On the Topic of Automatic Trust Disclosure by Fiduciaries.

Automatic Disclosure Vs Liability

Whilst most fiduciaries are willing to provide information such as trust instruments and bank account information to the donor and beneficiaries, there is a general reluctance to disclose any other information or documents to anyone else unless required by law.

The general practice is to request written approval from the donor prior to dissemination of information regardless of who the recipient might be. In yesterday’s world, the words “bank secrecy” were used as an attribute when describing reasons for establishing an offshore trust. After time, the word “confidentiality” was perceived to be more politically correct. In today’s world, anything to do with secrecy and confidentiality is discouraged.

The industry has moved toward transparency with emphasis on clients who are reporting and are compliant in their home jurisdictions. However, as tax laws change, many clients find themselves on the wrong side of the tax code almost overnight. When this happens, fiduciaries run the precarious gauntlet of disclosing clients to regulators or risk a legal battle by which the client sues for breach of confidentiality. This is why an important feature of any trust is a disclosure clause that allows the trustee to forward information to regulators with out fear of reprisal.

When disclosure without consent is imminent, trustees often seek a Beddoe Order. The order protects the trustees against claims by beneficiaries who suggest that an action should not have been brought and enables the trustees to recover the costs from the trust property.

Moral of the story, check your trust deed and review the clause on the duty to disclose…

Thinking out of the box with the Executive Entity Act

Due to the recently implemented Bahamian Executive Entity Act, financial service providers have the ability to act in the capacity of Trustee, Protector, Investment Advisor and or Appointor for existing and new trusts under consideration. Section 2. of the Bahamas Executive Entity Act provides for the functions following:

Any powers and duties of an executive, administrative, supervisory, fiduciary and office holding nature including but not limited to the powers and duties of:-

(I) an enforcer, protector, trustee, investment advisor and holder of any other office of any trust

(II) the holder of any office of any legal person

The ownership, management, and holding of:-

(I) executive entity assets; and

(II) trust assets

The use of an Executive Entity is most apparent when clients have decided to transfer trusteeship from one service provider to another and an interim trustee is required to facilitate the transfer.

If a trustee is removed or retired by Deed of Removal/Retirement and Appointment, the Executive Entity is able to be appointed as interim trustee. This allows the Settlor/Donor the ability to discern and appoint a successor trustee at their convenience.

If the Executive Entity is also a Corporate Service Provider, arguably the Executive Entity is possible of providing the same level of service offered by trust companies and where feasible, maintain the same investments and bank accounts that were previously managed by the successor trustee.

The Executive Entity Act is a fantastic fiduciary tool that provides flexibility when formulating custom solutions.

On The “FidPro Offshore Challenge”

On the “scaly” side of things and now that the summer months are winding down, we’d like to tell you about the annual open format fishing tournament called the “FidPro Offshore Challenge“.

This tournament is very unique as there are no set days on which you fish. Instead, you have a window that lasts 3 months to catch 4 of your biggest fish. At the end of the tournament, the 3 largest fish caught per team will determine the winner.

Due to the open format, the rules for The FidPro Offshore Challenge have to be strictly adhered to. The only prerequisite to entering the tournament is that one person on each team must be an active member of the Financial Services Industry. This list includes but is not limited to the following:

Lawyers
Mutual Fund Administrators
Accountants
Realtors & Property Managers
Protectors & Investment Advisors
Corporate Service Providers
Banks & Trust Companies
Family Office Advisors
Tax & Financial Advisors
Etc….

As the tournament progresses, the results will be tracked on a dedicated web page. At the end of the tournament, there will be an award cocktail party which we hope will foster greater synergies among practitioners. All excess funds will be donated to charity.

Please review the rules and post your comments. Broadcast this post to your fishing buddies and give us some feed back.

“Tight Lines” everyone and let the games begin!

On the The exchange of information between UK sovereign tax havens and HMRC

The Bahamas Benefits by being Independent

Could the Bahamas as an independent nation be perfectly poised to benefit from a very British form of FATCA? (Foreign Account Tax Compliance Act)

British “Crown Dependencies and Overseas Territories” (CDOTs) will have to exchange information with Her Majesty’s Revenue & Customs (HMRC) from 2016 onward. Some of the territories to be effected are:

The Turks & Caicos Islands
The British Virgin Islands
The Channel Islands
Monserrat
Bermuda
Anguilla
Gibraltar

This is a major step forward in eroding offshore confidentiality. In particular, if the UK makes the information available to all double tax agreement partners, the impact of such information could be far more reaching than FATCA.

