for a pure purpose [2] . (An important exception to this principle was the law relating to charitable trusts [3], but we are not concerned with those here).

Offshore growth

However, in modern times, there has been a tremendous growth in trust jurisdictions - mostly offshore - modifying their trust laws to permit the creation and enforcement of non-charitable purpose trusts, i.e. trusts in which property is held by trustees on trust to carry out specific purposes which do not qualify as charitable purposes. Liechtenstein was the first jurisdiction to do this - in 1926, followed by Nauru in 1972 and the Cook Islands in 1984. The idea, however, really took off after the enactment of the Trusts (Special Provisions) Act 1989 in Bermuda. Since then, a whole host of other jurisdictions have enacted such legislation. Now Jersey has joined them, with the Trusts (Amendment No 3) (Jersey) Law 1996, which came into force on 24 May 1996.

The General Scheme

The idea is that it will in the future be possible to establish a trust without ascertainable beneficiaries, but with a particular purpose stated in the trust instrument, which need not be charitable. All the usual rules for non-charitable Jersey trusts will apply [4], such as a maximum duration of 100 years, the lack of particular formalities for the creation of a trust, the lack of requirement for it to be registered with anyone or open in any way to public inspection, or for trustees of the trust to be resident in Jersey, and so on.

One important feature of a non-charitable purpose trust under the Jersey legislation, which does not apply to beneficiary trusts, is the need for a person whose duty it is to enforce the trust in relation to its non-charitable purposes. This person, in the legislation, is called the ‘enforcer’. He must be a person different from the trustee or trustees. This is a feature which, incidentally, is common to all the offshore jurisdictions which have changed their laws to permit non-charitable purpose trusts, although sometimes this person is not called the ‘enforcer’, but by some other title, such as ‘protector’.

Functions Of Purpose Trusts

The one great perceived advantage of a non-charitable purpose trust is that it has no beneficiaries. The trustees have the legal ownership, but not the beneficial ownership. Nor is there anyone else who can be regarded as beneficially owning the property. Such a trust therefore becomes seen as a kind of ‘non-owned vehicle’, which can be made good use of in connection with a number of different kinds of transaction.

One example of this would be a private trust company. A company is incorporated specifically to be trustee of a single private trust and no other. Its shares are held by a professional trustee, but in order to provide a buffer between the professional trustee and the private trust company, the professional trustee holds the shares of the private trust company on non-charitable purpose trusts. In this way it is hoped that the professional trustee is not the beneficial owner of the private trust company. A degree of insulation from potential liability and other hazards of professional trusteeship is thereby thought to have been obtained.

In a similar way, there are a number of other commercial purposes which are well served by the use of a non-owned vehicle. These will include off-balance sheet transactions, special purpose vehicles, cross-border debt securitisation, and other things. [5]

The Jersey Legislation

The 1996 Law adds three new articles to the Trusts (Jersey) Law 1984 ("the 1984 Law") namely Articles 10A, 10B and 10C, and two further paragraphs to Article 17 of the 1984 Law, namely 17(7) and 17(8). In addition to that, it makes a number of minor or consequential amendments to other articles in the 1984 Law.

The General Rule

Article 10(2)(a)(iv) of the 1984 Law provides that:

"A trust shall be invalid ... to the extent that .... it is created for a purpose in relation to which there is no beneficiary, not being a charitable purpose ..."

This provision is not repealed, but Article 10A now provides that:

"A trust shall not be invalid to any extent by reason of [that provision] if the terms of the trust provide for the appointment of an enforcer in relation to its non-charitable purposes, and for the appointment of a new enforcer at any time when there is none."

The first point that we note is that Article 10A only saves your purpose trust from invalidity if the terms of the trust provide for two particular things. So if you do not satisfy these two conditions, a non-charitable purpose trust will still be invalid.

The first condition

The first condition is that the terms of the trust "provide for the appointment of an enforcer". The draftsman has emphasised the fact that the terms of the trust should provide for the appointment. He has not actually specified that the appointment should be effective. Suppose that the trust says that X shall be appointed enforcer, but suppose further that for some reason (e.g. because X is also the trustee) that appointment is ineffective. Can it be said that "the terms of the trust provide for the appointment of an enforcer" in those circumstances? Plainly, one could take either view. If the point is ever raised before the court, it should take a purposive view, and hold that this condition to be satisfied requires that an enforcer should be validly and effectively appointed, or at least that a valid and effective mechanism should have been created.

