Monte-Carlo 1995 meeting

Meeting Summary
  • Choosing a JurisdictionPaul Egerton-Vernon (updated 1998)
    • The choice of jurisdiction depends essentially on the nature of the business to be transacted. One also has to bear in mind the differences between the foundation and the trust: the foundation is a body formed under the civil law; the trust is an equitable obligation on a person to deal with property over which he has control for the benefit of beneficiaries, any one of whom can enforce those obligations. Unlike a foundation, a trust has no separate legal personality, nor is there any contractual relationship between the trustee and the beneficiaries. The Hague Convention has been ratified by only a few countries, but certain civil law jurisdictions have made provision for the establishment of trusts. This is true of Liechtenstein, but the trust has not proved universally popular there. Provision for trusts has been introduced also in Mauritius.
      Different types of trust exist; a life tenant under a fixed-interest trust enjoys the use of trust assets during his lifetime and trust assets pass to one or more others on his death. In order to avoid tax on the death of a life tenant, the modern practice is to use some kind of discretionary trust. “Asset protection trusts” have as their object the protection of assets against creditors of the settlor.

      A client from a civil law background is often reluctant to pass control of his assets to strangers. One solution to this problem is to have the client form his own trust company. However, if the trustee is not truly independent of the settlor, the trust may be held to be a sham. It may be that courts in some jurisdictions have been too eager to find that a trust is a sham.

      In choosing a jurisdiction, an intending settlor will look at its situation, its reputation, its professional and banking services and the relative costs. Trusts structures have lent themselves to lawful tax planning for clients from common law jurisdictions. Some of these jurisdictions have now put in place some structures to protect clients against defalcation.

      In planning for future generations, clients from civil law countries have traditionally made much use of Liechtenstein, but modern banking practices and the growing use of trusts have encouraged some move towards the common law jurisdictions. The rules of forced heirship have also given an impetus to the use of trusts and foundations.

  • Disclosure to BeneficiariesTim Bennett (updated 1998)
    • To what information about the existence or details of a discretionary trust are beneficiaries entitled? One must look at the trust instrument and also at the relevant law. Beneficiaries under a bare trust or a fixed-interest trust are entitled to full information. The discretionary trust usually confers a power to distribute on the trustee but imposes no obligation to do so. A “long-stop” beneficiary has a vested interest, subject to devesting. In a fixed-interest trust, the beneficiary has a right to know about the existence of the trust. A discretionary beneficiary may not have such a right.Trustees must keep proper accounts. Beneficiaries under a fixed-interest trust have a right to see accounts. With discretionary beneficiaries the position may be less clear. Similar rules apply to rights to see trust documents, but the position here is also doubtful and the meaning of “trust documents” may be the subject of argument; they include minutes, do not necessarily include technical reports or opinions and usually exclude letters of wishes. Recent Australian cases have taken a narrow view of the “documents” which a beneficiary is entitled to see. All discretionary beneficiaries are entitled to be considered periodically. This must be an active mental process. Fixed-interest beneficiaries may together bring a trust to an end. In theory, so may all discretionary beneficiaries, but in practice it may not be possible to identify and obtain agreement from all of them. The relevant law may provide variously – e.g. in Guernsey, Jersey, Liechtenstein, Belize, Cyprus, BVI. 1994 saw the Lemos cases in Cayman, where the Appeal Court ordered disclosure in the Cayman proceedings on terms that the information was not to be utilised in the Greek proceedings. Secrecy provisions may prevent trustees from disclosing information – e.g. in Guernsey, Jersey, Cayman, Liechtenstein, Cyprus, Cook Islands and Turks and Caicos Islands. There are also criminal sanctions in some jurisdictions: Cook Islands, Liechtenstein, Cayman, Bahamas, Switzerland. The Trust instrument itself may contain a non-disclosure clause, an exclusion clause or a no-challenge clause. It may also provide for a Protector to review the activities of trustees, and/or for an annual trust audit of the finances of the trust. In this way, it is submitted, discretionary beneficiaries can legitimately be kept out of the affairs of a trust if such is the settlor’s desire.

  • Hybrids and Other Quasi TrustsCharles Cain
    • Articles by Patrick Taylor, Paul Matthews and Julian Gash in the Offshore Tax Review are essential reading. A trust is a relationship, recognised by law; it is not created by law. It is a relationship between two persons relating to the disposition of the property: it is identified by a number of rules – by the passing of control of assets in the hands of the trust, by having ascertainable beneficiaries and so on. It is not an entity. The law is to be found in the cases; it is nowhere completely codified. It is not always well understood. The use of the guarantee company and of the “hybrid” company (i.e. limited by guarantee and by shares) provides an alternative to the, and one which is simpler and more understandable. The constitution of a guarantee company will provide for member’s rights, and may include provision for separate classes and for a deceased member’s rights to pass to his estate. Rights can also be conferred on non-members. In a hybrid company, all members are guarantors but some also have shares. A guarantee or hybrid company may function as a family foundation or a charity. They client may retain control of the assets without running any Rahman risks. The have been used for timeshare resorts. The interest of a non-member beneficiary is not that of a shareholder nor an interest under a trust. The interest of a guarantee is not a “security” for exchange control purposes: his identity is not public knowledge; the interest is safer than conferred by a bearer share.

