The purpose of this briefing note is to set out some of the benefits of Guernsey purpose trusts, whether hybrid or non-charitable, the main issues to consider when contemplating the establishment of a purpose trust, their main features and some of their uses. Primarily, the benefits revolve around wealth management and preservation, but they can serve many purposes and take many forms, depending on the requirements in each particular case.
What is a purpose trust?
Any trust established to further a purpose (whether charitable or non-charitable) is strictly speaking, a purpose trust. However, trusts established to further a charitable purpose are commonly referred to as "charitable trusts" and trusts established to further a non-charitable purpose as "purpose trusts". We adopt that terminology in this memorandum. Traditionally, trusts were established to provide either for beneficiaries or to further a charitable purpose with trusts established for advancing a non-charitable purpose being unenforceable in most jurisdictions. The Trusts (Guernsey) Law, 2007 (as amended) (the "Trusts Law") came into force in March 2008 and specifically provides for the use of non-charitable purpose trusts in Guernsey.
Guernsey law also permits the establishment of hybrid trusts which mix charitable and or non-charitable purposes and or beneficial trusts. With hybrid trusts it is possible to have both purposes and beneficiaries or, if desired, the option to add beneficiaries at a later date if needed. Purpose and hybrid trusts are being used more and more in Guernsey because of their versatility - for example, when using trust structures to assist in tax, estate planning or company restructuring, it may be of considerable assistance to a settlor to be able to create a trust in which no company or individual has a beneficial interest.
Creation of a purpose trust
A purpose trust is created when assets are vested in trustees for specific purposes. "Purpose" is defined in the Trusts Law as, "any purpose whatsoever, whether or not involving the conferral of any benefit on any person, and includes, without limitation, the holding or ownership of property and the exercise of functions". Under Guernsey law purpose trusts must have the same legal certainties as are required in relation to any Guernsey law trust. Accordingly, there must be absolute certainty as to the:
- settlor's intention to establish the purpose trust;
- property to be held on trust; and
- purposes for which the purpose trust is being established (see further below).
A purpose trust must not be so uncertain that its performance is rendered impossible, contrary to public policy, or immoral.
A purpose trust operates in much the same way as more traditional types of trust structures and the form and content of the trust documents are usually similar. A purpose trust, like any other type of trust in Guernsey, must have trustees who will hold the trust property on trust subject to the powers and duties set out in the trust instrument and the Trusts Law. The trustees' overriding fiduciary duties will include acting in the advancement of the purposes instead of or as well as (depending on the nature of the trust) in the interests of the beneficiaries or the trust's charitable purposes.
A distinguishing feature of a purpose trust is that an enforcer must be appointed to enforce the trust in relation to its non-charitable purposes as there often no beneficiaries that are able to enforce those purposes. The enforcer can be a corporate entity or an individual, cannot be the trustee but can be the settlor. Additional powers can be given to the enforcer such as a power to appoint and remove trustees or the enforcer's consent could be required before the exercise of certain powers by the trustee. Under the Trusts Law, an enforcer must not profit, directly or indirectly, from his office unless the terms of the trust permit such profit or unless such profit is sanctioned by the Royal Court of Guernsey. As is the case in relation to professional trustees, express provision is usually made in the terms of the trust instrument for payment of a professional enforcer's fees and expenses. An enforcer's statutory rights to documents and information concerning the trust are limited. Under the Trusts Law, the enforcer has the same rights as a beneficiary to see documents which relate to or form part of the trust accounts. It is possible to include more extensive rights in the trust documentation.
The non-charitable purposes must be clearly drafted so that they are legally valid and administratively workable. For hybrid trusts the purposes can include a requirement to administer the trust in the interests of any beneficiaries but as a minimum for all non-charitable purpose trusts the purposes must fulfil the intentions of the settlor and must be drafted so that the trustee and the enforcer each understand and are able to fulfil their duties/functions under the terms of the purpose trust. Any ambiguity as to what is intended or whether a particular action is within a particular purpose may render a purpose uncertain and possibly the whole trust invalid.
Under clause 59 of the Trusts Law, where trust property is held for a charitable or non-charitable purpose and in circumstances including where, "the purpose has been, as far as may be, fulfilled...the purpose cannot be carried out, or not according to the directions given and to the spirit of the gift..." on the application to the Royal Court in Guernsey of Her Majesty's Procureur, the trustees or the enforcer a declaration may be sought that the trust property (or the remainder of the trust property as the case may be) shall be held for such other charitable of non-charitable purpose as is consistent with the original intention of the settlor.
The Royal Court may also approve any arrangement to vary or revoke the purposes of a purpose trust to modify the trustees' powers, providing it is satisfied that such arrangement is, "suitable or expedient" and is "consistent with the original intention of the settlor and the spirit of the gift". Where such an application is brought, the court must be "satisfied that any person with a material interest in the trust has had an opportunity to be heard."
Uses of purpose trusts
As with other types of trusts, purpose trusts (which as with all other types of Guernsey law trusts may continue in existence for an unlimited period of time) can be used in a variety of ways for commercial, succession or tax planning reasons including:
- to hold shares in one or more companies (special purpose vehicles). In a private wealth structure, such companies would generally own their underlying assets (eg real property, boats, planes and investment portfolios) and may in a corporate and commercial transaction where there may be a preference for their use be "orphaned" vehicles;
- to hold shares in a private trust company where that company acts as trustee of one or more family trusts. The associated additional control and confidentiality may be especially attractive to high net worth individuals or family offices and as the shares will fall outside the estate of any one or more individuals the use of the purpose trust in this way has the benefit of dealing with any succession issues and continuity of the private trust company;
- to hold shares in a family business to aid with succession or for investing in family companies where economic performance is poor or uncertain; and 4. philanthropic - where trusts for purposes which lack an element of public benefit (and so would not be regarded as charitable) may be created and run in a similar way to charitable trusts.
Since the enactment of the Trusts law there has been an increased focus on the use of purpose trusts: they provide a flexible solution where assets need to be held for particular purposes without giving any person or class of persons an interest in those assets and it is possible for specific purposes to be combined with beneficial trusts and or charitable trusts. Given the versatility of purpose trusts, it is anticipated that their popularity whether in a commercial or private wealth context will continue to grow.
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.