Category: Private Client

In 2007, Malta enacted specific legislation regarding foundations. Subsequent legislation was introduced, regulating the taxation of foundations, and this further enhanced Malta as a jurisdiction for foundations designed for charitable and private purposes.

The Objects of a foundation may be charitable (non-profit), or non-charitable (purpose) and may benefit one or more persons or a class of persons (private foundation). The Objects must be; reasonable, specific, possible, and must not be unlawful, against public policy or immoral. A foundation is prohibited from trading or carrying on commercial activities, but it may own commercial property or a shareholding in a profit-making company.

Foundations and the Law

Despite the relatively recent implementation of the law on foundations, Malta enjoys an established jurisprudence relating to foundations, where the Courts have dealt with foundations set up for public purposes.

Under Maltese law, a foundation may be set up by natural or legal persons, whether Maltese resident or not, irrespective of their domicile.

Two main types of foundation are recognised by the law:

• The Public Foundation

A public foundation may be set up for a purpose, as long as it is a lawful purpose.

• The Private Foundation

A private foundation is a fund endowed to benefit one or more persons or a class of persons (the Beneficiaries). It becomes autonomous and acquires the status of a legal person when it is formed in the manner prescribed by law.

Foundations may be set up either during a person’s lifetime or as specified in a will, on that person’s death.

Registration

The law provides that the foundation must be constituted in writing, via public deed ‘inter vivos’, or by a public or secret will. The written act must include detailed provisions containing the powers and signing rights.

The setting up of a foundation involves the registration of the foundation Deed, with the Office for the Registrar of Legal Persons, through which it gains a separate legal personality. The foundation itself is, therefore, the owner of the foundation property, which is transferred to the foundation through an endowment.

Registration and Voluntary Organisations

For voluntary organisations in Malta, there is a further registration procedure which must be fulfilled.

A voluntary organisation must fulfil the following conditions to be eligible for registration:

• Established by a written instrument;
• Established for a lawful purpose: a social purpose or any other lawful purpose;
• Non-profit making;
• Voluntary; 
• Independent of the State.

The law also establishes a procedure for enrolling Voluntary Organisations in a Register of Voluntary Organisations. Enrolment requires the fulfilment of several requirements, including the submission of annual accounts and identification of the organisation’s administrators.

The Benefits of Enrolling a Voluntary Organisation

Any organisation that fulfils the above criteria is designated as a Voluntary Organisation. Enrolment, however, confers essential advantages to the organisation, including:

• Can be created by foreigners, hold foreign assets and distribute dividends to foreign Beneficiaries;
• Can receive or be the beneficiary of grants, sponsorships, or other financial aid from the Maltese Government or any entity controlled by the Maltese Government or the Voluntary Organisations Fund;
• Founders do not need to be featured in any public records;
• Ability to benefit from policies supporting voluntary action, as may be developed by the Government;
• Details relating to the Beneficiaries, are protected by law;
• Receiving or benefitting from exemptions, privileges, or other entitlements in terms of any law;
• Being party to contracts and other engagements, whether remunerated or not, for carrying out services to achieve its social purpose, at the Government’s request or the request of an entity controlled by the Government.

The formation and enrolment of a Voluntary Organisation does not automatically give rise to a legal person. Voluntary Organisations have the option to register as legal persons but do not have the obligation to have to do so. Similarly, the registration of a Voluntary Organisation as a legal person, does not imply the enrolment of the organisation.

Setting up a Foundation

A public deed or a will can only constitute a foundation, if a ‘general act’ takes place to establish a foundation, it must be published by a public notary and subsequently registered in the Public Registry.

The minimum endowment of money or property to set up a foundation is €1,165 for a private foundation, or €233 for a public foundation established exclusively for a social purpose or as non-profit making, and must contain the following information:

• The name of the foundation, which name must include in it the word ‘foundation’;
• The registered address in Malta;
• The purposes or Objects of the foundation;
• The constitutive assets with which the foundation is formed;
• The composition of the board of administrators, and if not yet appointed, the method of their appointment;
• A local representative of the foundation is necessary, if the foundation administrators are non-Maltese residents;
• Designated legal representation;
• The term (length of time), for which the foundation is established.

A foundation is valid for a maximum term of one hundred (100) years from its establishment. Except when foundations are used as collective investment vehicles or in securitisation transactions.

Setting up a Non-Profit Organisation

Purpose foundations, also referred to as non-profit organisations, are regulated under Article 32, where one of the essential requirements  is an indication of the purpose of such a foundation.

This can subsequently be amended through an additional public deed. This may include supporting a class of persons within the community due to a social, physical, or other type of disability. Such an indication of support, will not render the foundation a private foundation, it will remain a purpose foundation.

The deed of foundation, for such an organisation, may indicate how its money or property will be used. It is at the administrators’ discretion whether or not to make such a specification.

As the foundation is explicitly being established for a particular purpose, if the purpose is; achieved, exhausted or becomes impossible to accomplish, the administrators must refer to the Foundation Deed, to determine how the remaining assets, left in the foundation should be treated.

Taxation of Malta Foundations and Non-Profit Organisations

In the case of foundations enrolled under the Voluntary Organisation Act as long as they are purpose foundations and are non-profit organisations, there are several options available:

1. To be taxed as a company, such a decision is irrevocable; or
2. To be taxed as purpose foundation and pay a capped rate of 30%, rather than 35% tax; or
3. If the foundation has not opted to be taxed as a company or as a trust and does not qualify for the capped rate above, the foundation will be taxed as follows:
   • For every euro within the first €2,400: 15c
   • For every euro within the next €2,400: 20c
   • For every euro within the next €3,500: 30c
   • For every euro of the remainder: 35c

The relevant provisions will be applied to the Founder of the foundation and to the Beneficiaries.

How Can Dixcart Assist?

The Dixcart office in Malta can assist with the efficient establishment and management of a foundation to meet the agreed Objects.

Additional Information

For further information about Maltese foundations and the benefits that they offer, please speak to Jonathan Vassallo: advice.malta@dixcart.com at the Dixcart office in Malta. Alternatively, please speak to your usual Dixcart contact.

Establishing an effective Offshore Trust that is both operationally sound and achieves the Settlor’s objectives is of paramount importance, but can be fraught with pitfalls. As a Trust service provider we often find that Settlors and individual Trustees can have misconceptions about their roles, responsibilities and the Trust itself. These misunderstandings can culminate in issues and create unintended liabilities. This series has considered the key elements of Offshore Trusts; If you would like to read the other articles in the series you can find them here:

• Offshore Trusts: An Introduction (1 of 3)
• Offshore Trusts: Types and Uses (2 of 3)

In the final article in this series, we will examine the most common misunderstandings and pitfalls for Settlors and Trustees to be aware of. Where appropriate, we suggest some best practices for avoiding future problems and how a Trust service provider can help. We will be discussing:

• Common misunderstandings of Offshore Trusts?
• Common pitfalls when establishing Offshore Trusts
• Working with a Trust Service Provider

The Nature of the Legal Arrangement

On the subject of Trusts generally, it is important to note that Trusts do not have separate legal personality and therefore do not benefit from limited liability. It is the Trustees who are liable for any actions taken, or not taken, in respect of the Trust.

Often Settlors will either not be aware or overlook the basis of the legal arrangement – the transfer of beneficial ownership – this confers legal title onto the Trustees; the Settlor will no longer have any legal title to the settled assets. To continue to exercise control, as previously, will most likely result in the Trust being deemed a sham and therefore voidable.

Following this, there is also a common misunderstanding that the role of Trustee is simply ceremonial, purely an administrative requirement. Of course, this is not correct. The Trustees have a fiduciary duty to any named or class of Beneficiaries, to manage the Trust Fund in good faith, in line with the Trust Deed. As noted above, they hold legal title over the assets of the Trust. As legal owners, the Trustees are liable for tax due on the Trust assets, which may arise in jurisdictions other than their local jurisdiction of residence.

Subject to Tax Advice

Often, and understandably, clients that come to us directly are not aware of the significant changes in reporting, compliance requirements and the general approach to tax planning and anti-avoidance measures. These changes have made tax advice a necessity from outset. Such advice ensures that, where best practices are followed, business is conducted bona fide and is globally compliant.

