A question of trusts
27 July 2009
14 May 2013
10 June 2013
8 August 2013
27 February 2014
Principles applicable to legal costs incurred in trust-related proceedings in Jersey by trustees, other fiduciaries and beneficiaries
1 October 2013
Offshore purpose trusts have come into their own as a flexible legal vehicle, with most centres now embracing them in one form or another. By Samantha Morgan and Philip Munro
For many, a ‘trust’ suggests merely a legal arrangement facilitating the devolution of wealth within families. Trusts are, however, used to effect a range of commercial arrangements and functions outside the family context.
A useful form of trust that can be the basis of many arrangements is the non-charitable purpose trust. A purpose trust is one that exists so that its trust fund is held to be applied not to beneficiaries, but to meet prescribed purposes.
It is a fundamental principle of English law that a trust must have an identifiable beneficiary to be valid; subject to some limited exceptions, a trust for purposes will be void. The best-known exception to this rule is a trust for purely charitable purposes.
Many offshore jurisdictions have, however, recognised that non-charitable purpose trusts have advantages and have legislated to allow for the formation of such trusts. It is useful to consider some of the uses given to purpose trusts:
Settlors may wish to promote a cause that does not fall within the strict legal meaning of ‘charity’. An offshore purpose trust can be used to achieve philanthropic purposes that are not charitable.
Private trust companies
A private trust company (PTC) is a company formed for the express purpose of acting as a trustee of a specific group of trusts, typically for the benefit of a particular family. PTCs are popular in planning for wealthy families that find the flexibility of a bespoke trustee vehicle preferable to the use of an institutional trustee. Where a PTC is formed as a company limited by shares (as is normal), it will generally need a shareholder to own it - a function that can be given to a purpose trust.
Purpose trusts are often used in arrangements to effect the securitisation of assets - that is, the conversion of assets that may generate future cashflows into securities that are immediately marketable. A key aspect of a securitisation transaction is that the assets transferred to the vehicle will not appear on the balance sheet of any of the parties to the arrangement. There is a number of ways in which the vehicle used to effect the transaction can be structured to achieve this effect. In some instances, a company might be used and the shares in this company might be held by a purpose trust. A company may not always be the optimal vehicle for a securitisation transaction and a trust might be preferable.
Purpose trusts can be used in structuring investment products. In a pooled investment arrangement, a purpose trust can be established to hold title to the investments on behalf of the investors. Alternatively, a purpose trust can be used to hold the management shares in a corporate fund or as a vehicle to issue participation notes.
Purpose trusts can be used to hold high-risk assets where there is a concern about litigation exposure.
Purpose trusts might be used to hold shares in trading companies. Sometimes there is a desire to settle voting control of a company into a purpose trust to ensure its long-term continuance.
Purpose trusts can be used to hold reserve funds because they can ensure that monies will be applied for their intended purpose without other claims being made against them.
Given the range of uses that are being found for purpose trusts, it is not surprising that there has been a trend among offshore jurisdictions to legislate to allow them. All of the leading offshore trust jurisdictions now allow for purpose trusts (in most instances without the constraint of a perpetuity period). That said, each regime has particular requirements, such that a decision as to governing law needs to be made on a case-by-case basis. These are as follows:
Requirement for an enforcer
Many jurisdictions require that a purpose trust has a supernumerary to ‘enforce’ its terms. This is a requirement in the British Virgin Islands (BVI), under the Cayman Islands’ STAR trust regime and in Jersey. It is not, however, a requirement in Bermuda.
Residency of trustees
Some jurisdictions require that the trustees of a purpose trust be resident in the jurisdiction supplying the governing law. This is not a requirement in Bermuda, Guernsey or Jersey, but is in the BVI and for Cayman STAR trusts.
Cayman STAR trusts have been popular as they can be created for both purposes and beneficiaries. These ‘hybrid’ trust arrangements can be very useful because of the flexibility they offer. Guernsey law expressly allows for the creation of trusts for beneficiaries and purposes and it is understood that they can be created in Bermuda, the BVI and Jersey, although in some jurisdictions this effect is achieved by drafting purposes that allow individuals to benefit rather than by having trusts for both purposes and for beneficiaries.
Purpose trusts can be created as flexible, long-term vehicles. There are key points of difference between the offshore jurisdictions allowing for purpose trusts, but among them a suitable form of purpose trust is likely to exist in most situations.
As practitioners become increasingly familiar with purpose trusts, further innovative uses will be found for them.
Samantha Morgan is a partner and Philip Munro an associate at Withers