Wong Wen-Young & Ors. v Grand View Private Trust Company
ISOLAS LLP Partner Adrian Pilcher explains why this case is so important and how the Privy Council decision affects how trustees should exercise their powers of adding and removing members to and from the class of beneficiaries, as well as factors that should be considered when establishing a trust.
The underlying story dates back more than two decades. On the same day in May 2001, Wang Yung-Ching, the founder of the Formosa Plastics Group in Taiwan (“FPG”) and his younger brother Wang Yung-Tsai, placed assets worth more than US$20bn into two separate trusts.
The first of these trusts, the Wang Family Trust, was (despite its name) a non-charitable purpose trust established to allow for the continued growth and prosperity of FPG, as well as for additional philanthropic purposes, including the provision of “mutual assistance to mankind and help to those in need” and to “improving the standard of living for mankind” (“the Purpose Trust”). A second trust, the Global Resource Trust, was a discretionary trust established for the benefit of the Wang brothers’ children and their descendants (respectively “the Family” and “the Family Trust”).
Four years later, the trustee of the Family Trust, on or around the same time, (1) excluded all Family members from the class of beneficiaries of the Family Trust; (2) replaced them with the trustee of the Purpose Trust as sole beneficiary; (3) appointed all the assets of the Family Trust to the trustees of the Purpose Trust; and (4) terminated the Family Trust. Ostensibly the rational behind this was the fact that the children had ended up benefitting from direct ownership rights in FPG, which was something that has not been envisaged by the settlors at the time the trust were established. As a result, it was felt that the purpose of the Family Trust had fallen away.
One of the children, Dr Winston Wong OBE, claimed that, among other things, the trustees had exercised their powers to add and remove beneficiaries both (1) for an improper purpose i.e. for a purpose which fell outside the scope of the powers conferred on them and (2) in a manner which altered the fundamental purpose or “substratum” of the Family Trust, which had been, he argued, to benefit the Family. Other Family members joined the claim.
The trustee of the Purpose Trust (Grand View Private Trust Company) counterargued that the settlors’ intention when they established the original settlements was for the Family Trust to be as flexible as possible, and that the terms of the trust deed, which stated that the trustee could add (and indeed exclude) “any person” as a beneficiary in the future, reflected this.
Supreme Court decision
In 2019 the Supreme Court of Bermuda concluded that the trustees could not use their powers of addition and exclusion to create a change to the trust’s “substratum” which, in the case of the Family Trust, the judge concluded was clearly to benefit the Family.
Court of Appeal decision
The Court of Appeal, however, reversed the decision of the Supreme Court. In coming to its decision, the Court took the view that the trust’s substratum was highly adaptable – if it existed at all, and concluded that the proper test was whether the power to add and remove beneficiaries had been exercised for a proper purpose. In other words, the Court was concerned with whether, by removing all the Family members from the class of beneficiaries of the Family Trust and adding the trustee of the Purpose Trust as the sole beneficiary, the trustees of the Family Trust had acted within the scope of their powers to add and remove beneficiaries. The Court of Appeal unanimously concluded that they had. However, permission was granted to Dr Wong (and the other Family members) to appeal to the Judicial Committee of the Privy Council.
Privy Council decision
In the Privy Council, Dr Wong and the other family members argued, among other things, that:
• the trustees of the Family Trust had exercised their power to add and remove beneficiaries for an improper purpose; and
• powers of amendment were subject to a rule that they could not be used to destroy the nature or character, or the substratum, of the trust (the substratum rule) and that the powers to add and remove beneficiaries were a specific type of amendment power to which the substratum rule applied, so they could not be used to destroy (rather than to advance) the nature of the Family Trust, which was to benefit the Family.
In December 2022, Lord Richards handed down the long anticipated Privy Council judgement, with which his fellow panel members agreed. Although the panel considered other aspects of the appeal, specifically in relation to the above arguments the panel decided the following:
1. Substratum rule: There was no absolute substratum rule as described by Dr Wong. If a trust did, however, have a discernible overall purpose, it would be a very powerful factor in deciding the scope of a power of amendment contained in the trust deed but it was not, however, an overriding factor which, notwithstanding all other considerations, determined the proper construction of the power. In the case of the Family Trust there was discernible substratum rule and, in any event, the powers to add and remove beneficiaries could not be regarded as a type of, or even analogous to, a power of amendment. Therefore, even if the Trust had been held to have an overall discernible purpose, or substratum, the substratum rule would not apply to the exercise of the powers to add and remove beneficiaries; only to powers of amendment.
