Varying Guernsey trust instruments: a case study in tax efficiency and modernisation

Under Guernsey law, not all trusts must be declared in writing, but it is generally advisable when constituting a trust for a trust instrument to be agreed between the trustees and the settlor setting out the terms under which the trust will be administered.

However, there will be times when the terms are no longer entirely suitable or as appropriate or modern as they could be. 

There are any number of reasons why it may be necessary to vary a trust instrument, including updating the terms to better suit the beneficiaries’ needs, to deal with a change in circumstances or if the instrument needs modernising following developments in the law or regulations applicable. If the trust instrument does not contain the relevant powers to permit such changes, it may be necessary to go to court for assistance. 

Ogier recently supported a trustee in securing a variation to a Guernsey trust instrument through a Royal Court application. The successful application showed how local trust law can be utilised to modernise outdated instruments and unlock substantial tax efficiencies for family trusts. 

Background 

The trustee of a Guernsey law trust applied for court approval under Sections 57 and 69 of the Trusts (Guernsey) Law, 2007 to vary the trust instrument. The core objectives of the application were: 

Modernisation 

The trust instrument, which originally had restrictive clauses and limited the trustees’ powers to change the length of the trust period, no longer suited the needs of the trust and its beneficiaries, given the substantial growth and value of its principal asset – a family business. 

Tax efficiency 

There was an urgent need to amend the trust instrument ahead of imminent changes to UK business property relief. Terminating the current life interest and restructuring into discretionary trusts before the changes came into place would secure significant inheritance tax savings.  

Dynastic planning 

The desired changes included the following changes with a view to long-term flexibility and protection: 

• introducing a new overriding power of appointment 
• replacing the restrictive perpetuity provisions 
• adding the ability to appoint a protector 

These amendments would allow the business to remain in the trust for future generations, help avoid fragmentation and strengthen the protection of family interests against risks like divorce or creditor claims, just as the settlor had originally desired. 

The application was supported by all adult beneficiaries and, through representation, by the minor and unborn beneficiaries  

The legal test 

The Guernsey Royal Court adopted the established two-part test under section 57: 

1. Is there a variation of trust terms? 
2. Is the arrangement for the benefit of those affected, notably any minor or unborn beneficiaries? 

The Court said the proposed changes were clearly in the category of varying trust terms rather than a resettlement, because they were variations within the existing structure.  

Crucially, it reaffirmed that "benefit" is interpreted broadly for these purposes and includes not only financial benefit but also moral, social and financial advantages. 

The Court specifically noted that the potential tax saving, dynastic succession, modernisation of trust governance (through the introduction of a protector) and the ongoing protection of trust assets were all legitimate and substantial benefits to the beneficiaries, both immediate and future. 

Practical points to take away

While it will not always possible nor practical to keep trust instruments up to date on a day-to-day basis, in the fast paced world in which trustees operate, trustees, settlors and beneficiaries will want to consider:

Building in flexibility into the trust documentation from the outset: a wide power to vary and overriding powers of appointment can help allow trustees to make essential changes to reflect the legal, regulatory and family aspects around the trust.

Consider building in protector provisions from the beginning, even if not mandatory for there to always be one: it is possible to include protector provisions in the trust instrument but in a manner that does not require a protector at all times or only if certain events occur, a time has passed or the beneficiaries request (by way of example). This can help avoid the need to change the trust terms later down the line and demonstrates an intention from the outset to have a protector, even if limited to certain circumstances.

Carry out periodic reviews with legal and tax advisers: this is a sensible and prudent approach to take, but is particularly so where there are significant legal or regulatory changes on the horizon or circumstances relating to beneficiaries (such as moving country) or the family business (such as expansion internationally) change.

Regularly speak with the settlor and beneficiaries: it is important for the trustees to stay up to date and aware of circumstances surrounding the administration of the trust, including any developments within the family business where this is held in the trust.

Care to be taken in varying trust terms: it is important that advice is taken in how to vary trust terms, whether or not a Court application is required, including advice to ensure variations do not amount to a resettlement where this needs to be avoided.

Conclusion

The case showcases the pragmatic approach of the Guernsey Royal Court under pressing deadlines and the importance of keeping trust structures up-to-date and tax efficient in a fast-changing environment, particularly with entrepreneurial family trusts.  

The ability of the Royal Court to deal with trust matters in short timescales, together with Ogier’s expert team acting quickly and efficiently to bring the matter before the court, ensured the necessary orders were made. 

How Ogier can help 

Ogier’s Trusts Advisory Group offers specialised expertise and a dedication to excellence. Our highly skilled experts navigate the complexities of trust law across multiple jurisdictions, ensuring our clients receive the highest standard of service and advice. 

We are known for providing clear, practical and responsive advice and provide tailored solutions to meet your unique needs. 

About Ogier

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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