Sep 2021
The position of illegitimate versus legitimate children is often considered consigned to history but for those dealing with trusts on a day-to-day basis, the distinction may remain a live issue.
This is illustrated by a recent Californian case. Hollywood financier Steve Bing died in 2020, leaving two illegitimate children, Kira and Damian. Steve’s father, Peter Bing, had established a number of trusts for the benefit of future grandchildren in 1980.
Prior to Steve’s death, some litigation had been concluded in respect of these trusts. The dispute focused on the meaning of the word “grandchild” as used in the trust instruments. The Trustee had taken the view, supported by legal advice, that “grandchild” did not include grandchildren born out of wedlock who had not lived as a regular member of the household of their natural parent whilst minors. Steve had not lived with his children as regular members of his household and hence the Trustee had come to that conclusion.
Whilst the legal findings have little application in Bermuda, it raises issues common to many jurisdictions in respect of definitions used in trusts and also highlights a recent change to trust law in Bermuda.
Generally speaking, there is a more relaxed societal approach to children born out of wedlock such that the legal distinction between legitimate and illegitimate children has been largely abolished. However, for some individuals, the distinction remains important and they wish assets to pass through a legitimate line.
In Bermuda, the legislation that equalised the position of legitimate and illegitimate children was introduced in 2002 and originally intended to protect children in areas such as care and supervision of children and custody arrangements. One result of the legislation was that it also made it more difficult to exclude illegitimate children from trust arrangements. The Trusts (Special Provisions) Amendment No. 2 Act 2020 now provides that illegitimate children can be excluded if the trust instrument expressly states a contrary intention.
To date, there has been no case law on what constitutes a “contrary intention” and it may be that none arises for some time. However, when drafting a new trust deed, it may be that avoiding a class gift for individuals, which has an ordinary or statutory meaning, could be avoided and a bespoke definition which accurately reflects the intentions of the settlor is preferable. This may be particularly attractive when the class has yet to come into being or where the settlor has strong views about children born outside marriage, adopted children, or those conceived via assisted fertility. Where individuals in the proposed class of beneficiaries are in existence, it is possible to simply name the individuals in question, though other issues may arise if the class increases unexpectedly and the terms of the trust do not permit the class of beneficiaries to be altered.
Where trustees are administering an extant trust, it may be the trustee who has to determine the class of beneficiaries where there is ambiguity and this may not be a straightforward or easy decision to make. The trustee may also be reluctant to make the decision without the blessing of the Court, particularly where matters are contentious.
A simple solution, though one which is only likely to be feasible where all parties are in agreement, is to amend the beneficial class or exercise the trustees’ power of appointment or advancement (if the trust instrument permits) to remove any distinctions. This is illustrated by the case of PQ v RS[i] where a trust was established in 1968 (before the change in the law abolishing the distinction between legitimate and illegitimate). An issue arose because RS had three children, two of whom were born whilst he was married, and V who was born shortly before marriage. The trustees wished to exercise their powers of appointment to appoint assets on to discretionary trusts following the death of RS for the benefit of his children, including V. The trustees were concerned that V may not be a beneficiary of the trust. It was generally accepted that V was always intended to benefit and, indeed, the settlor was said to have considered the possibility she would not be included as ‘‘abhorrent’’.
Ultimately, the court did not determine whether V was a beneficiary or not but they did confirm that the proposed appointment was within the trustees’ powers and was a proper exercise of their powers. The Court made this decision on various grounds, including that the appointment was for the benefit of RS as it allowed RS to make provision for V, the appointment was considered ‘right’ by the family and the inclusion of V would potentially avoid family dissention which was for the benefit of V’s siblings.
As mentioned above, depending on the terms of the trust, it may not be possible to alter the beneficial class or for the trustees to exercise their powers of appointment or advancement. The terms of the trust may not include such powers i.e. the powers may be inadequate to resolve the issues or it may be that the trustee can only exercise those powers with the consent of another person, such as the settlor or protector, who is unwilling or unable to consent.
Trustees of a Bermuda trust have two Bermuda specific options available. One option is the statutory power of advancement under s24 Trustee Act 1975 which provides as follows:
“24.(1) Trustees may at any time or times pay or apply any capital money subject to a trust, for the advancement or benefit, in such manner as they may, in their absolute discretion, think fit, of any person entitled to the capital of the trust property or of any share thereof, whether absolutely or contingently on his attaining any specified age or on the occurrence of any other event, or subject to a gift over on his death under any specified age or on the occurrence of any other event, and whether in possession or in remainder or reversion, and such payment or application may be made notwithstanding that the estate or interest of such person is liable to be defeated by the exercise of a power of appointment or revocation, or to be diminished by the increase of the class to which he belongs so, however, that –
(a) the money so paid or applied for the advancement or benefit of any person shall not exceed altogether the amount of the presumptive or vested share, estate or interest of that person in the trust property; and
(b) if that person is or becomes absolutely and indefeasibly entitled to a share in the trust property the money so paid or applied shall be brought into account as part of such share; and
(c) no such payment or application shall be made so as to prejudice any person entitled to any prior life or other estate or interest, whether vested or contingent, in the money paid or applied unless such person is in existence and of full age and consents in writing to such payment or application.
(2) This section applies only where the trust property consists of –
(a) money or securities which are not by any provision of law or in equity considered as land; or
(b) property held upon trust for sale, calling in and conversion and the proceeds of such sale, calling in and conversion are not in equity considered as land.
(3) [REPEALED]
(4) For the avoidance of doubt, when exercising the power of advancement the trustees may-
(a) create any provisions, including –
(i) discretionary trusts and dispositive, administrative or managerial powers exercisable by any person; and
(ii) the delegation of discretions and duties to any person; and
(b) provide that the capital money may become subject to the terms of any other trust, provided that the requirements of subsection (1) are satisfied.”
It is generally accepted that s24 allows incidental benefit to strangers to the trust without resulting in a ‘fraud on the power’ but trustees should only exercise their fiduciary powers appropriately for the benefit of the beneficiaries.
Alternatively, the trustees could consider an application to the Court using s47 Trustee Act 1975. This would require the Court to consider whether it is ‘expedient’ to confer upon the trustees the power(s) they request. Much has been written about the benefits and uses of s47 of the Act, and there is no need for them to be repeated here, but it is worth noting that it can be flexibly and pragmatically used by trustees. In contrast to other jurisdictions, there is no requirement for all the capable beneficiaries to consent.
Additional problems can arise where trustees are not fully informed and are simply unaware of children born outside marriage, and where a child is born out of an extra-marital relationship which would cause embarrassment and upset to disclose. This can cause trustees to make decisions based on incomplete information which could ultimately result in unexpected challenges to their decision-making through no fault of the trustee.
What can a responsible trustee do to mitigate the potential risks of family disharmony and expensive litigation? Amongst other things:
- take advice where there is ambiguity or the trustee is unsure;
- if there appears to be mismatch between the understanding of the beneficiaries and the legal position, use the trust instrument to remedy the situation;
- if it is not possible to use the trust instrument, consider whether one of the statutory provisions above is suitable;
- maintain a line of communication with beneficiaries.
This article was originally published in IFC Review.
[i] [2019] EWHC 1643 (Ch)