Case report: court overrides discriminatory settlor wishes

As we all know, the role of a trustee is fraught with difficult decisions. In some cases, those decisions can be momentous in terms of their impact on beneficiaries. In making such decisions, a trustee may wish for the protection of the court from future claims.

In Representation of Zedra Trust Company (Suisse) SA re C and D Trusts the court was asked to bless the decision of the trustees to vary dynastic trusts to include female family members. This was contrary to the discriminatory wishes of the original settlor who had deliberately excluded the female line.

The facts

The original trusts were governed by the laws of Ruritania in 1974 and were established to benefit the settlor’s spouse, three sons, and any male issue of the three sons born within the trust period. A letter of wishes stated that the trusts should benefit the male line only and that the beneficial class should not be changed. 

In 2017 a restructuring exercise created new separate trusts for each family branch. The C and D trusts were established for the benefit of C and his male living and remoter issue. C’s three daughters were thereby excluded, as well as their issue. 

There was a clause which provided that beneficiaries could only be added from the beneficiaries or class of beneficiaries existing in the original trusts.

The trustee had the power to vary the trust instrument. The trustee with the support of C and his one son, sought the court’s blessing to vary the C and D trusts to add in C’s wife and female issue. 

The blessing jurisdiction

The court’s duty, before approving the decision, was to satisfy itself that the trustees’ decision:

• had been formed in good faith,
• was one which a reasonable trustee, properly instructed, could have reached, and
• had not been vitiated by any actual or potential conflict of interest (Representation of Otto Poon [2015] JCA 109).
  
  

Reviewing policy considerations in the matter of the Y Trust and the Z Trust 

It was recognised by the court that, in this case, the trustee was seeking to address provisions in the trust deed which are of a discriminatory nature. The court found useful guidance in In the Matter of the Y Trust and the Z Trust [2017] (1) JLR 266, in which the Royal Court considered the variation of trusts to enable the children of unmarried or same-sex parents to be added to the beneficial class, in circumstances where they had been expressly excluded by the settlor.  

There were two public policy points to consider: 

1. “the policy argument that the financial services industry might be able to encourage trust business by indicating to putative settlors that if they wanted to discriminate against those born out of wedlock or those of the same sex or sexual orientation those wishes would be respected on an Article 47 application”
2. The “policy statement of where this island currently stands in relation to such issues as is demonstrated by the legislation referred to above and the international treaties by which the island is bound”. The legislation and treaties referred to were those such as the Human Rights (Jersey) Law 2000, the International Covenant for Civil and Political Rights, the International Covenant on Economic Social and Cultural Rights, the Discrimination (Jersey) Law 2013 etc.
   
   

The court concluded that the public policy interests in respecting settlor wishes could be disregarded given the competing public policy requirements which point in the opposite direction. In this case those interests were outweighed by the need to comply with the anti-discriminatory legislation by which the Island is bound. 

The court also concluded that it is wrong in principle to have regard to the intentions of a settlor who is not or is no longer a beneficiary, except to the extent that those intentions bear upon the interests of the beneficiaries. It also noted the important social benefit of family harmony:

“The objective of seeking family harmony is an extremely laudable one … a strong family provides support and cohesion to family members throughout their lives and is an important social benefit to which the court should have regard”.

Application in representation of Zedra Trust Company (Suisse) SA

Whilst this was not an article 47 application, the judges in Representation of Zedra relied heavily on this guidance. They found that, while it is appropriate to have regard to settlor’s views, it is equally appropriate to have regard to the views of the current beneficiaries and that it was reasonable for the trustee to conclude that the settlor’s views are not reflective of the culture, values and lifestyle of the living beneficiaries. They stated: “A dynastic trust is likely to have to provide for a number of generations and, as the philosophy of the family changes it is appropriate for consideration to be given as to whether it reflects that philosophy and, if it does not, whether any changes are appropriate”.

Continuing to exclude the female line could well lead to family disharmony, which should be avoided. They therefore approved the proposed variation. 

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2024