Changing A Trust’s Governing Law To Cope With Unavoidable Change

They are also usually combined with a provision authorising the administration of the trust to be carried out in a jurisdiction different from that of the governing law, and in many cases – at least where the trust is drafted on the lines of the English law model trust - will also exist alongside express provisions enabling the trustee to resettle the trust fund and/or transfer it to the trustee of a different trust. These often take the form of “overriding” dispositive powers of a trustee and may include powers of advancement and appointment that are considerably extended beyond any statutory powers available to the trustee. Combined with a change of governing law provision, they are essential parts of the trust planner’s structuring and restructuring toolkit, and it is restructuring that we will focus on here.

Before turning to that subject, and in particular why a change in governing law might be advisable in the present climate of economic upheaval and systemic changes in the global trust services industry as a whole, it is helpful to consider the basic nature of change of governing law provisions.

Surely, It’s A Fiduciary Power?

To begin with, a trust practitioner’s instinctive reaction to a trustee power to change a trust’s governing law might be (a) that it will be valid if included in a trust with the settlor’s informed consent but (b), as it relates to something so fundamental as the law governing the substantive provisions and future administration of the trust, it can only be exercised in accordance with conventional fiduciary principles, including the requirements to consider only relevant factors, ignore irrelevant factors, and generally act in the best interests of the beneficiaries of the trust as a whole without any improper, and in particular self-interested, motive on the part of the trustee.

Since many (but by no means all) change of governing law provisions also include a power to make amendments to the terms of the trust in order to ensure compliance with the new governing law, the impact of an exercise of the power can be very significant, and that increases concern over what principles govern conditions for its valid exercise. These will include any requirement for third party consent, such as that of the settlor, a trust protector, or (perhaps less common) the beneficiaries or specified number of them.

The essential validity of such a power does not appear to be in any real doubt although authority on the question is relatively sparse. It has certainly been assumed (in the absence of any dispute on the point) that such powers are valid, as was the case in the Privy Council’s decision in Oakley v Osiris Trustees Ltd [2008] UKPC 2, [2009] W.T.L.R 461 (an Isle of Man appeal). And in Chellaram v Chellaram No.2 [2002] 3 All E.R. 17 (a first instance decision of Lawrence Collins J, as he then was) it was held that an express power to change the governing law included in a trust was “probably” valid (para. [146] of the judgment). An older English Court of Appeal judgment, Duke of Marlborough v A-G [1945] Ch. 78, indicates that under English law, a change of governing law will be valid if all the beneficiaries, being ascertained and of full capacity, agree to change it and that this was the only method of making such a change. Nonetheless, the view expressed by the editors of the current edition (20^th) of Lewin on Trusts, is that:

“it is perfectly clear that the [governing] law can be changed under an express provision in the trust instrument . . .  Powers to change the proper law are now almost universal in offshore trusts and are commonly exercised; we are not aware that any challenge to them has ever been made and it has been taken for granted that they are valid”. (section 12-123).

In the Oakley case referred to above, Lord Scott (in a dissenting judgment) was clear in his view that a power to change the governing law is a fiduciary power (paragraphs [49] and [53]-[54] of the judgment; the majority judgment, written by Lord Walker, did not turn on this question but appears to have proceeded on the same assumption). It is difficult to conceive of a power of this kind being drawn in terms that exclude fiduciary obligations on the part of the power holder(s), and in the vast majority of cases, the validity of the exercise of the power will turn on whether it was in the interests of the beneficiaries as a whole and not, for example, to thwart a potential claim by one of them; see for example Crociani v Crociani [2014] JCA 089 at [56] and BNP Paribas Jersey Trust Corp. Ltd v Crociani [2018] JCA 136A at [148].

Why Change At All?

One answer to this question, reflecting current trends in the global trust industry as a whole, is that surrounding circumstances may have changed so substantially, possibly to the extent of falsifying basic assumptions made at the time the trust was created, that a change is necessary to facilitate the continuation of the trust in the basic interests of those it was intended to benefit.

To take a relatively common example from current practice, a settlor may have created a trust in a particular jurisdiction based on an existing relationship with a trust service provider in that jurisdiction and on the assurance of that provider (and professional advisors) that the essential dispositive scheme the settlor wished to implement would be faithfully implemented. Years later, the settlor is no longer on the scene, the regulatory landscape in the jurisdiction has changed, and the original service provider is no longer of the standing it once was, perhaps because it has been absorbed by another provider or otherwise ceased to exist in its original form.

More importantly, the circumstances of the members of the beneficial class, or a significant proportion of them, may have changed, including that their personal centres of interest are geographically remote from the original jurisdiction or have become concentrated in a jurisdiction, such as the United States, where continuing to be beneficiaries of a foreign trust structure carries potentially highly adverse fiscal consequences.

Concerns over disclosure requirements and tax imperatives are driving many beneficiaries and their advisers to consider large scale revisions of what might be termed “legacy” structures that were once fit for purpose but are now problematic.

Is Near Exact Equivalence Between Existing And New Governing Laws Required?

This is often a basic concern, particularly where (1) a trust originally settled in an English common law-based jurisdiction is intended to be “migrated” to a US state; (2) the settlor’s original dispositive scheme was fairly prescriptive and a change of governing law might affect that; or (3) the change is between jurisdictions that have “firewall” legislation that provides for a trust to be exclusively governed by that jurisdiction’s law if it is expressly made subject to it.

The short answer, subject to the terms of the provision in question, is as a general matter no - near exact equivalence is not required, but this requires consideration of certain preliminary factors. In summary form they include the following:

• The validity of a change of governing law is determined by the law that presently governs the trust. In some jurisdictions, in particular the Cayman Islands, this is provided for by statute. Section 89(4) of the Trusts Law (2020 Revision) provides that if the trust so provides, its governing law may be changed to or from that of the Cayman Islands, in the latter case provided that “the new governing law would recognise the validity of the trust and the respective interests of the beneficiaries”.
• Broadly, this is a permissive approach; it does not require (although some change of governing law clauses do) that all or substantially all of the trust’s provisions be capable of taking effect under the new governing law.
• It also reflects the fact that a change in governing law may be made with a view to increasing the flexibility to deal with changed circumstances. There are numerous examples of this, including changing the governing law to that of a jurisdiction where the court may vary the trust if circumstances make it “expedient” to do so (meaning that it is in the interests of the trust as a whole) without requiring the consent of all beneficiaries able to give it (section 47, Bermuda Trustee Act 1975). In US states that have adopted a version of the Uniform Trust Code (a model statute which a majority of US states have adopted with individual state variations), the power of variation may extend to modifying administrative or dispositive terms of a trust “because of circumstances not anticipated by the settlor” although the modification “must be made in accordance with the settlor’s probable intention” which may include “the settlor’s tax objectives” (Uniform Trust Code sections 412 and 416).
• Additionally, a change in governing law may be made in order to deal with past events, such as a failure (by virtue of a drafting mistake) to vest in the trustee the very assets the settlor intended to be the subject of the trust: In the matter of the Golden Trust [2012 (2) CILR 356]. In that case a trust had been settled under Liechtenstein’s trust law, which did not confer any jurisdiction on the court to rectify a trust deed. The trust’s governing law was changed to that of the Cayman Islands, where rectification was an available equitable remedy and was granted.

Conclusion

Changes in the governing law of trusts may be more frequent now than in the recent past. That is a reflection of restructuring needs brought about by changed circumstances. In a well-drawn trust this will not be the only option but in practically all cases it increasingly needs to be considered.