This article is written primarily for those individuals who are in the fortunate position of being beneficiaries of an offshore trust. It addresses both the need to understand and work with the existing trust structure so as to minimise the chances of third party attack and the possibility of change. The author is Frank Hinks QC; he is a member of Serle Court, Lincoln’s Inn in London. (Further details are below the article.)

This article examines some of the issues that come into play around offshore trusts; given all the developments in the offshore world in recent years, it is extremely valuable to be able to share such insights. Readers responses are most welcome.

Understanding and respecting the trust structure
It is important that persons interested in offshore trusts understand and respect the trust structure. A trust is not a bank account to be operated in accordance with the instructions of the settlor or beneficiary. It is a fiduciary relationship in which the trustees hold assets on trust for the beneficiaries. 

If the trust is discretionary no beneficiary is entitled to income or capital as of right. Before the trustees make a payment they need to exercise their discretion taking into account all relevant factors. If from the outset the trust is administered in a manner inconsistent with its terms there is a danger of it being void as a sham. 

Even if not a sham, if the trustees always do what a particular beneficiary requests there is a danger that on the divorce of that beneficiary, a London Family Division judge may treat the assets in the trust as available for the making of financial provision on divorce. Beneficiaries should cooperate with trustees to ensure that they have the information necessary to make properly informed decisions which are not open to attack, and trustees should ensure that they record the decisions properly.  

Trusteeship
The performance of the trustees should be reviewed regularly: investment returns, trustee charges, and the general efficiency and responsiveness to the family’s needs and circumstances (but keeping in mind that for the above reasons it is sometimes in the best interests of all interested in the trust that the trustees say no to requests). 

PTCs (private trust companies) are a popular form of trusteeship for very wealthy families. PTCs are limited liability companies. They are not licensed to conduct trust business generally, but have authority to conduct the business of an individual trust or related trusts, and in consequence do not need to be regulated like normal trust companies. Normally the shares of the PTCs are held by a purpose trust and it is through the purpose trust that family influence is exerted, for example, by giving the protector or enforcer power to remove and appoint directors of the PTC. It is desirable that the directors are not beneficiaries but professionals experienced in trust administration. 

PTCs are not appropriate for all, particularly as a custom made trusteeship of this nature is not cheap. Also existing individual trustees or trust company may not be prepared to retire in favour of PTCs without security and without court approval since PTCs are companies of straw with no assets.   

Reviewing the trust structure
We live in a period of change. Tax rules change. Public attitudes towards tax avoidance are hardening. There is a movement towards greater transparency and regulation and whether through hacking or more lawful means, a greater risk of a family’s financial affairs (including trust arrangements) becoming a matter of public knowledge. 

From time to time families need to review their offshore trust arrangements and see whether the arrangements need to be changed. The process of review is normally best started with the family’s onshore legal and tax advisers before involving the offshore trustees and their legal advisers. In the absence of powers to remove trustees the attitude of the existing trustees is likely to be crucial if the desired changes are to be achieved without the expense and uncertainty of litigation.

Proposals need to be put to them in a manner which demonstrates that they are in the best interests of the beneficiaries and hence difficult for them as trustees to oppose in the proper exercise of their fiduciary obligations. 

The family also needs to come to an early assessment as to whether the proposed changes will enjoy general family support or give rise to a dispute between beneficiaries. Offshore trust litigation is extremely expensive and not to be embarked on lightly. 

On review, one issue is whether the trust should be brought to an end, brought onshore, or its offshore life extended. There are cases where offshore trusts established by US and Canadian families have ceased to enjoy the tax advantages for which they were established and where it is in the best interests of the families to bring the trusts onshore or simply bring them to an end. That is not likely to be the position in relation to UK resident families. 

The tax regime in the UK is now weighted against trusts. Since the Finance Act 2006 even interest in possession trusts and accumulation and maintenance trusts cannot be established without entry periodic and exit inheritance tax charges. Where there is an existing trust it may be desirable to make a court application to vary the trust to extend its life and avoid assets becoming vested absolutely in beneficiaries. 

Modern trusts normally contain provisions enabling the proper law of the trust and the jurisdiction to which the trust is subject to be changed.   Change will entail expense, but in some circumstances will be desirable. The most important requirement is that the jurisdiction has an established trusts law with courts and local lawyers of the calibre sufficient to ensure that if problems do arise they will be properly and cost effectively resolved and the assets thereby protected.

However, the modern world of increased transparency regulation and public scrutiny also makes it desirable that the jurisdiction has moved with the times and has a good reputation. A jurisdiction with the most far reaching asset protection legislation (advantaging the beneficiary at the expense of the creditor in a manner that most would regard as unfair) is not likely to be the most desirable residence for a legitimate fortune.

About the author:
Frank Hinks QC has a domestic  and international trusts practice (advisory, drafting and litigation) appearing in court in England, Cayman, Bermuda, Bahamas and Hong Kong as well as advising in relation to other jurisdictions, including Jersey and Guernsey.