The Perception of ‘Offshore’

This neatly leads us to our next common misunderstanding. The level of negative media coverage that Offshore structures have received over the last decade is unfortunate and often disproportionate or even misleading. For example, some of the most recent and prolific stories, the Panama Papers, Paradise Papers and Pandora Papers, all present the use of Offshore planning as immoral or even criminal – whilst the reports do highlight a minority of offenders, 95% of the leaked documents will have related to wholly legal and compliant planning, that is commonplace.

In fact, to use the UK as an example, it is mandatory for UK employers to provide a minimum 3% private pension contribution to employees. Those pensions will more than likely be linked to non-UK domiciled funds. 75% of UK households are directly or indirectly engaged in such asset management services and therefore many UK residents will already have some form of offshore involvement.

Hopefully the above example briefly illustrates the point I am driving towards; to many people, the word Offshore, especially in the context of wealth management, is synonymous with scandal. When, in reality, Offshore is omnipresent – it is the norm, wholly legal and it is almost always advised by highly qualified and regulated intermediaries. In summary, going Offshore should now be a transparent and compliant tool for sophisticated planning, which can lead to legal, tax and various other benefits. Offshore should not be seen as a shortcut to tax evasion or hiding wealth.

One Size Does Not Fit All

Finally, many UK resident and domiciled individuals are unaware of the various rule changes and subsequent erosion of various tax benefits, which previously flowed from the use of Offshore Trusts. Therefore, for many in the UK who are resident and domiciled, there are little to no benefits associated with using an Offshore Trust. The limited benefits can include the regulated nature of Isle of Man Trustees and the ability to benefit from gross roll-up, in certain circumstances.

Unlike Trustees in many other jurisdictions, providing Professional Trustee services is a licensed activity on the Isle of Man. Isle of Man Trustees require a Class 5 License from the Isle of Man Financial Services Authority, and are therefore properly regulated – ensuring that good levels of governance and compliance are followed and informed trustee actions. In addition, due to its illustrious heritage in Trust planning, both the Island and Dixcart have extensive expertise in this area.

Gross roll-up describes an offshore structure’s ability to benefit from untaxed compounded growth for the duration of its lifetime. Offshore Trusts may benefit from gross roll-up in certain circumstances – this has to be caveated as there may be tax to pay on establishing the Trust, periodically (e.g. on 10 year anniversaries), in respect of any distributions, on settlement etc. The taxation of Trusts is complex and will require specialist advice to consider your circumstances. however, there can still be many benefits to using Offshore Trusts for UK Resident Non-Domiciliary individuals.

Offshore Trusts – Common Pitfalls

There are many issues that can be avoided by proper planning and expert guidance from outset. Some of the most common considerations include:

• Allowing for Flexibility

The Trustees are mandated to follow the provisions of the Trust Deed; contravention of this can lead to legal action being taken against them for breach of fiduciary duty. Therefore, the Settlor needs to foresee the Trusts requirement for flexibility, ensuring that it is not blinkered in the approach to achieving its objectives, or ties the Trustees’ hands regarding effective management of the Trust.

There are several scenarios where an overly prescriptive Trust Deed can cause unintended issues. We will examine some brief examples below.

Distributions: Where, for example, the Trust Deed stipulates that a distribution or distributions are to be made to a Beneficiary on or following a certain milestone (e.g. upon a birthday, marriage, purchasing a first home, graduation etc.), the timing may not always be ideal as circumstances change. For instance, vulnerable or young Beneficiaries receiving a sudden windfall could lead to negative impacts/outcomes.

Further to this, where the distribution schedule is fixed, this can cause unintended tax consequences. Beneficiaries are taxed on distributions received, taxable at their personal rate in their jurisdiction of residence. If the Beneficiary’s income falls into a higher or additional rate of tax at the time of transfer, this can lead to the payment of unnecessarily high tax. Rather, given the flexibility, the Trustees could defer the payment until they either take tax advice or fall into a lower bracket e.g. on retirement, etc.

Asset Selection: It is not unusual for the Trust Deed to name or preclude certain types of activity regarding the management of the Trust fund. For example, it would be perfectly logical to limit the level of risk exposure to certain assets/activities owing to volatility – e.g. Bitcoin investment. On the flipside, where certain investments are specified, this can be far too restrictive and cause various longer-term issues – e.g. what happens if the fund or company specified ceases to trade?

Solution: Discretionary Trusts offer the Trustees complete control over how the Trust achieves its aims. The Settlor can still provide some guidance via a Letter of Wishes, which is persuasive but not binding. As long as the Letter of Wishes is reviewed regularly, the Trustees will be aware of the Settlor’s changing intentions and take this into account when taking any actions. In addition, Isle of Man Trusts can now continue in perpetuity, which provides additional flexibility when estate planning. Dixcart have significant experience in establishing and administering Offshore Discretionary Trusts.

• Choice of Trustees

As I am sure you can appreciate by now, the choice of Trustee is extremely important. Several factors need to be considered when choosing who performs this vital role:

Longevity: A key consideration when appointing Trustees is their longevity – will the selected Trustee be able to fulfil their duty for the lifetime of the Trust? If not, you will have to consider succession planning to replace those Trustees as and when they pass away or lose capacity. Longevity also applies to the Trustees’ tax residency i.e. If the Trustee is living in an Offshore jurisdiction, but then moves to the UK, the Trust will also move with the Trustee and could be liable to UK taxation. The Settlor needs to ensure that the Trustee will provide continuity and stability.

Expertise: Depending on the assets held in Trust, or the activity undertaken, there may be certain expertise required to meet the Trust’s objectives. For example, when managing assets such as investments, the Trustees will have to be comfortable dealing with the assets, their administration and any third party professionals involved. This also extends to knowledge of the Trust, as well as the legal and regulatory requirements.

Liability: As noted previously, the Trust does not benefit from limited liability, and therefore the Settlor will need to take the potential risks e.g. litigation etc. into consideration when selecting who to appoint as Trustee. The tax aspects are also worth considering here, as mentioned above, the Trustees will be liable for any due tax on the assets. Therefore, the Trustees will need to be willing and able to perform the role and understand the implicit risks of the undertaking.

Protectors: In many respects Protectors police the Trust, in theory providing a stopgap to wayward Trustees. In practice, giving a third party too much say in how the Trust is run, can make administration of the assets onerous and potentially negatively impact its objectives. Further to this, where a Protector is given too much scope, they can be deemed a de facto co-Trustee, and therefore beholden to the same fiduciary duties and liability as a Trustee. Where a Protector is desirable, ensuring that their powers are narrowly defined is vital to ensuring they add to rather than detract from the objectives of the Settlor.

Alternates: Where the Settlor has appointed an individual to act as Trustee, this can cause issues further down the line. Where the individual is the sole Trustee, if they pass away without making proper provision, there can be unintended burden and unwarranted cost involved in remedying the situation. Where individual Trustees are desirable, you must ensure that a minimum of two are appointed at all times, and ideally provision made for replacement within the Trust Deed to protect against unforeseen events.

Neutrality: Where family members are appointed as Trustees, it is not uncommon for relationships to faulter and communication to breakdown. Such issues can present significant administrative barriers, potentially affecting the Settlor’s intended outcome.

Solution: All of these issues can be abated via the appointment of a professional Trustee rather than individual Trustees. Professional Trustees, such as Dixcart, can provide an unbiased and expert service for the lifetime of the Trust. Using their technical knowledge and adhering to best practices, they can administer the Trust effectively and efficiently, reducing the burden placed on both the Settlor and their loved ones. And as previously noted, unlike in some other jurisdictions, professional Trustees located in the Isle of Man are licensed and regulated – so you can rest assured that the Trust is in capable hands.

• Settlor’s Involvement

It is understandable that Settlors may wish to retain control over the Trust assets for as long as possible; after all, they have more often than not spent a lifetime accumulating the wealth they want to pass on. Some may even seek to appoint themselves as Trustee, however, too much involvement from the Settlor can lead to the Trust being deemed a sham, and therefore the Trust assets could form part of their estate for tax purposes. It is worth underlining the fact that there needs to be clear separation between the Settlor and the assets, ensuring that the Settlor cannot be deemed to have retained any unintended beneficial interest. 

