Trust with a twist
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23 April 2014
Caroline Garnham explains how a revolutionary trust structure could help families with their wealth management
Legislation currently going through parliament in the Bahamas could revolutionise the cost of, and the bureaucracy involved in, managing offshore trust structures. For the first time legislation has been drafted to create a perpetual entity to carry out executive functions, while at the same time giving the officers of the entity limited liability.
The concept was developed while reviewing a client’s trust structure. The trustee of the structure was a company created to be in business as the trustee of his family trust (the private trustee company) that held his businesses, assets and homes. The company was owned by a purpose trust with a professional trustee, and the client’s eldest son was the enforcer of that purpose trust.
On the board of the private trustee company were three of the client’s professional advisers and two of his adult children, including the enforcer. The private trustee company had a contract with a professional trustee company for the provision of the administration functions, the duties of which were overseen by the board of the private trustee company.
The client was extremely pleased with the way the private trustee company and the services of the professional trustee operated. The board of the private trustee company made all the important decisions with regard to the running of the family business and the investment of the family assets owned by the private trustee company. Meanwhile, the board members all had limited liability to protect them from any decision where a loss arose to the trust’s assets.
The client did not, however, like the structure owning the private trustee company. In particular he did not like having a professional trustee holding the power to appoint and remove the board of the private trustee company, and he did not like his son in the role of the enforcer, with the power to replace the purpose trust trustee.
He felt his position would distort the independence of the purpose trust trustee, one of the duties of which was to appoint and remove the directors of the private trustee company, including his son.
What’s the purpose?
It was also questionable as to whether holding the shares in a worthless but powerful private trustee company was a purpose. Finally, there was concern as to the personal liability of the enforcer in situations where a loss was incurred to the trust assets as a result of gross negligence of the private trustee company. If the board of the company should have been removed by the purpose trust, it was unclear whether the enforcer who had power to remove the professional trustee could be personally liable for that loss for not doing their job properly.
It was clear that what the client wanted was to replace the private trustee company ownership structure with a perpetual entity. In that entity officers could be appointed whose principal purpose was to ensure the directors of the private trustee company were acting properly as trustees, and to appoint and remove the directors in accordance with the articles of the company when necessary.
These officers would, of course, all need the benefit of limited liability, because the assets held in the trust were of significant value and could easily wipe out their personal wealth. Their duties were fiduciary and personal.
The solution creates an orphan self-owned entity to carry out executive functions, which is designed to sit at the top level of a private trustee company’s structure. It does not have shareholders, beneficiaries or enforcers. These are not necessary for an executive entity because it is designed to carry out executive duties only. It cannot be used to hold assets of any nature other than shares in a company of nominal value, the purpose of which is to carry out executive duties, such as a private trustee company, and such sums as are necessary to carry out executive duties.
The executive entity is therefore an ideal structure to hold the shares of the private trustee company and to be an enforcer of a purpose trust, a corporate director of a private trustee company and a protector of a trust or an advisory board. In due course it could replace the private trustee company, but not until Bahamas legislation is amended to include the ’Bahamas executive entity’ as a vehicle that could be licensed as a private trustee company.
The legislation is now before the Bahamas parliament. However, it has already attracted interest from families asking for reviews of their trust structures to improve the cost and bureaucracy of their wealth ownership structures, and to make governance more balanced as well as robust against attack from outside or inside.
Caroline Garnham is a partner at LG