INTRODUCTION

When most settlors establish a trust they use a professional trust company as the trustee. This way they can ensure that their trustees are professionals with experience gained being the trustee of many other trusts. However, whilst this is an ideal way to proceed for many settlors, some jurisdictions have made available the flexibility of using private trust companies ("PTCs").

The purpose of this guide is to demonstrate the advantages and disadvantages of PTCs and to give a brief overview of PTCs in Jersey, Guernsey, Cayman, the British Virgin Islands and New Zealand.

What is a Private Trust Company?

A PTC is a company whose sole purpose is to act as trustee in relation to a specific trust or trusts. Such companies do not provide trust services generally, and it will be a condition that they must not solicit business from the public at large.

Practical Application

PTCs are valuable in a number of situations, including as trustees of private family trusts, as trustees of commercial trusts and to hold SPVs that are used in financial or other structures.

The most common use of a PTC is to act as trustee of a purpose trust or a discretionary trust which holds shares in a family company. Settlors of such trusts often wish to keep control of the company themselves, and simply desire that the trustees retain such shares. A professional trustee will often be wary of doing so, however, as failure to diversify assets will almost always be a breach of its duty as a trustee as the trustee cannot be said to be acting in the interests of the beneficiaries.

In the past this has been solved by placing express provisions in the trust deed which provides that the trustees shall hold the particular investment and removes all discretion on their part to deal with the investment. Such a provision will only be effective if absolutely unambiguous, and even then the trustees may be left with a residual discretion or the direction may be void for other reasons (e.g. public policy).

The PTC may provide the solution.

Advantages and Disadvantages

For a settlor, the key advantage of establishing a PTC is the additional element of control which the PTC can provide. Control is particularly an issue where the settlor is from a jurisdiction unfamiliar with the trust concept, as a settlor is often unwilling to give away control of the assets to strangers in another jurisdiction. The settlor and/or his or her family could be the shareholder or shareholders of a PTC and through that shareholding would be able to appoint and dismiss the directors to the PTC. Whilst this is an obvious disadvantage to the professional administrator, the control of the board of the PTC is often a welcome feature for settlors wishing to retain control. However, if the settlor and/or his family were minded to be shareholders of the PTC, the potential tax consequences of that ownership would need to be fully investigated.

Ownership will generally be recommended to be through a purpose trust, rather than the settlor himself. A purpose trust is a trust which is established to achieve a non-charitable purpose, which in the present case would be to provide trusteeship services to designated trusts. This holdings structure is illustrated in the diagram below:

On a practical level, a PTC ensures more privacy in relation to the trusts, and allows for rapid commercial decisions to be made. The annual costs are often significantly lower than they would be should be a public trust company run the trusts.

The PTC does not compromise the validity of the trust structure and its residency for tax purposes, and can provide immediate and long-term tax planning advantages.

The main disadvantage of a PTC is the cost. On top of the creation of the trust, a company must be incorporated. The cost would be further increased if a purpose trust was used to hold the PTC, as illustrated above, however this could solve potential tax problems. As a result of the cost, PTCs are likely only to be attractive in a commercial context or for very large family structures. For the latter, the costs may be outweighed by the advantages of having a dedicated trustee to look after a complex structure and the control provided to the family.

CHOICE OF DOMICILE

Different rules apply to PTCs in each jurisdiction. Each is considered in turn:

Jersey

A Jersey PTC is an incorporated Jersey or non-Jersey company whose sole purpose is to provide trust company business in respect of specified trust. A company carrying on trust company business in Jersey is usually required to be licensed and regulated by the Jersey Financial Services Commission ("the Commission") under the provisions of the Financial Services (Jersey) Law 1998 ("the Law"), however a PTC may be exempt if it satisfies the exemption in s.4 of the Schedule to the Financial Services (Trust Company Business (Exemptions)) (Jersey) Order 2000 ("the Exemptions Order"):

"A person being a company-

  • the purpose of which is solely to provide trust company business services in respect of a specific trust or trusts;
  • that does not solicit from or provide trust company business services to the public; and
  • the administration of which is carried out by a registered person registered to carry out trust company business,

when providing a service specific in Article 2(4) of the Law where the name of the company is notified to the Commission."

Of note here is (c) which requires the administration of the PTC to be carried out by a body which is registered under the Law. If this is not complied with then the exemption will not apply.

Certain provisions of the Law will still apply to PTCs so as to enable to Commission to exercise a supervisory role despite the lack of registration.

The only demand upon a PTC is that its name be notified by letter to the Commission. If the PTC is a Jersey company there is the additional requirement of disclosure to the Commission of the ultimate beneficial owners of the company and information of the trusts of which the company was to be the trustee. If the PTC is incorporated in any other jurisdiction, the rules relating to disclosure of ultimate beneficial ownership would depend on the rules in that other jurisdiction.

The liability of the PTC directors will fall to be assessed in accordance with normal principles, as the duties of the directors are owed to the PTC and not to the underlying trust..

The constitutional documents of the PTC need not mention the names of or refer to the trust(s) which will be involved in the structure.

Guernsey

A Guernsey PTC that provides its services "by way of business" (i.e. it charges a fee for acting as trustee) will be carrying on a regulated activity under sections 1(2) and 2(1)(a) of the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (as amended) (the "Fiduciaries Law").

Such a corporate trustee has three possible options.