A Settlor may also wish to name themselves or their spouse as beneficiary, however, this requires very careful consideration. If the Settlor or his or her spouse can benefit in anyway, the Trust is deemed to be a Settlor Interested Trust, giving rise to adverse tax consequences.

Solution: The Settlor needs to be clear about what they want to achieve from outset. This way, the correct form of Trust and appropriate provisions can be included at planning stage. The client will need to work with the adviser to come to a decision. Referring to my note above, regarding professional Trustees, this can also provide comfort. The Settlor should be able to have confidence that their chosen service provider will always act in the interests of the Trust, taking into consideration the Settlor’s Letter of Wishes where appropriate.

• Beneficiaries

The selection of Beneficiaries needs to be carefully thought out – sometimes it is immediately clear who should benefit, and other times it can be a ‘Sophie’s choice’ dilemma. Of course, the choice will be directly influenced by the type of Trust being setup i.e. in the case of a Discretionary Trust, specific Beneficiaries or classes of Beneficiaries are selected for the Trustees to determine who should benefit. In addition, the Settlor must choose whether or not to make Beneficiaries aware of their interest in the Trust. Depending on the type of Trust, a Beneficiary can have a legal right to the assets held in Trust or information about them. Additionally, the Beneficiary can have a tax liability in certain circumstances.  

Solution: This needs to be considered on a case-by-case basis and will very much depend on the Settlor’s personal circumstances. It can be very useful to either make the Beneficiaries aware, so that open discourse can be had between Trustee and Beneficiary, or alternatively in some cases retaining privacy in this matter until time of distribution may be preferrable – note that depending on the constitution of the Trust, the Beneficiary may have an immediate tax liability, and therefore would need to be immediately notified. Either way, the level of communication desired can be facilitated by professional Trustees, such as Dixcart.

• Costs

Before establishing the Trust, the Settlor needs to take the costs of administering the assets into account – whether this is for trading investments, the procurement or sale of property, potential tax consequences, professional services, etc. An additional consideration will be the impact of increased regulatory and compliance reporting required in today’s world – this means that administering an Offshore Trust is no longer an exercise that incurs nominal fees.  

Solution: Whilst fees can be paid from an alternative source i.e. outside of the Trust fund, this can provide operational issues. For example, where the Settlor was paying the operational costs of the Trust and the Trust continues after death, alternative provision must then be made for the fees to be met. It is often far simpler to apportion a percentage of the Trust fund to cover the administration in achieving the objective of the Trust. In prosperous times the growth of the Trust Fund often more than covers these costs – however, in times of low interest, depressed markets or even depending on the assets held, such fees must be seriously considered in light of the Trust Fund’s sustainability. Such costs should be illustrated by service providers on receipt of the full details.

Working with a Trust Service Provider – Dixcart

Dixcart have been providing Trustee Services and guidance for over 50 years; assisting clients with the effective structuring and efficient administration of Offshore Trusts.

Our in-house experts and senior employees are professionally qualified, with a wealth of experience; this means we are well placed to support and take responsibility for the Offshore Trust, acting as Trustee and providing specialist consultancy services where appropriate. If required, the Dixcart Group can also assist with individuals seeking to immigrate to the UK and the required tax and wealth planning. 

We have developed an extensive range of offerings, which includes an array of Isle of Man structures. From pre-establishment planning and advice to the day-to-day management of the vehicle and troubleshooting issues, we can support your goals at every stage.

Get in touch

If you require further information regarding the use of Offshore Trusts, or Isle of Man structures, please feel free to get in touch with Paul Harvey at Dixcart: advice.iom@dixcart.com

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

This series considers the key elements of Offshore Trusts, particularly Isle of Man Trusts. This is the second of three articles, which examines some of the most common types of Offshore Trusts and their uses. If you would like to read the other articles in the series you can find them here:

• Offshore Trusts: An Introduction (1 of 3)
• Offshore Trusts: Misunderstandings, Pitfalls and Solutions (3 of 3)

From protecting family legacies, to ensuring proper succession planning, providing for dependents or even employees, the Offshore Trust is still an extremely flexible tool at the advisers’ disposal – hopefully the following article will help illustrate this point.

Article 2 of 3, Offshore Trusts: Types and Uses will explore the following:

• Discretionary Trusts
• Interest in Possession Trusts
• Accumulation & Maintenance Trusts
• Other Forms of Offshore Trust
• Working with Dixcart

Offshore Discretionary Trusts

The Discretionary Trust is one of the most commonly used types of Trust and can provide maximum flexibility for the Settlor and Trustees in terms of how the Trust achieves the desired objectives.

For instance, a Discretionary Trust can provide the Trustees with the ability to make distributions in a way that avoids wasting or depleting the Trust Fund unnecessarily and in line with changing circumstances – this can be for many reasons, including the protection of vulnerable Beneficiaries, tax planning or even asset protection with regards to Beneficiaries personal liabilities, and more.

Additionally, whilst a class of Beneficiaries may be apparent, the Settlor may not know what the best way of dividing the fund will be and may wish to allow for future changes in circumstances and even additional beneficiaries to be considered – for example, unborn grandchildren.

Discretionary Trusts can be formed during the Settlor’s lifetime, either as a living settlement or written into their Will, coming into existence upon death. If created as a living Trust, the Settlor may be liable to taxation on the chargeable transfer value. Furthermore, the Trustees may also be liable to a periodic liability on 10 year anniversaries, and on any distributions to Beneficiaries. For this reason, tax advice should be sought at the outset in respect of the circumstances of the Settlor and Trustees.

The Settlor must not retain any beneficial interest in possession or control over the assets settled into the Discretionary Trust, otherwise the Trust may be considered a sham or voidable, and the assets may still form part of the Settlor’s estate.

Instead, the Trustees are empowered to administer the Trust Fund in the interests of the Beneficiaries and the Trust itself. The Trustees are also able to make distributions at their discretion, to any beneficiary at a time they deem appropriate. Whilst the Discretionary Trust provides Trustees with complete control over the arrangement, their actions must still be compliant with the Trust Deed.

The provisions of the Trust Deed can provide for restrictions that the Settlor wishes to put in place. In addition, the Settlor may elect to appoint a Protector, who is usually a trusted professional adviser, to oversee the Trustees and ensure compliance with the Trust provisions. The Protector retains certain powers as desirable, to make sure that the Trustees achieve the objectives of the Trust in congruence with the Trust Deed. Whilst the inclusion of the Protector can provide controls, it is important to not restrict the Trustees so as to erode the effectiveness of the Discretionary Trust.

Finally, the Settlor can guide the Trustees by providing a Letter of Wishes. The Letter of Wishes provides a statement of the Settlor’s intentions at that point in time, allowing the Trustees to take this into consideration when making decisions and distributions. So long as the Letter of Wishes is regularly reviewed, it can provide fantastic insight into the Settlor’s mind as circumstances change – albeit, this document is persuasive and not binding; it creates no legal obligation on the part of the Trustees.

The Discretionary Trust is a very attractive solution that delivers maximum flexibility and gives the potential to remove tax liability from the Settlor’s estate – although this flexibility comes at a price. Discretionary Trusts can be complex, requiring specialist knowledge to avoid pitfalls – the Settlor needs to understand that they are placing their assets under the control of their chosen Trustees, who must act bona fide in line with the Trust Deed, but not necessarily in line with their wishes – so long as they consider it is in the best interests of the Trust and Beneficiaries.  

Offshore Interest in Possession Trusts

Less common, but still widely used, is the Interest in Possession Trust. This type of Trust can have a myriad of uses, all of which hinge on this instrument’s ability to provide the Settlor with access to the Trust Fund during their lifetime – in fact, sometimes this type of Trust is called a Lifetime Possession Trust.

The interest in possession can either be for a fixed period of time or indefinite. It is very common for provision to be made for the remainder of the Settlor’s lifetime.

