Private trust companies have become popular with clients. They offer a far greater degree of control or influence over the trustee than where an institutional trustee is appointed, whether through the client being directly involved in decision-making as shareholder and director, or indirectly through the ability to choose or influence who makes the key decisions.

There's also continuity, which is all the more important where the underlying wealth is substantial and more complex than an ordinary trust with a classic portfolio of liquid investments. Where an institutional trustee is appointed and needs to be changed for whatever reason, the handover is not only time-consuming and expensive but also disruptive as new personnel familiarise themselves with the assets and needs of the family.

Recently, this has become significant as more and more trust companies across the industry consolidate or see their ownership change, not always in ways that please the client.

In most private trust company structures, an institutional trustee remains involved. But whether it's as corporate service provider or as director and trust administrator, involvement is contractual so it can be terminated easily without any change in trustee. Because many private trust companies are intended to be enduring, the flexibility to adapt to changes with minimum disruption is a distinct advantage.

Where the principal asset is an operating company, the ability to mirror the board of the company can also be advantageous as is the ability to bring in junior members of the family when they are considered ready.

Private trust companies are also popular with institutional trust service providers because of the reduced contractual rather than fiduciary liability (subject to so-called dog-leg claims remaining unavailable). Involving professional trustees enables such structures to benefit from their fiduciary experience in managing trusts, which, because of the often deemed higher-risk nature of the trust assets, such trustees would otherwise refuse to be involved with.

Ownership issues

Why then are private trust companies not the perfect panacea? One major issue is ownership. Any company limited by shares must have at least one shareholder who will usually enjoy the right to appoint and remove directors. Although attractive to clients, this can have tax implications. For many clients it will be necessary to demonstrate unequivocally that the assets transferred to the underlying trusts are no longer subject to their direct control. Where tax is not an issue, being seen to have control can have other non-fiscal implications: weaker protection against claims from other creditors whether in connection with commercial or matrimonial claims.

If being seen to be in control is not an issue for the client, direct share ownership may be possible. This can lead to succession issues, though, including forced heirship or equivalent rights, arising on the death of a shareholder.

The favoured solution to date has been using non-charitable purpose trusts, which have become available in more jurisdictions. Purpose trusts, however, are probably the least worst solution. Many clients do not appreciate the need to have another trust with its own trustee within their structure bringing with it an extra layer of complexity, administration and cost. In some jurisdictions, there is also a question whether it is a valid purpose just to hold an asset and another ancillary purpose may need to be added.

An alternative way to structure the private trust company and avoid having a purpose trust is to incorporate the company in the form of a company limited by guarantee. The issue here is that as there is no person with a shareholder role, there is no person external to the company who can appoint or remove directors. Other solutions used include incorporating as a company limited by shares but with distinct classes of shares, perhaps with one class having the right only to appoint and remove directors but no other and no economic rights.

Laying the foundation

  • The client can choose to be the founder and endows the foundation with its initial capital. The founder does not have any continuing role solely by virtue of being the founder. Any continuing role, where appropriate, is determined by the foundation's constitutional documents.
  • The foundation is run by its council as a company is run by its board of directors. The council must comprise at least one councillor, and councillors can be individuals or corporate bodies. The councillors owe a duty to the foundation to act in good faith in the exercise of their functions.
  • As the foundation will not have any beneficiaries, it must have a guardian (similar to the enforcer often required for a purpose trust). The guardian can be the founder but not a councillor. Their duty is to act in good faith and en bon père de famille to enforce the constitution and the purposes and in exercising their functions.
  • The guardian can enjoy the power to appoint and remove councillors. This direct power is better than the indirect power of an enforcer of a purpose trust where the enforcer can only remove the trustees of the purpose trust who improperly refuse to appoint and remove directors as requested.
  • Where it is important to demonstrate separation between the family and the foundation trustee, family members should not hold any positions or reserve any powers under the foundation.
  • If neither the guardian nor any of the councillors are Guernsey-licensed fiduciaries, the foundation must appoint one as its resident agent. This is a little different from most private trust company structures where a licensed fiduciary provides the registered office as well as trust and corporate administration services to the structure. It is not a requirement in Guernsey to have a Guernsey-licensed fiduciary sit on the council, though it may be sensible as the foundation will be exercising fiduciary powers.

Winning combination

The alternative to a trust is a foundation, and a mix of the two could be the new least worst solution for a client needing to divest themselves of wealth but wanting reassurance that their long-term plans will be fully adhered to. Rather than incorporate a company to act as their private trustee, the client establishes a foundation to act as trustee of trusts for the benefit of an individual family.

While foundations can themselves be used in similar ways to trusts, they do not easily lend themselves to private trust company-type structures because of the nature and range of assets often held for different beneficiaries or on different terms. Private trust company structures often have many underlying trusts: dry trusts to hold assets and wet trusts to provide liquidity; separate trusts for different classes of beneficiaries; and often philanthropic trusts.

Establishing separate foundations would be expensive and administratively burdensome but having a foundation as trustee of various trusts allows for the best of both worlds. Where assets are held in non-trust jurisdictions, the foundation as the registered owner may also afford more protection as foundations are often seen where trusts are not as it will be recognised that the company is not holding the assets for its own benefit.

Guernsey law

Guernsey, with its new foundations legislation and trust heritage, is an ideal jurisdiction for the hybrid trust with foundation trustee. The island's law clarifies that a Guernsey foundation has its own legal personality separate and independent from its founder and any foundation officials. So there is no need to have the extra layer of a purpose trust and the additional trustee. The structure is simplified accordingly. See box.

The Guernsey foundation trustee offers an easy, practical solution to the control issue with the advantage over a private trust company that, as an orphan vehicle, it does not have any owners or controllers.

Previously published in

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.