summary

The case concerned an Isle of Man discretionary trust, the principle beneficiaries of which were A, B, and D. D was the widow of the late settlor and A and B were his children from an earlier marriage. A and B’s issue were also beneficiaries, but not the issue of D. D raised concerns that the late settlor might have been considered to be UK domiciled which would give rise to UK tax consequences and thus D wished to take advantage of the exemption from charge in respect of a transfer from the Trusts to her as the widow. However, this had to be completed within two years of the Settlor’s death which made the application very urgent.

At the court of first instance, D applied for the court to direct that the trustee appointed one third of the trust fund in her favour. The trustee subsequently made a Public Trustee v Cooper category 2 application seeking the court’s blessing of its decision to appoint a smaller portion (ie not a third) of the trust assets to D and then exclude her from the trust. The trustee’s application was supported by A and B and was opposed by D. The court of first instance consolidated both claims. At the first instance hearing, minute scrutiny was given to the late settlor’s letter of wishes (the LoW). D argued that the trustee’s decision was unreasonable because it had failed to give proper importance to the parts of the LoW which provided that there should be equality amongst the primary beneficiaries (A, B and D). The trustee, on the other hand, considered that whilst equality was important, the overriding principle of the LoW was that the trust should operate as a long-term financial vehicle, not only for the primary beneficiaries, but also for subsequent generations of the family (ie the issue of A and B). The trustee therefore considered that whilst it had given consideration to equality, the need for there to be an investment vehicle to look after subsequent generations meant that an appointment of one third of the trust fund would not be appropriate. The court disagreed with the trustee’s analysis and declined to bless the trustee’s decision. After the trustee declined to decide to appoint one third of the trust fund to D, the court ordered the trustee to do so, as it considered that was the only reasonable decision available to the trustee given the terms of the LoW.

A and B appealed to the SGD against the above ruling on, inter alia, the following grounds:

The court erred in law by refusing to bless the trustee’s decision on the basis that it disagreed with its interpretation of the LoW and it could not impose its interpretation of the LoW on the trustee in circumstances where the trustee’s interpretation was not one at which no reasonable trustee could have arrived; and
The court erred in law and breached the non-intervention principle by giving effect to D’s request for one third of the trust fund.

On appeal, the SGD found that the court’s interpretation of the LoW was not the only reasonable interpretation of the document and that the trustee’s interpretation of the LoW was not unreasonable. The SGD also held that the court below breached the non-intervention principle in directing the trustee as it did, not least due to the absence of the very limited set of factors which might permit the court to intervene (such as a conflict of interest, deadlock, etc).

Analysis

In assessing a category two Public Trustee v Cooper application such as the one brought by the trustee, the court must determine whether the trustee’s decision is one which falls within the band of reasonable decisions available to it. The court’s function is not to determine if it agrees with the relevant decision, or whether it would have taken a different decision. This is where the court of first instance committed its first error as, rather than assessing the reasonableness of the trustee’s decision, the court concluded that its own interpretation of the LoW was the only reasonable interpretation available and that because the trustee did not adopt the court’s interpretation of the LoW, its decision was unreasonable.

Trustees are selected by settlors to administer trusts in accordance with the trust deed and in consideration of the settlor’s wishes, not the court’s. This is precisely why the court must not impose their own interpretation of a settlor’s wishes on trustees. After all, a trustee which has been working closely with a family for years should be in a much better position to take a view of the settlor’s wishes than a court.

This leads to the second error of the court of first instance’s decision, namely breaching the non-intervention principle in actively substituting its own decision for that of the trustee. This core principle of trust law which precludes courts from interfering in the running of trusts is vitally important. The SGD reaffirmed that a court can only intervene when very specific conditions are met.

If the courts were prepared to intervene every time at the behest of a disgruntled beneficiary, they would be inundated with claims by disgruntled beneficiaries seeking to have the court overrule every trustee decision with which they disagree. Not only would this be an expensive and highly unsatisfactory process, it would also take away from the importance of the role of the trustee and the degree of certainty that a settlor has in placing their property in the hands of their chosen trustee for them to administer in accordance with the trust deed and the settlor’s stated wishes. The enforcement of the non-intervention principle by the SGD and the assertion of the principle that courts must not usurp the powers of the trustees (save for in for very limited instances) ensured that the flood gates were not opened in the IOM for claims for the court to interfere with trustee decisions which are not agreed with.

CONCLUSION

This is an important decision for the jurisdiction which will give local trustees confidence that, provided they exercise their powers reasonably, the courts cannot overrule the exercise of their powers.

To access the judgment please use this link and please contact the authors should you need assistance with any trust related matters.

Managing Partner, Mark Holligon; Counsel, Erin Trimble-Cregeen; and Associate, Phillip Cronje of Appleby (Isle of Man) LLC acted for the Trustee in this matter.