Taboo or not Taboo – why Trusts matter
Author: Michael-Pierre Giraud, Head of Fiduciary Services, Jersey
Many of life’s taboos are, without a doubt, justified. However, some should be open to challenge and simply seem a little out of place when sensibly considered. An example of such a taboo is when a person establishes a trust with asset preservation as their key motivation (i.e. with the intention of protecting the settled assets from future uncertainty and claims). It seems odd that being prudent and safeguarding assets are considered a taboo when people manage and mitigate risks, as a matter of course, on a daily basis.
This analysis may, on the face of it, seem overly simplistic however the use of trusts in estate planning is not only integral in common law jurisdictions but also globally recognised, especially for families with significant assets and family members who are globally dispersed. The benefits associated with establishing a trust are also widely recognised and include managing the risks which the future may bring. Such risks may include claims by a future creditor, a future spousal claim (against the settlor or the settlor’s descendants), the potential dissipation of wealth by a future generation of spendthrifts, political instability, the break-up of a family company or a potential forced heirship claim in a home jurisdiction. Lastly and arguably most importantly, considering the current Covid-pandemic and associated uncertainties, to save something for a rainy day has never been more important.
The wider ancillary benefits to establishing a trust have purposely not been considered in this article, which is focussing on preserving assets by managing, and where possible mitigating, the future risks associated with them. At this point it is important to acknowledged that aggressive asset protection is morally wrong and, depending on the fact pattern, can be illegal. It should not be promoted by trustees or the jurisdictions in which they operate. That said, unfortunately, certain jurisdictions have historically introduced asset protection legislation which is heavily weighted in favour of a settlor and which is drafted to protect assets from existing creditors. It is easy to see why implementing this type of planning, and using jurisdictions with such aggressive legislation, is viewed as a taboo.
Should asset preservation be a motivation for settling a structure then using a jurisdiction with aggressive legislation should be discouraged as it is likely to raise a red flag. This could arguably also open the door to a potential claim over the assets as it might be suggested, even if it was not the case, that the jurisdiction was only used in order to try and defraud creditors.
So, when should asset preservation not be considered a taboo and when, ideally, should a settlor establish a trust with asset preservation as a principal motive?
Below are five scenarios where, subject to sourcing legal and tax advice, it may make sense for an individual to establish an offshore Trust in a well-regulated jurisdiction .
When a person wishes to preserve his or her wealth to plan for the financial risks and uncertainties that go hand-in-hand with the current Covid-pandemic.
When an entrepreneur has worked hard to build up and sell a company and, in the process, realised significant liquid assets. It is not uncommon for this person’s entrepreneurial ambitions to remain and the individual may wish to reinvest part of the proceeds into another venture which, if it goes wrong, may result in a claim against the individual’s wider estate. Would it not be prudent for this person to mitigate the risk of a future claim by ringfencing part of the assets so that they do not form part of their personal estate?
When a parent wishes to gift assets, at their discretion, rather than having their legacy dictated by forced heirship rules in the jurisdiction in which they are resident. Would it not make sense for the individual to gift assets to a trustee to hold and distribute them in line with the individual’s wishes and as deemed appropriate by the trustee?
Where a parent is concerned by the spending patterns, business instinct or choice of spouse by younger generations of a family and fears that a legacy (which may include a family business) will be quickly squandered. Should this individual not establish a trust for the trustee to manage assets and ensure that wealth passes to the next generation in a controlled manner?
If an individual is in a jurisdiction which is experiencing political and economic turmoil then there is clearly a risk that assets may be expropriated or fall in value. Would it not be prudent for some of these assets to be held by a trustee, in a separate jurisdiction, for the benefit of the individual and future generations of beneficiaries?
Should you wish to establish trust for any of these reasons then there are several key points that should be noted.
Firstly, professional advice needs to be taken from a reputable legal advisor.
Secondly, the terms of the trust should ideally be irrevocable and discretionary as this provides the greatest protection and the greatest flexibility.
Thirdly, a jurisdiction should be selected which has conservative legislation and a high level of regulation which discourages aggressive asset protection planning and has suitable firewall legislation which limits the recognition of foreign judgements against trusts. The Island of Jersey, for example, has a reputation for having robustly regulated trustees, has industry leading lawyers and a judiciary which has repeatedly found that, if a structure is properly established, meaning the assets settled actually belonged to the settlor and the settlor remained solvent after the trust was established (and therefore in a position to settle all known creditor claims from the assets which remained in their personal estate at the time), then the trust will be afforded the protection of the Jersey court’s jurisdiction. Significant case law exists which reinforces this position.
Lastly, the situs of the assets settled onto trust will need to be carefully considered and will ideally either be in the same jurisdiction as the trustee or, as a minimum, outside the jurisdiction where the settlor is resident or where the forced heirship rules may apply.
What is clear is that asset preservation structures, settled properly and for the right reasons, should not be considered a taboo but an integral part of any wealthy individual’s estate plan. Implementing such planning in today’s uncertain times and when family wealth is potentially at stake is surely the prudent thing to do.
This document has been prepared to assist clients who are considering creating a trust (in either the Island of Jersey or Mauritius). It is intended to provide a quick overview to the establishment and administration of offshore trusts and the benefits of estate and succession planning. It is not intended to be comprehensive in its scope and it is highly recommended that a client obtains both legal and tax advice (as may be appropriate) prior to the establishment of a trust and any proposed transfer of assets.
These services are provided by Standard Bank Offshore Limited’s subsidiaries in the Island of Jersey and Mauritius. Standard Bank Offshore Trust Company Jersey Limited is regulated by the Jersey Financial Services Commission, to provide corporate and trust services. Registered office address is Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ and registered in Jersey under No 9153.
Standard Bank Trust Company (Mauritius) Limited is regulated by the Financial Services Commission, Mauritius, to provide corporate and trust services and does not fall under the regulatory and supervisory purview of the Bank of Mauritius Registered office address is Level 9, Tower B, 1 Cyber City, Ebene, 72201, Mauritius and business registration number: C06021609
The above entities are wholly owned subsidiaries of Standard Bank Offshore Group Limited whose registered office is Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ. Standard Bank Offshore Group Limited is a wholly owned subsidiary of Standard Bank Group Limited which has its registered office at 9th Floor, Standard Bank Centre, 5 Simmonds Street, Johannesburg 2001, Republic of South Africa. The Standard Bank of South Africa Limited, an authorised Financial Services Provider (FSP number 11287).
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