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Private progress

Bob Reynolds looks at how offshore financial centres are looking to private trust companies

Under the weight of new internationally inspired regulation, offshore financial centres have been obliged to devise new products or adapt proven vehicles to compete in increasingly demanding markets. The growth of private trust companies is a prime example of this second phenomenon.

PTCs have been around for decades but it is only in the last 10 years that they have really taken off. What makes PTCs different from professional trust companies is the degree of control they can give to the family in the administration and exercise of trustee decisions both over investments and distributions (without involving the additional complications of protectors).

They also give the client flexibility in terms of structuring the ownership and operation of the trust company.

Generally, they are more expensive to set up and so they tend to be used by ultra-high-net-worth families and corporates. As a rule of thumb, in the case of family wealth, family offices of $50m or above are considered suitable for PTCs.

The jurisdictions which have effectively exempted PTCs from regulation have done best in terms of bringing in business. The specifics of each exemption vary from centre to centre but at the heart generally lies a concept of conn- ected parties.

To be exempt from regulation, the PTC must be established to serve the needs of the immediately family and, in most cases, be non-profit making.

The rules for establishing PTCs are now broadly similar in the jurisdictions which compete for business in this market. There are local variations which may offer minor advantages in particular situations but, broadly speaking, the choice of jurisdiction is geared more towards other factors such as the jurisdiction’s trust legislation.

The primary reasons for setting up a PTC are:

  • Control – whether direct (where tax and other considerations allow) by giving family members positions on the board, or indirect through being given a role in appointing and removing board members.

  • Flexibility – the PTC structure is designed solely around the needs and circumstances of the client.

  • Empowerment – the ability to involve and educate future generations as and when appropriate in parts of the underlying trust structure.

    Edward Stone, head of the London private client division of offshore law firm Conyers Dill & Pearman, says: “In my experience, PTCs are most appropriate for ultra-high-net-worth individuals with an intricate and diverse web of assets.”

    In particular, PTCs are well suited for entrepreneurial cli- ents who wish to invest at least part of their wealth in assets which an institutional trustee may perceive as being of higher risk, says Stone.

    Another more practical advantage of using a PTC is continuity. If a client seeks to change institutional trustee for whatever reason, as well as the issue of negotiating indemnities, the legal ownership of the underlying trust assets has to be changed too. For ultra-high-net-worth families, where there may be many different underlying companies or other assets, this can be a very complex and even expensive process.

    But within a PTC structure, a bank trustee would basically be a service provider and it would be a simple procedure to terminate the service contract and sign up the replacement. There is no legal change in the trusteeship.

    Stone says if a PTC is appropriate for clients, administration must not be forgotten. “Irrespective of the jurisdiction chosen, it is vitally important that it is properly administered. Clients are not faced by a choice between an institutional trustee or a PTC. They can have a PTC administered by an institutional trustee and this solution works very well in practice. The client has the benefit of professional administration required but the control and flexibility of the PTC.”

    In Europe, the preferred jurisdictions are Guernsey, Jersey, the Isle of Man and Switzerland, which has no trust law of its own but allows trusts from other regimes to be domiciled there. Cyprus, which is a popular venue for Russian businesses, will use other centres to host PTCs.

    In the US sphere of influence, Bermuda, the Bahamas, the BVI and Cayman are the lead centres.

    Bermuda is generally regarded to be the mother country for PTCs. They have been a common feature of investment planning in the jurisdiction for more than 20 years. But they have also been used extensively in Guernsey, Jersey, the Isle of Man and the British Virgin Islands.

    The British Virgin Islands modernised its rules on PTCs a year ago and as a result of its new, more straightforward regulatory regime, the centre has attracted considerable new corporate and family PTC business, especially from the Far East.

    But the key development in the last month has been a substantial change in the rules in The Cayman Islands. The local equivalent of PTCs was heavily regulated and unattractive. The Cayman authorities decided to make a play for PTC business and introduced new rules which are broadly comparable to the most competitive centres.

    Andrew Miller, of the Cayman-based international law firm Walkers, says: “On August 7, the Cayman Islands enacted a series of amendments to its Banks and Trust Companies Law (2007 Revision). The changes substantially widen and simplify the circumstances in which a trust company may carry on trust business without being required to obtain a trust licence or restricted trust licence under the BTCL. The trust licence and restricted trust licence regimes will otherwise continue to exist in parallel.”

    The changes took effect on September 15.

    Russell Clark, partner at international law firm Carey Olsen in Guernsey says: “We do a considerable amount of PTC work here. They are very attractive but they are not a universal panacea, I wish they were. When deciding to recommend a PTC to a client, it is important to look at the personalities inv- olved. PTCs are far easier to implement if there is a unanimity of purpose. If the family, for example, is in one mind about the investment strategy then PTCs can work well. If there are divergent views, then adopting a PTC strategy can be expensive and wasteful.”

    Tony Pursall, partner and head of the London trust team for the Cayman-based international law firm Maples and Calder, says: “The costs can be prohibitive for less wealthy clients. But PTCs can be more cost effective for ultra high net worth families and are certainly proving popular with that client base, because of the flexibility and control that they offer. That is especially so for those clients with operating companies and other high risk assets.”

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