21st century trusts: why offshore, and on whose shores?
11 June 2020
The concept of trusts was first established as a matter of English law in the 12th century. When landowners left to fight in the Crusades, they transferred legal title to their land to another, on the basis that legal title would be transferred back upon their return. When the holders of legal title started to renege on that promise, the disgruntled landowners took the matter to the courts who agreed that, as a matter of equity, it was only fair to recognise the claim of the returning landowner.
The uses of trusts have since increased to suit modern times, but the fundamentals of a trust relationship remain the same, in that a person known as a trustee would be entrusted with the property of the property owner (known as the settlor). It is the duty of the trustee to hold the property on the agreed terms for the benefit of beneficiaries, being those who can benefit from the property.
Why offshore trusts?
Even though the concept of the trust was created in England, many Commonwealth jurisdictions have adopted the concept into their domestic laws. However, not all jurisdictions have sought to develop their trust legislation in a progressive manner in order to suit modern needs.
The major offshore jurisdictions (including Jersey, Guernsey, British Virgin Islands ("BVI") and the Cayman Islands), which tend to be more nimble in terms of their legislative developments, have understood the importance of having legislation and wealth structuring options which are flexible and easy to understand so as to serve the needs of clients.
This briefing will discuss the standout modern features of offshore trust legislation in Jersey, Guernsey, BVI and the Cayman Islands (the "Offshore Jurisdictions") and the key legal differences between these jurisdictions.
The ability to create asset protection trusts
Clients who want to protect their assets from creditors, spouses, political instability or forced heirship laws can consider setting up an asset protection trust in any of the Offshore Jurisdictions. The firewall legislation in each jurisdiction limits the recognition of foreign judgments by the courts of the jurisdiction in question.
Reserved power trusts
It is very common for settlors to wish to retain certain powers in relation to the ongoing administration of their trusts. This is particularly so for those settlors who are entrepreneurs or have built up their own wealth. The fact that they wish to use an offshore structure for asset protection purposes does not necessarily mean that they wish to give up complete control over how those assets are administered.
The Offshore Jurisdictions have found a way to reconcile these competing interests by legislating to allow settlors to reserve for themselves a range of powers in relation to the operation of the trust.
The legislation makes clear that the reservation of powers to settlors does not invalidate the trust. Not only does this provide certainty and clarity on the matter, but the list of powers are broad and are far greater than those which you may be allowed to reserve under an onshore trust.
Private trust companies
One concern of using an offshore trust can be the requirement to transfer the family assets to an offshore professional trustee company and the effective loss of control. To alleviate that concern, clients may use a private trust company ("PTC") to act as the trustee.
A PTC is a private company incorporated for the sole purpose of acting as trustee of their family trusts. Family members can appoint themselves to the board of the PTC, which would allow them to retain a key role in the decision making process.
Provided that the PTC meets certain requirements, the Offshore Jurisdictions have created exemptions for PTCs from their financial services laws which ordinarily require trust companies to be registered or licenced. These exemptions allow PTCs to be set up quickly and flexibly.
Some clients wish to simply use trusts as an asset holding vehicle without the desire for any persons to benefit from the trust. For example, a client may wish to hold an asset in an offshore trust for tax neutrality reasons and only for the lifecycle of the investment. In such a case, it can be cumbersome to set up a discretionary trust.
The Offshore Jurisdictions have dealt with this requirement by allowing non-charitable purpose trusts to be established. These trusts have no beneficiaries, but they must have enforcers to oversee the actions of the trustees.
In all of the Offshore Jurisdictions, there are no public filing requirements and there is no public register of trusts. Further, trust documents do not need to be filed with any public authorities (although certain beneficial ownership information needs to be disclosed), so they remain confidential documents. This allows clients to maintain a high level of confidentiality in respect of their personal and business matters.
Furthermore, offshore trusts afford greater confidentiality within the trust itself. In Jersey and Guernsey, the trust law permits trust deeds to include provisions which preclude the disclosure of information to beneficiaries.
The effect of the trustees being resident in one of the Offshore Jurisdictions is that the trust is itself tax resident in that jurisdiction. Generally, provided that all beneficiaries of an offshore trust are not resident in the country in which it has been established, the trust will not be subject to income, capital gains, corporation, inheritance, wealth or gift tax in the relevant Offshore Jurisdiction.
It is important to note, however, that this does not automatically release the trust from all tax obligations. Depending on the tax laws of the jurisdiction in which the settlor is domiciled, tax may be payable when assets are settled in the trust, at certain intervals throughout the duration of the trust and when assets leave the trust. Annual taxes may also be payable in other jurisdictions depending on the nature and location of the trust's assets.
By not imposing additional tax liabilities, the Offshore Jurisdictions allow individuals to take advantage of the modern trust laws, without facing the prospect of double taxation in doing so.
On whose shores?
Upon deciding that an offshore trust delivers the benefits which the client needs, the next decision is which offshore jurisdiction in which to establish the trust.
One aspect to consider is whether any one of the jurisdictions' laws is more appropriate than another based on the particular requirements of the client. A detailed table which provides a comparison of the relevant features of Jersey, Guernsey, BVI and Cayman Islands trust laws can be found in our briefing "Offshore Trusts: A Jurisdictional Comparison".
The comparison highlights that, on the whole, the Offshore Jurisdictions covered in this briefing have a lot of common features.
One notable difference is their rules on perpetuity. Whilst Jersey and Guernsey allow trusts to exist indefinitely, both the Cayman Islands and BVI restrict the duration of trusts. BVI laws allow trusts to exist for 360 years, with the basic limit in the Cayman Islands being 150 years.
Where a client is seeking to establish a dynastic or multiple-generational trust, the differing rules of perpetuity may have a bearing on which jurisdiction is most appropriate.
Furthermore, certain offshore jurisdictions have created bespoke trust structures which are exclusive to that jurisdiction. In the BVI, the Virgin Islands Special Trust Act created the BVI VISTA trust. A VISTA trust is a special trust which is established solely to hold shares in a BVI business company. That BVI business company can, in turn, hold a number of other worldwide assets.
The BVI VISTA makes clear that trustees are not bound by their standard fiduciary duties and that their sole role is to hold the shares of the BVI company. Further the trustee cannot intervene in the activities of the underlying company. This is attractive for clients who wish to keep control of their underlying assets.
The Cayman Islands has established the STAR trust which can be established for a purpose or for the benefit of beneficiaries. Like general purpose trusts, STAR Trusts are enforced by an enforcer. They are also exempt from the 150 year perpetuity rule.
There are also many practical considerations which the client may wish to think about, such as the location of the service provider they wish to use, whether the jurisdictions in question have any double tax treaties which may provide tax benefits in certain cases, the location of the assets and, therefore, there may be an inherent bias towards a jurisdiction in question.
At Bedell Cristin, our International Private Client Team has trust experts in Jersey, Guernsey, BVI and the Cayman Islands, so we are well placed to advise and to establish your 21st century trust in whichever jurisdiction is right for you.