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How trust law has evolved to meet families’ philanthropic spirit

How is the trust concept of ‘Benefit’ evolving to fit today’s world? Alice Killingbeck, director at KPMG Law, takes a closer look.
Alice Killingbeck of KPMG.

On May 14, 2021, the Jersey Royal Court handed down a contemporary judgment “In the matter of the May Trust”, reflective of the modern world’s acceptance that inherited wealth is increasingly intertwined with a family’s purpose and values, tax morality and public reputation.

This case is interesting to generators and beneficiaries of private wealth, trustees and custodians of private wealth and their advisors. It illustrates how the courts can take a more flexible approach to interpreting existing trust law, enabling fiduciaries to work together with families to fulfil the family’s philanthropy objectives.

In the matter of the May Trust: The facts
The case concerned a trust with a value of approximately £150 million and a governing law of Jersey. The beneficiaries of the trust were the principal beneficiary, his family and the family’s charitable Foundation.

The court was asked to consider a proposed distribution to the principal beneficiary of £75 million for him to make an onward gift to the foundation. The trustees could have made this transfer directly to the foundation as a beneficiary without triggering a tax liability, however, it was the principal beneficiary’s request that the distribution was made direct to him instead. The principal beneficiary could then, as a UK taxpayer, make the transfer to the foundation in such a way as to deliberately trigger a personal UK tax liability.

The court remarked that it was unusual for them to be asked to approve an arrangement that facilitated the payment of a legitimately avoidable tax. However the ‘well-established’ principle that the court’s role is purely to focus on trust law and not any consequent tax liabilities could be turned on its head and applied here - “Just as the court has no function of ensuring that proper amounts of taxes are paid, we also have no function of ensuring that proper amounts of tax are not paid.”

Trusts and the evolving concept of “Benefit”
The Court accepted that: - Benefit is not limited to financial benefit but can also encompass social and educational benefits for the beneficiary in question; - May include the application of the trust fund to discharge what a beneficiary feels is his or her moral obligation.

Tax morality interwoven with family purpose
It was significant in this case that the family had agreed a briefing note setting out their ‘family values and ethos of philanthropic giving’.

During this exercise, the family had made it clear that they thought it was appropriate for UK tax to be paid on a part of the sum, as it would enable the government to provide a ‘broader social benefit’.

Making the proposed distribution, and incurring the unnecessary tax charge, was therefore considered to be for the benefit of the principal beneficiary. The family were united in their agreement to the distribution being made in this manner.

How does this relate to wider trends?
While the desire to pay unnecessary tax may not be mainstream, the value of promoting ‘Broader social benefits’ today is clear.

The court in this case made it clear that previous case law has been too focussed on purely financial factors when determining the meaning of “Benefit”. Instead, fulfilment of a beneficiary’s personally felt moral obligation should be treated as being for their benefit.

The judgment shows a significant development in trust law which is reflective of modern attitudes, particularly where managed wealth intersects with philanthropy and tax.

Wealth generators and beneficiaries of assets which are held in wealth structures for asset protection purposes should be comforted by this evolving area of law which enables them to meet their philanthropy/responsible personal tax objectives.

For fiduciaries and custodians of private wealth, they should take comfort in this evolving law and when considering environmental, social and governance (ESG) investing, and the extent to which they should take on board non-financial considerations when making responsible investments. It may be indicative of the direction of travel in respect of these hot topics as well.

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