The changing international private trust company landscape
Samantha Morgan, partner, and Philip Munro, associate, Withers in London report on the key developments on private trust companies (PTCs). Additional reporting by Toby Crooks of Rawlinson & Hunter in the Cayman Islands
International clients are familiar with the benefits of the trust as a structure offering a degree of asset protection and a mechanism for the transition of wealth through generations. In response to the needs of such clients, trust structures and international trust laws have become more flexible and sophisticated over the last few years. In the last few years, in establishing family holding structures for our clients, we have increasingly been using private trust companies to act as trustee of the family trusts instead of an institutional trustee provided by a bank or other professional service company.
A private trust company is a company incorporated for the sole purpose of acting as a trustee of specific family trusts; as a bespoke trustee vehicle, a private trust company can offer prospective settlors advantages such as retained influence and control over their trusts and greater investment freedom and flexibility. There are some fundamental decisions that need to be taken in considering how best to establish a private trust company for a client, such as how the shares in the private trust company should be held (to the extent that the private trust company is a company limited by shares) and who its directors should be. However, the most crucial first decision in creating any private trust company must be to choose where it should be incorporated.
Choice of jurisdiction
The choice of jurisdiction for a private trust company is a vital element of ensuring that the private trust company advantages are maximised. In approving the choice of jurisdiction, the following are major factors to be considered:
Structures availableIn some cases, the choice of jurisdiction is driven by the various structures available. For example, in order to establish a Cayman Islands STAR trust it is necessary to have a Cayman trustee and a private trust company will satisfy this test. In the BVI, a VISTA trust requires the appointment of a BVI trustee, although it is not yet possible to appoint a BVI private trust company for this purpose.
One consideration that can have both immediate and ongoing practical implications is a jurisdiction’s licensing requirements. In the Cayman Islands, for example, it is presently necessary to obtain a licence from the Cayman Islands Monetary Authority (CIMA) because private trust companies are regarded as carrying on trust business. In Guernsey, a private trust company that provides its services by way of business will also need to be licensed unless either it is engaged to act as trustee on the basis that it will not charge a fee or a successful application for an exemption is made to the Guernsey Financial Services Commission.It is generally quicker to set up a private trust company in a jurisdiction where no licence is required. Further, where a licence is required, there will be continuing regulation of the private trust company with possibly an obligation to file annual audited accounts and the need for any change in directors to be approved by the licensing authority. Time and effort is required to obtain and maintain licensed status.
Regulation can, accordingly, be seen as disadvantageous, involving costs and complication and disclosure of information to local regulators. However, this does not mean that licensed private trust companies should not be considered because these regulated vehicles can, in some instances, be advantageous.
A private trust company operating in a regulated jurisdiction can offer third parties with whom it is dealing with greater comfort because of its regulated status. These third parties might include commercial institutions such as banks and brokers dealing with the investment of the trust fund of the private trust company’s trusts – in many instances we have found it easier to open investment accounts for trusts with a licensed trustee than where an unregulated corporate acts as trustee.
They might also include local securities regulators if, for example, an entity held by one of the private trust company’s trusts needed to be regulated itself as, say, a mutual fund. While having a licensed private trust company can now be very useful from a compliance perspective, as there is an ever-increasing emphasis on the satisfaction of ‘know your client’ requirements, it is likely to become even more useful in the future.
Quality of trust law
The quality of the local judiciary and their track record in upholding key trust principles needs also to be considered.
In the context of a structure which is being established for a European family, there are obviously advantages in considering the Channel Islands in terms of arranging review meetings and day-to-day communications. New Zealand might suit Asian settlors for this reason.
The extent to which confidential information in respect of the private trust company and its trusts must be disclosed varies between jurisdictions.
It is important to consider whether the local trust law is of appropriate quality particularly with reference to the specific concerns of the settlor – some jurisdictions offer better protection against divorce and forced heirship claims and it might be advantageous to choose a jurisdiction that does not automatically recognise all foreign court orders.
As between these factors influencing jurisdictional choice, prospective private trust company founders will have differing priorities. Although advisers with experience establishing private trust companies will view some jurisdictions as better in respect of some factors than others, the relative merits of jurisdictions are changing so that to achieve the optimal private trust company structure recent developments must be borne in mind. The private trust company landscape is changing through case law developments and general law reform to the extent that local trust law is a determinant in choosing a jurisdiction. For example, prior to the change in the law, directors of a Jersey private trust company were liable for claims against the trust as if they were personally trustees and not merely directors of the company. This made Jersey less attractive as a jurisdiction in which to establish private trust companies although the position has now been reversed. Beyond general trust law changes, a number of jurisdictions have made (or are proposing to make) changes specifically to their private trust company regimes which impact on their relative merits:
Historically private trust companies incorporated in the Bahamas needed to be licensed by the Central Bank of The Bahamas with a requirement of a restricted trust licence being that a minimum capital of $100,000. We worked with The Bahamas on a review of their private trust company regime and as a result of this review the Banks and Trust Companies Regulation Act 2000 was changed with effect from December 2006 to encourage the use of Bahamas private trust companies by exempting them from the need to be licensed. Rather than require licensing by the Central Bank, a Bahamas private trust company now simply needs to be administered by a registered representative.
