More families are seeking to retain a degree of ongoing control when they set up wealth structures. How are they structured, what are the benefits and how much control can and can’t be secured?
People are increasingly seeking to have more control over their personal and working lives – the choice to work from home to improve their work/life balance; changing jobs more regularly to be more fulfilled; or even streaming the movies or sport of their choice rather than following traditional TV schedules.
That search for control is also extending to wealth management, mainly through trusts and foundations.
With standard trusts such as discretionary trusts, a trustee is given discretionary powers, including how much and when they can distribute income to beneficiaries. The settlor has no ongoing involvement, aside from giving the trustees a letter of wishes. There is little retention of control or oversight.
Jersey and Guernsey trust law allows settlors – primarily high-net-worth individuals and family business owners – to have more control over these decisions, by giving them the ability to create a reserved powers trust or sit on the board of a private trust company (PTC).
“Setting up a conventional discretionary trust can ensure that your family business assets get passed down the generations on a long-term basis,” says Robert Dobbyn, Jersey-based Partner at Walkers.
“But families are also aware that, although the trustees are professionals from well regulated businesses, they are strangers from the family’s perspective. In the old days, people would appoint their local family solicitor, accountant or a friend as the trustee – but now there is a geographical and emotional distance between settlor and trustee.
“As such, people increasingly want to remain involved with their family assets once they have been put into that trust or foundation structure, and giving themselves more control brings that extra comfort.”
He says it is “human instinct” for entrepreneurs who have spent a large amount of time building up their family business and are thinking about how and when to pass it and the assets on to the next generation not to “wash their hands of it and walk away”.
Michelle Tring, Trust Director at Ocorian, believes that there has been a shift in mentality and often emotions around wealth. “We are seeing more private wealth being created by entrepreneurs. When setting up ordinary, purely discretionary trusts, they are handing over a lot of control to trustees, and that can play on their heartstrings,” she says.
“More and more of these families now want an element of control around passing on their wealth, particularly when they are passing over business assets that they have worked hard to make successful.”
What are the options?
One option is to install a protector role in the standard trust they have created, such as a trusted friend or adviser, and give that person certain powers over the trustees.
“It is basically a discretionary trust where the trustees make all the decisions, but some require the protector’s consent,” says Dobbyn. “This often includes large distributions to beneficiaries, removing or adding beneficiaries or amending the terms of the trust.
“Protectors can also be given positive powers, such as getting to pick the successor trustee. It’s tried and tested and very common.”
Another is the ‘reserved powers trust’ option, which allows settlors to reserve decisions for themselves – most typically being able to direct how the assets of the trust are invested.
Other powers that can be reserved include adding, removing or excluding beneficiaries, appointing or removing a trustee, enforcer or protector, and revoking, varying or amending the terms of the trust deed.
“They will choose the investments made and dictate investment strategy. A lot of settlors really understand business and the market they operate in and want to be involved,” says Dobbyn. “You can also mix and match having a trust with a protector whose consent is required for certain trustee decisions and the settlor making the investment choices.”
This investment power is particularly attractive for entrepreneurs or family owners who may be well off retirement age and not yet ready to hand over to a new generation.
“When clients are still making their wealth and earning money, it becomes important for them to retain control over investments in which they are particularly interested, from ESG to philanthropy,” says Philip Carlton, Private Client Director at Highvern. “They see it as part of their asset allocation strategy and have a different view of risk when it comes to trusts than those gone before. They want to have their say and use their expertise.”
Foundations and PTCs
A Jersey foundation is another option, which, unlike a trust, is treated as a legal entity in its own right.
“A trust is essentially an arrangement between and relating to different people, but a foundation is more like a company that doesn’t have any shareholders,” explains Dobbyn.
“The foundation can own investment portfolios or other assets and it can have beneficiaries. The family members can sit on the council of the foundation alongside a regulated qualified member. They can all then make decisions on investments and when it’s the right time to distribute assets.”
Tring is involved in such structures and says it is particularly positive for second- or third-generation members. “You see younger family members on the council slowly and carefully learning about the business,” she says.