The European Parliament has voted to adopt the amended Fourth Money Laundering Directive, requiring EU member states to set up publicly accessible registries of the beneficial owners of companies and trusts. The decision created a “back door” by which CDOTs have been asked to do the same. After all, how is the UK expected to comply and not request that it’s CDOTs adhere to a similar process.

Have you had a discussion with your wealth planner concerning CDOT compliance?

“Pass it Forward”

What shall I consider when settling a trust?

Are you thinking about an APT?

This post concerns a few basic features that should be considered when settling a trust. Its important to note that nothing in this post or blog should be construed as advice. This post is simply a forum by which practitioners and interested persons can comment on the best succession planning options available.

The basic features that should be considered when settling a trust are:

What form of Trust shall I use?

Answer: Asset Protection Trust: The key features of this robust and dynamic form of trust include: its flexibility, its discretionary nature and its capacity to endure perpetually

Do I need a Holding Company?

Answer:Yes, International Business Company (I.B.C): An I.B.C. is frequently used together with an Asset Protection Trust to properly custodize the trust fund. This arrangement provides significant tax benefits against U.S. estate taxes as well as succession planning when owned by a trust.

How do I get the trustee to exercise it’s discretion?

Answer: Letters of Wishes (L.O.W.): LOWs are most often more definitive than the trust instrument. Whilst the trust is considered a core document that contains the terms and conditions of the fiduciary relationship, the LOW is non binding and will usually contain the specifics of the settlor’s intent.

How do I vary the trust if required?

Answer: The Trust Protector: The protector provides a means by which the trustee can add further value to the administration of the trust.

Who will manage the trust investments?

Answer: A settlor appointed Investment Advisor: The IA of an Asset Protection Trust (APT), is tasked with the very important function of growing and perpetuating the trust fund on behalf of the beneficiaries.

The complexity of a trust instrument depends entirely on the dynamics of the family and purpose of the trust. With this in mind, its important to build provisions in to the trust that provide for maximum fiduciary oversight with minimum fiduciary involvement. E.g. The appointment of an investment advisor and protector. See posts below.

Are the features referred to above included in your trust? Are you thinking about settling an asset protection trust?

On the Role of the Trust Investment Advisor

The “Settlor” Appointed Investment Advisor

Direct investments by appointing an IA

The Trust Investment Advisor or IA is by far the most challenging of all roles to have in a fiduciary relationship. The IA of an Asset Protection Trust (APT), is tasked with the very important function of growing and perpetuating the trust fund on behalf of the beneficiaries. Once the investment suitability has been determined, the IA has the meticulous task of formulating an Investment Objective Setting and Bench Mark for the trust.

As referred to in the APT post, the investment component of an APT is usually part of the discretionary mandate of the trustee. However, due to the dynamic benefits of an APT, the investment component can be removed from the trustee and placed in the hands of a trust IA. This person has the ability to direct the trustee in regard to investments. With that being said, the other discretionary features of the APT still remain in tact. I.e. Distributions of income and capital as well as the trust period.

In most cases, the IA is located in a jurisdiction which is NOT the same as the settlor. This feature protects the integrity of the trust by eliminating any uncertainty as to the mind and management of the trust.

Last but not least, the IA should be qualified. Once an IA is appointed, the trustee will typically rely on language that fully indemnifies them against loss.

Is control of the investment piece crucial to your decision to go discretionary or directed? Have you considered the cost of appointing a professional IA as an alternative to a discretionary manager or fund?

“The Trust Protector”

“Captain Trust Protector” Illustration by M. Collins

The words “Trust Protector” conjures images of a person who swoops in to rescue a beneficiary in distress from an om onus trustee. However in reality, it’s the trustee that relies most frequently on the protector.

The protector is usually a close friend or associate of the settlor who has an intimate understanding of the family’s dynamics. More importantly, the protector provides a means by which the trustee can add further value to the administration of the trust. E.g. If a protector has not been appointed, the trustee is significantly deprived due to its inability to vary the trust so that it mirrors the current objectives of the beneficiaries.