  • first, it could seek a full fiduciary licence under the Fiduciaries Law. The initial application to the Guernsey Financial Services Commission (the "GFSC") and on-going regulatory burden is relatively onerous and consequently, this option may not be attractive.
  • secondly, the PTC could be engaged on terms under which it is not entitled to any fee for acting as trustee. In such a case, it will not be acting "by way of business" and a licence under the Fiduciaries Law would not be required.
  • thirdly, the PTC could charge a fee for acting as trustee and apply to the GFSC for specific exemption from licensing pursuant to section 3(1)(y) of the Fiduciaries Law. The granting of an exemption from licensing under the Fiduciaries Law is at the discretion of the GFSC. However, the GFSC's normal practice in respect of PTCs is to adopt requirements analogous to those set out in the Jersey Exemptions Order applicable to PTCs. Accordingly, so long as the three requirements in the Exemptions Order noted above in the section dealing with Jersey apply (mutatis mutandis) to a particular Guernsey PTC, that PTC would be expected to be able to obtain exemption from licensing under the Fiduciaries Law. Application for exemption carries a small fee.

Provided the GFSC grants the exemption, and the PTC does not engage in any other "regulated activities" (for example "trust administration") as defined in the Fiduciaries Law then it should not be subject to any further regulation in Guernsey under that law.

The constitutional documents of the PTC need not mention the names of or refer to the trust(s) which will be involved in the structure.

Cayman

Under the Banks and Trust Companies Law (Revised) ("the Law"), anybody wishing to carry on trust business must apply to the Cayman Islands Monetary Authority ("CIMA") for the grant of a license. The Government has recognised the importance of PTCs and has created a special category of private trust company license with lower initial and annual fees. A Restricted Trust License has the condition that the trust business is limited to certain named clients, and such licenses are not difficult to obtain provided that there is minimal risk to the public.

It is a requirement that the registered office of the PTC be in the care of a trust company which holds an unrestricted trust licence in Cayman, known as the 'managing trust company'. The managing trust company can also be employed to handle the administration of the PTC and the trust but crucially it is contracted to provide such services as administrator or manager and not as trustee.

A Cayman PTC can restrict its activities and its assets to particular jurisdictions, which may be useful if, for example, a settlor wishes to avoid forced heirship. However, care must be taken in the choice of members and directors of the PTC, who could themselves be vulnerable to attack.

A PTC must submit audited accounts to CIMA annually, and unaudited accounts quarterly. It must have at least 2 directors, and all directors must be approved by CIMA.

A Cayman PTC can apply to be an Exempted Company if its objects are to be carried out mainly outside the islands and it has applied to be an Exempted Company under the Companies Law, the advantage of which is that it will receive a guarantee from the Government that it will not be taxed for twenty years after incorporation and that it is permitted shares of no par value.

Cayman does not impose any statutory liability on the directors of trust companies.

British Virgin Islands

The Financial Services (Exemptions) Regulations 2007 ("the Regulations") are intended to clarify what is meant by a PTC and simplify the procedure by placing the onus on the registered agent (a trust company holding a Class I license) to determine whether the proposed PTC meets the criteria.

In accordance with the Regulations, in BVI a private trust company is:

"a company:

  • that is a qualifying BVI company;
  • that is a limited company within the meaning of the BVI Business Companies Act, 2004; and
  • the memorandum of which states that it is a private trust company"

The definition of a qualifying business company does not come into effect until 1 January 2008, however the rest of the Regulations came into effect as of 1 August 2007.

The BVI Companies Act 2004 has been altered in advance to allow the phrase 'PTC' to be included in the name of a company engaged in such business.

PTCs are to be exempt where they are unremunerated, and fall within the exemption if they are able to satisfy the definition in Part I, s.2 of the Schedule:

"(1) Trust business carried on by a private trust company is unremunerated trust business if no remuneration is payable to, or received by, the private trust company, or any person associated with the private trust company, in consideration for, or with respect to, the services that constitute the trust business.

(2) For the purposes of subparagraph (1),

  • "remuneration" includes money or any other form of property; and
  • it is immaterial whether remuneration is payable or received
  • out of the assets, or underlying assets, of a relevant trust;
  • from the settlor or beneficiary of a relevant trust; or
  • from any other person pursuant to an arrangement with the settlor or beneficiary of a relevant trust."

New Zealand

New Zealand does not currently regulate the provision of trustee services. Accordingly, prima facie, there is no New Zealand regulatory limitation upon the incorporation of a New Zealand ("NZ") company to act as a PTC.

The PTC would not be subject to licensing or financial services regulation in NZ of the type which exists in Jersey, Guernsey, BVI or Cayman.

While there is no specific legal requirement for one or more of the directors of the PTC to be resident in NZ, a NZ resident solicitor or accountant would have to be a director of the PTC if the PTC wished to be able to utilise the exemption to the relevant NZ information disclosure (and potential penalty tax) provisions. Moreover, there may be non-NZ legal, tax, regulatory, or other reasons which may make it desirable to have at least one NZ resident as a director of the PTC.

While there is no express legal requirement that a NZ PTC be owned legally or beneficially by one or more NZ residents, NZ financial reporting requirements are more limited if a NZ PTC is NZ owned. Accordingly, it would be common for a NZ PTC to be owned by a NZ professional corporate trustee in its capacity as a trustee of a NZ charitable trust or of a non-NZ purpose trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.