To the man on the street, trusts are complicated and associated by many with ‘naughty’ financial goings on. Perfect timing, then, for this guide to what trusts in the Channel Islands really are all about
Trusts are a weird idea when you think about it. Entrusting someone with a personal secret is one thing, but handing them millions of pounds, your family business, share portfolio, superyacht and priceless collection of Jackson Pollock paint splats for safekeeping is another.
Add in the fact that you’re putting your faith in a total stranger – and, as far as the law’s concerned, you’re actually giving all this stuff to them – it’s no wonder that many are baffled by this Anglo-Saxon creation.
Yet there’s clearly something in the concept – private individuals have stuck £400bn in Jersey trusts alone. So, if you’re having trust issues, we hope this guide will help…
In a nutshell, what is a trust?
Put simply, a trust is a legal arrangement where someone with assets (the settlor) hands those assets to a trustee to look after for the benefit of one or more other people (the beneficiaries), or for a specific purpose, with agreed restrictions on what they can do with those assets. Simple.
Trusts have been around since the Crusades, used by knights to protect their assets while they were out doing the Lord’s work with a sword.
And there’s more than one type of trust, yes?
Yep. There are tons. Which type you choose depends on what you want to use it for. There are those set up for charitable and non-charitable purposes; and there are all sorts of trusts for beneficiaries – from fixed trusts, which lay out the rights for the beneficiaries very specifically, to unit trusts, which give each beneficiary a set proportion of the assets.
“The very basic trust is purely discretionary,” says Michelle Tring, Senior Client Manager at Estera. “Trustees have discretion over what they want to do with the assets, as long as it’s for the benefit of the beneficiaries. An accumulation of maintenance trust ensures that the assets are used to maintain minor beneficiaries – to pay for school fees at a certain age, say.
"The other most common type is the reserved power trust, where the settlor hands over assets to the trustee but retains certain powers over investments. You could go on forever…”
What’s this we hear about certain cultures struggling with the concept of trusts?
People tend to think, quite sensibly, that ownership means ownership. Simple as that. The trust demands that they rethink this and make a distinction between two types of ownership – the legal and the beneficial.
“The trust is registered in the name of the trustee, who holds legal title, but the beneficiaries have beneficial ownership,” explains Marcus Leese, Head of Ogier’s Guernsey private client and trusts team.
“So, should the trustee take the assets and bet them on the 2.30 at Kempton Park, the beneficiaries have a right to go to court to get those assets back. That division is fundamental to the concept, which is absolutely fine in common law jurisdictions like the UK, US and Australia. But if you go to a civil law country like France or Germany, that division is completely alien.”
Also, unlike a company, a trust isn’t a legal entity but a legal relationship, a set of rights and obligations, which can really flummox some people too.
“A jaundiced bureaucrat on the continent may view the trust as suspicious and dodgy, and a source of great mischief,” says Christopher Scholefield, Partner at Viberts. “They want to know the address of the registered office – and we’ll have to explain it again: it’s not a thing, it’s a relationship.
"The Arab world has something like a trust – a waqf – so they don’t struggle too much with the idea, but it usually results in scowls in Europe and Latin America.”
Who uses trusts and what do they use them for?
Anyone, basically. And for anything. These days they’re hugely popular for ultra-high-net-worth individuals planning succession, whether it’s to prevent their kids from selling the family business or to delay them having full control of their assets until they’re 25 years old; to ensure the estate is distributed properly or protected against future claims; or simply to put a degree of distance between the individual and their assets, to protect their privacy.
But that’s not all. “My day could go from a multimillion-pound litigation case in the morning, to an old lady upset that she’s had no cheques from her trust and can’t pay for her prescriptions,” says Tring. “Part of why I love the job is that you get to work with all these people.”
Then there are more commercial uses. Investors such as pension funds may use a unit trust to pool their money, so they can make a collective investment in stocks or real estate. And finally, there are charitable uses – where a wealthy individual or family sets up a trust as a means of giving money to cancer research or to build a school, for example.
But they’re really only for the mega-rich, right?