In an interest in possession arrangement, the Settlor places the assets into Trust, thus transferring legal title to the Trustees (as per every Trust arrangement) – but here the settlor carves out an interest in possession, giving themselves an immediate and automatic right to the income flowing from the Trust assets.

Sometimes the Settlor of an Interest in Possession Trust is referred to as an Income Beneficiary or a Life Tenant, because of this legal right. The carveout can provide the Settlor with rights to enjoy the assets and/or all income generated from the assets during their lifetime. For example, to live in a property, pay living expenses or pay for long term care etc. from the gains of investments or other assets such as dividends from shares in a family business.

There can be more than one Income Beneficiary or Life Tenant, who will not typically have any beneficial right to the settled assets themselves, such as a spouse. In the case of income payments, this is paid to them periodically as set out in the Trust Deed.

The income received will be less the expenses of the Trust – it is important to remember that this will include any costs of administering the assets (custodian fees, investment adviser fees, property management etc.) along with potential remuneration of Trustees, which so long as fair is allowable under Trust Law.

When making investments decisions, Trustees will have a duty to both the Income Beneficiary / Life Tenant and the Beneficiaries who are entitled to the assets, making such decisions by considering the competing needs of income and longevity, unless otherwise stated in the Trust Deed.

As per the Discretionary Trust, the Trust assets will be held by the Trustees for the benefit of the named classes of beneficiaries or named individual Beneficiaries contained within the Trust Deed. These Beneficiaries can benefit after the set period that the Income Beneficiary or Life Tenant can enjoy the interest in possession – this is normally after death.

There are tax implications for the implementation of this type of Trust, and as ever, it can be quite complex. Therefore, tax advice should be sought in all cases.

Offshore Accumulation and Maintenance Trusts

Accumulation and Maintenance Trusts are somewhat of a hybrid approach between a Discretionary Trust and a Bare Trust. At its core, this type of trust places the Trust Fund under the care of the Trustees until a child or young Beneficiary reaches a specified age, up to 25 years.

For the intervening period, the Trustees will have discretion over the administration of the settled assets and how best to use them for the benefit of the Beneficiary – of course in compliance with the provisions of the Trust Deed. Broadly the Trustees may accumulate the income and gains to build the Beneficiaries capital entitlement or can apportion elements for the ongoing maintenance of the Beneficiary.

Prior to the Finance Act 2006 changes to the treatment of Accumulation and Maintenance Trusts, these Trust arrangements were set up to achieve certain IHT planning benefits – however, in the modern day, and due to the changes in the Relevant Property Regime (RPR), this benefit has now been removed. Accumulation and Maintenance Trusts will need to consider the RPR, which can result in periodic 10 year anniversary charges, as per Discretionary Trusts discussed above.

For those Accumulation and Maintenance Trusts settled pre-2006, there was a window until the 5^th of April 2008, whereby the age of majority could be increased from 18 to the maximum of 25 years. These Trusts will continue to receive the same pre-2006 IHT treatment for the lifetime of the Trust i.e. before the Beneficiary reaches the age of majority. However, it is important to note that any additional settlements post-2006 will render the trust subject to the RPR changes. Furthermore, if there is no absolute interest in the trust i.e. it is a Discretionary Accumulation and Maintenance Trust, and the age of majority was not amended before 6^th April 2008, the RPR changes and periodic charges will be applicable.

Before maturity, whilst the Trustees can elect to roll up the income and growth of the Trust assets, they can also defer or even reallocate them depending on the Trust Instrument. This can only be actioned before the Beneficiary gains an interest in possession at age 18 or 25 as per the trust terms.

If done so bona fide and in line with the Trust Deed, the Trustees could invest the Trust Fund into certain specific fixed form assets before the Beneficiary’s 18^th birthday e.g. real estate, bonds, fixed term deposits etc. This means that the value could be released in tranches over time or produce ongoing income via maturing investments, rent etc. in turn avoiding wasteful behaviour and allowing the Beneficiary to mature beyond the age of Majority.

In summary, Settlors may feel more comfortable establishing an Accumulation and Maintenance Trust, rather than a full Discretionary Trust – this is because the Trustees will have the flexibility of administration during the Trusts lifetime, whilst the Beneficiaries’ position can be fixed. However, the drawback is that the child Beneficiary will have an automatic right to the Trust Fund at the age of majority, which might be considered detrimental depending on their character and level of maturity.

Other Forms of Offshore Trust

In addition to the above, it is worth noting some other commonly used types of Trust. For brevity these have been listed below with a short description:

• Purpose Trust – Rather than being set up for the benefit of an individual Beneficiary, the Object of a Purpose Trust is to achieve a specified commercial or charitable objective e.g. financing transactions, acquisition or disposal of property etc. On the Isle of Man, there is a dedicated piece of legislation that caters for this Trust – Purpose Trusts Act 1996.

• Employee Benefit Trust (EBT) – Employee Benefit Trusts are created by employers for the benefit of past, present or future employees, dependants and relations. They can be a vehicle for conveying any number of benefits, and useful for companies of any size – especially those that have a global footprint. Common uses include operating share purchase schemes, discretionary bonuses, pensions etc.

There are of course many more Trusts available, and we would recommend speaking with your professional adviser to assist with choosing the right type of Trust for meeting your objectives.

Working with Dixcart

Dixcart has been providing Trustee Services and guidance on Offshore Trusts for over 50 years; assisting clients and their advisers conduct their offshore planning.

We have in-house experts with a wealth of experience in all matters relating to Trusts; this means we are well placed to support and take responsibility for any Offshore Trust, acting as Trustee and providing specialist consultancy services where appropriate.

Due to our diverse offering, which includes an array of Isle of Man structures, we can assist From pre-establishment planning and advice to the day-to-day management of the vehicle and troubleshooting issues. We can support your goals at every stage.

Get in touch

If you require further information regarding the use of Offshore Trusts, or Isle of Man structures, please feel free to get in touch with Paul Harvey at Dixcart: advice.iom@dixcart.com

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Introduction

The fiduciary world expends much effort and resources in establishing suitable structures for the migration of wealth out of Africa, particularly South Africa.  However, little thought is given to the vast opportunities for inward investment into the African continent itself, investment that will also require structures.

Over the past few years Dixcart has seen a steady stream of enquiries for structuring investments into the Africa for family offices, Private Equity (PE) Houses and groups of mutual interest investors.  Structures are usually bespoke and often feature an ESG (environment, social and governance) investment strategy.

What has been particularly interesting is the high number of acquisitions or investments targeted at the sub-Saharan region ranging from process and production facilities, mining and mineral exploration, through to infrastructure projects such as renewable energy and water.

Whilst these investment structures are applicable to investments around the world the question is what is it that attracts investors to the African Continent and why use Guernsey structures for inward investment?

The African Continent

The big opportunity is the fact that the African continent is one of the final frontiers as other emerging markets such as Asia Pacific are maturing.

A few key reminders about this amazing continent:

• The Continent of Africa
  • Second largest continent by area and population
  • 54 countries fully recognised by the United Nations
  • Significant natural resources
  • Africa’s complicated political situation, history of colonialism, and ongoing insurrections in many countries has largely kept multinational and institutional investors away from some countries
• South Africa – probably the most developed country, driven by raw materials & mining industries (largest producer of gold / platinum / chromium in world).  Also, strong banking and agricultural industries.
• Southern Africa – Generally the more developed market with strong mining industry
• North Africa – Similar to the Middle East with oil reserves attracting oil related activities and industries.
• Sub-Saharan – The lessor developed economies and often untouched by international investors where infrastructure type projects are key opportunities.

What are the patterns being seen in investing into Africa?

From working with our clients, Dixcart see the targeted countries are driven by the client’s specific sector of interest (see above) and have noted the following general trends:

• Often the targeting of successful investments / projects in the more developed Southern African countries first; then,
• Expanding into the lesser developed countries thereafter, once having gained an understanding and track record in order to provide confidence to investors (as more challenging to invest into the lesser developed countries but may ultimately produce greater returns).

Why Structure through Guernsey?

