Private trust companies (“PTCs”) have been widely used in international structured finance transactions for many years and they are now increasingly being used by high net-worth private clients (hereinafter a “settlor”), who prefer to establish their own PTC to act as the trustee of their family trusts rather than transferring assets to an offshore professional trustee company.

With the introduction of foundations there is now a choice between PTCs and private trust foundations (“PTFs”) to act as trustee.

This briefing note considers key issues relating to the establishment and use of a PTC or a PTF in the context of private wealth management. References to “PTVs” are to both PTCs and PTFs.

Regulation

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended (the “Fiduciary Law”) is the principal legislation which regulates Guernsey’s fiduciary industry. Amongst other things, it requires any person who carries on, by way of business, various commercial activities from or within the Bailiwick of Guernsey, including the provision of trust and foundation services, to be licensed by the Guernsey Financial Services Commission (the “Commission”) under the Fiduciary Law.

The Commission has issued guidance that a PTV may be acting by way of business even if it is merely acting as a conduit and paying fees on to a third party. In order to avoid any doubt a PTV may apply to the Commission for an exemption from the requirement to obtain a licence provided:

  • it acts as a trustee only in respect of a specific trust or connected trusts;
  • it does not advertise or market its services to the public;
  • it is administered by a company which is licensed under the Fiduciary Law; and
  • it has a representative of a licenced fiduciary on its board of directors or its council (as the case may be).

A one off fee is payable with the application. The key points to note are:

  • when an exemption is given there are no annual fees to pay and no requirement to capitalise the PTV in a particular way;
  • there is no requirement to submit to the Commission copies of documents in relation to the trust or trusts in respect of which the PTV is to act as trustee; and
  • a PTV is not a “financial services business” for the purposes of Guernsey’s anti-money laundering legislation and there is no requirement for a PTV to make annual returns to the Commission in relation to its activities or to have a dedicated money-laundering or compliance reporting officer.

PTC

The ownership structure of a PTC

As an alternative to a company limited by shares, a PTC may be incorporated as a company limited by guarantee. Membership interests in a company limited by guarantee may be held by the settlor or members of the settlor’s family where this is appropriate.

Where a PTC is constituted as a company limited by shares the shares may be owned in a number of different ways depending on tax considerations and the client’s circumstances. The principal alternatives are set out below.

Individual

Whilst it is possible for an individual, such as the settlor or a member of the settlor’s family (or his/her nominee), to be theshareholder of a PTC, such an arrangement can give rise to concerns upon the individual’s death.

One concern is practical and relates to probate requirements in respect of the individual ownership of the PTC’s shares. The second concern relates to succession and the suitability of those person(s) to whom the PTC shares devolve upon the individual’s death.

Purpose Trust

In view of the problems associated with ownership by an individual of the shares of a PTC, a PTC is usually an ‘orphaned’ structure so that its ownership is not attributable to any particular person.

The shares of a PTC are therefore often held under the terms of a charitable or non-charitable purpose trust (the “Purpose Trust”). Where there is doubt about whether a charitable purpose trust will be used for genuine charitable purposes, a non-charitable purpose trust may be used.

If a Guernsey non-charitable purpose trust is used, an enforcer must be appointed to enforce the stated purpose of such trust. The enforcer must be a separate entity from the trustee of a non-charitable purpose trust. The enforcer does not need to be licensed by the Commission if it is not acting as an enforcer by way of business. For example, a family member could act as the enforcer, although thought should be given to succession if that is the case.

The trustee of the Purpose Trust (the “Trustee”) may be unconnected with, and located in a different jurisdiction, from the administrator of the PTC. The division of roles in this way may assist with separating out the respective rights and responsibilities within the structure.

Foundation

A foundation can be established with the sole object of holding the shares in a PTC. A foundation is incorporated on the instruction of a founder, but is neither owned by the founder or by anyone else. Therefore ownership issues will not arise in that context. If a foundation is used, a guardian must be appointed to ensure that the purpose of the foundation is carried out. The guardian need not be licenced by the Commission if the guardian is not acting as guardian by way of business. For more about foundations see paragraph 4 of this guidance note.

Incorporating a PTC

A PTC can be incorporated with or without limited liability in any part of the world and is usually incorporated using standard private company memorandum and articles of incorporation (or the equivalent). Its name cannot include any reference to trusts or trustees although it may use the initial PTC in its name.

Composition of the board of directors

The choice of the board of directors of a PTC is a key issue. The settlor may wish to control the composition of the board of directors and/or may wish to be a member of the board so that the settlor participates actively in the decisions made by the PTC in relation to the underlying trusts and their assets.

Control of the board of directors can be structured through the constitutional documentation of the PTC and/or through the terms of the Purpose Trust. It may be that the Trustee is required under the terms of the Purpose Trust to seek the approval of the settlor or a nominated other, such as a protector or the enforcer (in the case of a non-charitable purpose trust), in relation to the appointment or removal of directors of the PTC. Alternatively, the Trustee could be required to follow the directions of the settlor, the protector or the enforcer (in the case of a non-charitable purpose trust)in relation to the composition of the PTC’s board of directors.

Whatever structuring and mechanisms are used in relation to the appointment or removal of directors (and indeed other aspects of the management of the affairs of the PTC), a prevailing issue for advisers to the settlor, the Trustee and the PTC is for the settlor to understand how the balance of power will work in practice so that there are no surprises for the settlor, or indeed other family members, once the structure is in operation.

The directors should be selected based on knowledge and experience although selection is also likely to be influenced by tax considerations and the protection of privacy. Concern can arise if one or more of the directors of the PTC is resident in an unfavourable tax jurisdiction and adversely affects the location of the PTC’s management and control or even the situs of theunderlying trusts or trusts. Issues may also arise if a director is subject to domestic legislation which can be used to obtain detailed information about the PTC, its underlying trusts and their assets.

Where family members participate as directors, conflicts ofinterest need to be managed and this can be addressed in the constitutional documentation of the PTC, for example by regulating voting rights where personal conflicts of interest arise during the course of the PTC’s business.

As a matter of Guernsey company law, if none of the directors of a Guernsey PTC is resident in Guernsey then the PTC will require a Guernsey licensed fiduciary to act as a resident agent to hold the PTC’s records in the jurisdiction. This situation is unlikely to arise where an exemption from having to hold a fiduciary licence is obtained.