Most offshore jurisdictions require the appointment of a licenced trustee company to act as a trustee of an offshore trust. In some jurisdictions however, a client may form a separate international company for the special purpose of acting as a trustee of a limited number of related trusts, in lieu of a licenced trustee company. This entity is known as a private trustee company (PTC). It does not usually require a trustee company licence and is ideal for a group of trusts established for a family.
There are many situations where a client may prefer to use a PTC as trustee, instead of a licenced trustee company, and in particular instead of an institutional trustee company. Examples of this might be where;
- a client wants to retain a high degree of control over investment activity,
- a client intends to remain active in the management of trust assets and wants the legal relationship to follow the actual, rather than construct a sham,
- a client will be actively involved in trading stocks in international markets requiring real time responses, instead of making recommendations to a 3rd party trustee and waiting for its decision.
- a client does not want to share information about his assets beyond immediate family,
- a client wants to put a proper succession plan in place to ensure minimum disruption on his death.
- a client is sensitive to trustee fees often based on a %age of assets under management,
In some of the above situations a client may achieve an advantage if he uses a smaller independent licenced trustee company, instead of an institutional trustee. However, the client may not have previous dealings with any independent trustee company, and may (understandably) be reluctant to entrust his worldly assets to an unknown person in a distant offshore jurisdiction.
There are also situations where the client may have difficulty finding a trustee company (whether institutional or independent) willing to act as trustee of his trust. For example, where the trust assets might by their very nature attract liability, or where the client has pending litigation likely to result in the trustee being joined as a party to an action.
Having decided on using a PTC, the client will have a number of issues to address. The internal structure of the PTC will depend on the circumstances of the client. The PTC is normally controlled by the founder of the offshore trust. Its shares may be held by the founder, who may also be a director of the PTC. Some advisers are reluctant to recommend this structure in case the structure itself is seen as a sham. Other advisers will be concerned that this structure is an invitation to the founder to administer the PTC as an operating company, (as opposed to acting as a trustee), leading to the trust being treated as a sham. An adviser therefore recommend the shares not be held by the founder, but be held instead by a purpose trust set up specifically for this purpose.
They may also recommend a licenced trustee company provide ongoing management advice to the PTC or perhaps provide an independent director for the PTC.
There may also be external factors affecting the structure. For example, income tax and or estate tax planning may call for distance between the founder and control of the PTC. Similarly, if there is litigation pending against the founder, the founder should not hold any position of control.
Advantages of Cook Islands law
The Cook Islands is one of the jurisdictions where a PTC can be formed and operated without a trustee licence. A Cook Islands PTC can act as trustee for a maximum of 3 trusts. The PTC can be administered from outside the Cook Islands with no requirement to appoint a resident director. In addition, recent legislative amendments give greater certainty as well as flexibility of operation, to a Cook Islands PTC.
A. A prerequisite to registration of a trust as a Cook Islands international trust, is the appointment of a licenced Cook Islands trustee company as trustee. This provides a legal nexus between the trust and the Cook Islands, justifying the application of Cook Islands law to the trust. However, provision is also made for a Cook Islands international company to be appointed as trustee in lieu of a licenced trustee company. Initially this does not appear helpful as the Trustee Companies Act (2015) (Cook Islands) (“TCA”) prohibits any entity (including an international company) from “carrying on trustee company business” unless licenced under this Act”. In addition, an international company is also prohibited from “carrying on the business of acting as a trustee company” by the International Companies Act, (“ICA”).
Exactly what is meant by the terms “carrying on trustee company business” or “carrying on the business of acting as a trustee company”, causes considerable uncertainty in many offshore jurisdictions. Because of this uncertainty, many advisers will recommend PTC’s do not charge fees or even recover disbursements for their services as a trustee to avoid any argument it may be carrying on business. A PTC is therefore usually restricted to act as trustee of a group of related family trusts. Even then, fees cannot be charged by the PTC, which must enter into separate fee agreements with the professional advisers. This problem makes a PTC difficult for professional advisers to use for related family structures and impractical for multiple client structures. This issue is one of those addressed specifically in recent amendments to Cook Islands law.
S. 7 (2) (c) ICA now provides that despite the earlier prohibition, an international company is deemed to be not carrying on the business of acting as a trustee company in breach of S 7 (ICA), when it is acting as trustee of not more than 3 trusts. Likewise, the Trustee Companies Act (2015) now provides that an international company acting as trustee for no more than 3 international trusts is deemed not to be carrying on trustee company business. (S 5 (3) (b) (i)
TCA). This removes the restriction on the PTC being able to charge fees, and makes it practical to utilise a Cook Islands PTC to act as trustee for up to 3 unrelated trusts.
B. As mentioned above, there are different opinions about whether the founder of the trusts should also be able to control the PTC. The standard structure therefore often includes a special purpose trust to hold the shares. Cook Islands law has long provided for non charitable purpose trusts but there has been an outstanding issue as to whether the holding of an asset (and in particular shares in a company) is in itself a “purpose”. The existing purpose trust provisions have therefore been updated in the International Trusts Amendment Bill (2018) (ITAB) currently before Parliament. S 12 A of the Bill permits a trust to have a purpose that is non charitable. The term “purpose” is defined in S. 2 of the Bill as follows:
“purpose in relation to sections 12, 12A and 12B includes the acquisition, holding, ownership, management or disposal of any property and the exercise of functions whether or not a benefit is conferred on any person;”
The terms of a purpose trust must provide for the appointment of a person capable of enforcing the trust, and for the appointment of a successor to that person. In the absence of this appointment the trustee is authorised to apply to the Court to appoint a suitable person to so act.
