Governance – you get what you (don’t) pay for.

In the world of international private wealth structuring, high net worth individuals are frequently setting up legal entities and other arrangements such as trusts and foundations. As families’ planning needs become more developed, additional governance mechanisms may also be accommodated – such as private trust companies, family charters and so on.

Human beings are needed to operate such structures -whether to act as directors of companies (including trust companies and corporate directors/protectors), to fill other formal offices / committees or to hold certain powers. 

In trust arrangements, depending on the particular structure, there can be some or all of the following requiring to be filled by natural persons:

·       Individual trustees;

·       Directors of private trust companies or underlying asset holding vehicles;

·       Protectors or members of protector committees;

·       Appointors[1] or members of appointor committees;

·       Enforcers[2] or members of enforcer committees;

·       Investment managers or members of investment committees.

In some instances, there will also be detailed “successor” provisions set out in the trust deed. There is also, in many cases, the frequent reservation of powers to the settlor – perhaps in conjunction with some or all of the other roles referred to above. 

With foundation structures, depending on the jurisdiction and /or the structure, there can be the need for council members and guardians as well as, in some cases, protectors. The founder(s) may also continue to be involved.

Where there are multiple companies – often connected or transacting with one another- and other inter-related committees, utilizing different persons can be of benefit. Having the same person wearing multiple hats does not spread risk or facilitate continuity. Where the client reserves too much control to themselves, the efficacy of any planning can be at risk.[3] Likewise if those too close to the client have too much influence this can also be an issue.

Who can and, more precisely, who should, fill these roles?

As shall be seen, there should be some thought given to this -and, with due respect, in many cases often a lot more thought given than there would appear to have been.

The easiest and/or most obvious and /or cheapest option should not, in many cases, be followed. Certainly, the process should be far more than inserting a name in a schedule to a trust deed.

Advisers – to the extent they are involved- should be more aware of the issues and be more proactive.

“Can I (the client) be the sole director[4]?” or “can my wife be the Protector?” should be considered as “should” rather than “can”.

What sort of factors should be considered?

Frequently, the “client” wants to retain as much control as possible, place as little trust in outsiders as possible and keep fees to a minimum.

In many cases, the first choice therefore becomes the client himself and (if that does not suit) the second becomes those close to the client - particularly those the client can control (or will do what the client instructs). 

However, in many cases, professionals should be hired to assist with the governance. This should be seen as a prudent, risk management expense rather than an unnecessary one. As a minimum where there are committees or boards, professional experts should be considered to be part of those committees / boards. If professionals are not suitable, family members should be given advice[5] and coaching to prepare them for the roles and proper assistance with documentation.

As a minimum, the following should be considered:

-       What is the nature of the role?

-       Who are the potential candidates & what is their level of experience?

-       Where are they resident[6]?

-       What is their relationship to the client? What other issues may be relevant to them – particularly in the future?

The nature of the role

One of the first questions is the nature of the powers?

The nature of other powers will depend on a variety of factors –such as the holder of the power, the intention of the donee of the power, the express or implied terms of the power[7], relevant statutes and so forth.

Are they fiduciary powers? Personal powers? Or somewhere in between? This is a topic in itself[8] but by way of illustration:

A protector’s powers may be held:

- in a personal capacity (can be exercised for powerholder’s own benefit, without restriction); or

- in a limited capacity (no need to consider whether or not to exercise but, if exercised must do so only for the purposes for which the power was conferred, for the benefit of one or more of the beneficiaries); or

-in a fiduciary capacity (need to consider from time to time whether or not to exercise powers and if exercised must do so in the interests of the beneficiaries).

Aside from duties of honesty, loyalty, and good faith, there needs to be management of conflicts[9].

Clients will usually want to be able to act as they please – usually in their own interests – so (where there is an option) fiduciary powers may not be intended and may not suit! 

Would a client wish others to also have unfettered personal powers?

Will other family members in the future accept that another family member be able to do as they please? Could this lead to disputes – particularly in multi-branch families?

Who are the potential candidates and their level of experience?

Aside from having capacity, there are usually no pre-requisites to be the director of a company or holding another office. But it would seem ill-advised to not be prepared for the role. Structures that are not well-run are at more risk of being challenged.

Is it prudent, for example, to have directors of a private trust company none of whom have any knowledge of trusts[10]? Is it sensible to have a protector unfamiliar with trusts?

Beneficial ownership and KYC requirements also catch “shadow directors” so clients cannot remain in the shadows via the use of so-called “nominee” directors! Likewise, a professional trustee should have issues with any notion of a “nominee” protector acting on the direction of another.

Where are the candidates resident?

Many jurisdictions have “mind and management” and /or “CFC[11]” concepts so care needs to be taken about where decisions are made. This is relevant for taxation and also reporting. It may also be relevant for non-resident trust planning[12].

Certain jurisdictions may require one or more directors to be resident in a particular territory[13].With economic substance having been implemented in many jurisdictions, there may also be requirements for certain management and direction to take place in such jurisdiction. 

 What is the relationship to the client?

When asked about the motives for structuring many clients speak of “tax planning”, “succession planning” and “asset protection[14]”. Poor governance can put this at risk.

If we have persons in the structure who may have other relationships to the “client” – spouse, child, employee – can it be said that their decision-making will remain independent or will they be influenced?

What if Committee A has certain powers but members of Committee A are appointed by Committee B? Should there be common members?

Conversely, because of their position, could a spouse / child be privy to additional information to enable them to make a challenge to a structure (“the attack from within”) or cause disruption because of their office?

If we look at the model discussed in Hartley Goldstone, James E Hughes Jr and Keith Whitaker’s book[15], they see the trust protector as the “judicial” branch. In the separation of powers model, the judiciary should be separate from the executive and legislature. Consideration should be given to having truly independent decision makers in a structure to ensure matters proceed smoothly.

[1] Typically to deal with changes of Trustee but also may extend to other functions in the structure.

[2] Where there are non-charitable purposes

[3] For example the Pugachev decision.

[4] See some issues at https://www.dhirubhai.net/pulse/companies-without-capacity-part-i-richard-grasby-tep

[5] Advisers should note potential conflicts of interest!

[6] And also note any potential US nexus.

[7] And also any exoneration, indemnification and remuneration provisions.

[8] See for example: “Fiduciary Duties” – Martin Day: Trusts & Trustees Vol 15, No 6, August 2009 pp447-457; “Protectors as fiduciaries: theory and practice” – Matthew Conaglen and Elizabeth Weaver: Trusts & Trustees, Vol 18, no 1, January 2012 pp 17-35; “Protectors: law and practice” – Antony Duckworth: Trusts & Trustees, Vol 19, No 1, February 2013, pp98-112

[9] Disclosure and informed consent may be possible in certain circumstances but not, for example, where there are minor or unborn beneficiaries.

[10] This is permitted in some jurisdictions but not all. See https://www.step.org/step-journal/step-journal-augsept-2019/mind-pitfalls-ptcs

[11] Controlled Foreign Corporation.

[12] E.g. falling outside the US control test by virtue of a non-resident protector.

[13] E.g. Singapore.

[14] For these purposes we shall assume that this means stability, reduction of challenge etc.

[15] Family Trusts: A Guide for Beneficiaries, Trustees, Trust Protectors and Trust Creators.