Re T Trust

JurisdictionCayman Islands
Judge(Smellie, C.J.)
Judgment Date16 March 2000
CourtGrand Court (Cayman Islands)
Date16 March 2000
Grand Court

(Smellie, C.J.)

IN THE MATTER OF THE T TRUST

A.G. Steinfeld, Q.C., J.L. Stephens, A.J.E. Foster and S.R. Andrew for the plaintiffs;

A.J. Jones for the first to fourth defendants;

C.R.F. Tidmarsh, A.J. Bolton and J.P. Walton for the fifth and seventh defendants;

A.G.D. Duckworth for the sixth and eighth to twelfth defendants;

Mrs. S. Warnock-Smith and W.J. Helfrecht for the thirteenth defendant.

Cases cited:

(1) -Clore”s Settlement Trusts, In re, Sainer v. Clore, [1966] 1 W.L.R. 955; [1966] 2 All E.R. 272, considered.

(2) -Gibson”s Settlement Trusts, In re, Mellors v. Gibson, [1981] Ch. 179; [1981] 1 All E.R. 233, distinguished.

(3) Gilbey v. Rush, [1906] 1 Ch. 11; (1905), 75 L.J. Ch. 32.

(4) -Gisborne v. GisborneELR(1877), 2 App. Cas. 300; 46 L.J. Ch. 556, distinguished.

(5) -Hillas-Drake, In re, National Provncl. Bank Ltd. v. Liddell, [1944] Ch. 235; [1944] 1 All E.R. 375, dicta of Simonds J. applied.

(6) Jones v. Maynard, [1951] Ch. 572; [1951] 1 All E.R. 802.

(7) -Vestey”s (Baron) Settlement, In re, Lloyd”s Bank Ltd. v. O”Meara, [1951] Ch. 209; [1950] 2 All E.R. 891, dicta of Evershed, M.R. applied.

Trusts-powers and duties of trustees-surrender of powers to court-court assumes all powers of trustees under trust deed following consent order for segregation of trust fund-unfettered discretion to apply income and capital amongst beneficiaries no exception-trustees may not fetter future exercise of powers

Trusts-segregation-division of assets-‘hybrid hotchpot’ may be most appropriate method of dividing trust fund between family sub-trusts if non-discrimination between stirpes is fundamental principle of trust-‘full expectations’ method flawed by uncertainty because reliant on actuarial estimates of future income

The trustees and beneficiaries of a trust sought an order as to the basis for the segregation of the trust fund into four separate sub-trusts.

The settlor established a trust for the benefit of his widow, children and remoter issue, under which the trustees had absolute discretion to apply the income for the benefit of the beneficiaries, accumulating the remainder to capital. At the perpetuity date, any remaining capital was to be distributed equally between the beneficiaries then living. In a memorandum of his wishes for the distribution of funds, the settlor provided for the future creation of a separate charitable trust as a discretionary beneficiary. After his death the L Foundation was set up to fulfil this role.

The deed of settlement was later amended to prohibit discrimination by the trustees against any grandchild of the settlor on the basis of the identity of his parent, the intention being that all grandchildren should have the same expectation of benefit on a stirpital basis. The trustees were also prohibited from removing the settlor”s widow, daughters or remoter issue as beneficiaries.

The distribution policy adopted by the trustees following consultation with all the beneficiaries provided for an annual index-linked payment to the settlor”s widow and two daughters and a fixed annual payment to the L Foundation. The settlor”s grandchildren received income only upon reaching 21 and calculated as a proportion of an index-linked sum (dependent on available income) determined by the number of grandchildren in the relevant branch of the settlor”s family.

After a long-running dispute between the family members concerning the trustees” administration of the trust and investment policies, the court ordered that the trust fund be divided between four sub-trusts

corresponding to the four branches of the family. Three alternative methods of allocating funds between the sub-trusts were then proposed.

The first was the full hotchpot method, under which the trust fund would be divided equally between the four branches, taking into account (by deduction from the relevant branch”s share) all moneys so far distributed to beneficiaries of each branch. This was rejected by the parties since the earlier amendments to the deed of settlement provided that the future expectations of the grandchildren were to be unaffected by payments which had been made to the settlor”s sons to buy out their beneficial interests.

