It is important that trustees understand their obligations if
their trust structure comes under financial stress. Helpfully, the
Jersey courts have provided guidance on the principles applicable
to 'insolvent' trusts, which is likely to be highly
persuasive in other jurisdictions.
When is a trust insolvent?
As the Royal Court noted in Re Z Trusts [2015]
JRC 196C, "[t]o talk of an insolvent trust is, of course,
a misnomer. A trust is not a separate legal entity and cannot, as a
matter of law, be insolvent." Nonetheless, the Court
described the term as a useful shorthand.
Whether a trust is insolvent is determined using the cash-flow
test: is the trustee unable to meet its debts as trustee as they
fall due out of the trust property?