C. An alternative to having the shares of a PTC held by a purpose trust, is to use the special default share provisions in S. 228 B (ICA). These were drafted specifically for asset protection structures, particularly where the assets of a company were under threat by a government agency. However S. 228 B is also useful for succession planning for a PTC.
S. 228 B (ICA) states the articles of an international company may provide that
“upon the happening of any specified event:
a) the membership interest of any member of an international company affected by that event shall automatically vest in (a) specified person ……..”
The term “specified event” is defined as including the expropriation of a membership interest by a foreign government. (S.228 B (3) (ICA).
A member is entitled at any time to change the specified person or persons by notice in writing to the company (S 228 B (6) (ICA).
The founder may therefore provide in the articles of a Cook Islands PTC for the automatic transfer of his shares to specified person/s in the event of his death or disability. He may also make changes to this appointment from time to time. This effects a transfer of shares to the specified person outside of any probate process.
PTC Management and Administration.
The issues relating to sham trusts will apply irrespective of who holds the shares of a PTC. Acting as a trustee is a specialised task and it is easy for the founder of a PTC to forget which hat he is wearing when carrying out trust transactions via a PTC. Cook Islands law already has special provisions
rebutting the doctrine of sham trusts where the founder continues to exercise control over the assets of a trust (S 13 C ITA). However, this law may not be given effect by foreign courts when assets are located outside of the Cook Islands. Cook Islands law therefore anticipates several different management structures designed to ensure the proper operation of a PTC.
One option available to professional advisers, is to own and control a PTC to care for a select group of clients. The PTC is not required to be licenced, is able to charge fees, and may act as a trustee for up to 3 trusts. This structure ensures the PTC is operated correctly, minimising any suggestion of a sham.
The prohibition against carrying on business as a trustee does not apply to a non Cook Islands person acting as a co trustee6. An alternative structure therefore is to appoint a non Cook Islands subsidiary owned by the professional adviser to act as a co trustee of a PTC. Note that the involvement of a professional trustee or adviser in a PTC structure may also change the classification of the PTC for CRS compliance issues.
Dynasty Trusts & PTCs
Cook Islands law has abolished the rule against perpetuities (S 6. ITA), so a Cook Islands trust can set its own perpetuity date and may be perpetual. The founder of a dynasty trust will need to make extra careful provision for succession of control over the assets upon his death. If an independent licenced trustee is used as trustee of the dynasty trust, succession can be handled by appointment of a successor protector. However, appointing a PTC as trustee of a dynasty trust provides more flexibility. The corporate structure allows the involvement of multiple persons at a director level and provides an efficient mechanism for the transfer of the shares in the PTC7 (and thereby control of the PTC) upon the death of the founder.
Asset Protection Structures & PTCs
Special care needs to be taken where the purpose of establishing a trust structure with a PTC includes protection of trust assets from litigation (including interlocutory actions) threatened or pending against the founder. In particular, it is critically important that if litigation is threatened, the founder does not have any residual control over the PTC, or the trust (as a Protector), or the trust assets (bank signatory). Management of the PTC at this time must therefore be demonstrably independent of the founder. This is a highly specialised area and most clients rely on the services of an experienced licenced trustee company at this point of time. This might mean the PTC relinquishes its position as trustee of the trust in favour of a licenced trustee company, or the shares in the PTC are transferred to the licenced trustee company. Again8, the ICA provides an efficient mechanism for the transfer of shares and thereby control over family assets, without requiring any overt act by the founder.
Compliance requirements and PTCs
Registration of an International trust and of a PTC must be carried out by a licenced trustee company9. The licenced trustee company also acts as registered office and provides a resident secretary for the PTC10, as well as registered office for the trust11. It is important to remember therefore that although the PTC is the trustee of the international trust, and not a licenced trustee company, there will be an ongoing relationship between the PTC, the international trust, and the licenced trustee company.
This relationship is important when you consider the comprehensive compliance obligations held by licenced trustee companies in relation to all clients. These obligations differ to some extent in relation to PTCs but it must be kept in mind that a licenced trustee company continues to have KYC and due diligence obligations in relation to both the PTC and the international trust. These include obligations relating to financial information12 which require careful analysis and are beyond the ambit of this article. Compliance and KYC obligations relating to PTC structures are not unique to the Cook Islands. They are somewhat less than those required a) by the trustee where the client appoints a licenced trustee company as trustee of his family trust, or b) by any bank or financial institution dealing with the trustee. Also, such of the information as is provided in the Cook Islands is protected by law, except to the extent that government authorities are required to share this with other states.
A PTC can form a useful and cost effective part of a client’s offshore structuring, as well as provide a high level of comfort for the client unwilling to surrender complete control of his affairs to an offshore trustee. A PTC established in the Cook Islands is able to operate with a high degree of certainty. Offshore advisers are able to assist their clients and participate in the administration and operation of the PTC. Licenced trustee companies in the Cook Islands are also able to provide guidance in the operation of a PTC. All of these factors ensure the integrity of the trust or trust it administered by a PTC.