AN OFFSHORE TRUST:    THE CHAMELEON OF FINANCIAL STRATEGIES

 

 

Despite a mixed reception from OECD governments, (highlighted in the September, 2001, issue of our Offshore Pilot Quarterly) the offshore trust continues to thrive as one of the most important elements in the majority of offshore financial planning strategies.  It is not just that it is so flexible, almost chameleon-like in its ability to adapt to any particular legal terrain, but it also has a heritage which can be traced back centuries.  Thus it is ingrained in common law and provides a monumental body of legal precedent for application and recourse to when necessary.

 

In most offshore trust centres today the legislation is geared to smooth the establishment and management of trusts.  Consequently, there is very little difference between the offshore centres and the choice might depend more on other factors such as the level of comfort and confidence one feels with a particular professional firm or bank.  This is, in any case, often a deciding factor in most offshore situations and it is one which has been written frequently about in past issues of the Offshore Pilot Quarterly.

 

When I was preparing a draft of the trust law for the British Overseas Territory of the Turks & Caicos Islands in 1989, I relied in large part upon an ample supply of offshore trust law precedents to frame its broad terms and then I worked some innovations into the provisions (see the article on Turks & Caicos trusts on our website).  Importantly, there was no attempt made to codify the law of trusts, employing a straight jacket when there is no need for one and although my bias is towards the Turks & Caicos Islands trust law, it does not stand head and shoulders above many other offshore trust laws – including Panama’s – which are all viable alternatives.  It will be discovered that the fundamentals will remain the same, regardless of an individual’s jurisdictional preference.

 

There is an argument that trusts are better settled by the client rather than being declared by third parties because by affixing his signature to the deed, the client is confirming his agreement to the settlement and acknowledging its terms.  Then again, where a client wants no visible connection with the deed (which may be examined, for example, by third parties) a declaration of trust has its attractions.  A popular type of trust is the express discretionary trust which is usually declared - as opposed to settled - by a third party on behalf of the individual or corporate party wishing to place assets into trust (settlor).  This method of creation does, of course, obscure the identity of the settlor and even where he is to be a beneficiary his name need not appear as a beneficiary in the deed either.   The settlor can be added subsequently to the beneficial class and his name will be recorded in a separate deed of appointment.  In such a trust the beneficiaries have no vested (fixed) right to any of the trust’s assets and the trustee decides (either solely or in conjunction with others) which beneficiaries will benefit.  It is, however, quite normal in such circumstances for the client to deliver a letter of wishes to the trustee indicating who should, including the conditions and amount, benefit from the trust.  There is a tendency to include other matters in the letter of wishes and whilst there is no problem with that, it is important to ensure that the contents are brief and precise.  Unless the wishes expressed are contrary to public interest, unreasonable or incapable of performance, there is little doubt that a professional trustee will comply, although he is under no legal obligation to do so.  Letters of wishes can be cancelled or revised at any time, and can be very useful aids in keeping matters confidential.  Unfortunately, their usage has been abused by the inexperienced and the concept has been debased by utilising them under conditions for which they were never intended.   If you employ the services of a professional trustee, however, you will avoid the pitfalls.

 

Ahead of drafting the actual constitution of a trust, a series of questions will need to be answered and these broadly cover 7 essential areas:

 

The distribution of funds (discretionary or vested) and the powers granted to third parties;

The trustee’s administrative powers as well as rights and duties;

The appointment or removal of trustees and the trustee’s powers of delegation;

 

The trustee’s personal relationship with the trust fund and the beneficiaries.  One needs to be mindful of conflicts of interest (such as where the trustee may also serve as banker).

 

The choice of the proper law and jurisdiction, including changes to the proper law and place of administration.  Today it is commonplace not to have the administration of a trust undertaken in the jurisdiction that provides the law of the trust.  There can be several reasons for this, but two frequently crop up:  it is considered prudent to locate the trust’s records (administrative and accounting) perhaps in a place which affords superior laws of privacy, although not necessarily a better trust law, and, secondly, a particular trustee is preferred who happens not to be located in the jurisdiction which controls the law of the trust.

 

The duration, revocation and amendment of the trust.  A decision has to be made as to whether or not the trust should be irrevocable.  Often the answer hinges on the question of taxation, especially as to whether or not the gift of assets to the trust is to be absolute.  Besides duration and revocation, consideration needs to be taken of changing circumstances, some of which can be unexpected.  A power of amendment could be included (the exercise of which by whom and how are matters to be addressed) so that part or all of the corpus, for example, can be transferred to a new or existing trust located elsewhere and with other trustees.  Perhaps the mandated terms of investment can be altered under certain conditions.

 

Powers of investment (to be exercised solely by the trustee or together with other parties) and the style of investment, whether conservative or speculative, will have to be decided and then set down (but see item 6) in unambiguous terms in the deed.

 

This summary only covers general issues and each individual case will require, after an initial analysis has produced the trust deed’s broad framework, a second careful review after which a final deed can perhaps be drafted. It is imperative that you avoid Espresso trusts.  Espresso means coffee that is prepared on the spur of the moment.   The enjoyment is short-lived, just like the advantages of such a trust which has not been thought out.

 

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