International Trust Jurisdictions and Forced heirship

Trustees and beneficiaries of family trusts in common law jurisdictions are from time to time faced with claims by the “heirs” or the spouse of a settlor or beneficiary resident or a citizen of a civil law jurisdiction.

Claims by such heirs or dependents may be made under civil law of succession or separation on the basis that the “settlor” of the common law trust exceeded his or her rights, in that other civil law jurisdiction, to settle or divest him or herself of their property in their lifetime. The trustee may accordingly be presented with a judgment of a court of a civil law jurisdiction either that the property in trust was never lawfully settled on the common law jurisdiction trustee and is treated in the civil law state of situs as belonging (in rem) to the civil law heirs or spouse or that, if settled, it (or its equivalent value) must be refunded (in personam). The aim of this note is to examine how a “clawback” action of a civil law state may play out in a common law jurisdiction and what a common law trustee may do to prepare for such an eventuality. The reported experience of the English and New Zealand trustees is examined.

Trustee personally liable

A claim by a civil law “forced heir” may carry with it additional danger for a trustee. The existence of forced heirship rights in the hands of beneficiaries of deceased estates necessitates that a trustee could be obliged to compensate forced heirs for amounts exceeding the value of the trust assets held. Taking into account distributions to beneficiaries, any investment losses, trustees’ fees and expenses incurred since “settlement” and costs of defending the trust, the trustee may find him or herself personally liable to fund the difference. A trustee facing potential forced heirship problems may therefore be well advised to seek directions from his or her court of forum and suitable indemnities. He or she should not simply yield to all claims without considering the interests of the remaining beneficiaries. Similarly, however, he or she should take care not to waste trust resources defending a strong claim.  

Recognition and Enforcement

A general foreign money judgment of one state is not generally enforceable in another state without an order of the other state. This could be important where a trustee is a multi-national entity or is owned by one such as a bank and where it may therefore be possible to enforce against it or its shareholder or place it under commercial pressure in the (civil law) state where the judgment was obtained, even if the trust property is situated in another (common law) state.  The courts of the common law jurisdiction of the trust, asked to enforce such an order may be amenable to a defence on the grounds that the civil law decision is contrary to the public policy of the common law state. From the common law perspective, the inter vivos (lifetime) gifts of the settlor are not matters subject to laws of succession; even those of the laws of succession of another state. 

The EU

In the Netherlands Supreme Court HR 18 November 1998 (31 756, BNB 1999/35c, 36c, 37c) ruled that the transfer of assets by an individual resident settlor to an irrevocable discretionary trust is a transfer to an unrelated party. Gift tax is therefore payable at the top rate of tax.

Switzerland recognises trusts and accepts that a Swiss resident is free to settle property into a foreign trust, provided it does not infringe the forced heirship rules. The Swiss Parliament approved the ratification of the Hague Convention on the Law Applicable to Trust and on their Recognition on 20 December 2006 and the convention came into effect in Switzerland on 1 July 2007.

In France, the Supplementary Budget 2011 (LFR 900-2011 of 29 July 2011) has introduced a general tax regime aiming at ‘clarifying and putting an end to the existing uncertainty as for the tax treatment of trusts’. Trusts are now taxable on the settlor’s death usually at the top rate of tax especially where there is an element of discretion and distribution is delayed.

Enforcement in England & Wales

Judgments of specified former Dominions may be “recognised” according to the English 1920 legislation; of specified commonwealth and foreign (mainly European) countries by 1933 legislation. Creditors of Commonwealth, European Enforcement Order (EEO) and 2010 EFTA Lugano Convention state judgments may apply to “register” them in England under CPR 74.3. An application to set aside registration may be made under CPR 74.7 including on the ground that the enforcement of the judgment would be contrary to public policy. The statutory or convention rules permit registration of foreign judgements rather than simply their recognition as a debt entitled to enforcement by a new action and provide that the jurisdiction of the foreign court is based on reciprocity rather than comity. The foreign debtor must have submitted to the jurisdiction of the foreign court for its judgment to be enforceable in England.  An appearance in the foreign court to dispute jurisdiction is not regarded in England as submitting to the foreign court’s jurisdiction.

For specified countries, statutes apply which supersede the common law. If the judgment is not covered by a statutory provision or one of the conventions, for example a judgment of the courts of a BRIC, US, Asian or Latin American country, its effect in England is subject to common law rules. The principles of common law may be stated briefly: For a judgment to be entitled to be recognised, it must have been given in a court regarded by English law as competent. In order to be enforceable, it must be final and conclusive upon the merits of the claim, and for a fixed sum of money. 

Enforcement in New Zealand

New Zealand became a colony of Great Britain in 1841. The effect of this was the adoption of English common law and many pieces of English legislation as the law of New Zealand. This system was confirmed by the English Laws Act 1858. Initially therefore the private International law of England was the private international law of New Zealand. New Zealand has ratified few private international law conventions. One example is the 1983 Closer Economic Relations Trade Agreement with Australia in which the two countries agreed to harmonize their laws. New Zealand has a non-reciprocity based regime for the recognition and enforcement of judgements. Common Law rules apply equally to judgements of all countries. The Reciprocal Enforcement of Judgements Act 1934 allows recognition of UK judgements and provides for orders in council to permit the judgments of specific states to be recognised and registered as judgements of the New Zealand High Court. In practice very few such Orders in Council have been made.

At common law, a general money judgment in personam of a foreign Court of competent jurisdiction is regarded as creating a debt owed by the judgment creditor to the judgment debtor, on which an action may be brought in the High Court alternatively the creditor may sue in New Zealand on the same cause of action or both. Where a person is subject to the jurisdiction of a foreign Court, that person has an obligation to comply with an order made by that Court. The original cause of action on which a foreign judgment is based does not merge in the foreign judgment: it is open to a plaintiff who has obtained judgment in a foreign Court to sue on the foreign judgment itself or on the original cause of action.

If a foreign Court has given judgment on a claim for either party, and proceedings are brought in New Zealand on the original cause of action, the judgment may be relied on as the basis for a cause of action estoppel or issue estoppel by the party in whose favour the claim, or a particular issue, was determined.

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