  • The Asset Protection TrustStephen Gray
    • A creditor can get at assets owned or controlled by debtor or by a trust of which he is in reality the sole beneficiary. The creditor cannot in general access assets transferred to others, including assets transferred to trustees of trusts under which the debtor has no vested interest: the Asset Protection Trust (“APT”) takes advantage of this rule. The APT has become, in the last 10 years, well known both to professionals and to the public. But there has only been one decided case referring to APT’s: this was in Colorado. Generally, the Court – in the Anglo-Saxon world at least – has not distinguished the APT from trusts of other kinds; it has given effect to the terms of the trust, notwithstanding that the interest of a creditor are adversely affected, unless a statute requires otherwise. Nor are the ethical obligations of the professional, the trustee, the custodian or others in the field of APT’s different from those requisite ion other fields. Indeed it has become a duty of an adviser to the wealthy client to consider setting aside some assets which will be free of future claims by creditors. It is expected that the Foreign Trust Tax Compliance Bill will become law in the United States. Its purpose is to prevent foreign APT’s being used for tax evasion. It does this by reporting requirements, which are imposed on the settlor and on beneficiaries who receive benefits from the trust. Creditors cannot obtain these reports from the IRS. A settlor who is being sued may think it wise to produce copies of non-confidential tax reports to the Court to show the bona fide nature of the trust. Nevertheless, these reporting requirements may not be welcomed by clients and may well cause conflicts of interest for trustees. It is well-recognised in the United States that the APT offers no tax advantage. Settlors in other countries may do well to approach the APT as a mechanism to achieve non-tax results. The trust assets of the APT should not be visibly located in the jurisdiction in which the settlor lives. The APT may also function as a pre-marital and post-marital planning device.

  • The Civil Law FoundationRobert Boonacker (updated 1998)
    • The Foundation is a civil law alternative to a trust. Certain tax consequences flow from the gift into the structure, the maintenance and the termination of the structure. If the individual in fact retains all power, the Foundation will have no substance, and may be disregarded both for tax and for forced heirship.
      In the Netherlands, the foundation is known as a Stichting. It has a board – which does not need to have Dutch members. Succession may be determined by the board or by the foundation instrument. “Certificiering” is the creation of depository receipts, separating the voting rights from the economic benefit of shares; a Stichting may be used this purpose.

      A high rate of gift tax in the Netherlands discourages gifts to a Stichting by Dutch residents. But no tax charge is incurred by foreign donors. Receipts by beneficiaries are generally taxable but may be exempted by the “other income” article of a tax treaty.

      Liechtenstein has its Anstalt and Stiftung. There is a small annual tax, but no tax on distributions to beneficiaries. There are virtually no treaties to which Liechtenstein is a party and accordingly the Dutch Stichting will often be more advantageous.

      Foundations are also available in Panama and in Austria. The Austrian Privatstiftung requires two out of three board members of Austrian nationality and a minimum capital of one million Austrian schillings. A much reduced gift tax is charged, so long as the Privatstiftung lasts for at least 10 years.

      No gift tax is charged on non-residents; German residents appear to be making use of the Austrian private foundation. Payments to beneficiaries suffer 22% income, but may be reduced by treaty. Austria now has the “participation privilege” company: a private foundation may be used as its shareholder. The private foundation may also be used to hold a Netherlands Antilles parent of a Netherlands holdings company.

  • The Purpose TrustJohn Conder (updated 1998)
    • New ways of using trusts are evolving. 1990 was the year in which purpose trusts came to the fore. Bermuda’s Law dates from then and has proved a model for the later enactments.
      A purpose trust is one which does not have ascertainable beneficiaries. The charitable trust is a form of purpose trust with a long history in English law. Other purpose trusts are invalid under English law (Morice v Bishop of Durham); there are minor exceptions to this rule. There is no-one to enforce a non-charitable purpose trust; the Bermudian and other offshore laws have overcome this difficulty. These laws are new and have not been considered by the Court in these jurisdictions.

