Twenty years ago I was approached by a professional trustee who I will call Jack, who had taken on the office of Protector of a Trust which owned a very substantial trading company. ‘I am nervous,’ he said. ‘If there is a claim against the company or the trust I could get dragged in personally. I have no funds at my disposal with which to defend any claim other than my own personal finances and have only limited information or right to information. A claim could wipe me out!’
I looked into the situation for him and wrote a report. He was in deed in a precarious position. He had a fiduciary duty towards the beneficiaries of the trust, which meant he had to act in their best interests even if it meant being proactive without being paid for his services. At the same time his hands were tied; he had no funds to take a legal opinion and no legal right to access information even if he did have the funds.
My report for Jack was put to the settlor who will I will call Joseph, who was luckily alive and well disposed towards Jack. He had not realised that Jack was, as the ‘Protector’ of his trust in such a vulnerable position to carry out his obligations in protecting his trust.
Joseph instructed me to see what solution we could find. He wanted Jack to remain in a decision making role, wanted him to have access to resources of information and funds, but did not want him to be exposed personally.
Between us we came up with the solution of setting up a private trustee company which was at that time, to my knowledge, the first. Jack was appointed a director, and as such had limited liability, had access to funds should he need to use them to fulfil his fiduciary duties, and access to information so that he could do his job properly. The professional trustees were then appointed under a contract of services to continue doing their job in administering the trust, but were relieved of their obligation to take fiduciary decisions which were now assigned to Jack and his fellow directors.
There are many trusts still being administered successfully by professional trustees to which powers, such as the removal and replacement of trustees have been reserved to a Protector. In some cases, the powers reserved are limited and in others they are extensive. Some trusts such as those governed by the International Trust Law of Cyprus, can reserve a power to a Protector which can determine when and to whom distributions are to be made without invalidating the trust. Whether the powers are limited or extensive, these powers give the Protector ‘significant control’.
Under the common reporting standard due to come into force next year tax relevant information will automatically be exchanged between jurisdictions and it will include the identity of the Protector and trust of which he holds office.
The definition of ‘beneficial owner has been extended in the CRS to include PSC’s; ‘persons exercising significant control’ as follows: 'Beneficial owner refers to the natural person who ultimately owns or controls a customer or the natural person on whose behalf a transaction is being conducted. It also so includes those persons who exercise ultimate effective control over a legal person or arrangement.’
The concern for every Protector is what will the tax authorities do, as and when they get hold of their name and the trust of which they are a Protector? Will they start an investigation under the Tax Information Exchange Agreement between the two countries?
The Protector, as I have said before, is in an invidious position; he or she does not have the resources to comply with a full investigation and neither will he or she have the necessary information, even if they were funded to comply.
The role of the Protector is to give the settlor some control over his assets, should the trustees begin to act in a manner which was not in line with his wishes. In most cases however the role of the Protector in practice is removed from the activities of the trust and so it may come as a real shock when the tax authorities start to investigate.
My advice to anyone who is concerned about their involvement with an offshore trust, whether as a Protector, settlor, beneficiary, trustee or director of a Private Trustee company is to get an independent review of the structure not only to protect the Protector, but also to ensure that the family knows who is reporting what and if necessary make changes.
Privacy Planning has nothing to do with the evasion of tax or any other illegal activity. For example, I will not take on any client if I have reason to believe they want privacy to evade tax. However, many wish to protect their family from an unwanted and expensive investigation and to do so they want to know what changes they need to make this year.
If you would like to book an appointment to see Caroline or any one of her team on succession, estate planning, offshore trust review, dispute resolution, matrimonial concerns, or investment strategies, please contact firstname.lastname@example.org or call 020 3740 7423.