Trust Disadvantages and Solutions
Memorandum of Wishes – When setting up a discretionary trust it is common for the settlor to indicate to the trustees how the settlor would have dealt with those assets if they had retained ownership. The trustees will make a comprehensive note of these wishes in a written memorandum, to which they will refer when dealing with the trust property. The wishes of the settlor will not be binding on the trustees but, in practice, trustees would be reluctant to deviate unless a change in circumstance or other matters would make it clearly disadvantageous to the beneficiaries to act in such a way.
Protector – A ‘protector’ may be appointed to exercise some degree of control over the trust property. It is usual for a trusted friend, family relative or professional adviser of the settlor to be appointed, but it is also becoming increasingly common to use the services of a professional trust company. Sovereign is able to serve as a professional protector where we are not retained to act as trustees. In our view, it is unwise for a protector to be given anything other than powers to veto decisions or actions of the trustees. A protector that is empowered to direct the trustees actively might be deemed as a ‘quasi-trustee’ and this could have harmful consequences for the trust.
Two-tier company and trust structure – Greater flexibility can sometimes be achieved if the underlying assets are owned by a company that is in turn owned by a trust. The settlor, or an appointee of the settlor, can act as the director of the company, enabling them to exercise day-to-day control over the underlying assets with minimal interference or need to refer to the trustees. This two-tier structure can be used to good effect in certain circumstances but might have tax and other disadvantages if the director of the company is resident in a high tax country.
Joint trustees – A trust can be structured using joint trustees such that the agreement of both is required for any action. The second trustee could be the settlor or a company controlled by the settlor. Again, there may be negative tax or other consequences resulting if the settlor is resident in a high tax country. Alternatively, a ‘check and balance’ may be obtained by having two different professional trust corporations acting as joint trustees. This can be cumbersome and expensive but it may be suitable for certain trusts.
Private Trust Companies – A Private Trust Company (PTC) is a company formed for the specific purpose of acting as trustee of a single trust or a group of related trusts. Family members can participate in the management of the PTC and therefore in the decisions that need to be taken by the PTC as trustee, including decisions relating to the control and management of companies owned by the trustee.
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