Guernsey has a long standing and successful track record for servicing Private Equity and Family Office type structures either through the use of corporate vehicles (utilising the flexible Guernsey company law), and Trust and Foundations which provides a lighter touch of regulation.

Guernsey provides security with experienced service providers in a mature, well-regulated, politically stable and recognised jurisdiction. 

Guernsey has a good track record for adherence to global tax harmonisation requirements and is a recognised jurisdiction with banks for setting up banking and lending facilities.

Conclusion

We are all aware of the huge amounts of capital available from international investors looking for investment opportunities and the African Continent, as one of the final frontiers left in the world provides attractive investment opportunities and returns.  These international investors need their capital invested through robust structures registered in an appropriate jurisdiction and Guernsey is one of the leading choices for such structuring.

Additional Information

For more information on Guernsey, and the investment structures for Africa (or indeed anywhere else in the World) and how Dixcart can help, please contact Steven de Jersey at the Dixcart Guernsey office at advice.guernsey@dixcart.com.

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Background

The original trust concept is widely believed to have originated under Common Law in the 12^th century when the English knights were leaving for the crusades and needed the ability to confer the authority to act on their behalf in respect of their assets whilst separating the legal ownership of those assets.

The concept can in fact be traced back even earlier to Roman Civil law with the concepts of fideicommissum and fiducia both of which effectively conferred title to an individual’s assets to a third party in return for obligations on the third party as to how those assets were to be applied.

The trust concept in its various forms continued as a means of passing value across the generations until the late 20^th century when use of the Common Law form of trust started to branch away from pure estate-planning and the ‘trust’ became more of a tax-planning tool for (relatively) short-term gains for both corporates as well as individuals.

This particular modus operandi was embraced by certain aspects of the legal profession and the newly nascent offshore / international finance centres and the industry blossomed throughout the 70’s, 80’s and 90’s attracting the interest of the various revenue services.

Increasing International Regulation and Exchange of Information

This in turn has led over the past twenty years to the introduction of a plethora of international tax, regulatory and automatic exchange of information (AEOI) measures. These cover base erosion and profit shifting (BEPS), common reporting standards (CRS), foreign account tax compliance act (FATCA), and mandatory disclosure rules for tax information exchange agreements and economic substance. With the most recent iteration of associated legislation being the Group of Seven’s (G7) consideration of a global corporate minimum tax as the latest of these initiatives specifically designed to ensure that multinational businesses are paying tax in the jurisdictions where their economic activity is carried out.

Guernsey – Rising to the Occasion

Throughout the introduction of these new measures Guernsey has managed through early compliance to maintain its position as one of the most well-respected and regulated of the offshore centres successfully navigating the international currents driving these initiatives, positioning itself as one of the first adopters of CRS and FATCA.

Guernsey’s willingness to proactively implement the necessary changes, coupled with its world leading financial services industry, means that the provision of fiduciary services from the Island is flourishing.

The use of a trust for financial planning is evolving once again and reverting in the main to its original concept as a means of wealth and estate-planning across generations rather than short term tax planning.

The net result of the above has been that rather than being put out of business by the increasing regulation to which international financial centres are subject, Guernsey has thrived and continues its position as a leading jurisdiction through which international families can structure their affairs.

Guernsey as a Trust Location

The increased regulation to which Guernsey (like other international financial centres) has been subject, is in fact attracting more clients to base their structures through Guernsey. They have greater confidence that their affairs will be professionally managed and that they will not face criticism for structuring through the Island.

An example of this is the increasing number of family offices based in Guernsey proactively seeking out regulation as a means of demonstrating to tax authorities, regulators, and the public, that they have nothing to hide and are fulfilling their role as good corporate citizens.

Additional Information

For more information on Guernsey and the opportunities presented please contact John Nelson at the Dixcart Guernsey office advice.guernsey@dixcart.com and visit our website www.dixcart.com

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

In this series we will examine the key elements of Offshore Trusts, taking a particular interest in Isle of Man Trusts. This is the first of three articles, and one that lays the foundation that we will build upon. This first article is aimed at those who have no prior experience with Trusts and those who wish to develop a deeper understanding of the constitution of a Trust. With that, some of the information may seem rudimentary to professionals but can at the very least act as a refresher.

The series will initially define the vehicle itself, breaking down the constituent elements of the Trust and who the relevant parties are and their features, responsibilities and general role in the Trust. The following articles will take a more considered view of the administration of the Trust and pitfalls to avoid, followed by the types of Trust and the reasons someone may implement them in their planning.

If you would like to read the other articles in the series you can find them here:

• Offshore Trusts: Types and Uses (2 of 3)
• Offshore Trusts: Misunderstandings, Pitfalls and Solutions (3 of 3)

This first article discusses the following subjects to help give a broad overview of Offshore Trusts:

• What Does Offshore Mean?
• What is a Trust?
• Parties of the Trust: The Settlor
• Parties of the Trust: The Trustee
• Parties of the Trust: The Beneficiary
• Parties of the Trust: The Protector
• Parties of the Trust: Third Parties
• Working with a Trust Service Provider

What Does Offshore Mean?

For the sake of completeness, we will first define what we mean when we say something is ‘Offshore’.

The term Offshore refers to any activity that takes place outside of the jurisdiction of residence. The Offshore jurisdiction will have a different legislative, regulatory and/or tax regime, which has traditionally provided the Ultimate Beneficial Owners (UBOs) of any offshore structure/asset with the opportunity to take advantage the benefits of that territory.

Therefore, an Offshore Trust is one that is settled and managed in a separate jurisdiction from the home country of its UBO. Popular offshore financial centres include island nations such as the Isle of Man, the Channel Islands, British Virgin Islands, but also landlocked locations including Zurich, Dublin, Dubai etc. – It is important to select a jurisdiction in good standing, such as the Isle of Man, that appears on the OECD’s ‘whitelist’ and holds a Moody’s rating of Aa3 Stable.

What is a Trust?

A Trust is a fiduciary agreement for the transfer of beneficial ownership. At its heart, this means a Trust is a legal arrangement with the Trustees for the management of assets which are usually administered for a specific purpose e.g. family wealth preservation, asset protection, tax optimisation, corporate incentive arrangements etc.

The details of the arrangement are contained within a Trust Deed, which is the constitutional document of the Trust. Trusts are not incorporated i.e. they are not a legal entity like a company or corporation. Therefore, a Trust does not benefit from the features of a legal entity, such as separate legal personality and limited liability e.g. it cannot make contracts or create charges in its own name. Instead, legal title of the assets is transferred to the Trustees, for which duties are owed – we will cover this in more depth in the next article within the series.

For there to be a bona fide Trust, there must be three certainties present:

Intention	Did the Settlor of the Trust intend to obligate or place the duty on the Trustees? This is tested objectively having regard to the reasonable man. If there isn’t sufficient certainty of intent the Trust may be void for uncertainty.
Subject Matter	Assets must be placed in Trust from outset. The assets settled into Trust must be identifiable and clearly defined. If not, then the Trust may be void for uncertainty.
Objects	Simply put, the objectives of the Trust must be clear as far as who the Beneficiaries are or could be. If it is not clear who can benefit from the Trust, it may be void for uncertainty.

Unlike a UK Trust, which has a maximum lifespan of 125 years, since 2015, Isle of Man Trusts have been able to continue in perpetuity i.e. until the Trust prescribes, Trustees decide to wind up the Trust or the Trust fund runs out. This gives the Trust supreme flexibility, allowing advisers to plan or defer chargeable events efficiently – for example, making distributions that help with the Beneficiary’s personal tax position. Isle of Man Trusts can benefit successive generations indefinitely.

Another distinction between UK and Offshore Trusts is the requirement to register. Since 2017 it has been mandatory for UK Trusts which are liable for UK taxes to register with HM Revenue & Customs (HMRC). In the Isle of Man there is currently no comparable requirement, so long as the income is derived from non-Isle of Man sources, and there are no Isle of Man resident beneficiaries. Where these requirements are met, the income and gains can roll-up free of tax.

