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Privy Council analyses the validity of family trusts

In the recent decision of Webb v Webb [2020] EWHC 22, on appeal from the Court of Appeal of the Cook Islands, the Privy Council (the Board) examined, among other issues, the invalidity of two trusts on the ground that the settlor had failed to establish a sufficient alienation of assets into the trust, having regard to the retention of the associated rights and powers which proved synonymous with ownership. The appeal arose in relation to a dispute over the division of matrimonial assets.

In 2011, the Appellant (Mr Webb) was subject to an investigation by the New Zealand Inland Revenue Department, which resulted in significant tax debts. Subsequently, in 2013, the parties moved to the Cook Islands. Upon separation, the Respondent (Mrs Webb) issued proceedings for the division of matrimonial assets on the basis that the trusts established by Mr Webb were invalid and that the underlying assets were to be accounted for accordingly.

The court of first instance rejected Mrs Webb’s arguments and held that the trusts were valid. The judge also found that there was a "real likelihood" that Mr Webb would have to pay the debts owed and that this meant that, even if the trusts were valid, there would be nothing left over for division. This decision was reversed upon appeal, with the Court of Appeal holding that the trusts were invalid and that the debts were unlikely to be enforceable in the Cook Islands (on the basis of the rule against foreign revenue enforcement) and therefore should not be taken into account.  

The Board held, on the facts and the terms of the trusts’ constitutional documents, that the trusts were invalid. Mr Webb had the power to secure the benefit of all trust property to himself (notwithstanding the interests of the other beneficiaries); the rights he retained were indistinguishable from ownership (the Cayman Islands case of TMSF v Merrill Lynch Bank & Trust Co (Cayman) Ltd [2011] UKPC 17 was considered in detail). The Board also held (with Lord Wilson dissenting) that, because the debts were a foreign tax liability, they were unlikely to be enforced in the Cook Islands.

This is an important Privy Council decision and includes principles of application in both onshore and offshore jurisdictions.

This blog post was written by Moesha Ramsay-Howell, a member of our articled clerk programme.

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