Shan Warnock Smith highlights recent trends in Trust litigation while highlighting the dangers of 'Blue Vase' syndrome.
Rows about family trusts and estates have always been with us and always will be.
Human nature, the sometimes fragile state of family relationships, and the way in which control of money or other assets may be fundamental to roles within a family (or of their related professionals), are all contributory factors and will never go away. A complication is that it is not always about the money.
What I call ‘the blue vase’ syndrome (everyone has their own description) is part of the landscape for those of us who deal with family disputes about property. My blue vase happened to be the subject of a particular will dispute in which I was instructed in my very early days of practice. It became evident that Mummy’s blue vase was symbolic to her family of something entirely distinct from its nominal value. Its lucky beneficiary was thought to be especially favoured over the other children. It represented nothing short of love, the notion that Mummy loved you more than me. That family easily settled its disputes about the money, but the blue vase remained an intractable problem until some deal was finally done and my opponent and I adjourned for a much-needed cocktail to reflect on the vagaries of the human condition.
There are, in my experience, very few trust and estate disputes that do not have an element of the blue vase about them. Of course they often, and increasingly as fortunes have grown so big, involve eye-watering amounts of money, but it would be a mistake to ignore the underlying factors which make these disputes so fascinating and often so difficult to resolve. It is why we trust litigators like to think of ourselves as amateur psychologists as well as practitioners of a complex art, which requires one to synthesise many different elements if the dispute is finally to be resolved.
Perhaps these musings will be forgiven if I explain that the prompt for them is a recent trend in trust litigation, which has got me thinking afresh again about how particular geographical and economic factors may suddenly combine to give rise to a stream of disputes with a common theme. While all happy families may well be happy in the same way, unhappy families and their trusts may also have considerable similarities when the stars are aligned in a very particular way. So it is that a noticeable trend over the past three or four years has been an explosion of trust disputes originating in Asia and particularly in Hong Kong. Those disputes have a particular impact in the Caribbean, notably the Cayman Islands and the British Virgin Islands, which have long been favoured jurisdictions for settlors from that region. The crystal ball gazers among us have long been predicting it but only now is it coming to pass.
The paradigm case is this: sometime in the late 80s or 90s during the days of estate duty in Hong Kong, a Hong Kong Chinese entrepreneur with a growing business is advised to settle his shares into an offshore trust. The shares may already be held through a BVI company (it remains common in Hong Kong to called any company ‘a BVI’ such is the popularity of BVI companies there). The settlor is advised to settle the shares into a BVI or Cayman trust from which he is excluded from benefit. Many years pass (this calls for a video montage of the settlor’s life but that is beyond my powers – you will have to conjure up the images yourself). The business not only thrives but becomes hugely successful, the settlor has children by several women some or all of whom he marries, he grows older and dies in old age. Disputes arise between the wives, various children and the trustee about the devolution of the trust fund.
You may well object that there is nothing in that picture to distinguish it from any other potential family trust dispute anywhere in the world. So why now and why in Hong Kong/Cayman/BVI? The factors at play seem to be the following: vast growth in the value and status of the businesses in that part of the world, so the stakes are high both in monetary terms and in relation to the power and status involvement in the business will bring; the death or incapacity of a particular generation of entrepreneurs, who continued to hold the reins well into very old age and for whom true succession planning was never on the agenda; the expectation of eldest sons in the region that they will take over the business who may find those plans thwarted by the trust; and some ‘interesting’, to put it politely, trust drafting which gives rise to many difficult questions. But probably the most significant factor in all this is the human one: the increasing willingness of Chinese families to ventilate their disputes in a judicial forum, without the constraints under which earlier generations may have operated. Globalisation has had many dramatic effects, not the least of which has been the reduction in cultural differences when it comes to fighting about trusts.
One other, and related, trend worthy of note is the growth of forced heirship and community property claims from regions not hitherto regarded as traditional jurisdictions from which such claims might be expected. We are familiar with, for example, French civil law forced heirship and the way in which the ‘firewall’ legislation in the IFCs, including Cayman, protects trusts against certain of those claims. But less well recognised, I think, is the danger that trust assets might be attacked by a spouse who comes to the trustee with a community property claim against the settlor’s apparently solely-owned assets. I suspect that it is not always well understood that all the variants of the firewall legislation (of which I am aware, at least) include a carve-out for property, which the settlor did not own or over which he had no power of disposition. In other words, if the settlor had no power to give it away, the trust is not protected by the firewall provisions. This is all as it should be but it means that some detailed research may have to be undertaken by those involved in a community property claim from another jurisdiction.
Not all community property claims were created equal. Although the technical detail is beyond the scope of this article, broadly speaking it is the type of community property claim under which the spouse gains a proprietary interest in each and every asset, as it is acquired during the marriage and of which one of the spouses has no power to dispose without the consent of the other, which signals particular danger. On this basis the settlor had no power to dispose of the spouse’s half share into a trust and it is possible, given marketing and other considerations that nobody checked to see that the spouse consented to the disposal.
At the end of last year the Grand Court of the Cayman Islands was faced with exactly this issue. The trustee wished to compromise a claim from mainland China by the spouse of the deceased settlor by paying her a sum from the trust assets. She was not a beneficiary. Expert advice from the PRC suggested that the claim might be (it remained to be litigated in Beijing if the compromise could not be put in place) one of those I summarise above. If so, the trust assets might be at risk. The Court blessed the trustee’s decision to compromise the claim. While this decision does not in any way amount to an endorsement of the proposition that community claims from the PRC surmount the firewall, it is a useful reminder that the area remains fraught with difficulty and is likely to give rise to future litigation.
Also trending: variations and partitions of trusts to meet the requirements of US beneficiaries, challenges to trustees’ decisions based on letters of wishes given late on in the life of the trust, the extent of an indemnity clause to protect trustees from breach of trust claims against trustees for failure to supervise the activities of investment managers ... and so on and on.
The blue vase is as yet unbroken and looks as if it will yield continuing excitements for trust litigators well into the future.
Shan Warnock-Smith QC is a barrister who provides advisory and litigation services to professional clients in the wealth structuring field. From her bases in London and Cayman, Shan has an international practice, which takes her around the globe to advise and litigate.