Control or strategy

Commentary - 03 October 2016

Entrepreneurs - a natural desire to control

Author of article:

Michael Powell

Client Director, Private Client Services

Protectors can help entrepreneurs retain an element of control of their estate, says Michael Powell, Client Director.

Most entrepreneurs will attribute their success to many reasons, including hard work and luck. However, an ability to control much about their lives will almost certainly be cited as a major supporting factor.

It is unsurprising that when entrepreneurs are being advised to establish offshore structures to hold existing assets until a projected sale or the proceeds of a successful sale are received, they want to first understand how they can retain some control when they have transferred legal ownership to the trustees.

This article will consider some of the ways in which a prospective settlor might be persuaded that they do not need to give up de facto control of their assets. A pragmatic balance can generally be found between retention of control whilst ensuring the validity of the trustees relationship should it come under attack, for example, in circumstances of divorce or bankruptcy.

Private Trust Company

Starting with the trustees, consideration could be given to establishing a private trust company (PTC). The composition of the board of the PTC could be composed of a blend of persons (subject to any tax considerations) in whom the settlor has faith and/or who have the appropriate qualifications to work with the professional service provider. The shares in the PTC could be held by a purpose trust or a foundation, allowing the settlor to retain control over the composition of the board.

Once the settlor has decided who the trustees will be, consideration may be given to drafting a bespoke trust instrument to accommodate the settlor’s wish to retain control of those matters of most concern. The settlor may decide that they would like to reserve certain powers within the trust deed including, for example, the power to hire and fire the trustees, and most commonly proactive involvement in investment decisions. At its broadest, the settlor could reserve the power to revoke the trust. Whilst this power might be very reassuring, it will nevertheless be crucial to take advice in the jurisdiction of the settlor’s residence to ensure that a potential claim against the trust funds whether, for example in the case of divorce or bankruptcy, is unlikely to be successful and also to ensure that any argument that the trust was a sham could be rejected.

Protector comfort

In many cases, settlors feel comforted by the inclusion of protectorship provisions. Sometimes such provisions are incorporated, but a protector is not actually appointed at the outset, on the basis that the settlor feels satisfactorily comforted by the knowledge that they could appoint a protector in due course if required. In other circumstances a protector, often a trusted friend of the settlor, is appointed at the outset.

Care should be taken to ensure that the protector fully understands the nature of their duties and potential liabilities. For example, where the protector is simply asked to consent to certain trustee actions, in particular distributions of capital, their consent is unlikely to be fiduciary in nature. Whereas other more onerous or proactive protector responsibilities may be deemed to be equivalent to that of a trustee’s fiduciary powers.

In these circumstances the protector should receive independent legal advice to ensure that they fully understand the actual and potential implications of their role and are adequately protected either by the terms of the trust or by professional indemnity insurance. There are rare circumstances where the protector has been subject to claims that they have not carried out their role in an appropriately fiduciary manner.

The protector can play a valuable role providing for appropriate checks and balances in a family structure, particularly a complex one where there is a family business. They also provide an element of security, act as a sounding board for the family or for the trustees on strategic issues and are a point of contact for the beneficiaries. Sometimes they will work within the terms of a family protocol where all principal parties, including the trustees, are joined in agreeing their role in managing a family’s wealth.

Specialist advisers

Many trusts comprise ‘investment director provisions’ and an investment committee may be established. These structures are considered very helpful by settlors who may, for example, populate the committee with representatives that are expert in the various areas in which the trust fund is likely to invest. There may well be cost implications that would have to be justified.

In one sense, the settlor may not seek out trustees that are capable of flexible and lateral thinking. In another sense this very ability is often reassuring to settlors, who like to think that their trustees are not bound by the bureaucracy of a large international institution.

If the trust is discretionary in nature, the settlor will be asked to execute a letter of wishes. Whilst not binding, it is highly persuasive on the trustees and a valued indication as to how the settlor is requesting them to carry out their role.

If they do not have responsibility for investment policy and strategic decisions because these rest with an investment director, trustees must be certain that they are comfortable with having divested themselves of what is traditionally one of their core responsibilities.

Working together

There are a significant number of ways in which an entrepreneurial settlor who wishes to retain an element of control within a trustee relationship can achieve this, so long as the settlor understands the full nature of a trustee relationship. It is possible for a combination of the trust documentation, choice of trustee’s protectorship, and an investment committee combined with an increased day-to-day understanding of how a settlor’s mind works, to collectively provide a happy compromise which allows the trustees to carry out their role, albeit within the expectations of successful entrepreneurs.

Case study

Hawksford is working with a non-resident Indian entrepreneur and his advisers who are seeking the establishment an offshore structure to hold shares in a Singapore holding company which will in turn invest into India.

The settlor wants to retain control over the trustee actions so far as practically possible and without compromising the essential validity of the trust.

The agreed structure is likely to comprise:

  • a PTC (the board will comprise representatives of Hawksford and of the settlor’s choice once any tax considerations have been taken into account);
  • a bespoke drafted trust with specific provisions in relation to investment management;
  • an investment committee, which will comprise experts in the settlor’s principal fields of investment interest, and;
  • a protector or protectorship committee to represent the family interests.

When combined with a growing relationship between the settlor, his family and the trustees - and in the context of the terms of his letter of wishes - the trustees and settlor both anticipate that the combination of all these factors should provide a solid foundation for a successful fiduciary relationship.

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