By G. Alan Evans, Managing Director, H&P Trust Company Ltd., Jersey
Whereas trusts go back to medieval times and their concept has been shaped over the centuries, nowadays both domestic and international trusts are among the most flexible and efficient of legal structures and are increasingly used in a wide range of private and commercial applications. However, the situation has changed considerably over the past few years and the global environment has become particularly hostile to international trusts established in the world's low or no-tax jurisdictions. Numerous international trusts established a generation ago no longer play a useful role and have turned into a liability as many tax advantages have been eliminated, or have even become a tax burden for their settlors and beneficiaries. Furthermore, a heavy but inevitable regulatory burden in combination with higher fees and other costs in all reputable international trust jurisdictions such as Jersey have made the establishment and maintenance of trust arrangements increasingly expensive. Nevertheless, there are still many valid situations where international trusts can play an important role in the international structure of both private wealth and commercial transactions.
A brief comparison - ten years on
Some ten to fifteen years ago the most common form of trust in Jersey was a simple discretionary trust acting as an umbrella for underlying private assets as well as commercial and investment companies. This structure is still the most frequently used today. Although it offers a useful and practical management structure, a discretionary trust was most often put in place primarily to present a mask of confidentiality and to act as an insurance against unforeseen events happening to the client. In effect, the discretionary trust was used as a commodity and was often designed to run merely during the client's lifetime and to provide a structure for distributing his assets upon his death. Quite often, both professional trustees and clients (from their own perspectives) expected the structure of the trust to remain essentially unchallenged, and trustees felt very safe behind their statutory powers. While the reduction of tax liabilities was and often still is the key motivating factor in establishing a trust, at that time many countries did not have anti-tax avoidance legislation in place so it was safe and often perfectly legal to use properly structured foreign trusts to avoid taxes in high-tax countries. But life is no longer that simple, and more sophisticated tax laws and anti-avoidance legislation worldwide make it increasingly difficult if not impossible for clients resident in high-tax countries to make use of foreign trust structures.
The broader environment at the time was also conducive to this approach because despite the structure of laws and practices then in place, the trust company industry in Jersey consisted of a wide range of players - from major international firms to sole private practitioners - who set their own standards and code of conduct. However, although it cannot be concluded that any group was less professional than any other, there were no specific or comprehensive regulations or guidelines designed to ensure that trust companies were financially sound or that their staff were trained and experienced. Most firms were authorised to conduct business on the sole basis of the experience and qualifications of their founding partners. Each firm would decide what systems and controls to put in place and what client selection criteria to adopt. Again, life is no longer quite so simple, as Jersey has built up one of the world's most regulated environments for financial and trust services over the past few years.
It may be fair to suggest that it used to be very convenient for many trustees adopting a more relaxed attitude not to have to enquire too closely into a client's affairs and to use ignorance of the client's overall activities as a viable defence. The well-known Rahman case was one of those which highlighted some of these weaknesses but appeared to do little to change the overall mind-set. In the meantime, however, the world has changed considerably in this regard too.
The current environment and issues affecting trustees
September 11th merely added another dimension to a process already under way. The industry is dominated by issues of compliance and concerns for reputation and the avoidance of a negative press. In Jersey's case this has meant the introduction of a comprehensive code of licensing and regulation aimed at ensuring high minimum standards in the local industry and achieving a recognised leading position amongst its peers. Whether or not trustees took their duties lightly in the past, in the present environment they must be able to show that they live up to the most stringent requirements. The new client-acceptance procedures are intended to be rigorous and must be comprehensively documented, the internal management is subject to audit, the client accounting must be complete and also supported by extensive documentation. Needless to say, the costs associated with the establishment and maintenance of a trust structure have risen accordingly.
When establishing a new client relationship, trust companies are now asking not only what they will be doing for the client and why but also how their activities would appear to third parties? What will the staff think about the new client, what might the auditor and possibly the regulator say?
One major bank in Jersey refuses to do business with clients from certain countries. This is certainly one approach to avoiding potential problems. Some jurisdiction regulators have taken equally sweeping decisions. Now that some organisations or entire jurisdictions essentially refuse to accept clients from certain countries, those who choose not to discriminate by nationality or origin must ask themselves how they may be perceived if they continue to accept clients from such countries?
When does a client's requirement for confidentiality give the appearance of suspicious activity? Many clients insist that transactions should not expose their structures unnecessarily and trustees usually understand this. Trustees traditionally and habitually disclose as little as possible about their clients - indeed they are bound by a code of professional confidentiality - and such an attitude has become instinctive for trustees who have been in the profession for many years. Many trust companies use their general client's and broker's accounts to process or clear stock trades and payments - a common enough and efficient activity, but does it imply to a third party that they have something to hide? The staff of trust companies are now obliged to express their concerns openly and are legally liable to be alert to and report any suspicious activity. So an attitude of maintaining confidentiality has become inherently suspicious.
It should also be of concern that historically many trustees did not place a strong emphasis on the comprehensive documentation of their actions and decisions - and certainly fell short of today's expected standards. Trustees may be required to prove that they have shown due deliberation in responding to requests from beneficiaries, and despite the evident commercial soundness of their underlying decisions, they may easily find themselves on the defensive merely for the quantity of their paperwork (or lack of it).
