Deciding whether to use offshore trustees can be difficult, but having decided in their favour many other questions then present themselves.
For example, there is no shortage of possible jurisdictions or service providers – but which should you use? In choosing a jurisdiction the following are perhaps the principal considerations.
Taxation – the jurisdiction must provide the necessary fiscal advantages.
Legislation – the jurisdiction must facilitate and protect the chosen structure. Huge developments have taken place in offshore legislation in recent years. For example, in Jersey new laws have been introduced on limited liability partnerships and the trust laws have been amended to permit purpose trusts. Good planning takes account of all relevant legislation.
Security – internal, political and economic stability and also external relationships. For example, Switzerland's application to join the EU has brought with it some uncertainty. Clients may seek the certainty of dealing with an institution that is outside the EU and will remain so.
Infrastructure – good banking, investment and administrative support are essential.
Communication – although matters are often dealt with by phone, fax or e-mail, physical proximity and time zone can be important.
Perception – the jurisdiction chosen as a base of operations may affect how third parties view the offshore structure. The Republic of Seychelles, for example, did neither itself or those basing their operations there any favours by passing the Economic Development Act, a law which may have encouraged dubious businesses to set up in the country. On a different level, the bulk business approach of the British Virgin Islands to company incorporation (approximately 40,000 were incorporated last year with a total number incorporated of 216,000) compares to Jersey's “questions first” approach (last year just over 3,000 companies were incorporated in Jersey with the total number now in operation being slightly over 31,000).
Having chosen the offshore jurisdiction clients are faced with the task of picking their offshore trustees. Whether or not there are existing connections, the client should be aware of the available options.
There are three types of service providers: banks and other large financial organisations; trust companies associated with professional firms; and stand-alone trust companies.
Banks' trust companies seem to offer what is perhaps foremost in the mind of prudent clients – security. But it is still worth reviewing the true substance of the trust company, its relationship with the bank and the protection it gives to clients.
In return for the security of dealing with a bank trust company the client will often have to sign up to a fee structure based on a percentage of net asset value, often around 0.5 per cent per annum depending on total value, usually with additional fees for coming and going.
Other features of dealing with the trust companies of large financial institutions can be the cross-selling of investments and other products from the bank or its investment arm to the trustee (although the trustee should, for its own protection, exercise considerable care in this), and the need on the part of the trustee to seek outside legal and tax advice.
The recent Federated Pension case in Jersey appears to have given rise to a defensive approach to trusteeship by bank trustees in particular. Rightly or wrongly the result can sometimes be a loss of flexibility and extra expense.
In most instances professional firms' trust companies cannot offer the same services as banks but often compensate with charges that are based mainly on the cost of time spent on administering or setting up the trust rather than a percentage of assets held. The availability of in-house legal and tax advice and perhaps a less regimented environment can sometimes help trustees to take a more flexible approach.
In every instance the security of the structure will be very important. More clients are questioning the degree of protection afforded to their overseas interests. Not only is the level of indemnity insurance worth questioning but so are the terms. It is of little comfort to find out after the event that a policy does not extend to the cause of a loss.
Dishonesty cover seldom extends to the principal of a sole proprietor business, for example. Clients should be sufficiently well informed to enable them to assess the risk.
Security aside, the most important factor is quality of service. In an increasingly technical environment an awareness of the points of concern at all levels in a trust organisation is fundamental, as is immediate access to support and proper supervision. Small mistakes can mean big problems.
In deciding on an offshore service provider it is well worth looking at the organisation behind the salesperson.