Then, what does it mean to ‘provide for’ an appointment? Plainly if the trust says that "X shall be the enforcer" the condition is satisfied, at all events if the appointment of X is effective. Is it also satisfied if the trust says "the trustee [or a third person] shall appoint a person to be the enforcer in relation to the non-charitable purposes of this trust"? The question is whether an enforcer must be appointed by the terms of the trust alone or whether it is sufficient for them to establish a mechanism by which an enforcer is to be appointed. The Article says that the terms of the trust should "provide for the appointment", not that a person should be appointed by the trust instrument itself. Again, the court if faced with the problem should take a purposive approach to the interpretation, and should adopt the wider construction.

The second condition

The second condition is that the terms of the trust should provide for the appointment of a new enforcer at any time when there is none. Is it therefore necessary to comply with it at a time when there actually is an enforcer? Suppose a purpose trust under which X is originally appointed by the terms of the trust to be the enforcer, but there is no mechanism for replacing X in due course. Is the purpose trust valid for the moment, but becomes invalid when X dies or retires and there is no mechanism for replacing him, or is it invalid from the outset because there is no mechanism in place for the future?

Which construction is right depends on whether the words "at any time when there is none" refer back to the concept of "appointment" of the enforcer, or to the terms of the trust providing for such appointment. If it is the former, then the terms of the trust must make provision of this kind from the outset, even if someone is validly appointed at that stage. If it is the latter, then the trust will be valid from the outset, but cease to be valid at the time when the original enforcer dies or retires, and there is no mechanism for replacing him. (Even then, query whether the court might not take it upon itself to replace him anyway, just as the Court of Appeal of the Isle of Man held it could do in the case of a protector. [6] )

Additional cost

The need for an "enforcer", who will command a fee for his role - however nominal - in the structure, means that a non-charitable purpose trust will, in principle, be more expensive than a charitable purpose trust. This will need to be considered in deciding what kind of vehicle should be used in a given transaction.

Substantive purposes and self-serving purposes

But there is a problem with Article 10A. What are the "purposes" referred to? Since Article 10A goes to negative the effect of Article 10(2)(a)(iv), this must be a reference back to the "purpose in relation to which there is no beneficiary" referred to in that provision. Now it is not uncommon for draftsmen of purpose trusts in other jurisdictions to state that the purpose of a given purpose trust is something like "to hold the shares in such-and-such a company". This is what we may call an ‘internal’ or ‘self-serving’ purpose. It is directed really at the form that the assets of the trusts should be held in. In substance it is simply an investment clause. If you saw a trust which contained an investment clause, saying that the trustees should invest the trust fund in such and such-a-way, but made no mention of any beneficiaries or other application of trust funds, the most obvious conclusion to which you would come would be that the settlor had failed to make clear where the beneficial interest of the trust belonged, and hence that there was a resulting trust for the settlor.

A better meaning of "purpose" within Article 10 is the application of the trust funds or the income derived from such funds. For example, one might have a trust for the encouragement of planting oak trees or to encourage the speaking of the Cornish language. If we assume that these are not charitable purposes, nonetheless they are plainly substantive purposes. They are not concerned with the form that the trust funds take or how they are invested, but instead with how they are to be applied.

In my view, this is what the legislature was aiming at in Article 10 and hence it is this which Article 10A is also directed to. Consequently, in my view, a trust which purports to be a purpose trust, where the purpose if nothing more than a direction to the trustees to hold the assets in a particular form, is not a purpose trust within the meaning of Article 10A. It is a case where the settlor has failed to give away the beneficial interest in the trust funds, and so there will be a resulting trust for the settlor, with all the chaos and (possibly) tax liabilities that that may cause.

The Enforcer

Article 10B reads as follows:

1. It shall be the duty of an enforcer to enforce the trust in relation to its non-charitable purposes.

2. The appointment of a person as enforcer of a trust in relation to its non-charitable purposes shall not have effect if he is also a trustee of the trust.