Younger staff may accuse senior trustees of having a problem in coming to terms with the current environment - after all, they must square their old instinct to maintain maximum confidentiality with the need to cover themselves with comprehensive records and documentation. Such criticism is certainly valid but it is probably less certain as to where the goalposts should be repositioned.
Costs of compliance and increased involvement of the courts
Jersey has experienced a small revolution in the last two years, although the introduction of the changes was overdue and not surprising to many in the industry. Trust companies are required to apply for a licence and pay a fee according to their size which pays for their regulation to some degree. Staff are required to meet formal training targets before they are eligible to hold positions of authority. Compliance in itself is a non-fee-generating activity, as are the additional audit and reporting requirements. Like all other well-established jurisdictions, Jersey is not seen as a low-cost centre, and the increased compliance regulations will no doubt make it even more expensive and consequently less competitive.
Together with the increased cost of due diligence and compliance procedures, there is also a trend to seek the guidance of the courts in the early stages of disputes. This is both expensive for the relevant trust and can be perceived as an abrogation of the trustees' responsibility to the court. In a recent case, each of five classes of beneficiaries retained their own legal counsel, three of whom also appointed QCs. The results so far, especially the deliberations of the court, have been consistent with the concept of achieving the best settlement for the beneficiaries as a whole - a simple concept irrespective of the complexities of the case. Ultimately, the court refocused the parties back to basic principles. This is no more than any responsible trustees would have suggested.
Recent developments and examples of cases
The classic trust deeds, written in a style of English which can only have been invented to assist the trustees and confuse everyone else, make provision for wide powers and protections. What has changed is the way many trustees must now think about their powers and responsibilities and how they should approach their business.
A request for information from a beneficiary would previously have been met with the issue of a limited summary at best. However, the general mood and the judgements of the courts are inclining increasingly to a view of - as they see it - fairness and equity irrespective of the actual terms and restrictions built into the trust documentation. There is now also the added potential of "intrusion" of transparency.
There is a current, ongoing case in Jersey where - as so often - the relevant information is of different value to different classes of beneficiaries. Thus an ex-spouse wants a valuation to use in a divorce case in another jurisdiction, claiming that the court should award a settlement based on a percentage of combined matrimonial and trust assets and ignore the details of the trust structure. The husband may have to ask the trustees to release sufficient assets to meet the judgement. To the young children who are the principal beneficiaries, neither the mother's nor the father's potential situation improves their own.
Another case has created a situation where the trustees have been challenged by one class of beneficiaries to defend their actions in such a way that this defence would in itself lead to the disclosure of otherwise confidential commercial information. In the view of the trustees, the information would be used to try and undermine investments advantageous to the beneficiaries as a whole, as there is an underlying grievance outside the trust.
What should one think about a situation where, following a divorce and settlement, the ex-wife demanded that the trustees add as yet unborn children of her future relationship as a class of beneficiaries? The trust was established with matrimonial assets for the benefit of the parents and "their children".
In the few situations highlighted here, only ten years ago trustees had no hesitation in taking a robust stance but might now hesitate and look to their legal advisors or call on the guidance of the courts. These days, it may well be asked whether trustees are not too quick to seek answers outside the scope of their own rights and authorities.
What does the future hold?
After all that has been said here, there are still good reasons for private clients to look at international trusts as a viable vehicle for international wealth structuring and estate planning. Jersey is one of the most attractive jurisdictions in this respect because it is independent and has its own established judiciary which is able to try complex cases. Whilst the Jersey courts operate on the basis of English trust law, they do not automatically defer to English law. Some of the most important precedent-setting cases are being heard in Jersey and there is strength in depth in the industry and amongst the legal profession. All this bodes well during a period when independent governance is encouraged. Indeed, this independence of the judiciary in developing case law is also what makes Jersey one of the world's most important and reliable jurisdictions for establishing trusts.
Respected trustees in reputable jurisdictions will be less inclined to accept new business now and in the future, however compliant in other terms, unless it is demonstrably viable or bears at least a measurable commercial risk. Trustees will be less inclined to create lifetime commercial umbrella structures on the presumption that nothing adverse would occur. Finally, trustees are also much more alert to family issues that could potentially affect trust structures.
Compliance will continue to play an important role. Its implications are twofold: firstly, no sole traders are allowed, more highly trained staff and improved client-acceptance criteria are required. This should result in better documented and managed businesses, a factor which bodes well for the development of new business. But the implications also have a negative side: commercial business typically held under discretionary trusts is subjected to greater risk and acceptance analysis by trustees and there may be a trend away from any business which is out of the ordinary or difficult to quantify.
A list of the fashionable catchphrases of the finance sectors worldwide now includes good practice, vetting of clients, due diligence, and so on. Trustees also increasingly focus on the need to be seen to do the right things and to demonstrate their independence as trustees. In an ever more competitive environment leading to greater consolidation in the trust and wealth management industry and with large players taking over smaller ones, independence is a key factor and one of the cornerstones of the international trust business in the 21st century.
Key Issues Affecting International Trusts and Trustees
G. Alan Evans is the managing director of H & P Trust Company Ltd., one of a select group of Jersey trust companies that have retained their full independence. Its four directors each have around 25 years experience in the international banking and trust industry.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.