TRUSTS AND SUITS
Trust jurisdictions around the world have long recognised protective clauses. Key examples are:
· Spendthrift Clauses
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· Anti-Suit Clauses
These clauses were first invented and used in English trust law, going back to the days of the Napoleonic Wars, and even beyond that.
In Roman Law, 2,000 years ago, there was a specific office for:
curator - guardian for young persons over the age of puberty and under 25; and for the insane and the spendthrift.
20205 saw the UK tax authority HMRC claiming that it has power to tell anyone – in their domestic – or any foreign jurisdiction - that just talking about these clauses is against UK law.
If that seems strange, read on.
SPENDTHRIFT TRUST CLAUSES
What is a spendthrift trust?
A spendthrift trust is a type of trust that establishes certain conditions, or terms, that must be met for a beneficiary to receive assets held within the trust. These terms prevent a beneficiary from directly accessing the trust’s assets. While the terms of a spendthrift trust can vary, they are typically designed to release assets to the beneficiary slowly over time rather than all at once.
For example, the terms of a spendthrift trust might dictate that the beneficiary receives a certain sum of money on a monthly, quarterly or annual basis. Or they might specify that the beneficiary will receive interest and dividend payments on a quarterly basis while never gaining direct access to the trust’s underlying assets.
The biggest benefit of a spendthrift trust is that the beneficiary cannot access all of an inheritance at once, so you have less worry that they could waste it through poor financial decisions. With the proper design, a spendthrift trust can become a lifelong source of income for your heir. Another appealing aspect of a spendthrift trust is that the assets are protected from creditors.
https://www.northwesternmutual.com/life-and-money/what-is-a-spendthrift-trust/
The interest of any Beneficiary of this Trust in the income and principal shall not be subject to claims of his or her creditors, or others, or be liable to attachment, execution, or other process or law and no Beneficiary shall have the right to encumber, hypothecate, or alienate his or her interest in any of the trust in any manner except as provided herein. Nor may a creditor compel a trustee to make a discretionary transfer to a beneficiary. Where the trustee is also a beneficiary, restraint on transfer is invalid against transferees or creditors of the Trustor. In no case shall a disclaimer by a beneficiary be considered a transfer to that Beneficiary.
https://www.lawinsider.com/clause/spendthrift-clause
ANTI-SUIT CLAUSES
May 14, 2024
The use of “no contest” clauses to deter beneficiaries from challenging wills and trusts has grown in popularity. These clauses are motivated by the desire to have the beneficiaries, the trustees and personal representatives avoid time-consuming and costly litigation during the trust or estate administration.
The acceptance of the validity and scope of these “no contest” clauses varies widely across the country. In some states, e.g., Florida, such clauses are prohibited by state statute. In others, the clause cannot be enforced if a contest is brought in good faith.
In yet other states, a “no contest” clause can only be enforced if one or more provisions of the will or trust are challenged. On the other hand, if a beneficiary challenges a trustee over improperly administering the trust, then such a claim is not prohibited. In theory, the beneficiary in this scenario is seeking to enforce the trust, by compelling the trustee to conform to its terms and to the legal requirements for a proper administration under applicable trust law. In this instance, litigation will be allowed to enforce the terms of a trust.
A recent case decided by the Wyoming Supreme Court addressed a situation in which a beneficiary sued the trustee over several alleged breaches of the trust. See Spurlock v. Wyoming Trust Co., 542 P.3d 1071 (Wyo. 2024). One such breach involved the trustee allegedly turning off the heat in the building on a parcel of realty that the beneficiary subsequently exercised his purchase option to buy from the trust. The lack of heat allegedly caused flooding from cracked and ruptured pipes, which were not discovered until after the sale.
In addition to this claim that the trustee had not properly maintained the realty before the sale, the same beneficiary sought to remove the trustee for his failure to provide trust accountings and to comply with the trust provisions regarding the division of trust assets.
The trust in question had a “Noncontest and Litigation Provision.” The Settlor expressed his desire in this clause that the trust and the parties involved as trustees and beneficiaries not engage in time consuming and expensive litigation. To that end, the clause disinherited any beneficiary (and any beneficiary’s descendants) for challenging or in any way impairing the function or operation of the trust, its provisions or asset distributions.
