Foreword
· A trust can without notice change from one jurisdiction to
another. For a bystander this can be hard to understand, but for
this to be possible, all necessary steps have been considered by
those parties involved whilst drafting the deed. Little that many
people know about trusts is that a trust has no name at all. The
name is been given to the trust for simplicity reasons. A Trust has
a time, date and place and that in itself can never be duplicated.
The Proper Law of a Trust
There are essentially two issues to consider in relation to the law
of a trust, The first relates to which Court should be chosen to
adjudicate any possible future disputes or problems relating to the
trust, The second relates to which law should be chosen to govern
the trust. The first covers what is commonly referred to as the
forum (or jurisdiction) of the trust. Whilst the second
addresses what is commonly known as the proper law of the trust. In
practice, both laws will usually be the same for ease of
administrative convenience.
Matters Covered by the Proper Law
Generally speaking, the proper law of a trust will govern such
matters as its validity (which will be the method of creation
including, in some cases, the capacity of the settlor), its
effect (which will usually cover such matters as whither it will be
recognised outside that jurisdiction) and its administration
(which would include the powers of the trustees and the rights of
the beneficiaries).
The Choice of Proper Law
Deciding on the proper law of a particular trust should be a
relatively straightforward process. It will usually be accepted as
being the law which is specified under the terms of the trust deed.
Alternatively, if the trust deed is silent on this issue, the proper
law applied will usually be that with which the trust is most
closely connected. This is not always easy to determine although
such factors as where the administration of the trustees and also
where the beneficiaries are based would be considered.
It is possible for the trustees to
be resident in a centre which is different from that chosen for the
proper law. For example, a settlor might choose the Bahamas as
providing the proper law of his trust and decide to appoint trustees
who are resident in another jurisdiction i.e. Jersey.
Whether a trust will be able to
receive the protection of the laws of the centre chosen, where it
has no direct connection with that centre (which would usually mean
having trustees who are resident in that centre), is debatable.
However, there may be good reasons why a different law is chosen
form the centre where the trustees reside.
To avoid doubt, clients should be
advised to choose the proper law of their trust based on where the
trustees are to be resident. At least the courts of the centre would
be more willing to afford protection to local trustees in the event
of a dispute.
In most cases there would be no
practical advantages in appointing onshore trustees where the proper
law is offshore. In fact, there could be serious adverse
consequences in doing so. Apart from the fact that the courts in the
offshore centre would probably not wish to defend an action brought
against a trust with no local connections, other that the use of its
name for the purpose of naming the law, there are also general
management and control and taxation issues to consider.
Firstly, as the reader now can understand, the management and
control of a trust will usually be determined where the trustees are
resident. If the trustees (or even one of them) are resident onshore
it is possible ( if not likely) that the trust will be considered
resident for tax purposes in that location, which could result in
the trust incurring substantial tax liabilities.
Secondly, if there is a
dispute concerning, say, the validity of the trust, the person
bringing the action could choose to bring his petition in a court in
the onshore centre on the basis that this is where the management
and control is being exercised. If offshore trustees were chosen,
and the proper law was also that of the centre where the trustees
wee resident, any action would, realistically, have to be commenced
in the offshore centre concerned which would, in most cases, make it
harder to the action to proceed.
Changing the Proper Law
Most offshore trust deeds contain a clause which covers the proper
law of the trust. In addition, there will also usually be a
provision which cover who has the power to change the proper law to
that of another offshore centre.
The power to change the proper
law
In most cases the power to change the proper law ill be given to the
trustees ad would require them to execute a deed or declaration
stating that the law has been changed from one centre to another.
This is how the law is changed in the majority of cases and most
practitioners view this as the most effective method.
Situations where a change may
be required
Perhaps the main reason a change might be required would be of the
advantages or benefits of the original centre were diminished. This
could be as a result of the centre introducing a system of taxation
on local trusts, there being political unrest or perhaps as a result
of another centre altering its laws, with the result that it now
offers greater potential benefits that the original centre chosen.
Factors to consider prior to
making a change
There are a number of factors which a trustee should consider before
a change is made to the proper law and these are detailed below.
Trust law of New Centre
Effecting the change
This should be by deed. When trustees are deciding on the wording of
the documentation the change the proper law of a trust they may
forget to include reference to the desire to move the law of the
forum of the trust as well. It is therefore often advisable for the
deed o declaration which is prepared to cover altering both the
proper law as well as the law of the forum in an attempt to avoid
any possible future doubts or problems
Flee Clauses
Whilst on the subject of the proper law of a trust and how (and why)
it might be changed, we should take a look at a widely used devise
in offshore trusts which is commonly referred to as a "flee clause".
A flee clause is one which attempts
to switch the management and administration of a trust to another
centre on the occurrence of a particular event, such as civil unrest
or the introduction of taxation, in the original centre chosen.
Usually, such a clause will state
that on the happening of a predetermined event the trustees will
automatically retire and new, specified trustees in another centre
will be appointed. Often the clause will also specify that the
proper law and law of the forum will be changed at the same time as
the change in trustee.
Once again, the centre chosen which
the trust will flee to should have comparable trust laws so as to
avoid any possible future conflicts. The trustees in the emergency
centre will also require careful vetting, although in practice a
flee clause is only used where the original trustees have
representation (or as is usually the case, other offices in more
than one location. The flee centre will, therefore, be one where the
trustees have another office.
Another possible problem which
should be considered is the transfer of the trust property to the
new trustee on the happening of the specified event. Unless this can
take place almost immediately the validity of the transfer might be
in question. A possible solution which is sometimes used is the
assets being held through an underlying company. On the change of
trustees all that would be required to transfer the trust property
would be and alteration to the nominee declaration recording the
beneficial ownership of the company.
Dual Laws
Before leaving this topic we should mention that it is also possible
to include provisions in a trust deed which attempt to apply the
proper law over one part of the trust property and another law over
the remainder. Similarly, different laws may be selected for
different administration functions or powers.
