A trust is a legal arrangement which distinguishes between the legal ownership and the beneficial ownership of property. Legal ownership is transferred to a trustee who manages and administers the property for the benefit of the beneficiaries, that is those persons intended to benefit from the trust property. It is an arrangement intended for the safekeeping, management and eventual disposal of property.

A trust may be created either during an individual’s lifetime (referred to as an inter vivos trust) or on death (referred to as a will trust). A Jersey law trust may exist for a limited or unlimited period of time.

Jersey is a leading jurisdiction for the establishment and management of trusts. The Island has a large and well-qualified professional trust sector, modern trusts legislation and an effective judicial system. It is also recognised as being in the top division of international finance centres in the regulation and supervision of its financial services industry. The Island offers fiscal neutrality for trusts established for non-Jersey resident beneficiaries.

Trusts terminology

The settlor or grantor of the trust is the owner of the assets to be placed on trust. The settlor creates the trust and may also benefit under its terms. Subject to certain conditions, a settlor may also act as a trustee of the trust, although this is rare in the context of Jersey law trusts established for non-Jersey resident beneficiaries.

The trustees are the individuals or company to which the legal ownership of the property is transferred and who are empowered to hold, administer and distribute such assets in accordance with the terms of the trust instrument and the Trusts (Jersey) Law 1984, as amended, (the “Trusts Law”). Generally in Jersey, trusts are administered by professional, corporate trustees regulated by the Jersey Financial Services Commission.

A trust is normally documented by a trust instrument which sets out the terms on which the settlor agrees for the trustees to hold the assets. It identifies the beneficiaries and the circumstances in which they are to benefit from the trust fund. The instrument usually only refers to an initial nominal sum settled on the terms of the trust but its terms apply equally to subsequent property settled on the trust.

Jersey Trusts Law

Jersey’s principal trusts legislation is the Trusts Law which is supported by a body of case law from the Island’s courts.

Key features of trusts

Whilst it is not possible to cover the features of all trusts in this guidance note but five points are particularly worthy of mention:

Discretionary Trusts

Whilst some settlors wish to specify in the trust instrument the precise circumstances in which beneficiaries are to be given the income and/or capital of the trust fund, most settlors prefer to give trustees sufficient flexibility to take account of changes in circumstances of the beneficiaries.

A discretionary trust gives the trustees wide powers to administer the assets and to distribute them at their absolute discretion. The trustees will usually be guided by a letter of wishes from the settlor which sets out the settlor’s wishes regarding the manner in which the trust fund is to be administered and distributed. Although not legally enforceable, the trustees are guided by the wishes of the settlor which can be updated from time to time.

Purpose Trusts

It is possible for Jersey law trusts to be established partly or wholly for non-charitable purposes. Purpose trusts can be used in corporate transactions to hold underlying assets ‘off balance sheet’. More commonly in a private wealth context such trusts are used to maintain buildings such as theatres or opera houses, to collect and protect family heir looms or to hold certain assets such as the shares in a family trading company. An enforcer is required to be appointed to enforce the terms of a trust in relation to its non-charitable purposes.

Revocability of Trusts

A Jersey trust may be revocable or irrevocable. If a trust is revocable, the settlor may terminate the trust and regain ownership of the trust fund held on trust on the date revocation takes effect. For this reason, revenue authorities may argue that the settlor has always controlled the trust fund and careful advice is required if a trust is to be revocable in nature.

An irrevocable trust cannot be revoked. Generally, this is the preferred form of trust settled under Jersey law.

The use of Protectors

The settlor of a discretionary trust may wish to ensure certain controls are placed around core powers of the trustees. This can be achieved by requiring the trustees to obtain the consent of a third party before exercising such powers.

Such a third party is known as a protector of the trust. The rights and obligations of a protector vary from trust to trust and should be expressed in the terms of the trust instrument. Usually the protector is a close friend, relative or professional adviser of the settlor.

Common powers which are made subject to protector consent include the trustees’ power to appoint new trustees, the addition and removal of beneficiaries and the distribution of capital from the trust fund.

Settlor Reserved Powers

It is possible for a settlor to reserve certain powers for himself or herself (or to confer such powers on others) under the terms of a trust instrument. Such powers include the power to direct the trustees in relation to the investment of the trust fund.

Practical examples of the use of trusts

Jersey trusts are generally used by individuals and companies for personal, business and investment activities. It is important that any structure is properly established and professional advice is sought in each jurisdiction which affects the settlor, the beneficiaries and the trust fund.

The following examples outline some of the practical ways in which trusts can be used:

Asset Management

A settlor capable of handling his or her own investments may be concerned about the ability of his or her heirs to do so after the settlor’s death. A trust can be established and the settlor can reserve investment powers during his or her lifetime. On the death of the settlor, either a person nominated by the settlor or the trustees may assume responsibility for the investment of the trust fund.

Forced Heirship

Assets held in a trust can be distributed in any manner that the settlor desires. An individual from a country with rigid legal or religious inheritance laws may wish to arrange for an unequal distribution of assets among his or her heirs. By establishing a trust in a jurisdiction outside that country, the desired distribution plan can often be formulated and implemented.

Avoidance of Probate Formalities

Assets owned by an individual usually pass on death in accordance with the terms of a will. If the assets are held in a wide variety of countries it may be necessary to obtain a grant of probate to the will in each country where assets are located. This can be particularly troublesome, expensive and time-consuming. In addition, there may be estate duties and taxes payable before the estate can be settled and the assets distributed to the heirs of the deceased.

However, if such assets are owned by a trust, they can be held for the benefit of succeeding generations in accordance with the terms of the trust instrument. The death of the individual should have no detrimental consequences for the continued operation of the trust.

Privacy, Confidentiality and Anonymity

Trusts are generally created by a private document to which the settlor and the trustees are the only parties. The trust instrument does not have to be filed with any public body in Jersey. Beneficiaries of a trust may be entitled to certain information regarding the trust.

Prevention of Division of Assets

An individual who has built up a sizeable private company may have some children who are interested in the running of the business and some who are not. The individual may wish to benefit the children equally but would not like any of them to be able to dispose of their interest in the family company to non-family members. Such arrangements can be achieved through the use of a trust.

Family assets may also take the form of works of art or real estate which, by their nature, cannot be divided but from which a number of individuals benefit. Such property can be held in trust for the beneficiaries without disturbing the underlying property.

Control of Spending

Many individuals may be unfit to manage their own affairs due to age, infirmity or profligacy. A trust structure can allow trustees to help in the management and preservation of wealth by controlling the manner in which trust funds are spent.

Jersey taxation of trusts

In Jersey, the taxation rules for trusts are relatively straightforward provided the beneficiaries of the trust are not resident in Jersey:

  • Trusts with no Jersey resident beneficiaries are only liable to tax on Jersey source income.
  • By concession, Jersey bank deposit interest is not treated to be Jersey source income when received by trustees of a trust with no Jersey resident beneficiaries.
  • If a beneficiary of a trust with no Jersey resident beneficiaries becomes resident in the Island, action must be taken to vary the trust, for example by restricting that individual to benefit from an isolated fund in the trust, if the trust’s entire income is not to become subject to Jersey income tax.

Conclusion

A trust is a flexible arrangement which can be structured to meet the objectives of a settlor. Tax advice should be obtained by the settlor and in some cases the beneficiaries before a trust is established and it is in response to such tax advice that we, as Jersey advisers, can tailor the terms of a trust to suit the needs of a settlor and those he or she intends to benefit.