With Guernsey's new Foundations law coming into effect back in January 2013, Guernsey now has the full 'toolkit' of fiduciary structures for wealth planning needs. In this briefing, Heath Martorella looks at the key issues for international clients and their advisors to consider when choosing the right Guernsey structure.
As recently as six years ago, a discretionary trust was the principal Guernsey fiduciary structure offered to international clients. Now, a far wider choice of structures is available following the advent of the Trusts (Guernsey) Law 2007, which allows the creation of non-charitable Purpose Trusts, Reserved Powers Trusts and Private Trust Companies, now accompanied by the new Foundations Law which came into effect in January 2013. But what are the key factors that clients and advisors should consider before making their choice of structure?
For many, a discretionary trust will remain the 'strongest' form of structure. This is due to the complete separation of assets out of the control of the settlor, into the hands of the professional trustee as the new legal owner. The aim is to place the assets beyond the reach of unwarranted hostile parties. For maximum effectiveness, the settlor should not retain any trust powers or act in any official capacity such as a co-trustee or protector. This would extend to any persons who might be affiliated with the settlor, or the same jurisdiction as the settlor. These are also considerations for Private Trust Company ('PTC') structuring - i.e. who will be the Directors? Who will own the PTC?
Other suggested actions would be to ensure that the trust document does not permit the proper law and forum of administration of the trust to be changed to a jurisdiction affiliated with the settlor or any of the beneficiaries. The trust structure should ideally not have any actual or potential footprint in any jurisdiction where a claim might be brought, recognised or enforced - or where an injunction might be ordered. These considerations also extend to the situs of any assets the trust might own. The confidentiality benefits of trusts should not be underestimated, as these form an equally important pillar of asset protection (see "Confidentiality" below). With foundations, the above points are still valid and need to be considered by the founder, councillors and any guardian. Around confidentiality, whilst Guernsey Foundations are publically registered and must disclose limited information, the fact they are registered entities may be helpful in defeating any unwarranted claims of a "sham" arrangement, which can be a line of attack against trusts. Also, the councillors will owe their duties to the foundation itself (like a company) - and not to the beneficiaries (as with trusts).
Confidentiality of information and asset protection can also be brought into play where a founder might stipulate that a beneficiary of a foundation must enter into a pre-nuptial agreement before marriage, in order to remain an enfranchised beneficiary with rights to information about the foundation (see "Confidentiality" below). Please also see an excellent briefing in this field from our associated law firm, Collas Crill by clicking here: Asset Protection in the Channel Islands
For many clients, maintaining the confidentiality of their affairs is still a key consideration. We are speaking only of legitimate confidentiality needs here - for example high-profile families, or those who wish to avoid inter-family disputes over their wealth in the future.
In these scenarios, a discretionary trust will afford the highest degree of confidentiality, as there is no registration of trusts. (As a sidenote - in the current political climate it is important to stress that Guernsey trust service providers are regulated by the Guernsey Financial Services Commission, giving the regulator the ability - if ever necessary - to make enquiries and receive information where it has legitimate concerns about any trust, in strict confidence. This is in contrast to the unregulated position in some onshore countries.)
Where clients wish to mitigate the possibility of future disputes between beneficiaries, then there may be merit in considering a Foundation, albeit that very limited details are disclosed publically (see below). With a trust, beneficiaries have an 'equitable interest' in the trust assets and thus rights to information about the trust. The trustee can therefore face a difficult task to resist disclosure where it is concerned that information will be used by a beneficiary to initiate unwarranted and hostile actions. Guernsey Foundations law helpfully allows for the creation of two classes of beneficiaries; enfranchised - with rights to information and disenfranchised - with no rights to information about the Foundation's affairs. The Foundations law envisages promotion/demotion of beneficiaries between these categories. The will however be represented by a Guardian (akin to a protector) to provide oversight and reassurance. So if this is a possible solution, what information about the Foundation will be disclosed publically, since it is a registered entity? This information is limited to the name and registered number of the Foundation, its registered office address and the names and addresses of the councillors and any guardian. It should be an achievable scenario to ensure that a professional Guernsey fiduciary and non-related parties to the settlor are appointed as councillors to the Foundation - and to avoid the founder and his/her other family members fulfilling any roles. The Guernsey fiduciary could act as the sole councillor. Should the Founder wish to retain some ultimate control over the Foundation, where s/he does not act as a councillor, the Founder can still reserve key powers during their lifetime e.g. to remove and replace councillors, to wind up the foundation.
"Wealth never survives three generations" - Chinese proverb
An objective of many structures is to ensure the preservation and smooth transition of wealth to future generations. Research from Oxford Place in 2012 suggests that only 9% of wealth actually passes beyond three generations. By 'wealth', this might also include a significant family business, as well as cash, property, investments etc. A discretionary trust structure will again come into contention here - particularly where the client is aiming to hold wealth or a business together to avoid potential family conflicts, or the possibility that younger family members may not possess adequate skills and expertise. A trust will provide stability of ownership of the wealth or business. However, when dealing with a family business, the trustee (acting both as a shareholder of the company and as a trustee with obligations towards the beneficiaries) will play a very important role in balancing the interests of the company versus the beneficiaries' interests. Disagreements between beneficiaries might also arise e.g. as to how the business should be run, strategy around dividends. At the outset, the trustee will not be knowledgeable about the affairs of the family company, and will either need to acquire this knowledge over time, or possibly seek advice - perhaps via some form of family advisory committee, or an external adviser. Private Trust Companies and Foundations can offer a useful tool, where there is less risk of family disagreements, and the client is keen to involve family members. The Board of Directors of a PTC can include family members, or even go as far as mirroring the Board of a family enterprise. The same is true of Foundations, with the composition of the Council members.
