By:
Robert Mack, Head of Private Client and Trusts, HSM Chambers

The
recent unreported judgement of Kawaley J in the Grand Court of the
Cayman Islands of Butterfield
Trust (Cayman) Limited v A,B,C et. al
(Cause 119 of 2020) raised a number of interesting issues in relation
to a ‘category two’ Public Trustee v Cooper1
application brought by the Trustee of a Cayman Islands trust (the
“Trust”)
involving the appointment of the whole of the Trust Fund to a sole
discretionary beneficiary which resulted in the termination of the
Trust, issues surrounding the construction of the Trust instrument,
and whether (or not) the proposal to appoint out the whole of the
Trust Fund to a single beneficiary was ‘detrimental’ to the
interests of the minor and unborn beneficiaries.

Robert
Mack (Head of Private Clients and Trusts) and Sarah Allison (Partner)
of HSM Chambers acted for the Primary Beneficiary in this case.

Case
Background

The
Trust was a relatively standard discretionary trust for the primary
beneficiary (the “Primary
Beneficiary”)
and her descendants of which the Butterfield Trust (Cayman) Limited
was the sole professional trustee. The Primary Beneficiary was the
mother of the two minor beneficiaries, defined as “B” and “C”
in these proceedings, and together they constituted the whole of the
living beneficial class. The beneficial class, however, was not
closed as it included the descendants of the Primary Beneficiary, and
any such persons who could be added to the beneficial class by the
exercise of a power vested in the Trustee to do so.

The
Trust Instrument contained an unusual provision which purported to
prohibit any Beneficiary from benefiting from the Trust (and be
labeled an “Excluded
Person”)
if they became resident in certain countries, including Australia
(the “Exclusionary
Provision”).
Prior to the creation of the Trust the Primary Beneficiary and her
minor children were all residents of Australia, and the minor
children were born there and had spent their entire lives in
Australia. Prior to the creation of the Trust the family migrated
from Australia to avoid being classified as “Excluded Persons” so
they would be capable of receiving benefits from the Trust. The
Exclusionary Provision was designed to ensure the Trust was as tax
efficient as possible, however, it had the unintended side effect of
forcing the Primary Beneficiary and the minor beneficiaries uproot
themselves from Australia and relocate to a foreign country.

Problems
began to arise within the family unit as a result of their ‘forced’
migration from Australia. Despite the family’s attempt to adjust to
their new lives, they failed to find their footing and longed to
return to Australia. Due to the Exclusionary Provision the family
recognized they would be deemed “Excluded Persons” and would
remain that way so long as they resided in Australia. Given the fact
the Primary Beneficiary and her children were the only living
beneficial objects of the Trust, a technical question arose, although
it was not touched upon in the judgement, of whether the Trust could
continue to subsist without any eligible beneficial objects once the
Primary Beneficiary and her minor children were deemed “Excluded
Persons”. The Judge, however, was not required to address the issue
but conclusions on this technical point varied between the legal
advisors involved.

In
late 2019 the Primary Beneficiary informed the Trustee of her desire
to repatriate to Australia with her family. Both the Primary
Beneficiary and the Trustee procured detailed Australian tax advice
exploring the tax implications flowing from that decision. After
considering the tax implications and all possible alternative options
to sustain the Trust one of which included migrating the Trust to
Australia, the Trustee determined the best course of action was to
appoint out the whole of the Trust Fund to the Primary Beneficiary
while she remained a non-Australian tax resident and for the Trust to
terminate (the “Proposal”).
All other possible options produced problematic technical issues or
highly inefficient tax outcomes.

Prior
to the Judgement in this matter, one of the minor beneficiaries
developed a medical condition which necessitated her urgent return to
Australia for specialist treatment. This minor beneficiary was also,
due a pre-existing medical condition, more susceptible to contracting
the COVID-19 virus and it was determined to be in her best interests
that she should return to Australia with her father which in the view
of her parents had superior medical facilities to cope with the
growing global pandemic.