Where an Offshore Trust has a liability, or becomes liable to any of the following UK taxes: Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax or Stamp Duty Reserve Tax, there is a requirement to register with HMRC. Recent changes require Offshore Trusts to also register with HMRC in certain other situations, such as the acquisition of and interest in UK real estate. However, it is common for Offshore Trusts to hold shares in an Offshore Company, such as an Isle of Man company, which in turn owns the assets and engages in any commercial or investment activity on the Trust’s behalf – this creates further separation and facilitates further subsidiary companies as required.

Now that we’ve established the basic parameters of a Trust, we will now consider the parties of the Trust and their roles and responsibilities.

Parties of the Trust: The Settlor

The instigator of a Trust is known as the Settlor, and this is the party who places the assets into Trust – thus creating a Settlement. Any legal person can establish a Trust, meaning that the Settlor can be both a natural person or a body corporate.

The Settlor must transfer assets into the Trust for it to come into existence. Whilst it is typical for there to be one Settlor, it is possible for the Trust to have multiple Settlors who place assets into the same Trust. Furthermore, the Settlements do not need to be at the same time. Depending on the circumstances of the Settlor, this can require further consideration with regard to tax.

Within the Trust Deed, certain powers can be reserved to the Settlor; such as the appointment and removal of Trustees, and the power to appoint a Protector.

Where a Discretionary Trust is established, the Settlor can provide further guidance through producing a letter of wishes. This document guides Trustees’ decisions in their management and distributions of the Trust assets.

Not to worry if there seem to be a lot of moving parts – usually the Settlor has been advised by a qualified professional, who will work with them throughout the planning process. This ensures that the type of Trust established meets the Settlor’s objectives, helping to identify the most appropriate Trustees and who should benefit and when, configuring the operational aspects and advising of any tax considerations and/or consequences among other things. Following the planning process, if an Offshore Trust has been advised, a Trust Service Provider such as Dixcart is contacted to arrange the establishment of the Trust, and who usually provide Trustees in that Offshore jurisdiction.

Parties of the Trust: The Trustee

When the Settlor places the assets in Trust, the legal title of those assets is passed to their appointed Trustees. The Trustees have strict obligations to manage the Trust Fund in accordance with the terms of the Trust Deed – these legal obligations allow Beneficiaries to enforce equitable rights in a court.

Whilst it is possible for the Settlor to be a Trustee, it is highly unusual and would defeat any tax planning objectives. In theory a Beneficiary could also be a Trustee, but this is normally excluded by the Trust Deed and would conflict with the Trustees’ duties discussed below.

Each common law jurisdiction will have its own suite of pertinent legislation that the Trustees must abide by. In the Isle of Man, the relevant law includes the Trustee Act 1961, Trust Act 1995 and Trustee Act 2001 among other Acts. Many of these entrench and develop on previously existing common law doctrines, as well as add to them, to provide more clarity and certainty e.g. the Trustees duty of care in relation to powers of investment and the professional standards expected of them.

In fact, duty of care lies at the heart of the Trustee’s role. All Trustees are beholden to fiduciary duties, like a company’s Directors. This means that Trustees are jointly and severely liable for the actions they take (or don’t take) in respect of the Trust. These general duties are briefly summarised below:

• Exercise reasonable care and skill, considering the capacity of their appointment and any specialist skill or knowledge i.e. acting as a professional or lay Trustee etc.;
• To understand and carry out their obligations in line with the terms of the Trust;
• To maintain and act in the interest of the Beneficiaries, keeping it separate from their own assets;
• To avoid conflicts of interest e.g. situations where the Trustee may make decisions for personal gain, or gain of others by disadvantaging the Beneficiaries;
• To act fairly and with impartiality towards Beneficiaries;
• To exercise powers only for the purposes they have been given and in good faith
• To provide an accurate account of the Trust Fund upon the Beneficiary’s request.

There is also a duty for the Trustee to act gratuitously unless otherwise stated within the terms of the Trust; but most modern arrangements make provision for reasonable remuneration.

In the UK, Trustees are not regulated and do not need to be licensed. However, in jurisdictions such as the Isle of Man, in addition to the statutory and common law protections available, Professional Trustees are regulated by the Isle of Man Financial Services Authority and licensed under the Financial Services Act 2008.

As you can see, being a Trustee can be a complex undertaking, not least due to the legal obligations and subsequent liabilities incurred by the appointment. Further to this, there can be tax implications to consider that may create further liabilities for the Trustees. In the interests of brevity, we will cover various relevant considerations and best practices relevant to the role of Trustee within our next article in this series.

Parties of the Trust: The Beneficiary

When the Trust Deed is drafted, Beneficiaries or categories of Beneficiaries must be named. In doing so, the Settlor outlines who they wish to benefit, or to be eligible to benefit from the Trust. The Beneficiaries may benefit from:

• The income of the trust e.g. property rental or investment income,
• The capital of the Trust e.g. getting assets distributed to them under specific circumstances, or
• Both income and capital.

Remember, Trustees are normally excluded from benefitting, although as stated above, Professional Trustees can receive reasonable remuneration. There are types of Trusts where the Settlor can retain an automatic interest to the income during their lifetime, for example an Interest in Possession Trust – This will be discussed in the next article.

Choosing the Beneficiaries or categories of Beneficiary can be a tricky exercise for the Settlor, who must weigh up various considerations, such as:

• Is the Settlor married?
  • Does the current spouse need access to the fund?
  • Does the Settlor have a former spouse?
• Does the Settlor have children?
  • Does the Settlor have children from a previous relationship?
• Is anyone financially dependent on the Settlor?
  • Does the Settlor have any vulnerable dependents?
• Who does the Settlor find deserving?
• Are there any not-for-profits/charities that are close to the Settlor’s heart?

The Trust Deed can also include exclusions, which can detail anyone who the Settlor does not wish to be considered.

The Trust Fund can be apportioned into a main fund and sub fund elements, ringfenced for certain Beneficiaries. in practical terms, sub funds are created for the Beneficiaries or categories of Beneficiaries which only they can benefit from.

Should the Settlor wish to amend the list of Beneficiaries or categories, depending on the type of Trust, they can make a Deed of Variation. In the instance of a Discretionary Trust, the settlor would supply an updated letter of wishes to the Trustees – remember this document is not binding upon the Trustees and is only persuasive – Depending on the powers conveyed upon the Trustees, they will then consider the actions required.

The nature of the Trust will define the rights which the Beneficiary may seek to enforce. For example Discretionary Trusts, which are now regularly used in modern Estate Planning or Succession Planning due to their flexibility. Such Trusts convey few rights upon the Beneficiary, as the management and distribution of the Trust property is at the Trustees’ discretion. However, both Settlor and Beneficiary can take comfort in these circumstances from the Trustees fiduciary duties; whereby the assets must be managed in the best interests of the Beneficiaries.

Parties of the Trust: The Protector

Whilst not a mandatory requirement, the Settlor may choose to appoint a Protector from outset. The Protector of a Trust is an independent party who is not a Trustee, but is given powers under the Trust Deed. The Protector ensures the Trustees are administering the Trust in compliance with the Trust Deed and the Settlor’s wishes.

Typically the Protector will be a trusted and qualified professional, who may already have a relationship with the Settlor or their family, such as a Solicitor or Financial Adviser.

The Protector effectively provides a backstop to Trustees abuse of powers. For example, where a Protector is appointed, it is usual for the Protector to reserve certain powers, have the power to veto specified administrative actions, or those actions can require their sign-off in order to be bona fide. The power most commonly given to a Protector is the power to appoint or remove Trustees, or to consent to a distribution.

Other than guiding particular Trustee actions, the role of Protector can provide comfort to the Settlor that the trust is being administered as intended. However, Settlors should err on the side of caution when considering whether to appoint a Protector and which powers to reserve for them, as this can lead to many issues in the effective and efficient management of the Trust.

Parties of the Trust: Third Parties

Finally, with regards to the operation of the Trust Fund, the Trustees may seek to appoint various qualified professionals to ensure the best outcome for the Trust Fund and the Beneficiaries. The nature of the settled assets will determine which professional services are required, but these can typically include:

• Investment Managers
• Property Managers
• Tax Advisors

Working with a Trust Service Provider

Dixcart have been providing Trustee Services and guidance for 50 years; assisting clients with the effective structuring and efficient administration of Offshore Trusts.

