The Rights of Settlor and Beneficiaries under a Trust 28 & 29 - - PDF document

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The Rights of Settlor and Beneficiaries under a Trust

28 & 29 September 2017

Stavros Pavlou Senior & Managing Partner Patrikios Pavlou & Associates LLC

Cyprus Fiduciary Association

Seminar 6, 2017

A.

CYPRUS INTERNATIONAL TRUSTS (‘CITs’)

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• The concept of the trust dates back to the Crusaders in

the 12th century and is based on the Anglo-Saxon legal

• system. It was devised to allow continuity of family

property and succession in troubled times when the “master of the house” was off to war. Definition of Trust:

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• “A trust is an equitable obligation, binding a person

(who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries) of whom he may himself be one, and any one of whom may enforce the obligation”.

• (Azinas and another v Police 2 CLR 16/10/1981)
• The International Trusts Law of 1992 (the “CIT Law”) provides

that a CIT is constituted when specific requirements are fulfilled:

i.

The settlor is not a resident of Cyprus during the calendar year immediately preceding the creation of the trust;

ii.

At least one of the trustees is a resident of Cyprus during the whole duration of the trust; and

iii.

The beneficiaries, with the exception of a charitable institution, must not be residents of Cyprus, during the calendar year immediately preceding the year in which the trust was created.

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B. PARTICIPANTS TO A TRUST

Settlor: The legal owner of property who creates a trust by divesting his legal title to the trustee to manage in favour of the beneficiaries. Beneficiary: Receives the beneficial ownership of assets. Age, legal disability, minority is irrelevant. Enforcer: Duty to enforce a CIT for a non- charitable purpose in accordance with the CIT Law. A novel concept found only in Cyprus. Untested in court. Protector: The person, other than the trustee, who has the power to restrict key powers of the trustee.

Trustee:

• The person who agrees to hold the legal title to the trust

assets in its name for the benefit of the beneficiaries under the terms of the trust.

• Has the legal title to the trust assets, whereas the

beneficiary has the beneficial or equitable title thereto.

• Legal owner and administrator of the trust property.
• Exercises the powers under the CIT Law and under the

trust document.

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• The trustee’s main duties are (a) to administer the trust property

prudently and (b) to strictly comply with the terms of the trust document.

• The trustee owes a duty of care to the beneficiaries to perform his

role properly.

• A trustee stands in fiduciary relationship with the beneficiaries

which entails that he acts in the utmost good faith.

• C. TYPES OF TRUST

 BARE TRUST: no management by the Trustee  SHAM TRUST: A trust that may have apparently been created

but in reality is not a trust but some other arrangement or simply an empty pretence.

 IMPLIED, RESULTING OR CONSTRUCTIVE TRUST: by

• peration of law

 FIXED TRUST: no discretionary powers of disposition

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 DISCRETIONARY TRUST:

• The trustee has a duty to select from among a class of

beneficiaries those who are to receive, and the proportions in which they are to receive, the trust property.

 DISCRETIONARY TRUST (continued):

• The beneficiaries have no fixed right to the capital or income of

the trust property, they have only the right to be considered by the trustee when exercising his discretion to select the beneficiaries.

• No individual beneficiary has a right in rem, the equitable title

to the trust assets vests in the class of potential beneficiaries as a whole.

• During the period that the trustee has not yet exercised his

power to select beneficiaries from a class, they cannot terminate the trust and call for a transfer of property. They can

• nly compel the trustee to consider the possibility of making a

payment out of income.

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• D. RIGHTS OF SETTLOR

The settlor of a CIT must be:

a)

• f full age, and

b)

• f sound mind

c)

not a resident of Cyprus during the calendar year immediately preceding the creation of the trust, and

d)

the bankruptcy, liquidation or proceedings against the settlor at the suit of its creditors does not affect the validity of a CIT created while he was solvent, unless made with the intention to defraud the settlor’s creditors at the time of transferring trust assets.

• The settlor may restrict or stipulate additional powers

and duties to those granted to the trustee by the law.

• Governing Law: A trust shall be governed by the law

chosen by the settlor (s. 12A(1) CIT Law).

• Right to confidentiality: The settlor’s name shall not be

disclosed unless there is a court order.

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 The settlor may reserve the powers included in section 4A of the CIT

Law, which include inter alia:

• To revoke/amend the terms of a trust, or powers arising from it. A

CIT is irrevocable unless an express power of revocation of the settlor is provided;

• To advance, distribute pay or otherwise apply income or capital;
• To issue binding directions to the trustee in connection with the

purchase, retention, sale, management, lending, pledging or charging

• f the trust property;

 To require that any power or discretion of a trustee is exercised with

the consent of the settlor or any other person specified in the trust. The reservation or granting to a settlor the above rights shall not in any way affect the validity of the trust nor delay its execution but it may affect the evaluation of the Court as to whether it is a sham trust.

 Letter of wishes:

• Guidance provided by a settlor to the trustees as to how they

should exercise their powers and discretion.

• Usually accompanies a discretionary trust.
• It is not binding on the trustees.
• The beneficiaries do not have a right to inspect a letter of

wishes (Breakspear v Ackland [2008] 3 WLR 698). It is confidential to the trustees. A letter of wishes can only be disclosed by order of the Court if there are good grounds for doing so.

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• E. THE RIGHTS OF BENEFICIARIES

1.

Entitled to the beneficial interest of the trust property

• Replacing trustees does not affect the beneficiary’s right to the

property.

• The beneficiary has a right in rem in respect of property held in

a bare or fixed trust.

• Beneficiaries of a discretionary trust, of full age and capacity,

ascertained by the trustee and acting together as a group are considered to have a proprietary interest in the trust property.

2.