The Trustee originally asserted two arguments as to why the beneficiary’s suit constituted a violation of the Noncontest Provision. He asserted that the trust provided a mechanism for removal of a trustee, either by the Settlor during lifetime or by a majority of the children after the Settlor’s death. The claim was made that this is the sole trustee removal provision in the trust, which was intended to be “mandatory and specific.” So the Trustee argued that an attempt to remove a trustee due to an alleged failure to provide accountings or follow asset division instructions was not permitted by the Trust Agreement. Further, the Trustee asserted that the court proceeding impaired the function and operation of the trust, by delaying the final trust distribution and causing litigation expenses.
The Wyoming Supreme Court found that the trustee removal provisions in the Trust Agreement were permissive in nature, and not mandatory. According to the Court, these provisions did not preclude the trust beneficiaries from invoking their rights under Wyoming statute to remove the Trustee for cause.
Further, the Court concluded that the suit did not impair the function or operation of the trust – and to the contrary, sought to enforce the trust and cause proper trust accountings and asset distribution instructions to be provided by the Trustee. While the Trustee had chosen in his own discretion to delay final trust distribution pending the litigation, the Court found that the intent of the suit was not to hamper the function or operation of the trust.
Although the Trustee made novel arguments as to why challenging his breaches of trust constituted an attack on the trust itself and its operation, the Court ultimately followed numerous prior decisions from other states concluding that a trustee removal action did not challenge the validity of the trust itself – and thus did not violate a “no contest” clause in the trust.
UK TAX PUBLICATION
For reasons which are not entirely clear, the UK tax authority HMRC has decided to publish the details of another variant of the spendthrift/anti-suit clause, in application to trusts.
Under this “Stop Notice” it supposdly becomes illegal to talk about these trust deed clauses:
Stop notice 50
Date of publication: 15 May 2025
Date stop notice issued: 10 March 2025
Details of any arrangements or proposal for arrangements promoted by the person that meet the description specified in the notice
A clause in the offshore trust’s deed claims that the trust is not being used to avoid UK tax.
A further clause states that if any fiscal agent or authority, or court or tribunal, disputes this, then the trust is void ab initio. It is further claimed that if this happens, the assets of the void trust are automatically resettled into a new trust, and that the same clauses apply to the new trust and every subsequent trust.
In America - and everywhere else in the world that recognises trusts - it is standard practice to include express limitations on trustee powers, so as to confirm to local tax enactments – fiscal compliance and prohibition clauses:
Limitations on Trustees' Powers. Notwithstanding anything herein to the contrary, no power of the Trustees enumerated herein or now or hereafter conferred upon trustees generally shall be construed to enable the Grantor, or Trustees or either of them, or both of them together, or any other person to purchase, exchange, or otherwise deal with or dispose of all or any part of the corpus or income of the trust for less than an adequate consideration in money or monies worth, or to the extent prohibited by Section 675 of the Internal Revenue Code of 1954, as amended, to enable the Grantor to borrow all or any part of the corpus or income of the trust, directly or indirectly, without adequate interest or security, or the power to allow the Grantor directly or indirectly to borrow either corpus or income from the trust and not completely repay such loan, including any interest, before the beginning of the taxable year. No part of the corpus or income of the trust property shall be used for or applied to the payment of premiums upon policies of insurance on the life of the Grantor. Trustees shall neither have nor exercise the power to vote or direct the voting of any shares or other securities of the trust except as expressly directed in a signed, written authorization by a majority of the then current income beneficiaries; nor shall the Trustees have or exercise the power to purchase or sell any trust assets, including stock or securities, without written and signed authorization from a majority of the then current income beneficiaries.
https://www.lawinsider.com/clause/limitations-on-trustees-powers
The UK tax authority HMRC seems here to be saying that HMRC is against – and seeking to “Stop” – trust deeds which include such limitations.
It is not understood how HMRC can prohibit fiscal compliance and prohibition clauses. That is like HMRC trying to change English trust law.
Beyond that, the HMRC publication says that this is an “offshore trust’s deed”. HMRC cannot impose any limit on a trust governed by foreign law.
- It may be that this “offshore trust’s deed” is written under, say, New York state law.
- The British HMRC cannot invade the sovereignty of the USA and any of the 50 States and start telling New Yorkers how they can and cannot write their trust deeds.
Second, HMRC seem to be complaining about an anti-suit clause. In an “offshore trust’s deed”. The same observations apply:
- HMRC cannot change domestic trust law
- HMRC cannot violate the sovereignty of other nations and their trust law
- HMRC is objecting to an anti-suit clause which is common in US States laws, and in trust recognising juridictions around the world: including England.
With domestic law and sovereign state violations such as these, HMRC is heading for an international incident.