Trusts can be perceived as being too expensive and too reliant upon the integrity and expertise of the Trustee once the property has been transferred. These can be real concerns for both Settlors and their Beneficiaries, but we believe that, given the right Trustee and jurisdiction, there are sufficient remedies available to ensure that a Trust performs to the best advantage.
It is often assumed that the costs of running a trust are prohibitive. Many of the major banks and other financial institutions charge hefty fees for setting up a trust and also charge a percentage of the trust assets in annual administration fees. But the fees charged by smaller, independent trust companies are often more reasonable and make trusts affordable to relatively modest estates.
Independent trust companies offer a more personalised service and also benefit from the fact that they are truly independent. They can therefore select the best investments for the trust without being under pressure to place trust money with their own in-house investment advisors.
It is incorrect to assume that trusts cannot be revoked. Trusts can be made revocable but this usually has tax, estate duty, asset protection and stamp duty
consequences. Revocability is a matter to be discussed when the terms of the trust are considered.
Loss of Control of Property
Many potential Settlors are reluctant to transfer property to Trustees because they fear loss of control over that property. For those who wish to continue to exercise effective control over the trust assets after the transfer, careful planning, together with an understanding of the fundamental legal requirements of a trust is required if the trust is to remain valid. If a Settlor retains too much control over the assets there is a risk that the trust will not be
effective and the Settlor will continue to be regarded by the law as the owner. If this happens all the advantages of having the assets held in trust may be lost. In particular, a court may force a Settlor to exercise any control he retains in a particular manner thereby negating any asset protection advantage that would otherwise have existed. Despite this there are devices that may be used to give comfort to a Settlor.
Memorandum of Wishes
When setting up a discretionary trust it is common for the Settlor to indicate to the Trustees how the Settlor would have dealt with those assets if he had retained ownership. The Trustees will then make a comprehensive note of those wishes in a written memorandum, which they would refer to before dealing with the trust property. The wishes of the Settlor will not be binding on the
Trustees but, in practice, most reputable Trustees would be reluctant to deal with the trust property in any way other than that suggested by the Settlor except, for example, where a change in circumstance or other matters suggests it is clearly disadvantageous to the Beneficiaries to act in that manner.
It is possible to appoint a Protector to exercise some degree of control over the trust property. In our view, it is unwise for a Protector to be given anything other than negative powers - that is, vetoing the decisions or actions of the Trustees rather than having power to force them to act in any particular way. In the latter case, a Protector could be found to be a quasi-Trustee and negative consequences might ensue, especially if the
protector was to be resident in a high tax country. It is usual for a trusted friend, family relative or professional adviser of the Settlor to be appointed as Protector but it is also becoming increasingly common to use the services of a professional trust company. For this reason Sovereign is able to serve as a professional Protector where we are not retained to act as Trustees.
Two-tier Company and Trust Structure
Greater flexibility can sometimes be achieved by having the underlying assets owned by a company whose shares are then owned by a suitable trust, rather than the underlying assets being owned directly by the trust. The Settlor, or an appointee of the Settlor, may act as the director of the company and may therefore exercise day-to-day control over the underlying assets with minimal interference
or need to refer to the Trustees. This two-tier structure can be used to good effect in certain circumstances but may have tax and other disadvantages where the director of the company is resident in a high tax country.
There is no reason why a trust cannot be structured so that there are joint Trustees, with the agreement of both being required to take any action. The second Trustee may be the Settlor himself or a company controlled by the Settlor. Again, there may be negative tax or other consequences resulting from such a structure if the
Settlor is resident other than in a low tax jurisdiction. Alternatively, a check and balance may be obtained by having two different professional trust corporations acting as joint Trustees. This can be cumbersome and expensive but may be suitable for certain trusts.