3. Paragraph (4) of Article 17 shall apply to an enforcer as if the reference in sub-paragraph (b) of that paragraph to ‘a trustee’ were a reference to ‘an enforcer’ and the references in that sub-paragraph to ‘his trusteeship’ and ‘such trusteeship’ were both references to ‘his appointment’."

What does "enforce" mean?

Turning to the first paragraph, one difficulty is to know exactly what is meant by the word "enforce". No doubt it must include the taking of legal proceedings in cases where the trustee steals the trust fund or applies it to the wrong purposes. But it must also apply to preliminary steps towards enforcement, such as the obtaining of information to which (if this were a beneficiary trust) a beneficiary would be entitled, e.g. under Article 25. This is a conclusion strengthened by the amendment made (by Article 6 of the 1996 Law) to Article 25, to extend rights to information to the enforcer. On this basis, then, the enforcer not only has the duty to enforce the trust, but he has all the rights that a beneficiary would have if it were a beneficiary trust, for, without those rights, his ability to enforce the trust would be impaired.

If the trust is a mixed trust, i.e. partly for beneficiaries and partly for non-charitable purposes, the rights and duties of the enforcer only take effect in relation to the non-charitable purpose part of the trust. The enforcer appears to have no locus standi in relation to the beneficiary part of the trust.

Independence of enforcer

The second paragraph of the article prohibits a trustee of the trust from being appointed enforcer. Note that it does not prohibit a person connected with the trustee - e.g. a wholly-owned subsidiary - from acting as enforcer. This seems not to have been considered by the draftsman, and it weakens the efficacy of the policy behind the rule, ie that trustee and enforcer should be independent of each other. On the other hand, it may provide a solution to the "extra cost" point made above. A trustee could procure the appointment of its tame subsidiary as enforcer for no extra charge.

Remuneration

The third paragraph of Article 10B makes plain, of course, th cessary for the terms of the trust to set out the rights of remuneration and other benefits to accrue to the enforcer for performing the duties of the office. The position of enforcer is a fiduciary one, and hence, without specific authority, it cannot profit from it. [7]

Termination of Office

Article 10C reads as follows:

1. "Subject to paragraph (3), an enforcer may resign his office by notice in writing delivered to the trustee.

2. A resignation takes effect on the delivery of notice in accordance with paragraph (1).

3. A resignation given in order to facilitate a breach of trust shall be of no effect.

4. An enforcer shall cease to be enforcer of the trust in relation to its non-charitable purposes immediately upon -

1. his removal from office by the court;

2. his resignation becoming effective;

3. the coming into effect of a provision in the terms of the trust under which he is removed from office or otherwise ceases to hold office; or

4. his appointment as a trustee of the trust."

This Article deals with two quite different matters, namely (1) the termination of the office of enforcer by his own voluntary act, and (2) the termination of that office by the act of another person or persons, or automatically upon a stated event occurring.

Voluntary termination of office

As to voluntary termination, it should be noted that the notice of resignation not only has to be in writing but also has to be delivered to the trustee. If it is not possible for the enforcer to deliver the notice to the trustee, then voluntary retirement is not possible. An enforcer who found himself in the position of wishing to cease to be enforcer but not able to deliver a notice to the trustee, would have to go to court and apply for his own removal under Article 47(2)(a)(iv), inserted by Article 8 of the 1996 Law.

Involuntary retirement

Turning now to the termination of the appointment as enforcer without the consent of the holder, there are three events upon which he immediately ceases to be enforcer. Two of them are the same as in the case of the trustee, namely removal from office by the court and an automatic provision in the terms of the trust. As to the former, Article 47 of the 1984 Law is amended so that applications may be made to the court, not only about the office of trustee, but also about the office of enforcer. As to the latter, the Royal Court of Jersey has held [8] that it has power under Article 47 to override administrative provisions contained in the trust instrument, including one that a trustee ceased to be a trustee on reaching a certain age limit. This should apply similarly in relation to enforcers.

Trustees’ Duties

Filling a vacancy in the office of enforcer

In addition to those new articles, Article 17 of the 1984 Law is amended by the addition of two further paragraphs, (7) and (8). Paragraph (7) reads:

"A trustee of a trust for non-charitable purposes shall, at any time when there is no enforcer in relation to them, take such steps as may be necessary to secure the appointment of a new enforcer".

