Konrad Friedlaender and Natasha Kapp of Carey Olsen in Guernsey consider the types of structures available for private clients.
Guernsey is renowned for being one of the leading jurisdictions for fiduciary work having built a strong reputation over decades and providing private clients with the right wealth structures quickly and with a high degree of expertise and professionalism. One of the trends in recent years has been the emergence of the private trust company (PTC). Its popularity has grown as ultrahigh net worth families look to consolidate their various family interests in a bespoke private structure. The PTC offers many benefits such as the ability of the settlor to be closely involved in managing the structure, in-house specialist knowledge and expertise, continuity, flexibility and potential cost efficiencies. Many jurisdictions have actively been trying to attract and encourage the establishment and administration of PTCs by excluding or exempting PTCs from their regulatory and licensing regimes.
Regulations in the British Virgin Islands provide for an automatic exemption from licensing for PTCs provided certain conditions are met. The Cayman Islands allows for two types of PTCs (licensed and registered). Cayman-registered PTCs are subject to minimum regulation. Jersey enables PTCs to be established provided they meet tests set out in a trust company business exemptions order. In Guernsey, a PTC does not need a fiduciary license if the PTC is not paid for its services as a trustee. If the PTC is paid it may apply for a discretionary exemption by the Guernsey Financial Services Commission (the Commission) and, failing that, it would need a fiduciary licence. Local licensed trust professionals, who are subject to oversight and inspection by the Commission, continue to play a central role in PTCs by delivering administration services and/or providing the necessary trust experience and expertise on the boards of PTCs.
As mentioned the Fiduciaries Law only applies to fiduciary services provided by way of business. If a PTC is paid, directly or indirectly, it will be deemed to be carrying on business and subject to the Fiduciaries Law. PTCs generally need ongoing funding, particularly in complicated structures and, rather than having to fund the PTC upfront, the PTC may wish to charge administrative or management fees to the structures under its control. In that case the PTC will either need to apply for a fiduciary license or alternatively an exemption under the Fiduciaries Law.
The Commission has discretion as to whether or not to grant such an exemption. The Commission evaluates each application on its own merits but historically exemptions have generally been granted on the condition that the PTC does not offer its services to the public but that these are limited to a particular family or connected group of persons. The Commission would normally require that the board of the PTC includes at least one corporate director holding a full fiduciary license and that the licensee is responsible for the administration of the PTC. Although Guernsey therefore does not have a statutory exemption regime as is found in the BVI, Cayman as well as Jersey, the discretionary regime does allow for the Commission to grant exemption and to respond appropriately after evaluating the merits of each application.
Typical Structure
Frequently a double structure of a company and a trust are used to establish the PTC arrangement. A typical PTC is a limited company established for the sole purpose of acting as trustee of a trust or group of related trusts. In order to avoid issues arising from ownership or control of the PTC, the shares in the PTC are usually 'orphaned'. In Guernsey this can be achieved by the shares being held by the trustee of a non-charitable purpose trust. In BVI and Cayman, VISTA and STAR trusts are frequently used. A locally regulated fiduciary will therefore still be required to act as trustee of the trust which adds an additional layer of administration and cost. Charitable trusts and companies limited by guarantee are also sometimes used to hold the shares in a PTC.
The Guernsey Foundation
As an alternative to the typical PTC double structure described above, a Guernsey Foundation can be used to replace both the PTC and the purpose trust. A private trust foundation (PTF) can be established for the sole purpose of acting as a trustee. Receipt of remuneration for its services as trustee would be incidental to that purpose and would mean the foundation was not carrying out commercial activities. As a legal person of full corporate capacity, a foundation could act and exercise all the powers, and would be bound to the obligations, of a trustee in the same manner as any trustee which is a company. Unlike a company, a foundation has no members or shareholders and is therefore already an orphaned structure. Accordingly there is no need to establish a trust or other holding vehicle to deal with issues arising from ownership and control (founders will still need to be mindful of control issues when deciding who is to hold the power to appoint and remove councillors under the foundation's constitution).
Regulation
A PTF will not require a license if it does not receive any payment for its services as trustee. If it does receive any form of payment, whether directly or indirectly, the same considerations should apply as for any application for an exemption for a PTC. The Commission considers applications on a case-by-case basis and has discretion as to whether or not to grant a PTF an exemption from the requirement to hold a fiduciary license.
The Commission has recently considered the first enquiry regarding the exemption of a PTF from the requirement to hold a fiduciary license. This particular PTF is being formed to act as trustee of a number of family trusts which self-hold a diverse range of assets over various jurisdictions including a significant group of companies. The PTF will be established to benefit a specified family, and its close associates, administered by way of a family office to be established in Guernsey, and staffed and run by experienced fiduciary personnel, rather than being administered by a local fiduciary. A local fiduciary licensee will sit on the council and two further councillors will be representatives from the family office with significant fiduciary expertise. As the PTF will charge for its services as trustee, in order to cover its costs and expenses, the commission considers it to be acting 'by way of business' for purposes of the Fiduciaries Law. In light of the novelty of using a foundation to act as trustee of a private trust, the Commission has indicated that it would approach an application for an exemption of a PTF with caution.
The Commission
raised concerns over fundamental issues arising from the unique nature of a foundation (whether a foundation can be described as a 'person' or a 'body corporate') and whether it was possible for a foundation to act as a trustee having regard not only to the Foundations Law (whether it would be carrying on a commercial activity) but also in the context of the provisions of the Trusts (Guernsey) Law and the Fiduciaries Law. In particular, the Commission was concerned about control, governance and accountability of the councillors of a foundation which is acting as trustee (in light of the fact that the Foundations Law does not describe the councillors' duties as being fiduciary in nature) while the foundation itself, when acting as trustee, owes fiduciary duties to the beneficiaries of the trust.
The Commission has indicated that it will be prepared to grant the PTF an exemption from the requirement to hold a fiduciary license on condition that a holder of a full fiduciary license is on the council and that other remunerated council members who are resident in Guernsey hold personal fiduciary licenses. In addition, the commission requires that the constitution should expressly require all councillors to ensure that the foundation complies with its fiduciary duties as trustee.
The establishment of a PTF may be a useful alternative to the customary PTC. Benefits of the PTF would include the avoidance of the complexity and cost required by the double company and trust required for the typical PTC structure. A PTF should be able to obtain an exemption from the requirement to hold a fiduciary license under the Fiduciaries Law provided it does not provide services to the public but acts as trustee of trusts established for a family, or closely defined group of beneficiaries, and there is an appropriate level of involvement by a local, fully licensed fiduciary, as well as personal licence holders.
Despite the maturity of the fiduciary sector in Guernsey, the jurisdiction has repeatedly proven that it takes a pragmatic, timely and professional approach to the ever-increasing variety of structures demanded by private clients. It is this fleet of foot and the high level of professionalism from the finance industry and associated professions that maintains Guernsey's firm position as a leading offshore jurisdiction for private clients.
Originally published by IFC Review, August 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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