Settle down

  • Author : Marcus Leese
  • Date : February 2012
ABOUT THE AUTHOR: Marcus Leese TEP is a Partner at Ogier in Hong Kong

While high-net-worth individuals and families in Asia face many of the same issues as those in other parts of the world when it comes to private wealth planning, several issues seem to be more common or of greater significance. These include:

  • First generation wealth – as much of the wealth is newly created, the need for private wealth planning is a new phenomenon for many.
  • Culture and legal system – many of the traditional private wealth planning tools and structures (such as trusts) are either not known or not fully understood by clients and their trusted advisors.
  • Nature of assets – for many Asian families, the majority of their wealth remains in their family business, in which they are still actively involved and which they (and many trustees and bankers) may consider not well suited to ownership by a trustee.
  • Control – for many, loss of control over valuable assets is a significant hurdle to private wealth planning.
  • Limited domestic taxation – the modest rates and incidence of domestic taxation in many Asian countries means one of the principal drivers for private wealth planning in the west has been absent.

These and other factors limit the use of traditional private wealth planning (particularly trusts) by high-net-worth individuals and families in Asia. However, innovative trust structures under British Virgin Islands (BVI), Cayman Islands, Guernsey and Jersey laws can address many of these issues.

The key is to devise a structure that balances the requirement for asset ownership, fiduciary duties and ultimate oversight by the trustee with the legitimate wish for ongoing input and other involvement by the settlor and relevant family members (particularly in the management of trading or operating business assets, where the settlor and family members often have experience and expertise).

There is a variety of possible solutions, but the most successful can be arranged into three groups. The first group consists of reserved powers trusts: structures recognised by express statutory provisions in each of BVI, Cayman, Guernsey and Jersey. Such trusts permit the settlor to reserve to themselves (or to a designated third party, such as a trusted advisor or a family advisory committee) one or more of the trust powers, without calling into question the settlor’s intention to create the trust or otherwise invalidating the trust.

The reserved powers structure differs from the more common situation of a discretionary trust with a protector. A protector’s powers are usually negative (i.e. the trustee is the decision-making party, but its decisions are subject to protector approval), but in a reserved powers trust, the powers reserved are positive (i.e. the settlor reserves to themselves or to a third party the power to take relevant decisions, so the power-holder is the decision-making party for the matters that are reserved).

The powers most commonly reserved fall into three categories: beneficial (e.g. the power to make distributions to beneficiaries or to add or remove beneficiaries), administrative (e.g. the power to appoint and/or remove trustees) and investment (e.g. the power to determine the investments made).

Reserved powers trusts are used most commonly where the settlor has one or two matters of particular significance that require the reservation of powers. They are used less where the settlor seeks more comprehensive involvement, such as where an interest in an operating business is to be held in trust.

The second group comprises specific statutory regimes. These include BVI trusts established under the Virgin Islands Special Trusts Act 2003 (VISTA) and Cayman trusts established under the Special Trusts Alternative Regime in part VIII of the Trusts Law (2009 Revision) (STAR).

The VISTA legislation expressly permits the establishment of a trust where the trustee may retain the shares in a BVI company indefinitely. The management of that company may be carried out by its directors without intervention by the trustee (other than in exceptional circumstances defined by the parties). A VISTA trust can be seen as a form of reserved powers trust, but with the addition of express statutory exoneration from any requirement to monitor the actions of the directors of the company whose shares are held by the trustee. It is potentially useful for holding assets in a trust structure that in other situations a trustee may not be willing or able to hold, due to the nature of the assets or the trustee’s knowledge of and expertise in the management and operation of such assets.

The STAR trust approaches the issue differently. The only persons with standing to enforce a STAR trust are those appointed as ‘enforcers’ (who may or may not be beneficiaries). Beneficiaries (in that capacity) do not have standing to enforce the trust, and do not have enforceable rights against the trustee or the trust property.

The third group comprises private trust company structures. Such structures involve the establishment of a trust (including a trust in either of the first two categories or a simple discretionary trust), and the establishment of a special purpose company whose sole role is to act as trustee of that trust.

Such an arrangement does not absolve the private trust company of the fiduciary and other duties inherent in the role of trustee – it is a bona fide trustee like any other. However, it can still assist in addressing the issues that concern clients, as identified above.

First, the board of the private trust company can include the settlor, members of the settlor’s family, trusted advisors of the settlor and representatives of any one or more of these (including corporate representatives in some cases). This gives the trustee direct access to the knowledge, experience, expertise and information of these individuals, which can be used when the trustee makes decisions. This addresses settlor involvement.

Second, as a special purpose company with a board of directors, which themselves have (or have access to) specialist knowledge and expertise of the underlying assets, the private trust company can be more able to take commercial decisions about the ownership and management of the assets held in trust than could a commercial trustee. This means private trust company structures can be attractive for use in owning operating businesses or investments with a more volatile risk profile.

Such structures do not exclude professional trustee involvement. The private trust company (and the underlying trust itself) still requires the administration and support that a professional trustee can provide (and in some jurisdictions the regulatory regime requires the involvement of a professional trustee in the administration of a private trust company).

Private trust company structures tend to be used in larger or more complex cases (often as part of family office arrangements) because of the more complex structure, the greater costs and the need for good corporate governance.

While some issues are more common or of greater significance to high-net-worth individuals and families in Asia, a range of solutions are available. As a result, those issues should not prevent the use of trusts and other private wealth planning structures in Asia.


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