Introduction
So-called Red Cross trusts can be useful vehicles for would-be settlors who wish to keep the primary beneficiaries of the trust confidential. They have traditionally been common in offshore jurisdictions. They typically feature a charity – often the Red Cross – as the sole or default beneficiary, and the trustee, protector or other power holder has a power to add beneficiaries. There will typically be a Letter of Wishes explaining the settlor's wishes about when and in whose favour the power to add should be exercised. The trustee will generally consider these objects of the power to add, and not the charity, as the primary beneficiaries of the trust. The primary beneficiaries are therefore not readily identifiable on the face of the trust instrument.
The principle in Saunders v Vautier1 has generated some recent concern that a common purpose of these trusts – to settle property for beneficiaries in as confidential manner as possible – has been threatened, particularly following litigation on this issue in Guernsey.
This article first explains the principle in Saunders v Vautier and the debate about this principle in the context of Red Cross trusts and other trusts where there is a power to add beneficiaries. It then summarises the 2019 Guernsey Court of Appeal decision of Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited and Pullborough International Corp 2("Rusnano") and the recent amendment of the Trusts (Jersey) Law 1984. It concludes by offering the authors' views on the wider implications of this amendment to Jersey's trust law.
The principle in Saunders v Vautier
The longstanding principle in Saunders v Vautier states that where all persons entitled absolutely and indefeasibly to the whole of the income and capital of the trust property have been ascertained, and have full legal capacity to act in their own right, they are entitled to call for the termination of the trust and the distribution of the assets to them.
The application of the principle in Saunders v Vautier to Red Cross Trusts
The application of the principle in Saunders v Vautier is not always simple. One key debate is whether a trust can be terminated, and the assets distributed, where there is a power to add beneficiaries. If so, this would mean that Red Cross trusts can be collapsed by the sole or default beneficiary – typically a charity whom the settlor never intended to benefit, as explained above. This would be a great result for the charity in question (although, in practice, they are almost always unaware of their beneficial status) but not for settlors and potential beneficiaries of Red Cross trusts yet to be added.
The Rusnano litigation
This debate reached the Guernsey Court of Appeal in Rusnano. In this case, the Court of Appeal upheld the lower court's decision that a sole beneficiary can use section 53(3) of the Trusts (Guernsey) Law 2007 (the local statutory approximation of the principle in Saunders v Vautier) to bring a trust to an end, notwithstanding there being a power to add beneficiaries.
The relevant wording of section 53(3) is (emphasis added):
"[…] where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them."
The Court held that, by reference to other provisions in the 2007 Law and the Jersey case of In re Exeter Settlement3, a distinction is to be drawn between someone who is a beneficiary and someone who is a potential beneficiary under a power of addition. They held that an object of a power to add does not fall within the words in bold above. That being the case, the applicant could use section 53(3) to collapse the trust in its favour.
Amendment to the Trusts (Jersey) Law 1984
It is therefore not surprising that Jersey has recently amended Article 43 of its Trusts (Jersey) Law 1984, which mirrored section 53(3) of the Trusts (Guernsey) Law 2007, to prevent the termination of a trust where there is power to add beneficiaries. Thus, the following sub-paragraph 3A has been interpolated into Article 43:
(3A) But paragraph (3) does not apply in relation to a trust:
- if there are any other persons who could become beneficiaries in accordance with the terms of, or pursuant to the exercise of any power under, the trust; or
- if the terms of the trust provide for the disposition of trust property for a charitable or non-charitable purpose.
This means the termination of a trust will be precluded where the terms of the trust include a power: to add beneficiaries, vary the trust so that new beneficiaries can be added, and/or to appoint trust assets onto new or different terms for different beneficiaries.
The wider implications of the amendment to Article 43 of the Trusts (Jersey) Law 1984
In the authors' view, this amendment injects welcome certainty into Jersey law. The prevailing view had been that the existence of a power to add beneficiaries would prevent a trust being terminated under Article 43(3). However, the decision in Rusnano, had generated some uncertainty, particularly given that Guernsey jurisprudence is persuasive in Jersey. The amendment should ensure that the intentions of settlors of Red Cross trusts are protected.
This amendment is also in line with the prevailing view in English law that the existence of a power to add beneficiaries will prevent a termination of a trust under the principle in Saunders v Vautier.