One issue to consider is the possible separation of the "stewardship" of assets from their "control". Practically, this could be achieved in different ways; as an example, the PTC or a Foundation might have executive committees or advisory committees with different remits. The "stewardship" committee could include the patriarch and younger family members with a remit to oversee/ manage the wealth or family business. The "control" committee might include the professional fiduciary company, possibly joined by the patriarch or matriarch as settlor/ founder; only this committee will have the power to consider and authorise distributions to beneficiaries.
As noted above, Foundations include the ability to nominate which beneficiaries are enfranchised or disenfranchised. This may be useful depending on whether or not certain beneficiaries wish to become involved with the Foundation's management, or where the founder is concerned at possible disputes arising in the future. Changes can be made to promote / demote beneficiaries in the future, as circumstances change.
TYPES OF ASSETS TO BE HELD
The types of asset to be held will be an important consideration in choosing the right structure. This is also a key issue for fiduciaries, who might be comfortable administering a trust structure holding a balanced portfolio of stocks and shares, but not structures containing undiversified higher-risk assets - such as art or large shareholdings in private companies. For higher-risk assets, the concern is that the trustee could be held liable for failure to act prudently and diversify the assets in accordance with trust law.
The holding of higher risk / less diversified assets is often dealt with by the creation of a Private Trust Company, a Foundation or a Purpose Trust.
Private Trust Company - As the name suggests, a PTC will allow clients, their family members and professional advisors to form the board of Directors of their own incorporated trust company, which will act as trustee to family trusts. As such, they will be fully involved in the holding and administration of the higher-risk assets held in the trusts of which the PTC is trustee. The PTC is ultimately accountable to the family members who are beneficiaries of the trusts it administers. PTC boards will often include a professional Guernsey trustee, to add strength from a governance and administration perspective, but with reduced risk, as the Guernsey fiduciary is only one of a number of directors. Some PTCs will also take out their own PI insurance, giving further comfort to the professional fiduciary. Foundation - A Foundation will also be useful in the holding of higher risk assets, and the constitutional documents can enshrine that one of the purposes of the Foundation is to hold specific assets. This is perhaps a preferable route to the PTC, as the duties of the Foundation's councillors under law are towards the foundation itself (similar to a company), and not the foundation's beneficiaries.
Purpose Trusts - Another route to consider will be the use of a purpose trust, stating that one or more of the purposes is to hold certain assets - this is particularly useful for wasting assets, or for assets such as art collections which are to be held for the long-term enjoyment by present and future generations. "Hybrid" trusts can be created to combine purposes with a class of beneficiaries.
Reserved Powers Trusts - These forms of trust allow the settlor to retain powers to select and manage the trust investments, either by way of restricted power of attorney to manage the assets directly, or by directing the trustee. However, these trusts are not as widely used since the trustee can find itself in a difficult position if it becomes concerned around the management and ongoing suitability of the investments administered by the settlor using their reserved powers, notwithstanding indemnification terms in the trust document. This would inevitably lead to a difficult situation where the trustee might have to try and remediate the situation, or seek to have the settlor removed of their powers, or possibly resign.
Use of SPVs - In any of the above scenarios, further legal protection might be afforded if higher-risk assets are held via an SPV, rather than directly in the name of the trust or foundation. This will generally assist in ring-fencing any problems with the assets themselves - to prevent the parent structure and its other assets being drawn into any hostile actions.
I will leave the topic of tax to professional advisers, except to say that tax planning will often be an important issue - but not the sole issue in the design of structures. Particular care will be needed around the residency and domicile of beneficiaries who are internationally mobile e.g. someone who might acquire a footprint in a country such as the UK or US, including obtaining a US Green card. Tax considerations are also key for those persons who wish to be involved with the management and control of the structure in some way - such as co-trustee, councillor, protector or guardian. The place where meetings and decision-making will take place is very important - whether for the trustee, PTC directors or Foundation councillors. The situs of the proposed assets may also be relevant.
There could be other issues for international clients to consider when choosing the right structure. These might include: Forced heirship issues - does the client wish to benefit certain family members from a different way from that permitted under the heirship laws in the client's country of residence? If so, which are the unrestricted assets that the client can place into the structure, and how much (if any) control they can retain?
Philanthropic endeavours - will part of the wealth be set aside for charitable endeavours? Will there need to be some family representation to decide upon and oversee donations? It might be that more than one type of structure is used e.g. a trust for wealth planning, and a foundation for charitable endeavours.
CONCLUSION - A BALANCING ACT...
The wide choice of structures now available in Guernsey offers clients flexibility to choose the most appropriate structure for their needs. The above issues will be key considerations in the planning stage, and clients and advisors will often need to take into account some or all of the above issues. There will often be "trade-offs" to consider. As an example, if the client seeks more control over a structure, this might come at the expense of confidentiality, and there may also be tax implications.
A "stress-test" exercise for a potential structure can be a useful tool - e.g. Will it withstand divorce? What if my children argue / or do not wish to become involved with managing wealth? Is there flexibility to amend the terms of the trust or foundation if circumstances change? Do I want anyone else to exercise my reserved powers as Founder when I am gone?
Asking these sorts of questions will assist clients and their advisors to choose the most suitable and robust structure for the client's long-term objectives.
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.