Guernsey: Guernsey Innovates For Middle Eastern Wealth

Last Updated: 4 December 2014
Article by Fiona Le Poidevin

Most Read Contributor in Guernsey, November 2016

Fiona Le Poidevin, Chief Executive of Guernsey Finance, looks at what sets Guernsey apart from others as a premier location for private wealth.

Innovation has been at the heart of Guernsey's financial services offering for decades. The launch of 2-REG, the Channel Islands Aircraft Registry, at the end of last year further added to the Island's track record in this regard and provided yet another differentiator for Guernsey over many other offshore wealth management centres. Indeed one of the early registrations was an Embraer Legacy 600 corporate jet, which is based in the Middle East/Gulf region and flies on behalf of the owner between the Middle East, US and Africa.

Likewise, Guernsey remains the only jurisdiction in the world to offer its own image rights legislation and image rights register after introducing its own law in late 2012.

The introduction of both 2-REG and the Guernsey image rights register enables the Island to continue to meet the varied and ever-changing needs of international clients, who have an increasing desire to place their wider wealth management arrangements in a reputable and reliable domicile where quality service provision is at the fore. The platform to be in this position comes through the significant experience Guernsey has built up over more than 50 years as an International Finance Centre (IFC) servicing structures, such as companies, partnerships and trusts, formed for the protection of assets.

Fiduciary excellence

Many of the Island's 150 licensed fiduciaries already have Middle Eastern clients who have established structures, including trusts. The trust concept is rooted in common law and most popular in the US and UK, but some clients based in other parts of the world, including the Middle East, are less familiar with it and sometimes unsure about the prospect of losing control of assets which are held by trustees – albeit professional service professionals – on behalf of the beneficiaries.

Many are more familiar with a foundation, a civil law structure and an alternative to the trust. With this in mind, another development for Guernsey's private wealth sector saw it introduce its own foundations law at the beginning of 2013, thus giving service providers with an additional tool on the menu of options available for best meeting client needs.

Foundations

The foundation has been available in other jurisdictions for some time, but the Guernsey model is quite different. It was tailored to meet the needs of international private client advisers and their clients and as a result contains a number of advantages. A foundation is more like a company in that it is an incorporated entity with a separate legal personality where assets are owned by the structure. Having said that, a foundation differs from a company in that it does not have shareholders to whom the board are accountable but instead it holds assets (in its own name) on behalf of the beneficiaries, for particular purposes, or both. Council members act in good faith and cannot, without express authorisation, profit from their position.

A particular innovation of the Guernsey foundation is the ability for beneficiaries to be classed as either being 'enfranchised' or 'disenfranchised'. Enfranchised beneficiaries will have rights to certain information regarding the foundation, whereas disenfranchised beneficiaries are not entitled to any at all.

Guernsey has also taken note of the fact that some clients may worry about confidentiality because as foundations are registered entities, they are, unlike trusts, publicly visible. In Guernsey, only very limited details are available to the public whereas in some other jurisdictions the whole charter is commonly visible. Yet, Guernsey's approach means the limited visibility offers the benefit of easily proving the foundation's existence.

The early foundation registrations in Guernsey were for philanthropic purposes but we are also now seeing structures set up for more traditional private wealth management, estate planning purposes and other family arrangements.

Trusts

The emergence of the Guernsey foundation does not mean the trust concept has become any less popular in Guernsey, but means clients and advisers now have a greater choice for what best suits their needs. Trusts differ from foundations and companies in that they are not incorporated entities and have no legal personality. Assets within a trust are owned by the trustees on behalf of the beneficiaries. However, within the arrangements of a standard Guernsey trust there are now special provisions which allow for the Settlor to have some oversight of the wealth or assets. By using a structure involving a Private Trust Company (PTC) or purpose trust, the Settlor can have greater control – they may sit on the board of the PTC and also be in command of the purpose trust which is the ultimate authority over the PTC board.

It should be stressed though that, aside from the tax implications, there are dangers in the Settlor having control, especially if they are not experienced or have particular expertise in managing such affairs. Indeed, trusts have been successfully used for many years in the UK and US precisely because the trustees have been independent financial professionals. Similarly, where dynastic planning is the goal, for the family wealth to successfully pass down through the generations, the client will have to give up control at some stage. The PTC structure allows for control to be handed over gradually with following generations brought in as and when most appropriate.

Middle East families

What we are now seeing in Guernsey when specifically dealing with clients from the Middle East is that they often require a more flexible structure for asset protection and succession planning than is available through a Shari'a compliant trust.

Guernsey's depth and breadth of experience means it is well placed to provide for this type of family office service. For example, trust structures for Middle Eastern families can span from strict Shari'a compliance through to fully flexible Shari'a compliance, where the patriarch wishes to entirely ring-fence assets outside of the Islamic world, with a view to departing from the application of Shari'a law for a proportion of his wealth. This is particularly brought into play to rebalance the distribution of wealth between male and female heirs as modern families are just as likely to have daughters at schools abroad who will then return to the Middle East and play a key role in the family enterprise. In such cases, the patriarch may be keen to ensure his daughters are provided for in the same way as his sons, and this can be achieved by putting assets offshore outside of the Islamic world, Guernsey being one such suitable jurisdiction.

Section 14 of the Trusts (Guernsey) Law, 2007 provides a useful anti-forced heirship measure to protect assets held in Guernsey trusts from attacks by the Shari'a courts. Similarly, robust firewall provisions are also contained in Guernsey's foundations law.

Conclusion

The addition of a tailored foundations law to Guernsey's wider private wealth management offering is yet another example of what sets the Island apart from other IFCs. Similarly, the launch of 2-REG and the introduction of our world-first image rights legislation further demonstrates that Guernsey's hard-won reputation for creating an environment synonymous with innovation and high standards shows no sign of slowing down.

An original version of this article appeared in Wealth Arabia, November 2014.

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.

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