The international private client community has observed a noticeable rise in popularity of both Private Trust Company (PTC) and Restricted Trust Licence Company (RTC) structures in Cayman over recent years. The purpose of this article is to highlight some practical tips and considerations which help clients, advisors and related parties to avoid some of the potential pitfalls associated with these structures.
While the PTC is sometimes perceived as being the ‘cheaper and easier’ route when compared to the RTC, it is erroneous to believe that the principles of good governance should be any different and that the structural composition and appointments thereto are not matters for equal deliberation and care. With this in mind and for the sake of ease the term PTC is used throughout this article and applies equally to both the PTC and RTC.
Ownership of the PTC – Think about the future
A fundamental question is how the shares of the PTC are to be held. This is something which is frequently overlooked in detail in favour of concentrating on the PTC itself and in some cases it is seen as a trivial inconvenience with settlors taking quick decisions to hold the shares directly. Unfortunately in doing so they can be exposing themselves to substantial and unnecessary risks in the future. Firstly, one should never forget that the shares will one day form part of the estate of the settlor. Testamentary issues during probate can affect the exercise of controlling rights and the general smooth functioning of the PTC. Move forward in time whereupon the administration of the settlor’s estate is finally completed, and the new shareholder of the PTC could turn out to be someone who the settlor would not have chosen for such an important, and potentially influential, position if more thought had been given.
Consideration should also be made for the potential repercussions on the settlor during their lifetime. For one thing, holding full ownership of the PTC increases vulnerability for attack during ‘onshore’ matrimonial disputes or when a fiscal authority seeks to impose domestic taxes on the assets based on ownership and control. Extend this further to a trustee appointed in the bankruptcy of the settlor and suddenly the new ownership of the PTC can be used in pursuit of the underlying trust assets for the sake of future and unforeseen creditors of the settlor.
While some orphan arrangements such as a charitable trust or foundation are perfectly suitable to use, and negate the risks of direct ownership as described above, there is a trend in preference among professionals to use the Cayman STAR trust. For one thing the STAR trust deed allows the settlor a choice of whether to keep the purposes fairly simple and limited to holding the PTC shares (with ownership restrictions imposed) or using the structure as a means to check and balance the powers of the PTC directors.
The PTC may stand or fall on its ability to act in a fiduciary manner
Attacks on the PTC can be founded in claims that the board of directors have not acted independently in the fiduciary best interests of one or more of the beneficiaries. For this reason it is highly recommended that a local professional trustee to be appointed to the board of directors, at least in the short term but arguably for the long term, to provide professional guidance. (Note: the Cayman Islands Monetary Authority requires that for the RTC at least one or more directors and officers have senior trust experience).
Some wealthy families incorporate their own dedicated family office to the PTC and appoint some of its senior members, along with other entrusted family advisers and family members experienced in managing business interests, to the PTC board. While this is a sensible approach (and such persons are often invaluable in the decision making process) they are unlikely to have the knowledge and experience of the Cayman professional trust company, the presence and impartial input of whom provides a balance to the board and robustness to the structure that may otherwise be lacking. The inclusion of the professional trustee goes even further with family members able to ‘learn the ropes’ for effective management of the family wealth, which then in turn allows the settlor to gain some insight into how the assets would be managed by family members when they are gone.
Some words of warning are appropriate here for appointing family members as directors of the PTC. Their inclusion to the board may be based on good subjective reasons, such as their knowledge of family assets and the beneficiaries and for their own personal education. However they are often unaware of the obligation upon them to sufficiently be involved in the general decision making by the PTC (or at least be aware of the decisions made by other board members where they were not in attendance) in order to be able to discharge their duties appropriately when called upon. At all costs they need to take steps against being found responsible for a breach of trust resulting in a loss of the trust fund. This is an important point and Cayman lawyers will talk of such things as ‘Piercing the Corporate Veil’, ‘Dog-Leg Claims’, ‘Derivative Claims’ and ‘Accessory Liability’. The settlor should be sure to take local advice on this and ensure that the relevant family members are aware of their responsibilities. It may be prudent for them to take out director and officer liability insurance but that will of course be limited.
Checks and balances; good governance is key
An ideal way to structure the PTC is to place an importance to its composition and appointments in a manner similar to any other well organised corporate structure with the powers prescribed to certain persons the result of careful deliberation. By doing so, the PTC should be ready to stand up to any future family disharmony or other significantly testing times.
We have already touched upon how the PTC shares are to be held, the appointment of trustee and enforcer(s) for the overlying trust and the appointment of directors to the PTC. The underlying trust for which the PTC will act as trustee is the next key area to focus upon. Whether a discretionary or STAR trust is used here will depend on the settlor and their advisor however, at a basic level the key decision will be whether or not enforcement rights over the trust are to be held by beneficiaries or enforcer(s) respectively. This is a matter of preference, however the idea of planning against unknown (and destructive) future classes of beneficiaries lends itself to the STAR trust. Most importantly, and in the spirit of multi-generational wealth planning, the STAR trust exists in perpetuity.
Whether or not a STAR trust or discretionary trust is used, there is an opportunity to appoint protector and/or investment committees to provide expertise for the underlying assets. Perhaps in appointing family members at this level of the structure they can add their value and expertise without being appointed to the PTC board?
Stress test and scrutinise the PTC – now and later.
Good initial planning and ongoing governance is the backbone of any good corporate structure and the same applies to the PTC. When the PTC is in its final draft form it is a worthwhile exercise to step back and review how the structure would work in a variety of different scenarios. The following examples are by no means exhaustive:-
What happens when the settlor dies?
What happens when a key business decision is required where commercial assets are held?
Is there an undesired balance of power in favour of the patriarch, a family member, the family office or the professional trustee when the structure is viewed in its entirety?
Are there appropriate terms for successive appointments to the structure? Who will decide upon these appointments and who is envisaged to take on such roles in the future?
Is there a leak in the structure and a means by which family members can bypass the PTC structure and seize upon part of the family wealth?
On an ongoing basis, reviews of the structure are highly effective in creating efficiencies which facilitate the good operation of the PTC and even reduce costs. PTC directors should of course be convening on at least a quarterly basis and perhaps an annual meeting in Cayman for those concerned with the PTC would not be too much of a hardship.
The composition and operation of PTC structures need not be overly complicated and time consuming. In drawing upon the experience and knowledge of leading Cayman law firms and trust companies, international high net worth individuals and families are well guided through the process and in an excellent position to accomplish their dynastic wealth planning desires.
The views expressed are the opinions of the writer and may differ from the views of Royal Bank of Canada.