Article 17 of the 1984 Law is headed ‘Duties of Trustee’. It specifies a number of the duties which a trustee must observe, in acting as trustee and administering the trust. Oddly enough it does not anywhere state that the duties owed by a trustee to the beneficiaries are fiduciary, though of course they are. By the same token, therefore, it must be assumed that the trustee of a non-charitable purpose trust also owes fiduciary duties to the purposes to which the funds are to be devoted. The Belize Trusts Act 1992 [9] makes this point explicit, but, given the fiduciary nature of trusteeship, it must be implied anyway.

Removing an unfit enforcer

Paragraph (8) of Article 17 reads:

"Where the trustee of a trust for non-charitable purposes has reason to believe that the enforcer in relation to them is unwilling or refuses to act, or is unfit to act or incapable of acting, he shall apply to the court for the removal of the enforcer and the appointment of a replacement".

Note that it is not necessary that the enforcer should actually be unwilling or refusing to act or be unfit or incapable; it is only necessary that the trustee should have "reason to believe" that that is so. This is neither completely objective nor completely subjective. Plainly, whether a trustee has such reason to believe is a question of fact. Whether the court would say that a trustee had such reason to believe if in fact the underlying circumstances were completely the other way, ie the trustee was wrong, is perhaps more questionable. The factual circumstances which the trustee has to have reason to believe bear a modest resemblance to some of the grounds contained in the (English) Trustee Act 1925 [10], as grounds upon which a trustee might seek to appoint a new trustee. So the English caselaw on the interpretation of these words in that Act may be of assistance to the Jersey court in the future in interpreting this paragraph.

Other Amendments

The other provisions of the 1996 Law make various other amendments to the 1984 Law. We have mentioned the amendment to Article 25 to provide that the enforcer in relation to any non-charitable purpose of the trust is to be entitled to information in the same way as a beneficiary of a beneficiary trust. [11]

We have also mentioned the amendment to Article 47, dealing with applications for directions and for orders from the court relating to the administration of the trust, so as to give the court jurisdiction under that article to deal with orders for the appointment or removal of an enforcer in relation to any non-charitable purposes of the trust [12] . Furthermore, the enforcer of the trust is given locus standi to make applications under Article 47 without the need for the leave of the Attorney General.

Similarly, amendments are made to Article 53 of the 1984 Law so as to provide for the limitation period of three years to run, in the case of non-charitable purpose trusts, from the date on which accounts were delivered to the enforcer, or the date on which the enforcer first knew of the breach of trust. [13]

Non-charitable ‘cy-près’

One very significant aspect of the non-charitable purpose trust is the question of what happens when the trust comes to an end. Article 7 of the 1996 Law amends Article 38 of the 1984 Law (dealing with failure or lapse of interests under trust), by deleting the word "charitable" from paragraph (2).

That paragraph formerly established a kind of statutory ‘cy-près’ doctrine for charitable trusts in Jersey law, though there were cases even before the 1984 Law applying such a doctrine in trust cases [14] . But now Jersey law has gone further, and by this amendment has introduced a kind of statutory ‘cy-près’ doctrine for non-charitable purpose trusts. This appears to be the first time that any jurisdiction has taken this step. It would allow the court, during the permitted duration of the trust, to modify the purposes for which the funds were to be held and applied.

We should bear in mind of course that with a charitable trust, which may last forever, the question of termination at the end of the maximum duration period does not arise. The ‘cy-près’ doctr therefore has a very strong role to play. But a non-charitable purpose trust is still subject, in Jersey law, to the maximum duration period of 100 years. [15]

Destination of property on termination

A question which has not been expressly addressed by the draftsman in the 1996 legislation is quite what is to happen at the end of the 100 year period when the non-charitable purpose trust has come to an end but there is property remaining. Since Article 38(1) of the 1984 Law has not been amended, it seems that, subject to the terms of the trust, and subject to any order of the court, the property the subject of the trust that has terminated is held by the trustee on trust for the settlor absolutely, or, if he is dead, for his personal representative. So it is important to make clear, in the terms of the trust itself, where the funds should go at the end of the one hundred year period. This in turn raises a further problem which is discussed below.

