Year on year there are stories and pessimists forecasting the demise of the trust industry. British newspapers like to portray Guernsey trustees as the facilitators of "suspect" tax planning. But what is the reality? In order to understand the trust industry and its continuing relevance to 21st century international families, the key is to understand the "Why's". Why do people establish trusts or foundations? Why do they do so in Guernsey? And why should they continue to do so?
Why establish a trust or foundation?
Trusts have always been used by society in one form or another. When knights of old rode off to the Crusades they entrusted their estates to trusted allies (often the Church) to look after their estates and to provide for their families pending their – hopeful – return. Those entrusted with looking after the assets were the trustees, the knight was the settlor and his family, who remained at home and relied on the trustees to safeguard the assets and provide for their welfare, were the beneficiaries.
The desire to protect wealth and ensure provision for descendants is still a perennial issue for families. As trustees we find the most common reason for clients establishing fiduciary structures is to ensure that the family wealth is protected for successive generations. In terms of why this protection is needed, reasons and motivations are varied.
The catalyst for establishing a trust may be geopolitical challenges, as many clients from politically unstable countries want to ensure that their wealth is managed from a politically stable jurisdiction, with Guernsey often being the jurisdiction of choice.
It may be to do with issues within the family itself. For example, protection may be required following personal situations such as divorce. With second and third marriages and children from first or second wives a common scenario, clients often want to ensure that all of the family are fairly provided for. Trusts can also be of use if, for example, there are concerns that a son or daughter has a substance abuse problem and needs to be protected from themselves – i.e. if they are unable to make informed and rational decisions when they inherit a large sum of money.
Alternatively, parents may want their wealth to be used for philanthropic purposes and for their children to learn the importance of building their own careers. Many international high-profile business people such as Bill Gates have committed to donate their wealth, which has led to the growth in charitable foundations.
Another possibility is establishing a trust for a disabled child to provide a degree of comfort and security that they will be adequately provided for once the settlor is no longer there to do so personally.
Clients from the Middle East will often use trust structures to ensure that the family wealth or businesses can be passed to the next generation as the father or mother would wish, rather than having to follow the requirements of Sharia Law. Guernsey has a trust law which specifically states that it will not entertain challenges from other countries on the basis of their forced heirship provisions.
In summary, the issues and challenges that international families face have not and will not change. Families still want to ensure that their wealth is protected and that the family is provided for. For many of these clients the most efficient and flexible means of meeting these challenges is through the use of a family trust or foundation.
Guernsey has an enviable reputation as a trust jurisdiction for many reasons. Clients want the reassurance that their affairs are being managed in a politically stable country with a court system that is not just fair and professional but also understands the industry and has many years of sound judicial precedent.
Guernsey was among the first territories in the world to regulate the fiduciary industry and, although there were doubters at the time, it has led many other jurisdictions to follow suit. Clients these days expect their financial service providers to be monitored and licensed.
Legislation is constantly being reviewed to ensure that it remains fit for purpose. Unlike in major industrial countries, the industry has a say in what legislative changes are required – thus ensuring Guernsey remains at the forefront of providing trust, foundation, company or intellectual property laws that match the changing international rules and requirements of clients.
One of the most important reasons why Guernsey continues to be ahead of the pack is due to the supporting infrastructure of banks, investment management companies, lawyers, accountants and other professional firms. Possibly the biggest selling point is the quality of the workforce within the industry. Guernsey has one of the largest concentrations of trust professionals anywhere and with the active involvement of organisations such as the Society of Trust and Estate Practitioners (STEP) and the Guernsey Association of Trustees these professionals are provided with an active programme of continuing professional development through seminars and conferences.
Why will international families continue to use Guernsey?
The reasons described above show why the Island is a flourishing centre for the trust industry. As wealthy families become increasingly international, and as international regulations become more and more complex and all-embracing, it will be the centres with the strength and depth of experience that will be able to provide the solutions that clients require.
Trusts have been relevant for centuries as families have valued wealth preservation and succession planning. In the 21st century international families continue, and will continue, to look for how best to provide for their descendants. Professional trustees will be part of those discussions and, for many international families, those trustees will be here in Guernsey.
An original version of this article was published in the Guernsey Press Finance Review, November 2015.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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.