Empowering the Settlor while keeping the Trust safe STEP CC - Vanessa Schrum
2 INTRODUCTION Benefits of Trusts: Estate and succession planning Tax mitigation Asset Protection Privacy and Confidentiality But Many Settlors reluctant to transfer control of assets to unfamiliar trustees
3 OVERVIEW Settlor influence or control over trusts by: Letters or Memoranda of Wishes Trusteeship co-trustee or managing trustee Reserved Powers Trusts Protectors Private Trust Companies
4 LETTERS AND MEMORANDA OF WISHES Traditional means of settlor influence and control Serve as useful guide to trustees Generally unenforceable and non-binding Settlor s initial and ongoing wishes relevant re trust property and circumstances of the beneficiaries - the Settlor s wishes are always a material consideration in the exercise of fiduciary discretions. Lord Walker in Pitt v Holt, Futter v Futter (2014) (English Supreme Court) But Trustee not absolved from liability and still required to exercise due care and to act prudently
5 SETTLOR AS SOLE TRUSTEE May be allowed provided have three certainties 1. Intention Settlor intends to create a trust pursuant to its terms 2. Objects certainty of beneficiaries or purposes must be (a) sufficiently certain to allow the trust to be carried out, (b) lawful, and (c) not contrary to public policy 3. Subject title of the trust property must be properly vested in trustees Trustee must be accountable to another person Re Q Revocable Trust : AZ v CQ [2010] Bda LR 26 Settlor initially sole trustee Settlor retained absolute powers over administration and distribution of trust fund and was absolutely entitled to trust income Trust deed provided that the Settlor could release trustee from liability Held: Trust was invalid because settlor was sole trustee and could release himself from liability was not accountable to any other person
6 SETTLOR AS MANAGING CO-TRUSTEE Legislation designed to separate trustee responsibilities and liabilities Section 30A Bermuda Trustee Act 1975 - A trust deed may permit certain powers to be reserved to or exercisable by a managing trustee; and - No other trustee is liable for any of the decisions, acts or transactions of the managing trustee in so far as they amount to exercise of powers reserved by the trust instrument to the managing trustee. Useful where: - Settlor wishes to act as co-trustee, or appoint a company controlled by the Settlor to act as trustee, or - A fund manager wishes to establish a unit trust and reserve discretionary investment management powers as managing trustee. Reduced risk to non-managing licensed trustee (often responsible for administrative and custodian functions). Reduced cost
7 RESERVATION OR GRANTING OF POWERS Desire to retain control over certain aspects of trust by: - Reserving one or more powers; and/or - Granting powers to another person (protector, appointor, enforcer) Article 2 of Hague Trusts Convention - the reservation by the Settlor or certain rights and powers.. is not necessarily inconsistent with the existence of a trust. Statutory provisions for reserve power trusts in many jurisdictions
8 RERSERVED POWERS LEGISLATION Jurisdiction Comparison Bermuda Trusts (Special Provisions) Act 1989 (as amended) Section 2A Lists a range of powers that may be validly reserved to a settlor or given to a third party; and Includes presumption of fiduciary/non-fiduciary nature of reserved powers, subject to the terms of the trust Section 2(3) Includes carve out for trustee liability. Cayman Trusts Law (2011 Revision) (as amended) Section 14 Lists a range of powers that may be validly reserved to a settlor or given to a third party. Section 15 Includes carve out for trustee liability. Jersey Trusts (Jersey) Law 1984 (as amended) Section 9A Lists a range of powers that may be validly reserved to a settlor or given to a third party; and Includes carve out for trustee liability. Guernsey Trusts (Guernsey) Law 2007 (as amended) Section 15 Lists a range of powers that may be validly reserved to a settlor or given to a third party; Includes carve out for trustee liability; and Includes presumption of non-fiduciary nature of reserved powers, subject to the terms of the trust. BVI Trustee Act 1961 (as amended) Section 86 Lists a range of powers that may be validly reserved to a settlor or given to a third party; and Includes carve out for liability of the person exercising reserved power, subject to instrument creating the trust.
9 RISKS OF TOO MUCH SETTLOR CONTROL If retain control need to consider: Jurisdictional tax, reporting and asset protection issues Validity of the trust (sham argument) Risk of bare trust Risk of claims against trustees Duties of any non-trustee power holder (ie personal vs fiduciary power) Risks of Personal Revocation Powers
10 VALIDITY SHAM TRUST RISK Difficult to establish sham as both settlor and trustee must have common intention to mislead parties Where trust is deemed invalid: - Onshore tax authorities could treat assets as settlor s and fully taxable - Onshore divorce court could treat assets as an available resource of divorcing settlor - Trustee could be forced to pay historic fees it has charged Legislative change designed to strengthen validity of reserve powers trusts Section 2A Trusts (Special Provisions) Amendment Act 2014
11 RISKS OF REVOCATION POWERS TMSF v Merrill Lynch (2011) UKPC 17 Settlor s power to revoke entire trust - tantamount to settlor s property Court can appoint receivers over settlor s powers of revocation and compel the exercise of those revocation powers Trust funds revert to settlor s estate and are available to creditors
12 PRIVATE TRUST COMPANIES What is a PTC? A perpetual company that is formed for the sole purpose of: - Acting as trustee - Identifiable trust or limited class or group of related trusts - Does not offer services to the public May be exempt from licensing May act as trustee for multiple families Also used in commercial trust structures
13 FAMILY RATIONALE FOR CREATING A PTC Control - Family members or trusted advisors on board - Control management and distribution of financial capital - Tailor made bye-laws for family succession Comfort - Ensures trustee knowledgeable of family background - May be better option than settlor directed trusts Investment Freedom - Avoids limitations of institutional trustee - Can hold high risk or depreciating assets Efficiency and cost Eliminate trustee succession issues Insulate advisors from fiduciary liability
14 FACTORS WHEN CHOOSING PTC JURISDICTION Bermuda BVI Guernsey Jersey Cayman (Restricted licence PTC) Cayman (Registered PTC) Local Regulatory Licence required? No No Yes, if PTC charging a fee or receiving monetary consideration No Yes No Minimum capitalisation? None None Nominal Nominal CI$20,000 (paid up capital None Local director required? Corporate directors permitted? No No No No No No Yes Yes Yes Yes Yes Yes Local representative required? Yes Yes Yes Yes Yes (reg office at Cayman licensed trust co Yes (reg office at Cayman licensed trust co Local board meetings required? No No No No No No Local records required? Yes Yes (trust deeds with reg agent) Yes Yes Yes Yes Time to incorporate PTC (subject to KYC/CDD) 2-3 days 1-2 days 1 day 1 day 1-2 days 4-6 weeks to acquire licence 1-2 days 1 week to obtain CIMA approval
15 STRUCTURING A PTC Licensed Trust Company as trustee Purpose Trust shareholder Enforcer Private Trust Company (Limited by shares) Board of Directors acting as trustee of Family Trust Charitable Trust Protectors Assets Assets
16 PRACTICAL CONSIDERATIONS WITH A PTC STRUCTURE Central Management and Control - Who will make up the board? - Where should the board be located? - Majority of directors in PTC jurisdiction to avoid potential fiscal mind and management implications - Must follow proper formalities re directors meetings and trustee decisions Sham Argument - Avoided by having PTC professionally managed and administered by licensed administrator
17 STEP CC2016 QUESTIONS? VANESSA SCHRUM Partner/Private Client & Trusts Appleby Canon's Court 22 Victoria Street PO Box HM 1179 Hamilton HM EX Bermuda Tel: +1 441 298 3299 vlschrum@applebyglobal.com