Validity is resolved by determination of the proper, i.e. governing law. There is little case law on the choice of law rules for trusts. Determination of the proper law of a trust is an undeveloped subject. The Hague Convention on the Recognition of Trusts simplified the issue. However, there is residual uncertainty about common law rules. The modern view is that the proper law of the trust is the law chosen by the settlor, as expressed or implied in the terms of the trust. Where there is no express choice, the emerging doctrine is that the trust is governed by the law with which it is ‘most closely connected’.
Uncertainty may also surround the question of which particular aspects of a trust the term ‘proper law of the trust’ applies to. For the purposes of determining the choice of law, several distinct trust issues require consideration:
(i) whether the trust instrument is valid according to the appropriately chosen law;
(ii) whether the trust itself is valid;
(iii) the validity of the transfer of the assets;
(iv) the capacity of the settlor to create a trust; and
(v) the administration, construction, variation and interpretation of the trust.
The question of the proper law of an offshore trust remains even in the face of an express choice of law clause. Therefore, the validity and effectiveness of a clause drafted in the 1970s, may now become contentious. It is also open to the English court to hold that the choice of offshore law offends public policy because of its hybrid and more flexible trust law features. While the general rule is to give effect to an express choice of law based upon the analogical premise of the ‘freedom to contract’, there are reservations, because it is logical to expect that such limitations for trusts will be on similar principles to those for contracts. On the conflict of law rules governing contracts, limitations are based upon the choice being:
(i) bona fide;
(iii) not contrary to public policy;
(iv) connected with the contract; and
Therefore, an offshore trust set up 50 years ago on the cheap, on standard instead of legally robust ‘bespoke’ terms, is potentially a sitting duck for a revenue authority, i.e. if the validity and applicable law of the trust can be challenged as a result of inadequate drafting. This potential line of attack is also connected to unlawful tax avoidance and tax fraud, which I will discuss in my next article for ‘Taxation’ (Tolley), which I am planning to write in 2023 entitled, ‘What is the jurisdiction of the English court where breach of fiduciary duty by a non-resident trustee amounts to unlawful tax avoidance or fraud?’
The taxation of trusts: a review – summary of responses (publishing.service.gov.uk)
Bermuda’s firewall legislation and its recent trust law reforms. | Carey Olsen