Our in-house experts and senior employees are professionally qualified, with a wealth of experience; this means we are well placed to support and take responsibility for the Offshore Trust, acting as Trustee and providing specialist consultancy services where appropriate. If required, the Dixcart Group can also assist individuals who require tax and wealth planning services. 

We have developed an extensive range of offerings, which includes an array of Isle of Man structures. From pre-establishment planning and advice to the day-to-day management of the vehicle and troubleshooting issues, we can support your goals at every stage.

Get in touch

If you require further information regarding the use of Offshore Trusts, or Isle of Man structures, please feel free to get in touch with Paul Harvey at Dixcart: advice.iom@dixcart.com

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

The Key Difference Between a Foundation and a Trust

The main difference between a Foundation and a Trust is that a Foundation is a legal entity and owns its assets in its own right as opposed to a Trust, where the assets are legally owned by the Trustees, who hold them for the benefit of the Beneficiaries under the terms of a Trust Deed.

A Foundation creates a separate legal entity with its own legal personality, distinct from the Founder(s), Council or Beneficiaries. A Foundation has a number of characteristics that are similar to those of a company having a separate legal personality and a management board known as a Council. However, importantly, it is entirely independent and has no shares and no members, nor any concept of share capital.

Beneficiaries and a Unique Feature of a Guernsey Foundation

A Beneficiary of a Foundation is anyone who is entitled to benefit from that Foundation. Beneficiaries must be identified by name or by their relationship to another person.

• A unique aspect of Guernsey Foundation Law is that it provides for both enfranchised and disenfranchised Beneficiaries.

An enfranchised Beneficiary is; entitled to a copy of the Constitution, the records and accounts of the Foundation, and can apply to the Court to change the Purposes, or to revoke or dissolve a Foundation.

Subject to the terms of the Constitution, disenfranchised Beneficiaries are not entitled to any information. This is a novel feature of Guernsey Foundations and is not found in any other jurisdiction.

The use of disenfranchised Beneficiaries may be attractive for family arrangements where there is a desire to protect the younger generation from the potentially corrosive effects of the knowledge of substantial wealth. Once the reason for a disenfranchised Beneficiary’s classification, such as age, disappears, they may then become an enfranchised Beneficiary.

Registration

A Foundation comes into being on registration of its statutory documents with the Registrar.

In order to register a Foundation the following documents and information need to be provided:

• The Charter
• A declaration signed by the Founder (or his agent)
• The names and addresses of the proposed Councillors and their consents to act
• The name and address of the proposed Guardian (if any), and his consent to act
• The address and telephone number of the registered office of the Foundation in Guernsey
• The registration fee

Provided that the name is not unlawful or already taken and the Purpose is not contrary to the Law of Guernsey, the Foundation will then be registered, and given a number and a Certificate of Registration.

At this point the Foundation becomes a legal entity separate from its Founder, the foundation officials (the Councillors and any Guardian), or Beneficiaries. The Registrar has discretion regarding whether or not a Foundation will be subject to an annual renewal process and, like a company, a Foundation can have perpetual existence.

Key Features of a Guernsey Foundation

• The Council

A Guernsey Foundation is managed by a Council comprised of at least two Councillors, except where the constitution permits a single Councillor. If neither the Councillors nor the Guardian is a Guernsey licensed fiduciary, then the Foundation will require a Guernsey resident agent to hold the Foundation’s records within the jurisdiction.

The Council of a Foundation owes its duties to the Foundation itself. The Council does not owe any duties to the Beneficiaries of the Foundation.

Councillors have a duty to act in good faith. They also have a duty not to profit, other than as permitted by the Constitution, to preserve the property of the Foundation, to give information to the Guardian and enfranchised Beneficiaries, to maintain accounting records and to be impartial.

• The Constitution: Charter and Rules

The core document by which a Foundation is governed is its Constitution. The Constitution comprises two parts: the Charter and the Rules.

The Charter must contain the name and purpose of the Foundation, a description of its initial capital or endowment, and whether the Foundation has a limited duration in which case the duration must be stated. It may also contain anything else that the Founder wishes to include.

The Rules set out the operating provisions of the Foundation, detail the functions of the Councillors, deal with the procedures for the appointment, retirement and remuneration of Councillors and any Guardian, and identify the default Beneficiary. The Rules may also specify other matters, such as how the assets of the Foundation should be applied and how Beneficiaries may be added or excluded. They may also impose obligations on a Beneficiary or contain protective measures to terminate a Beneficiaries’ interest, for example, if he becomes insolvent.

• The Founder

The Founder of a Guernsey Foundation determines; the Purpose of the Foundation, decides the Foundation’s Constitution, and provides it with initial capital. The Founder, or his agent, must also detail his name as the Founder, to the Constitution of the Foundation, by signing it.

It is also the Founder’s role to appoint the initial Councillors and any Guardian and to have the Foundation registered. The Founder may also be a Councillor or a Guardian, but not both simultaneously, in addition to being a Beneficiary.

Reservation of Powers by the Founder

The Founder may reserve certain limited powers to himself, such as the power of amendment or revocation of the Constitution, and/or of the Purposes of the Foundation.

Such powers can be reserved only for the duration of the Founder’s life, if he is a natural person, or for 50 years from the date of establishment, in the case of a legal person. After which point the reserved powers will automatically lapse. This does not preclude the Council from delegating certain functions to the Founder.

• Guardian

In situations where there are disenfranchised Beneficiaries or where there is a stated Purpose, but no individual Beneficiaries, a Guernsey Foundation must have a Guardian.

The Guardian’s function is to enforce the Purposes of the Foundation on behalf of disenfranchised Beneficiaries, or where there are no Beneficiaries, in substitution for them. Foundations that have Beneficiaries, but no disenfranchised Beneficiaries are not required to have a Guardian.

The Founder may act as Guardian. The Guardian will be named in the Register and may not serve on the Council at the same time. He must maintain accurate accounts and records during his guardianship.

Duties Owed

A Guardian also owes fiduciary duties to the Founder and the Beneficiaries to enforce the Constitution.

Additional Information

If you require any additional information regarding Guernsey Foundations, their benefits and how they can be used, please contact John Nelson at the Dixcart office in Guernsey: advice.guernsey@dixcart.com

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

The Use of Trusts in Switzerland

Switzerland does not have specific Trust Law, but recognised trusts with the ratification of The Hague Convention on the Law Applicable to Trusts (1985), on 1 July 2007. Whilst there is no domestic law governing trusts in Switzerland, trusts from other jurisdictions, and their specific rules, are recognised and can be administered in Switzerland.

In Switzerland, the Settlor (the individual who settles assets into the trust for the benefit of the Beneficiaries) can choose the law of any specified trust jurisdiction to govern the trust. For example, a Guernsey trust can be established with a Swiss Trustee. The Trustee holds and manages the assets in the trust on behalf of the Beneficiaries.

Why Use a Trust And What is the Role of a Trustee?

A trust is a very flexible instrument and is particularly useful for estate planning, wealth management and asset protection.

At a basic level, the concept of a trust is relatively simple: the Settlor places assets in the legal custody of another (Trustee), who holds the assets for the benefit of a third party (Beneficiary). The trust is not a separate legal entity, but more of a legal obligation agreed between two parties: the Settlor and the Trustee.

Trustees owe a fiduciary duty to both the Settlor and the Beneficiaries, as well as to the trust itself. Depending on the jurisdiction under whose laws the trust is constituted, the trust can either have a pre-determined life span or be indefinite. Trusts are intrinsically very flexible.

Taxation of Trusts in Switzerland

The Hague Convention (Article. 19) stipulates that the Convention does not prejudice the powers of sovereign states in fiscal matters. Consequently, Switzerland has maintained its sovereignty in relation to the tax treatment of trusts.

The tax advantages available in using a trust with a Swiss Trustee essentially depend on the tax residence of the Settlor and the Beneficiaries.