Nope. Not the ‘mega’-rich. But you still need a few quid. It’s unlikely you’d set up a trust for anything less than £2 million in assets, simply thanks to the costs involved in running it in a regulated, and thus more expensive, jurisdiction like the Channel Islands.
Is the client base changing, and are people using trusts for different things?
The rise of commercial trusts has led to more business people being involved. Companies use employee benefit trusts to pay pensions and benefits, insulated from the ups and downs of the company itself.
“Trusts sometimes own companies, or very large infrastructure projects such as bridges, tunnels and buildings, as they can provide flexibility of ownership,” says Mark Renouf, Partner at Benest Corbett Renouf.
Meanwhile, the Channel Islands have increasingly diversified to a base beyond the UK. “Clients now come from all over world,” says Matthew Guthrie, Head of Trusts and Private Client at Mourant Ozannes, Guernsey.
“Latin America, the Middle East, Far East and India. It’s increasingly international. Reserved powers trusts are popular among clients in China and Hong Kong – they can bundle up their assets in a trust and continue to tell them what to invest in.”
The one thing trusts aren’t used for so much these days is tax management, as increasingly strict tax rules around the world have gradually eroded any advantages. “I have one client in the Middle East who has a trust structure here that’s taxed back at home,” says Guthrie. “There’s zero tax advantage, but he wants his business to continue when he’s gone.”
So what do people put in these trusts?
Pretty much anything – from real estate to Ferraris, artwork, shares in the family business, yachts. But some assets do suit trusts better than others. “Classic cars generally go up in value over time, but private aircraft may go down, so that can be problem,” says Scholefield.
“Trustees have to establish that the settlor understands it’s a depreciating asset, so the beneficiaries don’t pop up later saying the trustee should have sold the aircraft and bought shares in Apple instead.”
And what about people using them to hide ill-gotten gains?
You can’t start any financial structure these days without disclosing a whole load of information as to who you are, why you’re doing it and where the money came from. There’s all the changes to tax legislation in onshore jurisdictions like the US, UK, Australia and Canada, as well as the need to disclose information under anti-money-laundering legislation, FATCA and the Common Reporting Standard.
All of which makes it nigh-on impossible to hide assets in trusts.
“Of course, like cars, computers, companies and cash itself, trusts can be one of the resources used by criminals,” says Renouf.
“But it would be very stupid to use the Channel Islands to hide ill-gotten gains. Trust assets can be frozen quickly and professionals can be jailed for not asking enough questions. Dirty money tends to migrate to other jurisdictions – which I won’t name in case I ever want to go on holiday there.”
So why are the Channel Islands such a big deal in the trusts space?
First, there’s legislation – Channel Island trust law is as modern, supportive and flexible as trusts require – many places won’t allow non-charitable purpose trusts, for example; the Channel Islands do.
The islands’ industry professionals – trustees, lawyers and accountants – are well-versed in setting up and managing trusts, and the islands have a long-standing relationship with the UK, the original home of trusts. They also share a common legal system, language and time-zone.
Finally, the courts are robust. “When you’re setting up a trust, you’re putting someone else in control of your assets,” says Guthrie. “So, you don’t want to use a tin-pot jurisdiction where you’re worried what the court would do if you have to litigate. Here, you can be satisfied you’d get the right outcome.”
Aren’t the global financial ‘police’ clamping down on trusts?
Not trusts per se. They’re clamping down on money laundering and tax evasion. This drive has, however, led some EU member states to push for a public register for trusts, which would declare the beneficiaries and leave them open to public scrutiny. This could fatally undermine the appeal of trusts, even when those trusts were being run in a respectable jurisdiction for legitimate reasons.
“If I’d set up a trust to reduce the chance of being kidnapped for ransom, I wouldn’t want ‘Scholefield trust: £50 million’ on a register,” says Christopher Scholefield. “Kidnappers would just think ‘goodie’.”
The islands’ trust practitioners aren’t too disturbed by the possibility of a public register, as it would be almost impossible to pull off.
“Identifying beneficiaries doesn’t work,” says Scholefield. “I could set up a trust for the benefit of the residents of Haringey in London. Try listing them.” A register open only to the authorities is a more likely prospect.
And we trust that this has answered all of your questions about trusts.