The powers

• f

the beneficiaries where the trustees are in breach of the trust

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• In cases where the trustee acts below the required

standard of care or acts against the terms of the trust or the law, then:

(a) The beneficiary may bring a personal claim against the

trustee for losses caused to the trust fund by breach of the trustee’s duty of care.

(b) The beneficiary may apply for a court order compelling

the trustee to act and administer the trust in accordance with the trust documents and the law. 3. Right of the beneficiary to call for the transfer

• f trust property

A.

The right to call for a transfer where the beneficiary is absolutely entitled

 A beneficiary can compel the trustee to distribute

and transfer trust property if the beneficiary is absolutely entitled to that trust property.

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B.

The right of the beneficiary to bring the trust itself to an end

 The rule of Saunders v Vautier:

• All beneficiaries of a trust who have an interest in the

trust property (full age and capacity and must all consent) can end a trust and request the transfer of the property to them even if this overrides the wishes of the settlor.

• The beneficiaries must act together as a group and must

form the whole beneficial interest in the trust property.

4.

Right of beneficiaries of a discretionary trust to be considered

• The trustee owes a fiduciary duty to beneficiaries of a

discretionary trust to consider them individually as potential beneficiaries and make reasonable efforts to notify all members belonging to a class of beneficiaries before exercising his discretion to select.

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• Beneficiaries,

members

• f

a class, can expect the trustees to consider making allocations to them in a way that reflects what can be reasonably expected from them, considering practicalities.

• The larger the class, the less onerous the duty of the

trustee to consider everyone: ‘trustee must make a survey of the range of objects [i.e. beneficiaries] or possible beneficiaries as will enable them to carry off their fiduciary duty… a trustee with a duty to distribute among a very large class would surely never require the preparation

• f

a complete list of names. He would examine the filed by class and category depending on how much money he had to give away and the means at his disposal’. (McPhail v Doulton [1971] AC 424)

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5.

Right to recover trust property from third parties

• A beneficiary may bring a proprietary claim against a

third party to recover trust property.

• This is achieved by “following” the trust property itself

into the hands of a third party (as long as that third party did not purchase the legal title to the property from the trustee in circumstances where the third party did not know, and should not have known, of the beneficiary’s interest).

6.

Right to recover trust property which is mixed with other property

• A beneficiary enjoys a right in rem which is not lost if the

trust property is wrongly dissipated by the trustee.

• The beneficiary ‘will normally be able to maintain the

same claim to the substituted asset as he could have maintained to the original asset’. (Foskett v McKeown, per Lord Millet, at 128).

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7.

Right to confidentiality

• The identity of the beneficiaries is confidential.
• It can only be disclosed pursuant to a court order if the

court is satisfied that disclosure is

• f

paramount importance (Section 11 CIT Law).

8.

Right to Information

 Under common law, the beneficiaries:

• Entitled to know the existence of the trust and the nature
• f their interest.
• Have a legitimate expectation of disclosure and they must

first request the information from the trustees.

• May request disclosure of the trust document and the

trust accounts.

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 Under CIT Law (section 11):

• The beneficiaries of a CIT may request from the trustee

disclosure of the trust accounts or of any documents or information relating to the proceeds and payments made by the trustee and the trustee has the power to disclose such information only if such disclosure is necessary and secures the bona fide interests of the trust.

• The court may issue an order of disclosure in civil or

criminal proceedings only if satisfied that disclosure is of paramount importance.

9.

Right to apply to court pursuant to the CIT Law

• Variation
• f

a CIT: The court may approve any arrangement which varies or revokes the trust terms or enlarges or amends the powers of administration or management of trustees, on behalf of persons mentioned in s. 10 (1) CIT Law.

• An application to the court under section 10 CIT law may

be filed by the trustee or any of the beneficiaries.

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 Section 11A (2) of CIT Law - the court may issue an

• rder concerning:
• The execution or administration of the trust;
• The trustee or protector (including the exercise of any

power or discretion, appointment, removal, remuneration, filing of accounts);

• The beneficiary or any person with connection to the

trust;

• The appointment or removal of enforcer;
• The validity or enforceability of a trust.

 An application to the court for an order under section 11A

• f the CIT Law may be made by a trustee, settlor,

beneficiary, protector and by any other person with the permission of the court.

 In a recent interim judgment (Valeriy Polosmak v Fellaco

Services Limited, 31/01/2017, DCL Malachtos J) in relation to an application by the beneficiaries to replace the trustee, it was held that as a general rule the beneficiaries do not have the right to select the Trustees. This is the right of the settlor, which must be respected. When the beneficiaries apply for a court order replacing the trustee they must provide sufficient grounds supporting such application.

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• F. SETTLORS SHOULD:
• Obtain proper legal advice when establishing a trust;
• Select and appoint appropriate persons as the trustees, capable in

administering the trust prudently and to properly perform their fiduciary duties.

• Ensure that the letter of wishes provided by them simply provides

guidance to the trustees and does not fetter their discretion;

• In case they want to retain certain powers for themselves, make

sure that such powers are included in the trust document;

• Ensure that the beneficiaries are clearly identified in the trust

document. BENEFICIARIES SHOULD:

• Know their rights under the applicable laws;
• Ask to be informed about the nature of their interest under the

trust;

• Request information and documents from the trustees in relation

to the trust accounts, proceeds and payments;

• Understand that they do not have the right to select the trustees

and in case they want the trustees to be removed they need to

• ffer to the competent court enough evidence to this extent;
• Understand they can seek a court order once their rights or the

trustee fiduciary duties are breached.

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Patrician Chambers, 332 Agiou Andreou Str., 3035 Limassol, Cyprus P.O. Box 54543, 3725 Limassol, Cyprus Tel: +357 25 871 599 Fax: +357 25 344 548 info@pavlaw.com www.pavlaw.com