Essentially banks, trust companies, licensed financial services providers and corporate services providers approved by the Central Bank of The Bahamas Unlike some other jurisdictions where unlicensed PTCs are allowed, a private trust company can be established in the Bahamas with no regulatory approval; in contrast, while Bermudan private trust companies are exempt from licensing, this exemption must actively be sought from the Bermuda Monetary Authority.
The burden of Central Bank licensing having been removed, the Bahamas are now an attractive private trust company forum particularly as the requirement to maintain the $100,000 share capital has been replaced with a requirement that a private trust company have a minimum share capital of $5,000. The Bahamas are attractive both because they have a strong local trust law from an asset and divorce protection perspective and also because their unlicensed private trust company regime does not require the involvement of any resident directors or any physical presence in the islands.
British Virgin Islands
Like the Bahamas, the BVI was long recognised as a jurisdiction offering a strong trust law, but it was not a favoured regime for private trust companies in part because of uncertainty as to whether or not licensing was required. As to uncertainty, the Banks and Trust Companies Act, 1990 (BTCA) provides that no trust company can carry on ‘trust business’ from within the BVI unless it is licensed. Trust business is defined by the BTCA as the business of acting as a professional trustee, protector or administrator of a trust or settlement, managing or administering any trust or settlement and company management as defined by the Company Management Act 1990. The potentially wide scope of the BTCA has been tempered by the Banks and Trusts (Application Procedures) Directions, 1991 (the directions).
Section 7(d) of the directions (which have now been revoked) provided that ‘a trust company formed on behalf of and owned by one or more members of a family to be the trustee of one or more trusts of which one or more members of the family are the principal beneficiaries and for which no remuneration is received, directly or indirectly, by the trust company shall be regarded as not carrying on ‘trust business’ for the purposes of the [BTCA]‘. It could then have been argued that a BVI private trust company which was neither remunerated for its trustee services, operating for profit or offering its services to the public was not carrying on trust business and need not be licensed and some private trust companies did operate out of the BVI on this basis. There was however no clear guidance on what exactly is considered as direct and indirect remuneration (eg, could directors’ fees be deemed indirect remuneration if paid directly by the trustee out of the trust fund?) and so there was a concern where BVI private trust companies did not seek to be licensed that all or some of their actions might be contrary to the BTCA.
The Financial Services (Exemptions) Regulations 2007 came into effect on August 1, 2007 and exempted BVI companies from the need to obtain a licence under the 1990 Act. To be exempt a private trust company’s name must include the designation private trust company and reference must be made in its memorandum of incorporation to the fact that it is a private trust company. It should be noted that a licence will be required to use either the word trust or trustee within the name of the private trust company.
The BVI, then, has moved to make itself a favourable private trust company regime. In comparison to its rivals, the government fees required to establish and maintain a private trust company in the BVI are noticeably good value with the fees payable on incorporation and annual renewal being just $750. While the trust law regime in the BVI is a selling point, advisers need to note that an unlicensed private trust company cannot act as trustee of a VISTA trust (a trust established under the Virgin Islands Special Trusts Act 2003): this is because the trustee of a VISTA trust must have a licence under the 1990 Act.
The Cayman Islands
The Cayman Islands are now nearly unique among the premier league’ offshore trust jurisdictions in requiring that all private trust companies be licensed. Although the benefits of licensing have made the Cayman restricted trust licence attractive to some prospective private trust company founders, the experience of many advisers was that the process of obtaining a Cayman licence was rigorous and required a good degree of organisation in the collation of the material to make the application.
This burden, and the costs of obtaining and maintaining the licence, may have discouraged applications to the CIMA with the effect that at the time of the writing (August 2008) only 87 companies hold restricted trust licences.The Cayman Islands regime is, however, undergoing change. Enabling legislation to change the regime was brought into force in August 2008 in the form of the Banks and Trust Companies (Amendment) Law, 2008 and the Trusts (Amendment) Law 2008 (Both statutes received assent from the Governor of the Cayman Islands on 3 August 2008 and were gazetted on August 7, 2008)Section 2(a) of the Bank and Trust Companies (Amendment) Law amends section 5 of the Banks and Trust Companies Law (2007 Revision) which had, in effect, absolutely prohibited unlicensed trust companies by making this blanket prohibition subject to ‘such other exemptions and conditions as may be prescribed by regulations made by the Governor’. Going forward, then, unlicensed private trust companies will be allowed in Cayman so long as they satisfy such exemptions and conditions as may be prescribed in regulations made by the Governor of the Cayman Islands from-time-to time.
The Trusts (Amendment) Law, 2008 reflects this change by updating the definition of ‘trust corporation’ for the purposes of the Trusts Law (2007 Revision) to include not only companies licensed to conduct trust business but also companies ‘registered as a private trust company under that Law’.Cayman, then, is to introduce parallel private trust company regimes: the current restricted trust licence route will remain available to those who see merit in having a licensed private trust company with there being a new, lighter touch regulatory option of registering a private trust company. The regulations detailing the registration process have not yet been published and the effectiveness or otherwise of the new Cayman registration regime will stand or fall in large part on the details of the registration process. In any event, however, the change does make the Cayman Islands a more attractive private trust company forum by potentially offering (as with the BVI and Bahamas) the best of all worlds: both licensed and unlicensed PTCs with (it would be hoped) a mechanism for moving between the two statuses.