The Status of Children Act (“the Act“) seeks to provide equal rights for children both in and out of marriage and abolish distinctions between ‘legitimate’ and ‘illegitimate’ individuals in terms of their rights to benefit under trusts.
There are three main changes which affect trusts governed by BVI law.
(1) Dispositions of Property.
There will be a presumption in any instruments that references to ‘children’ and ‘issue’, and any other terms of relationship, include illegitimate children.
(2) Duties of Trustees.
Trustees (and executors) will have an express statutory duty to make enquiries as to the existence of potential beneficiaries born outside of marriage whenever it is material in the circumstances.
(3) Artificial Conception.
There will be new presumptions about the parentage of children born by any artificial conception procedures.
Dispositions of Property
The Act abolishes the distinction between children born within and outside of marriage: all children are deemed to be of equal status. The general presumption will therefore be that all references to ‘children’ (and like terms) in a trust instrument include illegitimate children. It has always been important for settlors to make express provision as to whether or not illegitimate (and indeed, adopted) children should be included as beneficiaries of trusts – not least because problems can arise on changes of governing law where the new governing law applies a different presumption. That remains the case – the difference is that, if no express provision is made, the presumption is now due to be reversed.
The Act does not, however, affect lifetime dispositions made before the commencement date or dispositions made under a will or codicil executed by a testator who died before the commencement date. Nor does it affect any pre-commencement date dispositions containing a special power of appointment, even if the exercise of the power occurs after the commencement date. In particular, the Act will not extend the persons in whose favour the appointment may be made nor cause the exercise of the power to be construed so as to include any person who is not a member of the class.
Duties of Trustees
Trustees of BVI trusts should be aware that the Act will impose upon them a new duty to:
“…make honest and reasonable enquiries as to the existence of any person who could claim an interest in the estate or property [of the relevant disposition] by reason of the Act.”
A trustee is not, however, obliged to:
“…pursue such enquiries further than he or she honestly and reasonably believes to be necessary.”
While the qualification is helpful, the fact remains that the Act will impose an additional positive duty of enquiry on trustees. The Act is silent as to whether this duty can be excluded by contrary intention in the trust instrument, but there seems no reason in principle why it should not either be subject to any exoneration provision in the trust instrument (so that, for example, the trustee is not liable if it is negligent in making its enquiries but is liable, if guilty of actual fraud or wilful default) or indeed, be excluded completely, although the position is not entirely beyond doubt. The exclusion of the duty would need to be made by way of an express provision in the trust instrument specifically referring to the statutory duty.
A degree of protection is provided for trustees, in that no person who is within the class of beneficial objects by reason of the Act, but whose claim is disregarded by the trustee, can bring a claim against the trustee if, at the time of making the disposition or exercising their powers, the trustee had no notice of the relationship on which the individual’s claim is based. The Act does not specify whether notice includes ‘constructive’ as well as ‘actual’ notice, but given the express duty of enquiry, it is thought that it does. In other words, knowledge of beneficiaries claiming by virtue of an illegitimate relationship will be imputed to the trustee if they would have had notice if they had made honest and reasonable enquiries, notwithstanding the fact they did not actually know about those beneficiaries. This may prove to be an area ripe for disputes in the future!
The Act preserves the illegitimate beneficiary’s right to follow or trace the relevant property into the hands of any person (other than a purchaser) who may have received it. Potential claimants will therefore need to consider whether it would be preferable to pursue a trustee (possibly in light of its indemnity insurance (if a professional), but being mindful of any exoneration provisions that the trust instrument confers on the trustee) and pursuing the recipient, or indeed, both.
Under the Act, the presumption will be that any child born to a woman as a result of an artificial conception procedure will, where the couple in question are married and both consented to the procedure, be treated as a child of both husband and wife. That will be the case whether or not the child is biologically the couple’s child. The same presumption applies to an unmarried cohabiting couple, provided neither of them is married to anyone else.
Unless there is a valid contract to the contrary, a child born to a woman as a result of an artificial conception procedure is treated as hers, even if the child is not biologically hers.
The Act will bring the BVI into line with a number of other jurisdictions, in recognising illegitimate relationships and reversing the presumption in that regard in trust instruments and will be a helpful clarification of the status of children where difficult issues arise in artificial conception cases.
It is also welcome that the reversal of the presumptions will not affect pre-existing trusts, but thought may need to be given to whether trust instruments should be amended to counter the new presumption.
The duty of enquiry imposed on trustees will also be of potential concern to trustees and could lead to an increase in trust litigation. Given the potential issues outlined above, it is important that consideration is given to the drafting of trust instruments to clarify (and of course from the trustee’s perspective, limit) the trustee’s duties in this regard, to minimise the risk of costly and time-consuming disputes.
Where the duty of enquiry does apply, trustees will need to ensure that they have identified the extent of the potential beneficial class, which may require them to raise the potentially sensitive issue as to whether there are any illegitimate beneficiaries in existence. What constitutes ‘honest and reasonable enquiries’ is likely to depend on the circumstances and may ultimately need to be determined by the courts. Given this uncertainty, trustees are likely to be more nervous when making distributions to beneficiaries. One option is to seek indemnities from beneficiaries to whom distributions are made to cover the trustees in the event of a challenge from a previously unknown illegitimate child or the descendants of such a child. Of course, an indemnity is only ever as good as the person who gives it but it should give some comfort to trustees in that situation.
For further information, please contact:
+1 284 494 3365
LANX LANCIS (BVI)
This material is intended to provide only general information for clients and professional associates of Lanx Lancis (BVI). It does not purport to be comprehensive or to render legal advice and should not be treated as a substitute for specific advice concerning individual situations.