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Family offices and private trust companies: injecting freedom into the trust structure

12 Apr 2023

Although the last few years has shown continued growth globally for Caribbean succession structures generally, we have seen particular interest from family offices for Private Trust Companies (PTCs). All three of the British Virgin Islands, Cayman Islands and Bermuda offer them, but why the growth of interest?

We see it primarily as a sign of a growing confidence and knowledge among settlors, particularly as against five years ago (which have been years of extensive education in growing civil law jurisdictions). Settlors from jurisdictions newer to trusts are learning:

  • to trust professional trustees, meaning we hear fewer questions like “what if they run off with the money?”; but on the other hand
  • what they are comfortable with, meaning a familiar corporate entity like a PTC is often seen as attractive to top a trust structure; and
  • how structures can be adapted round their circumstances, meaning more bespoke tailoring and discussion, and fewer cookie cutter requests.

A PTC puts the family at the heart of the structure rather than an institutional third party trustee. It also means that the family will not feel frustrated at a trustee’s (perceived) brake on entrepreneurship or on the holding of more high risk-assets.

Why the PTC form?

How is a PTC different to any other company? Obviously, the exact form of the PTC will vary between jurisdictions but will certainly mean a company designed by legislation to act as trustee (or protector, enforcer etc) of one or more trusts. It will be a particular “enhanced” type of that jurisdiction’s standard registered company, with some alterations to the model Articles of Association. The board will usually be the settlor, family members and advisors, with no requirement that they be based in the jurisdiction (albeit subject to certain restrictions if a Bermuda PTC).

Although the regulatory requirements differ slightly by jurisdiction, by and large, each PTC must have a licensed registered agent or registered office provider. That agent or provider will need to hold various basic documents, and in the BVI, will need to hold the details of the directors and shareholders (in Cayman such details are given directly to the financial regulatory authority, albeit held privately). However there is no general requirement to file accounts. Nor is there any “onshore-style” requirement to capitalise the company.

It is the registered agent’s / provider’s task to monitor compliance with the restrictions on PTC activity. For example in Cayman, the activity must be “connected trust business” which basically means acting as PTC of one or more trusts for a family. The BVI has a similar concept of “related trust business”, or an alternative of “unremunerated trust business”, implying, obviously, that related trust business can be paid. Given that most PTCs do not expect to receive payment, most go for the unremunerated option.

PTCs continue to develop via legislation. In 2021 the BVI removed the prohibition on PTCs carrying out activities other than trust business, which in practical terms removed any question marks as to ancillary activities like opening a bank account. It also permitted directors to receive remuneration, even where the PTC is undertaking unremunerated trust business.

Where to base the PTC

We are often asked to choose a jurisdiction to base a PTC structure. Frankly speaking, all of the BVI, Cayman Islands and Bermuda have long-established trust industries. All have corporate entities that are used around the world and can mesh with local trusts to reduce legal costs and conflicts between laws. All have introduced innovations such as purpose trusts but stay within the mainstream of trust law and reporting. Any structure in any of these jurisdictions will have no or minimal local tax. So often the choice is still driven by settlors’ friends or reputation or cost, with US-oriented families frequently opting for Cayman for example. But the jurisdictions do have statutory quirks to mark themselves out.

BVI has the VISTA trust regime which delegates the trustee’s duties of investment and management to the board of directors of a BVI company which then holds the substantive trust assets underneath. Although a lawyer can draft a bespoke reserved powers trust under any common law jurisdiction, VISTA gives an inexperienced settlor the statutory reassurance that the trustee will not sell their crypto assets, artworks, or struggling but beloved family business.

Meanwhile Cayman’s STAR trust is not in fact “VISTA but Cayman”, as is often assumed. STAR instead allows a mix of beneficiaries and purposes, an unlimited perpetuity period, and transfers the beneficiaries’ rights to enforce the trust, and to trust information, to the enforcer. But it can be used in a way akin to VISTA by making one of those purposes the purpose of “continuing to hold the family business”. Again this can all be drafted in a bespoke fashion, but statutory backing gives reassurance to settlors, family offices and trustees, and ultimately results in lower fees.

The PTC's place in the structure

Why would PTCs combine with such trusts? Obviously, a key advantage of VISTA or STAR is to reduce client concerns when dealing with far-off institutional trustees, but surely PTCs remove the involvement of such trustees anyway? The issue is the ownership of the PTC shares. In the hands of the settlors they may bring back all the fallbacks of individual ownership that a trust avoids: tax residence, forced heirship, asset protection, etc. A simple VISTA purpose trust with a corporate trustee holds the PTC shares but, because of that VISTA delegation of investment and management, the trustee will have minimal involvement in the family trusts underneath, leaving it to the family members on the PTC board. And although the legislation allows VISTA trust deeds to regulate how the institutional trustee should exercise their shareholder powers to appoint and remove PTC directors, it does not specify the content of those regulations. We see rules specifying the person to direct the trustee, or specifying the future directors themselves, or being tied to some external shareholders’ agreement, all depending on the family’s onshore requirements (including management and control concerns).

Alternatively, if a client really does not want two layers of trusts, the PTC ownership can be orphaned by making it a company limited by guarantee instead of by shares. A client who chooses a Cayman structure can take this a step further with a foundation company. A foundation will be familiar to clients from civil law jurisdictions, and to ensure that the concept meshed with common law case law, Cayman grounded its foundation style entity in a corporate structure. Accordingly, foundation companies have many elements in common with companies, for example directors, but are much more customisable in terms of their bylaws. It is not necessary to have members, thus creating a truly orphan structure, and the rights and duties can be assigned to directors or other bespoke roles like “supervisors”. Foundation companies have found roles in commercial transactions, and of course can be used as a family succession structure entirely without a trust involvement, but for those who want the advantages of both forms, they are a convenient way to orphan PTC ownership.

Where we're seeing PTC's

The following two examples are amalgams of real-life cases developed with family offices over the last couple of years.

Four siblings together control a family business. They decide to have four discretionary fully managed trusts, one for each of their branches. They will have a PTC as Trustee, with themselves as the Board, the shares being held in a further VISTA purpose trust with a professional trust company as Trustee. The rules in the purpose trust deed, which they agreed together in a family meeting, will set out how the Board should be appointed, and will ensure that when one of them dies, someone from their branch of the family will take their place. If there is any dispute, the rules will refer back to their original shareholders’ agreement.

A family patriarch has spent his lifetime building his business. He does not want to see it split up and indeed has dreams of a dynastic legacy. He is not currently comfortable with his warring children having unfettered access. Preferring a Cayman structure, he opts for a STAR trust with his wife as enforcer and a succession mechanism for her eventual replacement. His children will be beneficiaries but do not have rights to information or to terminate the trust, and there will also be a stated purpose of holding onto the business. A Cayman PTC will be the trustee, with its shares held in a foundation company, again with a mechanism for replacement directors.

As settlor education grows around the world, we see no reason why this trend of families, and family offices, taking control of their futures should not continue.

This article was originally published in the PCD Group magazine.