By Nigel Rotheroe

I am a qualified accountant working in public practice and a director of a number of licensed trust and corporate service provider companies.  I am actively involved in wealth management and preservation structures for clients in the Isle of Man, where I live and further afield and this often entails working with clients and/or professional firms overseas.  My work varies day to day and ranges from giving bespoke tax and structure advice, undertaking special projects, and addressing the multitude of issues that trust and corporate administration work brings.  Life is never dull!

This article is now the third I have written on Private Trust Companies (“PTC”) and touches on what can go wrong with the administration of a PTC.

I have recently been involved with the transfer of a large family wealth structure to our offices which includes a discretionary trust (the “Trust”), the sole trustee of which, from its’ inception in the 1980s, is a private limited company i.e., a PTC.

The Trust was established, by way of a declaration of trust by the PTC, to benefit the beneficial owner (“the UBO”) of the PTC and his family.  From its inception and to date, the trust deed of the Trust (the “Trust Deed”) provides, inter alia, that:

• the class of beneficiaries are charities and public charitable causes of an Island in the Caribbean.
• the trustee, the PTC, has the power to add and exclude beneficiaries throughout the trust period.
• no trustee can benefit from the Trust and if the trustee is a company any shareholder of such a company.

Such a trust is typically known as a “blind” or “red cross” trust.

The Trust and its underlying companies have carried on for many years as one would expect, receiving and investing funds, receiving income and making gains, and it appears advancing money to and/or for the benefit of the UBO and/or other persons with which he is/was associated.  You will appreciate that for this and other reasons the UBO considered he was a beneficiary of the Trust.

The controlling administrator of the PTC and effectively the Trust have changed over the years and prior to our recent involvement and the transfer of administration, was a multi-jurisdictional trust and corporate service provider (“ICO”) based in Jersey, which had always until late been the Trust’s place of residence, management, and control.

During early 2017, having been administrator for a number of years, the ICO took legal advice and decided that the UBO should be formally added to the class of beneficiaries.

Subsequently, representatives of the ICO, who were the directors of the PTC, held a meeting and approved the addition of the UBO to the class of beneficiaries.

A large firm of Jersey lawyers were engaged to consider the provisions of the Trust Deed, the governing law of the Trust and to draft a suitable “Deed of Addition” [of a beneficiary] (the “Deed”) which was subsequently executed by ICO.

There are, in my opinion, two key issues with the Deed which both the lawyers and/or ICO (not least as it has its own inhouse legal team) should have noticed or considered before the Deed was executed.

The first and perhaps the most obvious, is the person that executed the Deed, ICO, was not and never had been the trustee of the Trust.  Thus, the execution of the Deed achieved nothing.

The second, but again something which should have been noticed and queried by both the lawyers and ICO prior to the execution of the Deed (which is not apparent from the documentation we have seen), is that the UBO could never be a beneficiary of the Trust because he was the beneficial owner of the PTC and although the shares in the PTC were held by another for his sole benefit i.e., as nominee, he was nevertheless the “shareholder” as regards the Trust.  This view was subsequently supported, on instruction, by another reputable firm of Jersey based lawyers and two English counsel.

From the UBO’s perspective, the Trust is not fit for purpose.  The UBO took legal advice before the Trust was established and professional trust and corporate service providers have administered the Trust for nigh on 40 years “for much fine gold”.

There are of course other issues to consider, such as any appointments or benefits which have been provided to the UBO and others from the Trust.

Invariably, whenever one looks at what has happened with a trust, one has to consider any tax implications and needless to say in this particular situation they are both “interesting and challenging”.

What, you may say, is the position for the ICO and those who have previously administered the PTC and thus the Trust? I would only say at this juncture, “time will tell”.  Perhaps another article will follow from me, or you may read about this case in some law report following a court judgement.

As with all wealth protection structures, implementation and maintenance are key to their success and taking regular and appropriate advice from suitably qualified professionals is a must.

Needless to say, “big” is not always “better”, especially when trust and corporate administrators are owned by large venture capital/equity backed concerns whose prime focus appears to be on profit and not client service, well-being, and protection.