It is incorrect to assume that trusts cannot be revoked. Trusts can be made revocable but this usually has tax, estate duty, asset protection and stamp duty consequences. Revocability is a matter to be discussed when the terms of the trust are considered.
Loss of Control of Property
Many potential Settlors are reluctant to transfer property to Trustees because they fear loss of control over that property. For those who wish to continue to exercise effective control over the trust assets after the transfer, careful planning – together with an understanding of the fundamental legal requirements of a trust – is required if the trust is to remain valid. If a Settlor retains too much control over the assets there is a risk that the trust will not be effective and the Settlor will continue to be regarded by the law as the owner. If this happens all the advantages of having the assets held in trust may be lost. In particular, a court may force a Settlor to exercise any control he retains in a particular manner thereby negating any asset protection advantage that would otherwise have existed. Despite this, there are devices that may be used to give comfort to a Settlor.
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 he had retained ownership. The Trustees will then make a comprehensive note of those wishes in a written memorandum, to which they would refer before dealing with the trust property. The wishes of the Settlor will not be binding on the Trustees but, in practice, most reputable Trustees would be reluctant to deal with the trust property in any way other than that suggested by the Settlor except, for example, where a change in circumstance or other matters suggests it is clearly disadvantageous to the Beneficiaries to act in that manner.
It is possible to appoint a Protector to exercise some degree of control over the trust property. In our view, it is unwise for a Protector to be given anything other than negative powers – that is, the Protector’s powers should be limited to vetoing the decisions or actions of the Trustees rather than having power to force the Trustees to act in any particular way. If the latter, a Protector could be found to be a “quasi Trustee” and negative consequences may ensue, especially if the Protector were to be resident in a high tax country. It is usual for a trusted friend, family relative or professional advisor of the Settlor to be appointed as Protector but it is also becoming increasingly common to use the services of a professional trust company. For this reason Sovereign is able to serve as a professional Protector where we are not retained to act as Trustees.
Two-Tier Company and Trust Structure
Greater flexibility can sometimes be achieved by having the underlying assets owned by a company whose shares are then owned by a suitable trust, rather than the underlying assets being owned directly by the trust. The Settlor, or an appointee of the Settlor, may act as the director of the company and may therefore 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 may have tax and other disadvantages where the director of the company is resident in a high tax country.
There is no reason why a trust cannot be structured so that there are joint Trustees, with the agreement of both being required to take any action. The second Trustee may be the Settlor himself or a company controlled by the Settlor. Again, there may be negative tax or other consequences resulting from such a structure if the Settlor is resident anywhere other than a low tax jurisdiction. 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 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 company 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. Such participation would not be possible if the Trustee was a third party professional trust company.
A third party professional trust company will often not be in a position to offer the Settlor the degree of flexibility and the speed of response that they require – and its employees cannot be expected to be as familiar with the business of companies owned by the trust as the family members themselves. Decisions may have to be referred internally or external advice obtained before they can be put into effect. If a change of Trustee is desired it can be a lengthy and expensive process. But with the PTC structure, these problems can be largely avoided. Directors familiar with the business make the decisions and, if a change of direction is desired for the management of the trust, this can be achieved by changing the board of the PTC. A PTC can therefore provide greater comfort for the Settlor that his or her objectives in creating the trust will be met.
It is usual and advisable to have at least one director who is a trust expert because running a trust company is complicated and is also very different from running a normal company. To avoid arguments that a trust is a sham, we believe it is vital to have expertise on the board to add substance and credibility to the PTC and to ensure that the PTC – and any trusts that it administers – is run correctly.
The directors of the PTC must remember that all decisions that they take in relation to the trust must be in the interests of the Beneficiaries as a whole. They should not be unduly influenced by their personal circumstances or desires.
Generally an offshore trust will only be subject to the offshore tax regime if it is administered by a trust company that is managed and controlled offshore. To achieve this, it will generally be necessary to have at least a majority of directors residing offshore. If the Settlor is an onshore resident, then they could be one of the directors, but onshore family members should not form a majority on the board.
More important than the constitution of the board will be the ultimate ownership of the PTC because this will, if the owners feel it necessary, allow them to remove directors and replace them. In this way the aim of having more control over the affairs of a trust would not be compromised, even if no family members were represented on the board, provided that ownership is in the hands of the Settlor or his family.
For this reason a PTC is best set up as a company limited by guarantee whose members can be appointed and removed, or cease to be members, upon death or the attainment of a certain age. As a result, the ultimate control of the PTC can rest with the family irrespective of the constitution of the board of directors, thereby giving the Settlor added comfort, while also avoiding any problems associated with having to transfer shares on the death of a member.
All the principal offshore locations now have in place licensing regimes for professional Trustees but many jurisdictions specifically exempt PTCs from the requirement to be licensed and regulated, provided that the PTC acts as Trustee solely of a specific trust or group of trusts, and does not solicit from, or provide trust company business to, the public. In most cases there is also no requirement to submit any reports or accounts to any statutory body of either the PTC itself or of the trusts for which it acts as Trustee.
Although the costs of establishing both a PTC and the trust or trusts of which it is to act as Trustee, are generally higher than the cost of simply establishing a trust, the ongoing costs may be less than the Trustee fees that would be charged by an independent third party Trustee. This is particularly the case where the trust assets are very substantial because independent Trustees will often charge fees based on a percentage of the assets.
It is often assumed that the costs of running a trust are prohibitive. It is true that many of the major banks and other financial institutions charge hefty fees for setting up a trust and also charge a percentage of the trust assets in annual administration fees. The fees charged by smaller, independent trust companies are generally more reasonable and make trusts affordable to relatively modest estates. Independent trust companies offer a more personalised service and also benefit from the fact that they are truly independent. They can therefore select the best investments for the trust without being under pressure to place trust money with their own in-house investment advisors.