What is a Private Trust Company?
10 February 2022
A Private Trust Company (a "PTC") is a company formed for the express purpose of acting as a bespoke trustee of a specific trust or a group of connected trusts typically for the benefit of a particular family. PTCs are generally exempt from the full licensing requirements which apply to companies carrying on trust business in many jurisdictions, including Guernsey. There is no specific PTC legislation in Guernsey and the incorporation of a Guernsey PTC is the same as for any other Guernsey company.
The operation and benefits of PTCs should be assessed in combination with a wide range of benefits offered by the use of trusts as a mechanism for holding family wealth. The separation of legal control and beneficial interest, which is essential to the nature of a trust, can play a vital role in tax planning and in protecting the underlying assets. Trusts have been a feature of Guernsey's customary law over the last hundred years and the legal basis of trusts is well established and understood. Trusts offer a range of benefits for international families with complex assets and/or family succession issues who are seeking to move away from direct ownership to a structure designed to offer coherency for the future. Guernsey's modern trust law, The Trusts (Guernsey) Law, 2007 (the "Trusts Law") is well developed, innovative and contains robust "firewall provisions" to confirm that all issues regarding the capacity of the settlor, the interpretation of the trust, its administration or variation will be a question of the Trusts Law alone. This offers significant protection to a Guernsey trust (i.e. a trust governed by Guernsey law) from hostile claims from creditors, spouses and against forced heirship claims against a beneficiary made outside of Guernsey. Guernsey trusts can last indefinitely, which is attractive to international families looking to establish a "dynastic" structure, as not all trust jurisdictions have perpetual trusts under their trust laws.
The characteristics of a PTC
Control and influence
In any trust the role and identity of trustees is vital. Where the assets held in a trust are substantial in value and complex in nature, the trust is often managed by a professional trustee company, rather than by individuals. A professional trustee company, whether attached to a financial institution/legal/accountancy firm, private-equity backed or independent, should offer a high level of service, including administrative support and financial management. However, in certain cases international families may prefer to establish their own bespoke trust company to act as trustee of their family trusts. This may be either because they want to retain a degree of control over the management of their assets or cannot find an appropriate service provider to act as trustee, which is often the case where the assets placed in trust are perceived as high risk and more difficult for an independent trustee to manage, such as family businesses, art works, jets and boats. A PTC structure is a special purpose vehicle which is incorporated for the sole purpose of acting as the trustee of the settlor's family trust and it is typically tailor-made to fit a family's profile and assets. The terms of the family trusts for which a PTC is to act as trustee can also be drafted to include bespoke provisions so as to suit the family's needs.
Provided the PTC is properly run, the settlor or his/her family may retain an element of family influence over assets settled on family trusts without compromising the validity of these trusts. The PTC would effectively be the "control" level of the asset-holding structure where key decisions will be taken in relation to the retention or disposal of the assets. The most common control structure for a PTC is where control of the PTC vests in the board of directors who make and oversee the strategic decisions affecting the trust assets as a whole. The board of directors of a PTC will typically comprise a mixture of the settlor's trusted advisers, close family members and independent professionals subject to the usual tax, legal, management/control and regulatory considerations. In this way the settlor has comfort that major decisions made by the PTC are made with the input of his family and trusted advisers. There is no longer a requirement for a representative of an administering fiduciary licensee to sit on the board of a Guernsey PTC. Nevertheless, most clients would prefer having a Guernsey fiduciary, who is subject to oversight and inspection by the Guernsey Financial Services Commission (the "Commission") on the board of the PTC to provide the necessary trust experience and expertise and to ensure that the structure complies with the relevant regulatory regimes.
A settlor might also seek to influence the exercise of a PTC's trusteeship function by creating roles for family members or trusted advisers under the terms of the family trusts of which the PTC is trustee. For example, an office of "Protector" is commonly included in trusts and the Protector is normally given the power to appoint and remove trustees. The Protector can also veto some key trustee decisions (e.g. addition/exclusion of beneficiaries, distribution of capital from the trust). It can also be useful to provide for the office of "Appointor" (if the trust has a Protector) who will be given the power to remove the Protector and to appoint successors to provide additional reassurance to settlors together with the involvement of trusted advisers/family members as directors of the PTC. The diagram below shows how an element of control and influence can be retained over assets of the trusts settled by using the offices of "Appointor" and "Protector".
Ownership of a PTC
As most PTCs are companies limited by shares a shareholder will be needed to own them. For a variety of tax, confidentiality, succession and asset protection reasons, it may not be desirable for the client and/or another family member to own the shares in the PTC. For these reasons, commonly the shares in the PTC will be held by a Guernsey purpose trust or a Guernsey foundation, both of which can last indefinitely, and the sole purpose of which would be to own the shares in the PTC. As the purpose trust would typically not have beneficiaries, it is seen to confer additional protection with respect to the PTC shares, as these shares cannot be seen to belong to the settlor or any other person in the event of the settlor's death and should not be available to a third party in the event of successful claims against the settlor. Similar advantages would be available to a Guernsey foundation established for a purpose. As a foundation, unlike a company, does not have shareholders, ownership issues in relation to the PTC shares will not arise.
