Jersey's trust law has long supported flexibility in trust arrangements, allowing trustees and beneficiaries to adapt trusts to evolving personal and tax-related needs. One key area of flexibility lies in trust variation applications under Article 47 of the Trusts (Jersey) Law 1984.
In a recent case, In the matter of the representation of IQ EQ (Jersey) Limited [2024] JRC 210, where a settlor had been irrevocably excluded, the trustees sought to vary the trust to add the settlor back in as a beneficiary, and sought the court's blessing to approve a distribution of the entirety of the trust assets to him. Of particular interest, were two points:
- whether HMRC should be notified in such a case; and
- whether this course of action was in the interests of the minor and unborn beneficiaries.
Background facts
This case involved a settlor's request to be reinstated as a trust beneficiary, despite having been previously irrevocably excluded, and to receive a distribution of the entire trust fund. His aim was to manage the assets more tax-efficiently to benefit his family, including his children who were also beneficiaries and had recently become UK residents – a factor introducing significant UK tax implications for the trust in the future.
This application raised two complex issues for the court:
- deciding if HMRC should be notified despite the lack of an immediate tax liability; and
- determining whether such a variation could still be viewed as "beneficial" for minor and unborn beneficiaries, who would lose their interest in the trust upon its distribution in full.
HMRC notification
It is well established that in Hastings-Bass or mistake applications, HMRC notification is standard practice. However, the point has not been formally considered in Jersey authorities on variation applications.
In this case, the court required HMRC to be notified of the variation application, even though no immediate tax liability existed. The rationale was that, should the variation be approved, it would likely impact future UK tax liabilities by allowing the settlor to make more tax-efficient provisions for family members.
In our view, as a result of this judgment HMRC notification will now be considered standard practice in Jersey for variation applications where the proposal has a potential effect on tax.
Benefit for minors and unborns
The Royal Court often wrestles with the question of benefit for minors and unborns where a distribution of some or all of the trust fund is to be made to a relative or relatives, thus reducing or extinguishing the assets of a trust of which they are beneficiaries. This case is perhaps the most extensive discussion in Jersey of such a scenario.
The question for the court was to determine what constitutes "benefit" for minor and unborn beneficiaries, especially in cases where a variation may appear, at first glance, to disadvantage them. In this case, the beneficiaries stood to lose their trust interest entirely if the trust was fully distributed to the settlor.
The court sought to balance the apparent loss of these beneficiaries' trust interests with the broader, practical advantages of allowing the settlor to re-assume beneficiary status and receive the trust's assets, to allow him to manage the assets more tax-efficiently. To address this, the court emphasised two points:
- Despite the immediate loss of a trust interest, the variation could indirectly benefit the minor and unborn beneficiaries by preserving the family's wealth through tax-efficient management. If the settlor could hold and distribute assets more tax-efficiently, the minors might indirectly benefit from his increased ability to provide for them during his lifetime or through inheritance.
- In evaluating benefit, the court also took into account the settlor's original purpose in establishing the trust, which was to preserve wealth for future generations, and his continued commitment to benefiting his family. The court noted that, historically, the settlor had acted in the best interests of his children and would likely continue to do so, especially given their consent to the proposed variation.
Ultimately the court considered the available evidence and was satisfied, on the balance of probabilities, that this indirect benefit was more likely than not to come to the minors and unborns in due course.
The judgment confirms that the concept of "benefit" in trust variations may include a broader, pragmatic assessment of family welfare and tax efficiency. It is likely to be a key reference point in future cases where trustees are wrestling with a similar decision.
Conclusion
This case shows Jersey's progressive approach to trust law, balancing tax planning and the protection of beneficiary interests in a pragmatic way. By requiring HMRC notification and supporting a broader interpretation of "benefit" under Article 47, the Jersey court sets a precedent for transparency and practical family-focused solutions in trust management.
