Originally published in Longtail's A Guide to International Finance Centres, What Chinese Investors Need to Know, March 2011
Russell Clark, Partner and Head of Fiduciary Law Group at Carey Olsen in Guernsey, explains why Guernsey is the perfect environment for controlling private wealth.
The establishment of a trust in an IFC such as Guernsey has typically involved the appointment of professional fiduciaries to whom the trust assets are transferred. Once the assets are transferred they do not belong, in any sense, to the settlor (the person who has established the trust) although it is possible for the settlor to also be a beneficiary of the trust.
The trustees are obliged to comply with the terms of the trust instrument and may only exercise their functions in favour of the beneficiaries of the trust. However in many cases the trust confers very wide discretions to the trustees regarding both distributions and investment.
Some potential settlors, particularly those unfamiliar with the Anglo-Saxon trust concept, would prefer to have a greater degree of control regardless of the professionalism and competence of third-party trustees. Private Trust Companies (PTCs) offer the settlor distinct advantages, primarily in relation to exerting more influence over the trust. Today, Guernsey represents an ideal home for PTCs following the amendments made to Guernsey's Trusts Law in 2008, which has encouraged the use of such entities.
What is a Private Trust Company (PTC)?
Instead of employing a professional trustee be it a bank-owned trustee, one associated with a practice of accountants or lawyers or one which is entirely independent some settlors are choosing to establish their own trust companies to act as trustees of their family trusts. A PTC does not provide fiduciary services to the public and can be established by private individuals or commercial enterprises.
The provision of trust services in many jurisdictions is a regulated activity. In Guernsey, conducting fiduciary activities by way of business requires a licence issued under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the 'Fiduciary Business Law'). The Guernsey regulator, the Guernsey Financial Services Commission (GFSC), supervises professional fiduciaries to ensure that they meet strict insurance, capitalisation, infrastructure, resourcing and training requirements.
However, a PTC is not subject to such regulation. A PTC which does not charge a fee to the trusts which it administers need not be brought to the attention of the GFSC. However in most cases, in order for the costs of running the PTC to be met out of the trust assets, a fee is charged. In appropriate cases, the GFSC is prepared to grant a PTC an exemption from any requirement to obtain a licence under the Fiduciary Business Law. There is a one-off fee, currently £740, for seeking this exemption.
Typically, the GFSC will want to see at least two appropriately qualified and experienced Guernsey resident directors on the board who will be accountable to the GFSC should the PTC engage in any inappropriate activities.
The PTC will need a registered office in the jurisdiction of its establishment. In Guernsey, PTCs are often administered by trust service providers that supply the necessary administration support, although a number of PTCs have been established with their own offices and complement of staff. Some have even gone on to become fully licensed trust service providers in their own right capable of providing services to the public.
Why use a PTC?
With the focus on just one family often with the involvement of members of the family, the PTC's greater understanding of the family and its dynamics gives increased assurance that decisions will be made quickly and sensitively to the specific interests of the family; particularly, for example, in relation to interests held in family businesses.
In instances where trust assets comprise a traditionally balanced portfolio of bonds, equities and cash the settlor may want to create a reserved power trust instead. In an appropriate case, the investment functions can be retained by the settlor. A PTC may also be particularly suitable if the trust assets comprise, for example, interests in a family business when the settlor wishes the family to retain a greater degree of control or where the assets would cause a professional trustee some concern, (such as where they are of a wasting nature or the assets are not diversified).
From the family's point of view, having family members or trusted advisers on the board of the PTC control can be retained. Also, a professional trustee will be more comfortable holding wasting or undiversified assets through a PTC than it would if its own trustee company were appointed. For families interested in building multi-generational solutions to the family's wealth there are advantages to bringing junior members of the family onto the board alongside more senior family members and suitably qualified professional advisers.
This provides the opportunity for them to learn about wealth generation and the responsibilities associated with significant wealth. PTCs may also be more responsive than institutional trustees where the assets within the trust include trading businesses. In this case the institutional trustee may not necessarily understand the nature of the underlying businesses. Usually institutional trustees are very good at getting to grips with the activities of underlying businesses. If that business is very specialised then no-one will understand it as comprehensively as someone with a background in that business. One can build a PTC board that has the necessary specialist experience.
Ownership of the PTC
A PTC is usually formed as a company limited by shares. Who holds these shares should be carefully considered, and depends upon why the trust is being created in the first place. Shares can be held, for example, by senior family members or several family members as joint tenants but thought needs to be given as to how the shares are to pass upon death or incapacity.
There is no reason why the settlor should not own the shares in the PTC but this may well undermine the tax planning that led to a trust solution being suggested in the first place.
A common solution to this issue is for the shares in the PTC itself to be held upon trust. That trust could be one for beneficiaries, where the family members benefit from the ownership of the PTC. However, a more common solution, particularly where the PTC is not likely to be a profit sharing asset, is for the shares to be held by what is called a non-charitable purpose trust. These are trusts which have no beneficiaries and exist solely for assets to be held for a specific purpose. For such a trust to be valid under Guernsey law somebody needs to be appointed as an enforcer to ensure that the trustees do indeed comply with the terms of the purpose trust. This ensures that the trust infrastructure survives the death of the settlor, and allows businesses to be continued for the benefit of the settlor's family without requiring that the businesses be fragmented or disposed of.
Guernsey has the highest reputation and standards, providing an extensive range of bespoke financial services to a global market. Over the last 50 years the island has developed a mature, innovative and service orientated financial sector and was also one of the first jurisdictions to introduce an effective licensing and supervision system in relation to trust administration services, company management and ancillary services. Its laws are modern and flexible.
There are currently approximately 150 licensed providers in Guernsey employing approximately 2,200 staff and holding more than £300 billion worth of assets in trust. The island has substantial expertise in using its innovative trust structures to preserve both institutional and individual/family wealth and assets.
Guernsey is a British Crown Dependency with over 800 years of independent self-governance. It has its own long established democratic parliament and generous fiscal regime, and, owing to its strong ties with the United Kingdom, enjoys a close working relationship with the European Union.
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.