Michael Betley of Trust Corporation in Guernsey looks at the roles foundations and executive entities can have in developing private trust company structures.
When assessing the advantages of creating a trustee function in a tax neutral jurisdiction, one is usually surrendering control of one's assets to mitigate penal taxes and to facilitate the smooth devolution of wealth between generations. A common theme when addressing the structuring needs of the family centres around the decision making processes. In a domestic environment, families will very often choose individuals to act as trustees or protectors, however, in the international context this is more difficult.
The use of family or private trust companies (PTC) provides an attractive solution. Whilst they are not necessarily the panacea that many perceive them to be, PTC's are nevertheless a highly attractive vehicle for wealthy families in dealing with their wealth management needs. On the one hand a PTC offers an opportunity for families to coordinate and communicate their views to a sympathetic executive fiduciary and, on the flip side, the professional PTC manager can work within a more structured framework which restricts fiduciary and investment risk.
By housing the decision-making and management functions within a PTC, the relationship between the family and the professional managers becomes a contractual one, which for many (especially those from civil code countries) offers a greater degree of comfort and understanding. Perfecting the control and influencing mechanisms within a PTC revolves around managing the executive decision-making process. With more complex and diversified families, this if often the main area of potential conflict and risk. The Bahamas introduced the Executive Entity (EE) last year specifically to address this issue. The EE was designed to carry out executive functions and in particular those usually associated with non-trustee power holders (such as protectors).
An EE cradles the individuals in a protective cocoon of a corporate entity. The EE is a foundation hybrid established by a founder and, as such, has no shareholders. The comparative advantages between EEs and traditional foundations is beyond the scope of this article, however, a foundation can act in an executive capacity too and perform many of the management functions required to meet the perceived organisational and operational challenges of a PTC. Under Guernsey Law, a foundation must be established for a purpose (be it to hold assets or perform a function), but cannot carry out commercial activities unless they are necessary for, and ancillary or incidental to, its purpose. When considering their use with PTCs, foundations can be interposed in a number of ways to address control issues and to manage better executive functions.
A typical PTC structure will often have a company acting as the corporate trustee and to prevent issues arising from the ownership and control of the PTC, its shares are often held by a purpose trust or some other vehicle which "orphans" the shares and addresses succession issues and shareholder intervention rights. A foundation has no shareholder and is in itself an "orphaned" vehicle which could act just as well as a purpose trust. With existing PTC structures, the introduction of foundations in Guernsey earlier in the year allows families and advisers to replace existing individuals to act in executive functions. With pre-existing PTC structures which have overlying purpose trusts in place, the foundation can be used to replace the required purpose trust enforcer.
Protector (or other non-trustee power holders)
An extension of using a foundation to act as enforcer is to transfer certain power holder rights or other specified executive functions to a foundation. Often there may be committees established to undertake certain functions, which collectively have the power of veto or direct how a trustee uses its powers. Managing individual committee members may be more efficient if they are council members of a foundation such that there is a single decision emanating from the foundation itself. This also enables the family members to participate at various levels whilst allowing for easier participation and succession of roles.
PTC board member
One of the key advantages of a PTC is the ability for family members and trusted advisers to sit on the board of the PTC. This not only allows them to participate in framing the wider family wealth management strategies, but appropriately empowers the right individuals. However, for confidentiality reasons or for personal liability ones, individual family members may hesitate to act as an individual director. Conducting one's role through a foundation addresses both the confidentiality and liability issues.
With diverse family assets and interests, there is often a need to appoint a variety of third party professional advisers and/or blending these appointments with the engagement of individual family members with an interest in the relevant subject matter. Foundations can act in an advisory capacity, and contract with and advise the PTC board, but equally at individual trust or asset holding company level. This is particularly so with key assets or asset types such as works of art, real estate or commercial or family business interests.
Acting as trustee is a valid purpose for a foundation. A foundation can therefore be used in place of a company and act as a private trust foundation (PTF). Whilst this is a reasonably innovative use for foundations, it has some particular advantages over the traditional corporate model. The PTF is, as a foundation, already orphaned and therefore one particular advantage is that the PTF is a conflated version of a traditional model which should provide cost and administrative savings. A PTF will still be subject to the same regulatory considerations as a PTC.
The variety of uses of foundations in wealth management structures provide for an exciting addition to the stable of options for Guernsey fiduciary practitioners. As can be seen, they also provide an opportunity to allow chosen individuals to more fully participate in specific roles at the same time as containing risk and creating greater definition around the obligations and duties of certain executive functions through the contractual relationship which foundations help create.
Originally published in Private Client Practitioner's 2014 Guernsey Special Review, January 2014.
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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.