Trustee Knowledge Series: Advanced Paper One: Adding and Excluding Beneficiaries
Published: 9 Jun 2021
Type: Legal Guide
As you will be aware, offshore trusts often include provision for the addition, appointment and removal of beneficiaries, to provide flexibility for the future and to “arm the trustees with a weapon which will enable them to consider all developments and respond to all future mishaps and disasters” (Kessler QC and Paul Matthams – Drafting Trusts and Will Trusts in the Channel Islands).
Without the benefit of a crystal ball, settlors cannot predict if a change in future circumstances may mean certain persons either need to be added to the class of beneficiaries or removed from the existing class. This paper is intended to give an overview of the relevant powers of addition and removal to be taken into account before exercising the powers and some of the common issues that may arise in relation to exercising the powers.
Power to Add/Remove Beneficiaries
Article 9A(2)(e) of The Trusts (Trust) Law 1984 provides, amongst other things, for a settlor to retain or grant to a third party “a power to appoint or remove any … beneficiary”
It is not uncommon to see Jersey law trusts with clauses giving power to add or remove beneficiaries, most often exercisable by the trustees either freely as they decide, or only with the consent of another, e.g. a protector
The power will normally be “fiduciary” in nature, meaning it will have to be exercised in the best interests of the beneficiaries
The power of removal is often broken down to the power to declare that a beneficiary ceases to be a beneficiary, or (ii) becomes an excluded person (defined in the trust instrument as someone who will never be able to benefit in any way under the terms of the trust). (Peculiarly Article 9A(3) of the Trusts (Jersey) Law 1984 states that “where a power has been reserved or granted by the settlor, a trustee who acts in accordance with the exercise of the power is not acting in breach of trust.”
Considering the Exercise of Power to Add/Remove
Is the power “fiduciary” and if so, what is the reason for the proposed addition or removal? Is the proposed exercise in the best interests of the beneficiaries?
Is adding a beneficiary to an existing class of beneficiaries in the best interests of those beneficiaries? Prima facie no, but it may have been the intention of the settlor to provide for say his children, and if the settlor had a further child after having set up the trust which named their then living children in the class of beneficiaries, it would likely be a proper exercise of the power
Is removing a beneficiary in their best interests? Most often not, however it may be where, for example the class of beneficiaries included a family member whereby one member is happy not to be in the class of beneficiaries whether for tax or assets protection purposes
What was the settlor’s intention when requesting the power to be included in the trust instrument? With every new potential trust, the proposed professional trustee should explain to the settlor the possibility of retaining flexibility to add or remove beneficiaries, considerations that would need to be taken before exercising such a power and the risks associated with including such a power
Should the addition or removal be revocable or irrevocable? If the removal is for tax purposes then a revocable removal is unlikely to achieve the aim
If you are considering removing a beneficiary, is the intention that the beneficiary be removed from the class of beneficiaries or be declared an excluded person who will never be able to benefit?
If you are considering removing a beneficiary, will there be anyone else capable of benefiting? Be careful not to create trusts without beneficiaries
If you add a beneficiary, will there be any tax consequences, disclosure requirements, asset protection issues etc. resulting from the addition?
Common Issues with the Power to Add/Remove
The power is exercised revocably when intended to have been exercised irrevocably resulting in, for example, the desired tax effect not having been achieved. Also, vice versa, the power is exercised irrevocably when intended to be revocable resulting in an application to court
The power is not stated to have been exercised revocably or irrevocably – in which case it is likely to be deemed to have been exercised revocably
The power to remove is exercised such that there is no one left in the class of beneficiaries
The power to remove is exercised improperly and subject to challenge by disadvantaged beneficiary
The trustee wishes to transfer assets from one trust to another trust but there is an excluded person of the transfer or trust meaning the transfer cannot be made, at least without that person also being named as an excluded person of the transferee trust
The power to remove is exercised to remove a class of beneficiaries, i.e. anyone resident in a particular country, leaving no named beneficiaries resident outside that jurisdiction, resulting in the trust possibly failing for lack of certainty of object (see paper 2 of the Foundation Series)
What if there is no specific power in the trust instrument to add or remove a beneficiary but you want to change the class of beneficiaries? It may be possible to alter the class of beneficiaries by exercising a power to amend (provided not restricted to administrative powers) or by exercising a power of appointment/advancement