Under the Trusts Law, a purpose trust would need to have an enforcer who cannot be the same person as the trustee of the purpose trust. The enforcer has a limited function to enforce the terms of a purpose trust, as a purpose trust doesn’t have any beneficiaries who would otherwise have this right. It may be possible to appoint the client's trusted adviser/family member as the enforcer.
Guernsey has strict regulatory requirements for the conduct of trust company business, which is a regulated activity, for which a licence may be required. On the plus side, incorporating a PTC in such regulated jurisdiction lessens the danger of a successful challenge being made against the trusts of which the PTC is trustee on the grounds of sham (i.e. neither the settlor nor the trustee intended to create a valid trust and the trust assets remain in the settlor's ownership), as the settlor would be unlikely to have chosen a regulated jurisdiction in such a scenario.
As far as a PTC is concerned, Guernsey offers a flexible regulatory environment, so that a PTC does not need a fiduciary license if the PTC is not remunerated for its services as a trustee. If the PTC provides its services "by way of business", it may apply for a discretionary exemption by the Commission or a licence. Whilst most PTCs do not charge for acting as trustee, they need ongoing funding and will in practice receive income to meet various expenses such as director/administrator fees. For the avoidance of doubt, a PTC is acting by way of business even if it is merely acting as a conduit and paying fees onto a third party.
For a Guernsey PTC acting only as a trustee to one trust or a group of family trusts an exemption from licensing should be available provided it meets certain criteria, including being administered by a licensed fiduciary and not advertising or marketing its services to the public. The licensed fiduciary which will administer the PTC would need to confirm to the Commission that it will retain sufficient knowledge and information about the PTC's ownership and control structure and about its activities to be satisfied that: a) the PTC is effectively administered and governed; and b) the PTC complies with relevant laws and regulatory requirements. This may be achieved, for example, by any of, or a combination of: provision of a director on the board of the PTC, provision of a company secretary, provision of an authorised signatory, and close monitoring and oversight of the PTC.
The granting of a discretionary exemption will depend on the facts and circumstances of each individual case. For example, the Commission will also need to be satisfied that it has no concerns in respect of the individuals, parties or activities associated with the PTC. As a matter of general policy, the Commission will apply a standard condition on the exempted PTC requiring it to be administered within the AML/CFT controls of the licensed fiduciary which administers it.
Advantages of a PTC
- To unite the client's business interests and thereby strengthen control whilst at the same time achieving segregation between different assets.
- To retain an element of influence over the management of the trust assets without compromising the validity of the family trusts.
- To facilitate the monitoring and devolution of control to future generations.
- To avoid the need for future changes of trusteeship, as only the administration agreement between the PTC and the licensed administrator would need to be changed.
- To preserve confidentiality to the extent possible, as ownership of the PTC structure can remain confidential when structured using, for example, a purpose trust
The PTC as a trustee owes fiduciary duties to the beneficiaries of the underlying trusts, so if there has been a breach of trust, the beneficiaries can bring a claim against the PTC. However, the directors of the PTC do not owe a direct duty to the beneficiaries, unlike professional trustees who may be reluctant to take ownership of "risky" assets because of their potential liabilities. Accordingly, professionals may prefer to act as directors of a PTC rather than to hold trusteeships. However, directors can still be liable for dishonestly assisting a PTC to commit a breach of trust or, possibly and in an exceptional case, they can be liable to beneficiaries under what is known as the "dog-leg" claim. The possibility of a "dog-leg" claim has been put forward on the basis that a director owes a duty of care to the company and the right to performance of the duty is deemed to be an asset of the relevant trust. Therefore, where directors are alleged to have breached that duty, it is claimed that the beneficiaries of the relevant trust can enforce performance of the duty in circumstances where the corporate trustee will not do so (usually due to wrongdoing directors having control at board and shareholder level). However, the so-called "dog-leg" claims by beneficiaries directly against the directors of PTCs to date have been unsuccessful. A possible solution is to ensure that if the directors of the PTC provided by a licensed fiduciary commit a breach of trust under the agreement for services between the licensed fiduciary and the PTC, the licensed fiduciary's professional indemnity insurance is available to meet claims by beneficiaries.
Private Trust Foundations
It should be noted that, as an alternative to establishing a Guernsey PTC to act as trustee of their family trusts, international families may establish a Guernsey Private Trust Foundation (a "PTF"). For a Guernsey PTF acting only as a trustee to one trust or a group of family trusts "by way of business", an exemption from licensing should be available similar to a PTC, provided it meets the same criteria. The PTF's "orphan entity" status with no shareholders should avoid issues relating to succession and possibly minimise costs associated with a double layer of a PTC structure option. Ultimately, the decision as to which structure to use would depend on many factors, including the unique needs of a particular family, the family's circumstances, profile, the nature of assets, the extent to which the settlor wishes to retain control over the assets and the need for diversification of a legal structure.
If you would like further information about Guernsey PTCs or indeed PTCs in other jurisdictions please get in touch with your usual contact or one of those listed.