In terms of Swiss Law:

• A Swiss resident Trustee is not liable to Swiss income tax or capital gains tax on the assets held under management in a trust.
• Settlors and Beneficiaries are exempt from Swiss taxation as long as they are not considered to be Swiss residents.

Why Use a Swiss Trustee?

In addition to the potential tax advantages detailed above, there are a number of reasons why use of a Swiss Trustee can be advantageous:

• Switzerland has a long established reputation for discreet professional support when managing the affairs of wealthy private individuals.
• Switzerland is located in the centre of Europe, where many affluent individuals are based. Swiss Trustees therefore offer the advantage of being able to provide frequent and high quality support as they can regularly liaise with and, when appropriate, meet with clients and/or other professional advisers.
• Swiss economic, political and legal stability provides a solid base for the provision of high quality support and administration services.
• Switzerland has a number of favourable and well developed banking laws, and has been a popular international private banking centre for many years. It is a jurisdiction with a good reputation and offers a high quality of knowledgeable professionals working within asset management, tax planning and private banking.

The Dixcart Office in Switzerland and Trust Services

The Dixcart office in Switzerland is a member of the Swiss Association of Trust Companies (SATC) and is registered with the Association Romande des Intermediaires Financiers in Switzerland (ARIF).

Confidentiality in Switzerland

Switzerland is well known for its commitment to banking services, professional confidentiality and commercial competence.

• SATC provides that: “Any and all information related to a trusteeship and acquired by a Member must be kept strictly confidential by the Member, its directors, officers and other employees.”

A breach of confidentiality, whether professional or commercial, would only be permitted by law in the event of criminal liability.

Summary

A trust based on the Trust Law of, for example, England, or Guernsey, or Isle of Man, or Malta and with a Swiss Trustee, can offer a number of tax efficiencies, as well as advantages in terms of wealth preservation and confidentiality.

Dixcart can establish and manage such trust structures.

If you would like more information on this subject please speak to Christine Breitler at the Dixcart office in Geneva: advice.switzerland@dixcart.com or to your usual Dixcart contact.

Dixcart Trustees (Switzerland) SA is a member of SATC and registered with ARIF Switzerland.

Individuals and families use various structures to protect their assets from uncertainty and volatility and to deal with estate and succession planning matters. Very often asset protection alone is not the principal driver in creating such structures.

It is not uncommon for the next generation of a family to move to new countries to study, work, establish businesses and settle down. As families become more internationally mobile the complexity of administering family estates and assets, as well as cross border succession and estate planning, increases.

Steps, Stages and Structures

Before a family’s estate reaches the size and complexity which requires the establishment of a dedicated, single family office, there are a number of stages through which the structure might transition.

Pooled and enhanced fiduciary support

At an early stage, several disparate family related structures are often transferred to a single fiduciary provider or trustee, with whom the family has a good existing relationship or who has been recommended by a trusted adviser.

These structures will generally take the form of a discretionary Trust or Foundation. The Trustee or Foundation Council can then be instructed to assist with developing the position into a standalone family office position, utilising their knowledge, experience and existing resources of; qualified staff, policies and procedures. At this stage efficiencies are created in the management and administration of the structures under a single provider, the family/adviser relationship is reinforced, and additional cost efficiencies often result.

Private Trust Company (PTC)

For many years the PTC has been the preferred vehicle for administering the assets of wealthy families and many variants have emerged across jurisdictions that specialise in providing them, and whose legislation and regulation are particularly suited to private wealth management. One of the main attractions of the PTC is that decisions, relating to the underlying trusts, are made by directors who are carefully chosen by the family and/or may even be family members.

There are a number of variants of the PTC, which can be limited by shares or guarantee and/or even with separate classes of shares for voting purposes.  Consideration as to the level of control exerted over the PTC needs to be carefully considered. Too much control can lead to tax implications.

The most common solution to the control issue has been to hold shares in the PTC through a Purpose Trust (see diagram below), which creates additional layers of ownership and administration.

Whilst PTC’s remain a popular specialist solution, Guernsey can also offer a simpler structure through the Private Trust Foundation (PTF).

Private Trust Foundation (PTF)

A PTF removes the need for the ownership layers which are required above a PTC, and can simplify the structure and therefore administration and cost (see diagram).

A PTF established under the Foundations (Guernsey) Law 2012 (the “Law”), must be for the sole purpose of acting as Trustee of the Trusts for the benefit of an individual or family.

The Law makes it clear that, on establishment, a Guernsey Foundation has its own legal personality, independent from that of its Founder and any Foundation officials.

Diagram: A Classic Private Trust Company Structure and the Guernsey Foundation Solution

The Advantages that a Guernsey PTF Offers

• A Guernsey PTF will be run and managed in a similar way to a PTC, with the involvement of a local licensed fiduciary such as Dixcart, but with the significant advantage that, as an orphan vehicle, it does not have any other owners or controllers.
• Family members or other trusted advisers can also be appointed to the PTF Council, which is responsible for acting as Trustee to the underlying family Trusts.

Managed Services

Managed support from a fiduciary provider, is often the penultimate stage in the progressive route towards establishing a full standalone family office, directly employing appropriately experienced staff in the jurisdiction of choice.

Managed Support Available from Dixcart

Managed support, as provided by Dixcart, can include dedicated serviced office space at the Dixcart Business Centre in St Peter Port, and fiduciary, accounting and legal support as appropriate. A fiduciary provider, such as Dixcart, can also help grow and develop the position into a standalone family office, ultimately operating independently.

Additional Information

For further information on private wealth structures and their management, please contact John Nelson, Director, Dixcart Trust Corporation Limited, Guernsey: advice.guernsey@dixcart.com.

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Key Advantages

The key advantages of a Swiss Private Trust Company (PTC) are the additional elements of control and discretion which the PTC can provide. A PTC is the ideal structure for high net worth families to use as part of their wealth structuring.

Important Considerations: Professional Trustee or Private Trust Company

One of the first things to consider when establishing a trust is who to appoint as trustee. This is a sensitive question as the settlor is often unwilling to give away control of the assets to strangers in another jurisdiction. A number of individuals may prefer to establish their own private trust company, rather than to use a professional trustee.

A PTC is a standard privately owned company whose sole purpose is to act as trustee of one or more trusts, usually connected to one family. In principle, PTCs do not offer services to the general public. Usually the PTC holds shares in a family company or in an investment company.

PTCs and the Role of a Professional Licensed Trust Company

Like any other company, a PTC is run by its board of directors who make the trust decisions. The PTC allows the settlor and/or family members or trusted persons, to act as shareholders or to be members of the board. As such the settlor or family members are able to appoint or dismiss the directors of the company.

PTCs are often set up and administered by an existing licensed professional trust company, which advises the board members of the PTC, in terms of corporate governance and trustee issues. In some cases, a representative of the professional service company will sit on the board of the PTC together with family members. This combination of family and professional advisers allows the PTC to react quickly to the needs of an extended family and to meet its best business interests. 

Specific Characteristics of Swiss PTCs

A Swiss PTC ensures privacy, when it is formed as a Limited Company. It makes it easier to control access to and disclosure of confidential information. It also allows for  rapid commercial decisions to be made.

A Swiss PTC does not have to be licensed as a professional trust company.

Switzerland as a Family Office Jurisdiction

Switzerland is a, if not the main, hub for family offices.

 Discretion, expertise and security together with one of the best jurisdictions in the world for asset protection and for asset management makes it arguably the best place for a high net worth family to conduct its estate management and control of its assets.

Dixcart Switzerland

Dixcart Switzerland has been providing Swiss Trustee services for over twenty years, is a member of the Swiss Association of Trust Companies (SATC), and registered with the Association Romande des Intermédiaires Financiers (ARIF)

The Swiss Federal Act on Financial Institutions (FINIG) came into effect at the start of 2020, and professional trustees must now gain mandatory approval. Dixcart Trustees (Switzerland) SA meets all of the required regulatory obligations and continues to do so.

Additional Information

if you would like additional information regarding Swiss Private Trust Companies, please contact Christine Breitler at the Dixcart office in Switzerland: advice.switzerland@dixcart.com.