      Bermuda was the first common law jurisdiction to permit the purpose trust – see the Trusts (Special Provisions) Act 1989. An “Enforcer” must be appointed: his duties are not defined, but it is thought that he has a general duty and power to ensure that the trustees carry out their obligations. If there is no Enforcer, the Attorney-General has power to apply to the Court for the appointment of one. The Attorney-General does not have any wider power to supervise the Enforcer. The Settlor may appoint himself the Enforcer.

      The legislation permits (though it does not regulate) a kind of “hybrid” trust, which is a purpose trust during the settlor’s lifetime and for individual beneficiaries afterwards.

      The Belize law modified the Bermuda law in some respects, but is essentially similar. The same is true of the BVI law, but there a purpose trust may continue indefinitely. The Cook Islands legislation proceeds by extending the concept of “charitable”, but requires no Enforcer and provides no role for the Attorney-General. The Cyprus law proceeds similarly. Laws permitting purpose trusts have been or are in course of being enacted in Anguilla, Turks and Caicos, Nevis, Samoa and Antigua. Other jurisdictions are considering legislation.

      It is essential that an Enforcer or his equivalent be appointed. It is an advantage of the multiplicity of jurisdictions that a purpose trust now has the possibility of moving elsewhere. Purpose trusts are developing uses in a commercial context. It may take a transaction off balance sheet or provide a mechanism for securitisation. It may also serve as a holder of shares in a private trust company.

      Since 1995, the thinking regarding purpose trusts has progressed. In particular, concerns have been expressed as to whether there is a valid purpose trust if it is both a trust for purposes as well as a trust for persons. The role of the enforcer has become viewed as increasingly important. As a result, Bermuda is actively reviewing its existing purpose trust legislation with a view to adopting some of these new ideas. However, the most significant development is the enactment in the Cayman Islands of their STAR Trust legislation. This law became effective in November 1997. Amongst other things it provided that a STAR Trust could be created for purposes or for persons or for both. There were other special features of the legislation.

  • The Trust with Treaty AdvantagesMilton Grundy (updated 1998)
    • This talk follows what Philip Baker and Paul Maurice said in 1993.
      Several jurisdictions present themselves as homes for trusts with treaty advantages. Barbados now has its Offshore Banking Act and International Trusts Act, which provide for trusts made by non-resident settlors for the benefit of non-resident beneficiaries to be (broadly) exempt from tax on their foreign income and their beneficiaries to enjoy a corresponding benefit.

      In Cyprus, the International Trusts Law of 1992 provides a similar exemption, as does the Income Tax Act in Malta. In Mauritius, trustees of offshore trusts have the option of paying a small amount of tax and having the advantage of treaties or paying no tax and not getting treaty benefits. New Zealand gives its local trust companies a tax exemption for the income of settlements made by non-resident settlors.

      While it appears that there is a good deal of undiscovered scope for treaty shopping through trusts, some discretion is to be advised. A careful reading of the text of the relevant treaty is required in each case.

  • Trusts in Civil Law JurisdictionsGilles Cervoni
    • Concepts of ownership and public policy present difficulties in recognition of trusts by civil lawyers. France has been trying to introduce La Fiducie for nearly six years. Civil lawyers have tried to understand the trust by looking for a similar institution – e.g. the foundation, the fiduciary arrangement, the fidei commissum, the contract. None of these parallels is very satisfactory: in a number of cases in France and other civil law countries, as well in the Hague Convention, the trust is recognised as an institution sui generi. The forced heirship rules cannot be put aside by contract: they considerably limit the use of trusts by individuals domiciled in France. It is expected that when the Fiducie law comes into effect, France will sign the Hague Convention: the Convention opens the door to the recognition of trusts in civil law countries. The French approach to the taxation of trusts is to tax the beneficiary on receipts from trusts as income from foreign securities; the proper treatment of receipts of capital and capital gains is obscure. Whether inheritance or gift tax is applicable depends on the domicile of the settlor, the location of the property and whether the trust is revocable. Similar distinctions are made in relation to wealth tax, though the position is not altogether clear. The treaty with the United States deals expressly with trust and the French commentary deals separately with simple and complex trusts. It seems that the French Revenue will treat a foreign trustee as the owner of a French asset for treaty purpose, but again the position is not clear. The Fiducie Bill has not yet been discussed by Parliament. The first draft was too conservative, but the second draft also shows afraid the authorities are of the use of this institution for tax avoidance. It separates the trust assets from the other assets of the fiduciaire. It imposes responsibilities on the fiduciaire. It provides a criminal penalty for abuse of power on the part of the fiduciaire. There are provisions to prevent improper use of the Fiducie for evading obligations to creditors. No gift tax is chargeable on the creation of the fiducie. In general, the Fiducie is transparent, but the fiduciaire pays tax only on his remuneration. It seems that the Fiducie law in France will encourage the tax authorities to recognise foreign trusts.

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