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The evolution of private trust structures

The evolution of private trust structures

26 April, 2023
Private Clients Trust Services

Private trust companies (PTCs) provide a degree of control retention for clients, and have risen in popularity in recent years

Having your cake and eating it: an increasingly corporate-like form of structuring for privately held assets

Former Prime Minster of the United Kingdom Boris Johnson famously disagreed, but most people stand by the proverb that ‘you can’t have your cake and eat it too'.

In the private client sphere, this has historically also been the case; if you want to set up a traditional trust structure then you do so through a third party and you cede an element of control after the structure is established.

However, there is a way that a form of Mr Johnson’s so-called ‘cakeism’ can be applicable to the modern-day high net worth individual (HNWI) or family – private trust structures. 

These are the current culmination of a trend in our industry for an increasingly corporate-like form of structuring for privately held assets, and are especially prominent in the Channel Islands, where advanced regulation allows for their establishment. 

Company as a trustee: one of the most popular means of settlers retaining an element of control over their wealth planning is the private trust company (PTC)

One of the most popular means of settlers retaining an element of control over their wealth planning is the private trust company (PTC). This creates a company to act as a trustee of a specific trust or trusts and means that the company (and therefore the asset(s) held in trust) are controlled by a board of directors.

Typically, the board will comprise of a combination of the settlor, their family members (partner, children, grandchildren etc.), trusted family advisors, and at least one professional trustee. This balance allows the settlor and their family to retain an element of control as they will typically outnumber the other directors of the company.

The long-term benefit of this is that an asset will be held in trust and passed from generation to generation, and not be bound by the parameters of a traditional trust vehicle.

To give an example: the founder of a successful family business wants to put it in a trust to benefit their children, grandchildren and future generations. Historically, they'd have opted for a discretionary trust that hands the asset over to the control of appointed trustees. Of course the business can be held in trust for a long time, but there will inevitably come a point, certainly if the trust is in Guernsey and Jersey, where the operations of the law come into play. 

In our scenario, it is unlikely that a prudent Guernsey or Jersey based trustee, acting according to the local trust law to observe the utmost good faith and act en bon père de famille, would maintain one company as the sum of the family’s assets. They would, at some point, be hidebound to diversify the assets, most likely by selling some or all of the company and investing in multiple other assets.

This may not sit well with our founder, who has set up the trust specifically to keep the business in the family’s control.

A PTC enables them to control the direction of the trust and how it is managed, obviating traditional trustee duties.

There is still the need for a professional trustee to play a role in a PTC; a Guernsey PTC can only be established if it is administered by a company licensed under the Guernsey Fiduciaries Law. That company is obliged to confirm to the Guernsey Financial Services Commission (GFSC) that it will retain sufficient knowledge and information about the ownership and control structure of the PTC so as to effectively administer and govern it, and be satisfied that it complies with relevant laws and regulatory requirements.

The input of the regulated trustee is not only vital from a legal standpoint; they also provide a level of professional governance, technical expertise and better-quality decision-making, and can act as an arbiter, or at least advisor, on bones of contention and disputes.

Growth in PTCs: HNWIs and families are increasingly involved in managing their assets and more engaged than ever in how their wealth is preserved, protected and enhanced

Over the past decade there has been a significant growth in the use of PTCs, for a number of reasons. One is that HNWIs and families are increasingly involved in managing their assets and more engaged than ever in how their wealth is preserved, protected and enhanced.

Another reason that PTCs are popular is cultural; in areas like the Far East and Middle East we have seen rapid accumulation of wealth creators and owners, and many of those individuals who have built successful businesses want to keep them under the control, to reap the fruits of their labours.

Digital assets too could benefit from being held in a PTC. As these assets, for example, cryptocurrency, don't fit in the standard parameters of trustee investments, using a PTC enables the settlor and trustee to step away from traditional obligations to invest in liquid, established assets, and instead hold more esoteric classes.

While a PTC provides a good level of control, it is still a company. That means it needs to have a shareholder, who will typically have the voting rights to appoint and remove directors. Normally, a purpose trust is established with the specific purpose of holding the shares of the PTC. But this needs to have an enforcer, who makes sure the shares are still being held. An enforcer is often a professional trustee or someone who knows the family very well and is a trusted advisor. 

This chain of responsibility means that, for some HNWIs and families, even a PTC does not grant them enough control. Hence the evolution of private trust foundations (PTFs).

PTFs: the next stage in private ownership, offering further choice to clients

An alternative type of structure to companies, a PTF offers further choice to clients.

As it's not a company, a PTF does not need shareholders and instead operates through a council; it must have a minimum of two councillors (unless its constitution allows for a single councillor). The council is governed by charter rules which are set out at the incorporation with advice from a professional trustee.

This appeals to some HNWIs and families a certain amount of hard-coding can be done that sets out clear rules of engagement.

Back to our business founder, if they have four children all of them can be appointed as councillors and hold 25% of the PTF, but naturally each will want to make decisions about their own families and future generations; sibling A does not want sibling B making decisions for their children. To do this, sub-councils can be established within the PTF that govern each portion of the vehicle. So sibling A and a professional trustee will be the trustees of that sub-council, and make decisions about the asset, but all four siblings can still pool resources and make collective (or at least unanimous) decisions about the overriding asset.

This scenario is more palatable to some, and we are lucky to have a range of tools at our disposal for managing the assets of clients who choose Guernsey for their wealth management and succession planning.

Under either structure, a professional trustee is there to ensure governance structuring is well designed at the outset and functions effectively. PTCs and PTFs allow for a combination of expertise; the family, who know the commercial ins and outs of their business, can retain control of it for generations, and the trustee, who is a qualified and regulated professional, can advise on sanctions risks, compliance, AML concerns, dealing with banks, and all the other things that are part of established fiduciary duty.

Any trustee requires a good flow of information from their client to maintain harmonious structuring and avoid dispute, and the collaborative nature of PTCs and PTFs is, theoretically at least, a means of achieving this and working for the benefit of all parties. 

It's all very well having and eating all the cake, but it's still best to have a professional involved to advise on portion control.