As
a result of that family decision the minor beneficiary was deemed an
“Excluded Person”2
upon her return to Australia. This raised a further technical issue,
as the Proposal would likely transgress an overarching provision of
the Trust Deed which prohibited the exercise of any of the Trustee’s
powers in such a manner which might directly or indirectly benefit an
Excluded Person (the “Overarching
Restriction”).
The Proposal, if carried out, would therefore likely end up providing
an Excluded Person with an indirect benefit as it was almost certain
that some of the funds received by the Primary Beneficiary would be
used to financially support an Excluded Person (the minor Australian
resident beneficiary) over the course of time. Although the Trust
Instrument contained a wide power of amendment which was capable of
varying the terms of the Trust Instrument to enable an Excluded
Person to enjoy an indirect benefit from the Trust, that power was
subject to the Overarching Restriction which meant such variation of
the Trust Instrument would not be possible without the intervention
of the Court (the “Amendment
Problem”).

Legal
Summary

The
combination of the Exclusionary Provision, the Overarching
Restriction, and the Amendment Problem, coupled with the fact the
Proposal was unquestionably a momentous decision in the life of the
Trust, caused the Trustee to apply to the Grand Court of the Cayman
Islands to invoke its inherit supervisory jurisdiction over the
administration of Cayman Islands trusts in accordance with Section 48
and 72 of the Trusts Law (2020 Revision) (the “Trusts
Law”) and
Grand Court Rule Order 85, Rule 2 and ‘bless’ the Proposal.

Section
48 of the Trusts Law allows any trustee of a Cayman Islands trust to
apply to the Court. “Any
trustee or personal representative shall be at liberty, without the
institution of suit, to apply to the Court for an opinion, advice, or
direction on any question respecting the management or administration
of the trust money…and the trustee or personal representative
acting upon the opinion, advice or direction given by the Court shall
be deemed, so far as regards that person’s own responsibility, to
have discharged that person’s duty as such trustee or personal
representative in the subject matter of the said application.”

Section
72 of the Trusts Law empowers the Court to vary the terms of a Cayman
Islands trust on behalf of minor and unborn beneficiaries provided
that any such amendment or arrangement would not be “to
the detriment of [such] person.”

Grand
Court Order 85, Rule 2 enables trustees, amongst others3,
to apply to the Court for the determination of any question arising
out of the administration of a Cayman Islands trust or for any relief
the Court may grant including for any question arising out of the
execution of a Cayman Islands trust. As such, Order 85, Rule 2
compliments Section 48 and Section 72 of the Trusts Law.

The
learned judge outlined the factors he considered in reaching his
judgement:

1. Does
   the Trustee have the necessary power to enter into the proposed
   transaction?
   
2. Is
   the Court satisfied that the Trustee has genuinely formed the view
   that the proposed transactions are in the interests of the Trust and
   its beneficiaries?
   
3. Is
   the Court satisfied that this is a view that a reasonable Trustee
   (having taken the same enquires and faced with the same
   circumstances) could have properly arrived at?
   
4. Is
   the Trustee operating under any conflict of interest, which would
   prevent the Court from approving the Trustee’s decision?
   

The
learned judge concluded each of the above factors had been satisfied.

The
learned judge concluded the Trustee had the necessary power to
distribute the whole of the Trust Fund to the Primary Beneficiary in
accordance with the Proposal. The learned judge also accepted that
notwithstanding an indirect benefit might accrue to an Excluded
Person it nevertheless consented to the variation of the Trust
Instrument to remove the restriction prohibiting an Excluded Person
from taking an indirect benefit from the Trust and that on the whole
the Proposal was in the interest of the beneficiaries.

The
learned judge concluded the Trustee had made genuine and thorough
enquires regarding the implications surrounding the Proposal,
including the Australian tax implications arising which played a
significant factor in the Trustee reaching its decision to agree the
Proposal.

Lastly,
the learned judge found there was no conflict of interest which might
prevent him from approving the Proposal, as all parties involved in
the Application including the protector and the guardian ad litem for
the minor beneficiaries had supported the Application. As such, the
learned judge ‘blessed’ the Proposal.