The second method, the full expectations or allocations method, involved deciding once and for all the legitimate expectations of the beneficiaries of each sub-trust by notionally allocating funds to each existing beneficiary based on the past performance of the trust fund, and dividing the remaining capital equally between the sub-trusts for the benefit of future generations. A fund representing the current value of the trust was to be preserved for division between the remaining beneficiaries at the perpetuity date. The calculations in respect of the second generation beneficiaries were to be based on the current number of grandchildren in each branch of the family and on the assumption that the ‘21-year rule’ was to continue indefinitely. This would require that different sized funds be allocated to each sub-trust to meet the calls on income arising at different stages of the trust period. A lump sum payment would be made to the youngest branch to redress the imbalance created by the 21-year rule. No account would be taken of previous distributions to first or second generation beneficiaries in the past.

Thirdly, the hybrid hotchpot method would allocate the future expectations of the settlor”s daughters based on present levels of distributions to them, to be vested in their respective family sub-trusts, and the expectations at present-day values of the L Foundation. The balance would be divided equally between the four sub-trusts, taking into account, at present-day values, distributions already made to second generation beneficiaries. The expectations of the settlor”s widow would be met equally as a first call upon each of the four family sub-trusts.

The sixth and eighth to twelfth defendants argued that (a) the court should not adopt a hotchpot approach in any form, since to do so would reverse decisions taken earlier by the trustees; (b) the idea that equality of benefit could be achieved by equality of division under hotchpot was not only erroneous-since a larger fund would need to be set aside for the ‘older’ branches in order to meet their expectations at an earlier date-but also should be employed only if no other basis of segregation existed; (c) under the full expectations method, the smaller funds allocated to the ‘younger’

branches would generate greater income in the early years following segregation, with the result that by the perpetuity date the total receipts of those branches would more than off-set the larger initial distributions to the ‘older’ branches; (d) the hybrid hotchpot method, on the other hand, would create an imbalance in favour of the ‘younger’ branches by making an equal distribution to them upon segregation, so that those beneficiaries would, in effect, become entitled before reaching 21; (e) that method would also result in large sums being appointed to the L Foundation, the operations of which would be beyond the other beneficiaries” control, whereas the settlor had intended that sufficient funds be retained to allow them to fulfil their moral obligations to charitable causes as they saw fit; and (f) under the full expectations method, periodic increases in distributions to the first generation beneficiaries could also be built into the calculations.

The plaintiffs and first to fifth, seventh and thirteenth defendants submitted in reply that (a) since the discretion previously vested in the trustees had been surrendered to the court, decisions taken earlier by them were not binding on the court; (b) at the second generation level, equality of division, taking into account distributions already made to grandchildren over 21, was the only means of ensuring equality of benefit in accordance with the terms of the deed of settlement and the settlor”s memorandum of wishes; (c) the beneficiaries” doubts as to the operation of the L Foundation could be resolved by the appointment of capital to a specially constituted Cayman trust rather than to the L Foundation, enabling charities and other benevolent objects to benefit; (d) the settlor had approved of the establishment of a body such as the L Foundation through which to benefit charity, and the other beneficiaries were free to do the same in their own right from funds allocated to the sub-trusts; and (e) there was no need to make provision for future increases in distributions to the first generation beneficiaries, since this would reduce the funds available to second and subsequent generation beneficiaries and the settlor”s widow and children were already well provided for.

Held, making the following ruling:

(1) Since the trustees” power to make appointments had been surrendered to the court as a result of the order for segregation of the trust, the court now enjoyed an unfettered discretion to distribute the trust fund subject to the terms of the deed of settlement, including bringing into account, so far as not prohibited by that deed, past distributions at present-day values. In any event, the trustees could not validly fetter the future exercise of their own or their successors” discretion (page 47, line 44 – page 48, line 28; page 49, lines 4–10).

(2) The ‘hybrid hotchpot’ method of division was the most appropriate means of allocating funds between the sub-trusts whilst observing the wishes of the settlor. By placing the grandchildren in each branch of the family in the notional position of having received the same average number of years” benefit under the trust since the settlor”s death, this method would achieve equality of benefit between the sub-trusts as at the date of segregation. The timing of distributions would remain within the trustees” discretion based on individual need, so that the younger beneficiaries would not...

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