In the Matter of the Mr & Mrs P Capital Asset

Protection Plan Trust - setting aside a Jersey trust on the ground of mistake This is the first occasion on which a Jersey law trust has been set aside on the ground of mistake. Last year in the Matter of the Representation of DSL(R) Limited, the Royal Court, for the first time, set aside an English Law trust over which it had jurisdiction on this ground. 

The Facts

Mr and Mrs P, 62 years and 55 years of age respectively, wished to do their best to protect their assets from inheritance tax, so that they could pass on the benefit of their assets to their children. However, it was fundamental to Mr and Mrs P that they should be able to have access to their money in the meantime. A financial services firm called Hamiltons Financial Services recommended to Mr and Mrs P that they should protect their assets with a purpose trust through use of a Capital Asset Protection Plan, which they described as a “type of commercial trust” which could be used to “protect [their] assets from tax and creditors”. Hamiltons explained that Mr and Mrs P would “exchange [their] capital for a contract with a right to receive income” (i.e. a deferred annuity), and that the capital would be held within an offshore purpose trust, which would enable the trustees to distribute “tax free funds” to the family of Mr and Mrs P as beneficiaries, after the death of Mr and Mrs P. In the meantime, the trustees would use the trust funds to provide tax-free loans to Mr and Mrs P and although these would have to be on “commercial terms”, they would be made on a deep discount basis and rolled over, if necessary until death. Any unpaid loans and interest outstanding on the deaths of Mr and Mrs P would create a debt for their estates, thus further reducing the inheritance tax payable. The non-charitable purpose trust created was for the primary purpose of, inter alia, providing deferred annuities in return for consideration, with a default power to appoint on other trusts after” execution” of the primary purpose. Subsequently, the trustees accepted £1 million from Mr and Mrs P, treated as an addition to the trust fund, and then issued annuity contracts to each of Mr P and Mrs P, providing for income to be payable to Mr P and Mrs P in 18 and 20 years respectively. The annuity contracts stated that Mr and Mrs P were providing £500,000each as consideration, but this may have been incorrect because the sum of £1 million previously paid to the trustees had already be entreated as an addition to the trust fund. The trustees’ Advocates subsequently wrote to Mr and Mrs P pointing out various flaws in the trust and the associated annuity contracts, the most important being that although there was power in the trust instrument for the trustees to make loans, the trustees were advised that in the particular circumstances they could not possibly do so, because the primary purpose of the trust was to fulfil the annuity contracts. If the trustees made loans to Mr and Mrs P when they knew that Mr and Mrs P would not be in a position to repay them, then the trustees would have insufficient funds to pay the specified annuities at the relevant time. This meant that in practice, it would not be possible for Mr and Mrs P to receive any funds out of the trust until the commencement of the two annuities many years in the future. 

The Law

Article 11(2) of the Trusts (Jersey) Law 1984 (as amended) (the” Trusts Law”) provides that a trust shall be invalid to the extent that the court declares that it was established by mistake (inter alia).The Court found that this was consistent with the general equitable principles established under English law. Wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the transaction will be set aside if the Court is satisfied that the donor did not intend the transaction to have the effect which it did, so long as the mistake is as to the effect of the transaction and not merely as to its consequences or the advantages to be gained by entering into it. The relevant test has been expressed in somewhat wider terms in the English case of Ogilvie -v- Littleboy: “A donor can only obtain that property which he has given away by showing that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him.”. The most recent detailed consideration of the doctrine of mistake in the context of trusts is to be found in the English case of Sieff v Fox.In that case, the English court found that:” there is a jurisdiction in equity to set aside a voluntary disposition for mistake as to the effect of a disposition. The discrepancy may arise from a legal defect in the disposition itself .. or from a mistake of fact as to the position under the relevant trusts .. or as to the effect of the disposition in the hands of the donee. It may arise from a misunderstanding of the nature of the trusts which would affect the property after the disposition, due to a failure on the part of the advisors to explain the position properly; .. a mistake must be as to the effect of the disposition, and a mistake as to its consequences is not sufficient. If that is the correct test.. the fiscal consequences of the transaction are not relevant ..and a misunderstanding as to those would not justify setting disposition aside. According to Ogilvie  v Littleboy... the test is more general …”.In that case it was not necessary for the English court to resolve which was the correct test or whether there was in fact any difference between them, and the Royal Court in the present case also did not need to resolve whether the test for setting aside a voluntary transaction on the ground of mistake is limited to where the mistake is as to the effect of the disposition, or whether the testis wider. That matter therefore remains open for decision in a future case, where the point arises directly. The Royal Court also considered whether the reference to” mistake” in the Trusts Law required the Court to consider the concept of “erreur”, which is derived from French law. The Court found that “erreur” may be relevant when considering a contract governed by Jersey law, but that it cannot “have any relevance in a case governed by equitable principles”, and that the concept should therefore be “confined to matters governed by the law of contract.” 

Findings

The Royal Court found that Mr and Mrs P were mistaken as to the effects of the scheme which they had been advised to enter into. The “key mistake” was that they were “advised and believed that they would have ready access to their funds by means of discounted loans from the trust”, but because of the way in which the trust and the annuity contracts were established, the trustees were not able to make such loans, as they would then be unable to perform the annuity contracts. The Royal Court was “satisfied that if Mr and Mrs P had known that they would not be able to receive any money from the Trust until the commencement of the payments under the annuity contracts, [then] they would never have contributed their funds to the Trust” at all, and it therefore declared that the trust should be set aside. In consequence the annuity contracts also fell away.

Comment

This is an important judgment for Jersey in that it is the first occasion on which an application to set aside a trust governed by Jersey law on the ground of mistake has been made and granted. In this particular case, the Royal Court found that the applicants met the more stringent test, in that they were mistaken as to the effect of the transaction, but left open whether the correct test should be wider, namely whether the settlor (donor) needed to show that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him. Carey Olsen acted for the trustees in this case. Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such. Carey Olsen 2008

For further information or professional advice please contact Robert Macrae, Carey Olsen. 47 Esplanade St Helier Jersey JE1 0BDTel: +44 (0)1534 888900 Fax: +44 (0)1534 887744