Commentary

The
case was interesting for a variety of reasons. It is the first time
the Cayman Islands Court has applied the ‘no detriment’ test
introduced by an amendment to Section 72 of the Trusts Law (2020
Revision). Prior to the revision of Section 72 of the Trusts Law in
2020, it was necessary to show that any proposed Court sanctioned
variation of a trust instrument must be for the ‘benefit’ of any
beneficiary affected. It is debatable whether (or not) the Proposal
would have satisfied the previous ‘benefit’ test, and the
somewhat more neutral ‘no detriment’ test likely made the learned
judge’s decision to approve the Proposal easier.

The
Exclusionary Provision was quite unusual as the vast majority of
trust instruments do not purport to restrict where beneficial objects
may or may not reside. The fact the Exclusionary Provision was
specifically targeted at the country the family considered home,
however well intentioned, actually caused much suffering for the
family. Although the Exclusionary Provision was designed to make the
Trust as tax efficient as possible, it had the side-effect of
fracturing family ties in their home country, and traumatized the
minor beneficiaries. It also resulted in much family disharmony. As
such, any tax benefits achieved were effectively wiped out by the
detrimental effects on the family unit arising from their ‘forced
migration’. The learned judge acknowledged that “…genuine
family welfare concerns...” played a major role in his decision,
thus effectively outweighing any tax benefits achieved by the
Exclusionary Provision. This wider concept of ‘benefit’ outside
of financial considerations was further exacerbated by the presence
of the global COVID-19 pandemic as acknowledged by the learned judge.
That such a unique external factor should play into the learned
judge’s decision making process is unprecedented in the author’s
experience.

Lastly,
the fact pattern was highly unique4.
The Trust was intended to last for multiple generations however it
was terminated in under two years from its creation. The Trustee was
faced with three very stark choices (1) Take no action and allow the
Trust to either fail for want of beneficial objects or (the
alternative analysis) allow the Trust to go into ‘hibernation mode’
awaiting the day (if any) that one or more of the beneficiaries
ceased to become resident in a restricted country (2) Take some form
of action to either migrate the Trust, or earmark a portion of it for
the minor and unborn beneficiaries in some manner, despite the
prohibitive tax consequences that would arise5
or (3) Approve the Proposal.

Looking
at all the available options none were wholly satisfactory and each
brought its own level of risk for the Trustee. Doing nothing would
either result in the Trust failing or the beneficiaries likely never
receiving any further benefit from it, implementing some sort of
scheme outside of the Trust would attract prohibitive tax
consequences capable of wiping out the entire value of the Trust
Fund, and carrying out the Proposal meant depriving all but the
Primary Beneficiary of any possible financial benefits. In reaching
his decision the learned judge took the view that the intentions of
the Primary Beneficiary towards her minor children were pure, and
that the minor beneficiaries would in due course receive some
financial benefits via their mother during their lifetimes. The
learned judge also took comfort from the fact the minor beneficiaries
remained beneficiaries of other family trusts and were therefore
capable of receiving benefits from those family trusts over the
course of their lives. In the end, the learned judge was satisfied
the Proposal was the best possible option amongst a range of
otherwise unpalatable options and ‘blessed’ the Proposal.

1
[2001] WTLR 901. The ‘category two’ variant being where there is
no real doubt as to the nature of the trustees’ powers and how the
trustees wish to exercise such powers but because the decision is
particularly momentous, the trustees wishes to obtain the blessing
of the court for the action on which they have resolved and which is
within the scope of their powers.

2
The way in which the rules of domicile operate for minors from an
Australian perspective is that it follows the domicile of the father
where the parents are married. This created a separate technical
issue in that the minor beneficiary who did not return to Australia
was also deemed to have resumed an Australian domicile of
dependency. A debate arose amongst the legal advisors as to whether
that meant the minor beneficiary who did not return to Australia
should also be deemed an “Excluded Person”. This was not touched
upon in the judgement and since the Proposal envisioned the Primary
Beneficiary alone would receive the whole of the Trust Fund it had
no impact on the ruling.

3
Includes executors, administrators, beneficiaries or an estate or a
trust (excluding beneficiaries of STAR trusts), and enforcers of
STAR trusts (see Order 85 Rule 2(4)).

4
The learned judge stated the circumstances were “…strikingly
unusual…”.

5
Australian tax advice concluded that some options under
consideration could have resulted in a rate of tax amounting to 100%
thus completely wiping out the value of the Trust Fund.