Problems

Quite apart from any drafting difficulties which may be thrown up in the course of discussing the legislation itself, there are three particular problems with purpose trust legislation.

The "self-serving purpose"

First, there is the problem, already mentioned, of the "self-serving" purpose, where, in effect, the purpose is directed towards the form that the assets should be held in, rather than what they should be applied to. In that case there is simply a risk that the property will be treated as held on a resulting trust, the settlor having failed to dispose of the beneficial interest. If, on the other hand, the purposes are more substantive, such as to plant trees on a particular person’s land [16], or to provide a recreation ground for the benefit of employees of a particular company [17], then the trust begins to look like a beneficiary trust anyway and the beneficiaries may have rights to benefits (and to information) [18] which the settlor would much rather they did not. There is also a risk, with some substantive purposes being stated, that the court might, in fact, treat them as charitable, with the result that the Attorney General or Charity Commissioners could be involved, something which again the settlor would not like.

So, how do you find a substantive purpose, one which, on the one hand, avoids the ‘investment clause’ problem, yet on the other does not have background beneficiaries to get in the way, and is not charitable? This is actually quite hard to do. Most substantive purposes benefit somebody. So, to prevent these ‘somebodies’ from being beneficiaries, you have to raise the purpose to a high level of abstraction. But at this point it usually begins to look like a public purpose, i.e. charitable. If you make sure the purpose is not beneficial to the public, you run the risk that the court will declare it void as against public policy. The best suggestion course may be to look at recent caselaw in the jurisdiction concerned, and find a public purpose trust which has been held not to be a charitable trust. Then copy it. If there is no recent example in that jurisdiction, then (depending how much respect is paid to foreign decisions) it may be worth looking at recent English or other Commonwealth cases.

International recognition

Another problem is the question of international recognition. Since purpose trusts in the offshore world often play a pivotal role in international commercial transactions, it is not simply a question of recognition in Jersey or the other offshore state where the trust is set up. It may be vital that this purpose trust should be recognised as effective in other countries, such as the USA or the UK. But this is by no means certain. Even if the Jersey court would be prepared to recognise an internal or "self-serving" purpose as constituting a valid non-charitable purpose trust, there is no certainty that the courts of the UK or the USA would do so. Even those states which have ratified the Hague Convention on the Law applicable to Trusts and on their Recognition, have only undertaken, by Article 2 of that Convention, to recognise trusts "for a purpose": that gives such courts plenty of scope to say that they have only agreed to recognise trusts for a substantive purpose, i.e. one to which you apply the funds. And in any event, many important trust states in the world (amongst them the USA and New Zealand) have not ratified the Convention.

Ultimate beneficiaries?

A third problem concerns the ultimate destination of the assets when the trust terminates. We said above that it was important to make clear where they were to go. But there are really only two possibilities. One is that the assets are to go to charity, and the other is that they are to go to people, whether back to the settlor (by resulting trust) or on to other persons named or described for the purpose. Yet each of these is problematic. They raise the spectre of these persons, or the enforcer of charity, seeking information during the life of the trust on the basis that they are ultimate beneficiaries of the trust. In essence, they put back into the equation the very factor which non-charitable purpose trusts were meant to take out, i.e. the prospect of interference by, or alternatively the attribution of tax and other liabilities to, beneficial owners. Of course, you may spend the whole trust fund before the 100 year life is up. But you might not. And a contingent interest is sufficient to give a beneficiary locus standi to seek information [19], or to land a settlor with a tax liability. To avoid this, you could perhaps make the ultimate beneficiary unascertainable until the 100 year life is up, e.g. the person who shall be the oldest resident of Jersey on 1 January 2097.

Conclusion

Jersey is to be congratulated on introducing purpose trust legislation in its own way, without following blindly the lead set by others. In this way it has produced legislation which is designed much more to fit in with its own pre-existing position. And, notwithstanding the drafting difficulties referred to above, in general terms the legislation is of a high order. But there are still underlying problems inherent in the use of non-charitable purpose trusts, and we may wonder whether, given the doubts that must exist in relation to their efficacy (and in particular whether they really are the "non-owned vehicle" which they are often made out to be), and the additional costs inherent in using an enforcer, they will in fact be as much used as some have suggested.

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