The complexities and responsibilities of managing ageing structures

When trustees are considering the future of a trust, they must review why it was set up initially. Generally, this will be by reference to initial advice, early file notes of family meetings, the trust terms and the settlor’s letter of wishes. Unless the beneficial class has closed and all the beneficiaries agree that the time has come for the trust to be wound up (Saunders v Vautier), consideration of the future of the trust should generally be instigated by the trustees working together with advisers and family.  Courts will not look favourably upon trustees who appear to have been prolonging the trusteeship where only they seem to be profiting. 

Given the impacts of the global pandemic, we are at something of an industry crossroads. Wealthy families recognise that COVID-19 driven fiscal constraints are leading to an increasing focus on offshore structures. Families have been impacted by COVID-19 and clients, wealthy or otherwise, want to ensure that they are getting value for money and have unexpectedly had time to review their affairs over the last year. 

As trustees, it is vital that we are on the front foot, making proactive recommendations – this is one way that the trust industry in Jersey sets itself apart from competitors. The level of expertise here in Jersey is second to none which brings about unparalleled expertise, another differentiating factor that sets the Island apart.

In practice, it is very easy when administering a busy trust, or indeed one that may be relatively dormant, to overlook whether a trust is actually providing sufficient benefit to justify its existence.  Assuming that the trustees are either giving routine thought to this question (it is sensible to diarise and consider this annually), or alternatively have been prompted to consider it, the trustees must take into account many factors. 

What is the trust’s purpose?

Is any one or more of the beneficial class demonstrably benefitting from the retention of the trust?This may, for example, be for tax purposes or the protection of a vulnerable beneficiary.  If this is the case, the trustees should consider whether the original trust structure should be retained or should consideration be given to distributing a proportion of the trust fund to some beneficiaries, with the balance being retained on trusts for the beneficiary that is clearly gaining benefit, thereby simplifying the structure and potentially reducing costs. 

Will the winding up of the settlement trigger an unacceptable level of tax charge?  In analysing a response to this question, it may be appropriate to take a practical approach and work out how many years of reasonably anticipated fees would equate to the likely tax charge. If the tax charge is considered unacceptable, the administration of the trust may need to be simplified.  

Onshore or offshore

As part of any review exercise consideration should be given to whether the trust needs to remain offshore.  Tax advice must be taken, but most practitioners will have had to consider whether it may be more appropriate to onshore a trust. 

If fees are not an issue and the trust fund is of a value that justifies retention of the trust, does its very flexibility potentially provide for other uses?  The answer to this may well be predicated by tax implications.  However, if tax is not an overriding concern and the beneficial class could potentially benefit from the trust arrangement, it may be worth considering the trust in a new light and canvassing the views of family and advisers.  For many wealthy individuals, increased geographic diversification of their assets is now just as important and sometimes more so than tax savings.  

Recent enquiries from the US have for example confirmed that some clients consider that they have too much exposure to the traditional offshore centres and would rather spread the jurisdictional risk, with tax reporting being a lesser concern.

Routine tax health checks are, however, crucial both from the trustees’ perspective, but also the beneficiary and increasingly the protector’s perspective.  CRS has ensured much more focus on what is being reported and the consequences.  In some cases, the implications, actual or perceived, of the reporting requirements are themselves leading to requests to wind up trusts.  

Trustee administration

Internally, it is necessary to ensure that the administration of trust structures does not become stale because the same people have run it for too long.  Experience suggests that when a structure has been administered by one director and their team, it is worth involving other senior professionals from time to time (if this does not automatically happen within board and trustee meetings) to provide the checks and balances.

Trustees would always do well to consider whether they may be vulnerable to litigation, particularly if they are being requested to consider winding up a trust, at which point they may well be appointing out the assets on the basis of an indemnity, which will not of course allow the trustees to benefit in the event of their negligence.  Such a claim, following retirement or appointment, could prove very expensive in practice.

It is accepted that the cost of administering trusts offshore has significantly increased over recent years, in line with the increasingly onerous nature of trusteeship and its many reporting and regulatory responsibilities.  Considering the future of the trust every time a fee increase is proposed would be wise.

Proactive trusteeship

Questions raised during Hawksford’s internal review process can be the catalyst to a health check, as can a change in family circumstances, and a concern that the fee / benefit ratio might not be appropriate from a client’s perspective.  As trustees we must be comfortable advising clients that we do not recommend keeping structures where there are no longer sufficiently justifiable benefits.  

With this in mind, at Hawksford we have customised trusts to make them US compliant where we have US beneficiaries and we have simplified trusts by paying out portions of the trust funds to certain beneficiaries when it seems appropriate.  As part of our ongoing reviews, we have simplified book-keeping processes e.g., block book-keeping where there are no adverse tax implications, repatriated trusts to the UK and elsewhere on receipt of tax advice, thereby reducing the costs of administration, as well as simplified trust terms with legal advice to reduce administrative burden and costs.

Ageing structures should be carefully considered from all perspectives, but in all ways such as not to invite any criticism of the trustees of self-interest.  Global uncertainty and the pandemic have given rise to more UHNWs taking stock of their wealth and structures. This gives trustees and intermediaries the impetus to take a proactive stance by reviewing clients’ structures, ensuring they are meeting their initial obligations and suggesting practical changes where necessary. 

We should not however underestimate the skill sets and experience that a jurisdiction like Jersey offers, when considering the future of the trust structure with the beneficial class.  In family office situations, for example, many families do not necessarily consider tax saving to be a top priority. They instead recognise that the traditional rationales of asset protection, succession and estate planning, when combined with extensive commercial, corporate and people skills, in themselves more than justify retention of offshore structures, even if in simplified or varied form.

Published with eprivateclient June 2021 > https://www.paminsight.com/epc/article/the-complexities-and-responsibilities-of-managing-ageing-structures