2. Proper purpose of the powers to add and remove: The natural reading of the Family Trust trust deed as a whole demonstrated that it established a family trust for the benefit of the Family. By contrast, there was nothing in the deed, beyond the use of the word “any” and the wide definition of “person”, to suggest that the trust deed intended to confer on the trustee the power to deprive all the Family members of any benefit under the trust and to substitute them with a trust whose purpose was wholly different and which was incapable of conferring any benefit on the Family members. A narrow analysis of the purpose of those powers and the Family Trust in general was supported by the fact that the settlors had established the Purpose Trust at the same time as the Family Trust, each with wholly separate purposes, and the fact that the settlors held strong views as to the purposes to which their wealth should be put. In the light of the focus of the Family Trust trust deed on the Family, and the circumstances in which the Family Trust was established, the purpose of the powers of addition and exclusion was to further the interests of the existing beneficiaries i.e. the Family members.
3. Best interests of beneficiaries: Generally, fiduciary powers conferred on a trustee of a trust with identified beneficiaries had to be exercised to further the interests of those beneficiaries. The power to add or to exclude beneficiaries was, however, a power of a potentially different character, as it had the capacity to effect significant, even fundamental, changes to a trust. In each case, the question of whether such a power was intended to have that capacity, or any purpose wider than simply furthering the interests of the identified beneficiaries, was not to be answered by applying, as an overriding principle, a rule that all powers had to be exercised in the interests of some or all of the beneficiaries, unless express provision to the contrary was made. The task of the trustees, rather, was to discern the intended purpose of the particular powers of addition and exclusion in the context of the particular trust.
4. Conclusion on proper purpose: In this particular instance, the Court was satisfied that the intention of the settlors when establishing the Family Trust had been to benefit the Family members, and therefore the decision by the trustee of the Family Trust to remove all Family members and replace them with the trustee of the Purpose Trust was for an improper purpose and was void.
The main conclusion to be drawn from this case is that whether or not the power to add and remove beneficiaries can be exercised only in favour of the existing beneficiaries is a question of construction, taking into account not only the provisions of the trust deed, but also the circumstances surrounding the establishment of the trust. The Court stated that the starting point is not to apply a rule that such powers must be exercised for the benefit of the existing beneficiaries unless the settlor /trust deed provides an express provision to the contrary. Rather, as stated above, the trustees must discern the intended purpose of the particular power of addition and exclusion in the context of the particular trust. The Board held that (my emphasis) “This requires the approach of considering the power in the context of the trust instrument, and of the circumstances surrounding it”, including “the circumstances in which the trust was created”. The Privy Council gave a lot of weight, for example, to the fact that both trusts were created on the same day, to the fact that the settlors had taken a lot of advice in relation to the establishment of the two trusts for different purposes, to the fact that the settlors felt quite strongly about the purposes for which the Purpose Trust was established and to the fact that the settlors had set up one trust to benefit certain purposes and another trust to benefit the Family.
When a discretionary trust is established, the trustees should take detailed instructions in relation to the scope of those powers which have the capacity to change the fundamental nature of a trust, including the power to amend the trust deed as well as the power to add and remove trustees. If the settlor does not intend for those powers to be exercised only for the benefit of the existing beneficiaries, either the relevant provision in the trust deed should be drafted to explicitly reflect this or, alternatively, a note of this can be made by the trustees at the time, whether by way of a memorandum to the trustees or a letter of wishes. Where the settlor prefers to record his or her intentions outside the body of the trust deed, it is important for the records to be contemporaneous as the Court, in determining the scope of any particular power, will look at the intention of the settlor at the time the settlement was made. Whether or not the above measures have been taken, trustees should always exercise caution when exercising their discretionary powers of additional and removal, and when in doubt seek legal advice.