Finally, a private trust company requires the creation of a company to act as a trustee of a trust or a group of connected trusts rather than transferring assets to a professional trustee company.
The family members then typically sit as directors on the board of trustees. “It is the deluxe costly option, generally only for those with at least £50m or £100m of assets in them, because the structure now also includes a company that needs to be administered and annual fees need to be paid,” explains Dobbyn.
“You also need to think about who’s going to own the shares in the company. You don’t usually want the family members to own them as they might have a dispute and the shares then get argued over.
“So, you may need to put those shares out of harm’s way in a purpose trust or perhaps a foundation. You have a lot of moving parts with this option.”
Henry Wickham, Counsel at Ogier and Chair of the Jersey STEP branch, says a PTC gives clients more flexibility in terms of involving the family. However, the light-touch regulation means the PTC, for trusts, can only act as trustee in respect of a specific trust or group of trusts with some sort of connection – perhaps for the same family or possibly owning the same asset.
“The administration must also be carried out by a registered person licensed to carry out trust company business,” he says. “Also, if the settlor and family were minded to be shareholders of the PTC, the potential tax consequences of that ownership would need to be fully investigated.”
Setting parameters
Apart from the issue of cost, there are other parameters and boundaries to consider when setting up these structures. As Dobbyn points out: “You have to take advice from lawyers and accountants in your home jurisdictions. Your local laws may dictate what is possible. The complexity of your family may also determine how complicated your trust needs to be.”
Wickham adds: “Careful consideration needs to be given as to where a settlor is from, and the reasons the structure is being set up. For example, the relevant authorities may look at a structure and say that, because you are reserving extensive powers, beneficial ownership has not been divested and it is not really a trust.”
Indeed, settlors of English trusts have been able to reserve powers such as power of appointment, but according to Trust & Trustees: “That ability is limited by case law and the doctrine of the ‘bare’ trust which may arise where a settlor reserves such extensive powers to himself so as not to part with any beneficial interest.”
“If you want to have control in the UK then you add people like a co-trustee alongside the trustees,” explains Carlton.
Even though they are in a more fortunate position than those in the UK, Jersey and Guernsey clients still want to push against the boundaries of their own laws. Dobbyn says there is a clear problem of people “trying to have their cake and eat it” when it comes to control.
“Some will say they want to retain all the control but that is not necessarily a good thing,” Dobbyn says. “If you have a protector and insist that they must consent to every single decision, even a small payment to a tax authority or opening a bank account, then it becomes expensive, bogged down and slow to administer. You have to find the right balance such as payments over a certain amount having to get consent.”
Tring believes that it is important to discuss control, particularly where they may be stretching the limits, such as having a veto over who and where money is allocated to in a trust.
“We don’t want them to undermine the fiduciary responsibilities of the trustees and the overarching purpose of having a discretionary trust in place,” she explains.
“Where a trust is being used, it works better if the element of control is more of a hand in the steer of the assets rather than distribution powers. You need to have a strong working relationship with the trustees.”
Carlton warns such behaviour could endanger the whole trust. “You don’t have the power to distribute assets. It’s not about going too far and becoming a trustee,” he explains. “Your lifetime planning could be jeopardised if you do that.”
So, what can we expect going forward? Some of the biggest demand for this type of control in the past 10 years has been from Middle Eastern families and this is likely to continue given global volatility.
“Some families are keen to protect their fortunes from seizure by political means in certain countries,” says Wickham. “Trusts can also provide help in terms of dealing with forced heirship requirements. And you avoid the issues of probate and divvying up assets when someone passes away.”
Tring adds: “Wealthy families are more international, open-minded and willing to involve their families and the next generation in their wealth – and want to use structures to do that given the wider benefits they can bring, including fiduciary expertise, legal framework, guided succession and so on.”
Wickham agrees, given the huge wealth transfer of trillions of assets worldwide that will be moved over the next 30 to 40 years.
“It needs to be co-ordinated and there will be a flight to quality and reputation,” he points out. “Jersey has positioned itself well with our trust laws – and the future looks bright.”