Exercising powers for improper purposes: a cautionary tale for trustees
Although the trustee had wide powers to add and exclude beneficiaries, the Privy Council determined that it had exercised those powers for an improper purpose. The case is a reminder for trustees wishing to change the terms of the trust to consider not only whether they have the power to do so, but also whether they are exercising the power for a proper purpose.
The case concerned trusts established by two brothers, YC and YT Wang (referred to as the “Founders”), who had built the Formosa Plastics Group (FPG), a large conglomerate business in Taiwan.
In May 2001, the Founders set up two trusts, both of which (directly or indirectly) held shares in FPG.
The first was the Global Resource Trust No 1 (the "GRT"). The beneficiaries of the GRT were the children and remoter descendants of the Founders. The second trust (which was much larger by value) was the Wang Family Trust (the "WFT"). This was a purpose trust for both non-charitable and charitable purposes, including holding FPG shares and helping those in need.
The evidence provided to the Privy Council was that the Founders wanted to use the wealth generated by the continued growth of FPG to give back to society – which is why they established the WFT. They also wanted to incentivise their descendants to support the growth of FPG by making some FPG shares available for their benefit – which is why they established the GRT.
Originally, the Founders had intended to transfer all of their FPG shares into the trusts; however, in 2005, they decided instead to retain some shares to avoid damaging public confidence in the company. This meant that their descendants would inherit FPG shares directly from the Founders and so the Founders therefore asked the GRT trustee to transfer the GRT trust fund to the WFT. The GRT trustee achieved this by adding the WFT trustee as a beneficiary of the GRT, excluding all the other (family) beneficiaries of the GRT, and appointing the GRT’s assets to the WFT.
In 2018, after the death of both Founders, certain family members challenged the GRT trustee’s actions. The case was heard in the Bermuda courts, before being appealed to the Privy Council.
Improper exercise of powers?
The Privy Council confirmed that the actions of the GRT trustee were within the scope of its powers, so the main discussion centred on whether or not the GRT trustee had exercised its powers for a proper purpose.
The Privy Council accepted that the proper purpose of the powers of addition and exclusion was to further the interests of the beneficiaries, or one or more of them. As a result, the GRT trustee’s exclusion of all beneficiaries in favour of a separate trustee was for an improper purpose, and therefore invalid.
The Privy Council considered that this view was supported by:
- the natural reading of the GRT, which demonstrated that it was established as a family trust. The only beneficiaries were family members, the trust deed referred to the GRT as a “private express trust” and adult beneficiaries were given the power to agree remuneration with the trustees. The Privy Council did not consider the power of addition to be inconsistent with the intention to benefit family beneficiaries, as the power could be used to add (for example) spouses or dependants of family members as beneficiaries, or charities which family members wished to benefit;
- the context in which the GRT was established, which made clear that the Founders purposely split the FPG shares between the two trusts, with the smaller proportion passing to the GRT for family members; and
- the admissible evidence of the Founders’ intentions – they signed an April 2001 memorandum, which confirmed that their intention was for the GRT to benefit their children.
An additional argument before the Privy Council, which was rejected at that level, was that the trustee’s actions were necessarily invalid because a trustee can never use its powers to alter the nature (or substratum) of a trust, and/or because all powers must be used to benefit existing beneficiaries.
The main effect of the Privy Council’s decision was to emphasise that there are no absolute rules in determining the proper purpose of a trust power – the trustee must look for the objective intention of the settlor in determining the proper purpose, based on the wording of the trust deed and the admissible contemporaneous evidence.
The Privy Council’s decision is not strictly binding on the English courts, but it is likely that they will consider the case persuasive. With that in mind, what are some of the key messages for settlors and trustees?
- When creating new trusts:
- settlors should be clear about their overall intention for the trust. This should be documented either in the recitals of the trust or a contemporaneous letter of wishes, so that trustees can analyse their use of trust powers in light of the overall purpose of the trust; and
- if settlors intend particular powers to be interpreted widely or narrowly, they should make this clear in the trust deed. For example, if the settlor wishes the power of addition to be used otherwise than for the benefit of the current beneficiaries, this should be clearly stated in the trust deed.
- When deciding whether to exercise their powers:
- trustees should consider the purpose of the power, which will require them to consider not only the power itself but also the purpose of the trust in light of the wording of the trust deed as a whole and the background to the creation of the trust;
- trustees should bear in mind that even if the settlor wishes them to exercise their powers in a particular way, this is not necessarily in accordance with the proper purpose of the trust, and there is a risk of challenge from beneficiaries; and
- if the trustees are using their powers to make a significant change to the trust, then it is always worth considering whether to apply to the court for a blessing of the proposed decision, to provide comfort for the trustee in the event of a later challenge.
We can expect this decision to be widely cited in the increasing volume of litigation over trustee decisions. It confirms, with persuasive authority, the principle that a power that is on its face extremely wide can be successfully challenged by a beneficiary. While the facts of Wong were unusual, the use of a power of exclusion to remove a beneficiary such as a spouse or estranged child is not, and it will take further decisions to establish how widely this principle can be employed.