In the absence of a protector, the trustee is usually compelled to seek direction from the courts. This process is not only time consuming but expensive and provides no guarantee that a decision will be made in favour of the beneficiaries.

The discretionary powers that are frequently subject to the protector’s consent are as follows:

Trusts of Income & Capital
Power of Appointment
Power to Transfer to Other Trusts
Power to Vary the Terms of the Trust
Addition to the Class of Beneficiaries
Exclusion from the Class of Beneficiaries
Power to Change Governing Law
Power to Vary the Trust Period
Removal and Appointment of the Trustee

For settlors domiciled in civil law jurisdictions, the notion of an irrevocable trust proves difficult to conceptualize. The ability to appoint a close family friend as protector is frequently the compelling feature that closes “the deal” on an Asset Protection Trust (APT).

With a protector appointed, the settlor receives the tax and succession benefits of a discretionary trust, as well as the flexibility of a directed trust. These attributes make the trust protector a fundamental component of the modern trust instrument.

Have you appointed a protector for your directed trust in the event of disability or death? Has your asset protection trust been difficult to administer because a protector has not been appointed?

On Letters of Wishes vs Trustees Notes or is it all a direction?

Precatory Words or Direction?

“ I should emphasize that I am in no way limiting your discretion or in anyway creating any binding trusts or obligation upon you but merely making you aware of how I would prefer the Trust Fund to be dealt with subject to the powers and discretion conferred upon you under the Trust “.

Can the precatory words above provide protection or is it actually a direction which could determine the mind and management of a trust? (“Garron” decision April 12 2012)

If a trustee is inclined to follow a Letters of Wishes (LOW), its imperative that the decision making process is documented to illustrate that discretion was exercised. If not, is it possible that the LOW can be construed as a direction?

LOWs are most often more definitive than the trust instrument. Whilst the trust is considered a core document that contains the terms and conditions of the fiduciary relationship, the LOW is non binding and will usually contain the specifics of the settlor’s intent. This means that in most cases, trustees rarely disclose the LOW unless requested by the settlor. (Londonderry’s Settlement).

Trust practitioners recommend the use of notes as a means to document the intent of the settlor. A well written memorandum marked “without prejudice” will not only capture the settlor’s intent but also ensure that his wishes are kept completely private and confidential.

Do you have a reason to question whether your trust is discretionary or directed? Perhaps your trust is discretionary but your LOW is not. Does your LOW provide sufficient information to assist the trustee without crossing the proverbial line of no return.

On the International Business Company of the second part

“The Bahamas’ International Business Company”

IBC 2

The Bahamas International Business Company or I.B.C., has kept pace with the demands of high net worth clients due to benefits such as tax efficiency, ease of administration and low costs. In comparison to the Cayman and British Virgin Isles. equivalents, the Bahamas I.B.C. is fully supported by an Agency Internet Module or AIM that allows the registered agent to manage the I.B.C. via the internet.

More importantly, there is tremendous pressure from the U.K. Home Office to direct British Overseas Territories and Crown Dependencies to transition to a Public Registry of Companies. As the Bahamas is an independent nation, this could be a game changer as there are numerous reasons why clients require confidentiality that are not tax or fiscal related.

Because a trust is not considered a legal entity in most common law jurisdictions, an I.B.C. is frequently used together with an Asset Protection Trust to properly custodize the trust fund. This arrangement provides significant tax benefits against U.S. estate taxes as well as succession planning.

When the time comes to consider a trust, its important to remember the benefits of using a Bahamian I.B.C. as the holding company for your trust assets.

On the Asset Protection Trust of the first part…

“The Asset Protection Trust”

The Irrevocable Protection Trust

Asset Protection Trusts have long been upheld as the gold standard for succession planning. To this day, this form of instrument remains the preferred choice among modern wealth planners.Consequently, copious amounts of jurisprudence exists in support of every conceivable client concern. The key features of this robust and dynamic form of trust include: its flexibility, its discretionary nature and its capacity to endure perpetually. The asset protection trust is always the best place to start when discerning succession planning needs.

More on this soon, in particular the use of an APT with an I.B.C.

The FidPro Blog

Author Archives: FidPro Agent