"Legal advisers in international finance centres have devised an efficient vehicle that permits the modern settlor ‘control’, ‘confidentiality’ and ‘capacity’, explains the BVI's Hélène Anne Lewis
When the knights of the Middle Ages established the practice of permitting their friends, neighbours or relatives to hold and manage their assets on their behalf, while they went off to war, human relationships were built on such concepts as (to use a pun in this context) ‘trust’. Integrity and honesty were not old fashioned values but were highly regarded character traits that were the norm not the exception. The role of trustees was sacrosanct, and although there were undoubtedly many unscrupulous people who defrauded the settlors of these early trusts, the courts of equity have ensured that the practice of entrusting assets to others has evolved and survives in the 21st century.
In many ways the common law trust is more popular than ever and its use as an effective succession planning tool has gained currency around the world even in non-common law jurisdictions in Europe, Asia and Latin America, some of which have introduced statutory arrangements that closely replicate the medieval relationships that came to be known as trusts. However, the difficulty with trusts for non-common law lawyers and their clients has always been that the relationship is plagued by separation anxiety! The settlor must hand over his assets to the trustee and essentially look away while the trustee undertakes to manage the trust assets for the benefit of the beneficiaries. It has never been easy to explain that reality to individuals who are simply attempting to protect their hard-earned wealth for their children and grandchildren, and even in modern English courts there are a plethora of cases where trust assets have been dealt with by settlors in negation of the trust arrangement. The concept of ‘control’, so essential to ownership in property law, causes deep conflict when one comes to consider the law of trusts. Happily, providing comfort to clients challenged by the conundrum of giving away assets in order to preserve them, has led to innovation in the trust sector.
Noting the increased sophistication of wealthy clients who are attracted to the trust, not only as a useful and efficient planning tool, but also as an investment vehicle, legal advisers in international finance centres have devised an efficient vehicle that permits the modern settlor ‘control’, ‘confidentiality’ and ‘capacity’. Melding the features of company law with those of trust law, the introduction of the private trust company (PTC) has revolutionised succession planning and made the common law trust an even more attractive proposition for a new generation of ‘settlors’. Structured as a company, the PTC is formed for the purpose of acting as a trustee of a specific trust or group of trusts that are related. The PTC is a more attractive prospect as a trustee because it is a personalised tool tailored to individual needs, rather than a professional corporate trustee that serves myriad clients for usually hefty annual fees. Individuals no longer easily accept appointment as trustees and professional trustees can be quite remote and inflexible in the discharge of their duties. Although the PTC will usually be subject to regulatory regimes in their place of incorporation, such regulations are not usually onerous and do not outweigh the numerous advantages of the PTC as trustee.
As a corporate entity the PTC will be specifically governed by its statutory documents, which should include a statement that the company is incorporated for the purpose of acting as a trustee, and benefits from the essential features of a corporate personality. As a corporate vehicle, the PTC will have an unlimited existence and limited liability – both highly desirable features in a trustee. It is, however, the personalised nature of the PTC that may be most appealing to the modern settlor. Whereas a professional trustee in an international finance centre is an institution with which the settlor is most likely very unfamiliar, the PTC can be individualised by the appointment of directors from amongst the settlor’s own family friends or trusted advisors. It is this feature of the PTC that makes it so attractive for settlors not comfortable with the traditional trust arrangement, by giving them some control over the trustee’s decisions, since they have control over the appointment of the directors of the PTC. This is particularly appealing to the settlor who is a relatively young person with a desire that the family business be kept as a going concern and that family members continue to be involved in the management of the business.
The facility of avoiding the high costs of a professional trustee – since a PTC will be structured so as to avoid such costs – offers another attraction. After all, the PTC is created by the settlor specifically for the trust also established by the settlor, so there could hardly be significant charges!
As well as control, using a PTC as part of a wealth-management or succession-planning structure, offers the settlor and the beneficiaries a certain degree of confidentiality that is not to be discounted in the increasingly difficult environment that pervades modern business relationships. Although the PTC will be subject to all prevailing regulations regarding disclosure of the identity of its principals, it should be noted that the particulars of the business affairs of the settlor and his family will essentially remain confidential, whereas an institutional trustee that will assign several different individuals to manage the trust and its assets, offers no such comfort. The PTC will essentially form part of the family business and although it is highly recommended that a professional trustee be used as one of the advisors of the company, and will need to be a service provider to the company in its home jurisdiction.
For the modern sophisticated settlor, the management of trust assets is an underlying cause of scepticism. Where assets comprise shares in a closely held family business that has been passed on from previous generations, or indeed shares in publicly traded companies, the settlor wants to be assured that decisions regarding the trust assets can be taken in a timely and competent manner, especially where specialist knowledge would be itself an asset. In these circumstances a PTC – the board of which is comprised of family members or close advisors – has the capacity to be a more flexible and responsive decision maker than a professional trustee that may not have the relevant expertise in-house, and in any event may feel constrained by the traditional rules that govern a trustee’s powers and duties. The extreme caution that would usually inform the decisions and actions of a professional is much less likely to affect the decision making processes of a PTC and although the question of liability of the PTCs directors ought not to be discounted, it is extremely useful for the settlor and his beneficiaries to have the advantage of flexibility and responsiveness.
When using innovative structures and statutory vehicles in succession planning, the risk of being deemed a sham used to be a cogent deterrent. With the PTC, that risk is mitigated by employing the services of professional advisers at the inception and relying on their advice as service providers, even as directors of the PTC. Because it is of fundamental importance to avoid the very real risk of too much settlor involvement in the management of the PTC and the trust assets, it is critical that the directors of the PTC employ independent decision-making processes especially with regard to making distributions of the trust assets. They should also not hesitate to rely on professional advice in the administration of the trust assets and the preparation and maintenance of accurate financial and corporate records regarding the PTC and the trust itself. Although personal liability of directors is not a very real risk where the use of a PTC as trustee is concerned, it is nonetheless prudent to ensure that directors’ decisions are taken in accordance with the PTC’s Memorandum and Articles and the governing law generally. The common law rules are not to be ignored or overlooked because, after all, the PTC is acting as a trustee. Their decision making is still required to be in accordance with all the traditional rules and they should not consider themselves merely the settlor’s nominees to be doing his/her bidding in all things. The PTC and its directors must be seen to be acting in accordance with the terms of the trust and any deviation is likely to expose the whole structure to disastrous consequences.
The shareholders of a PTC play a hugely important role in the structure as they have the power to appoint directors. Therefore the question of who should hold the shares should receive very careful attention. In addition, it is desirable that succession to the PTC shares be ensured by making careful provision so as to ensure that the settlor’s original intentions as to ownership and control of the PTC are taken into consideration. If the shares are held by individuals, then on their death it may be necessary to obtain a grant of probate with the deceased’s executor holding the shares until the grant is issued. This could have undesirable consequences, so it may be more efficient to have the shares vested in a trust so that such unintended consequences of ownership are avoided.
The regulatory regimes governing PTCs are not generally onerous and indeed it is usual to see legislative provisions that permit, not only the degrees of flexibility and control so desired by the modern sophisticated investor/settlor, but also provide options for securing the transfer of closely held family assets as well as more sensitive assets. By the introduction of these innovative vehicles, international finance centres such as the BVI seek, not only to meet the needs of the market, but also to retain the essential elements of tradition. The increasing popularity of PTCs proves that they’re getting it right.
Caveat: This article does not constitute legal advice. Readers are urged to obtain professional advice
Hélène Anne Lewis