non-charitable purpose trusts - bedell · non-charitable purpose trusts 1 u kerrie le tissier of...

non-charitable purpose trusts

1 uKerrie Le Tissier of Bedell explains why non-

charitable purpose trusts can be a useful tool forestate planning and wealth preservation

Kerrie Le Tissier,senior associate,

Bedell

uernsey statutory law hasprovided for non-charitablepurpose trusts (usuallyknown simply as ̀ purpose

trusts') since the Trusts (Guernsey)Law, 2007 (as amended) was broughtinto force in March 2008. This typeof trust operates much in the same wayas the more traditional types of truststructures and the form and contents ofthe trust documents are usually similar.The trustee still holds the trust propertyon trust subject to the powers and dutiesset out in the trust instrument and thelegislation and the same requirements fora valid trust apply.However, there are two key differences

which mean that to those unfamiliarwith them purpose trusts can appearto be a rather different beast. Firstly,the trust will be established for one ormore non-charitable purposes (insteadof or as well as beneficiaries or charitablepurposes in a hybrid trust), with thetrustee's overriding fiduciary dutiesincluding acting in the advancement

of those purposes (instead of or as well

as in the interests of the beneficiariesor charitable purposes). Secondly, an

enforcer (who cannot be the trustee butcould be the setdor) must be appointed

to enforce the trust in relation to itsnon-charitable purposes as there is nobeneficiary that could enforce those

purposes. The enforcer could haveadditional powers such as the powerto appoint and remove trustees or itsconsent could be required before thetrustee exercises certain powers (such asadding new purposes).This article looks at the key issues to

consider when establishing a purposetrust (and some of the common pitfalls)

and explores some of the uses of purpose

trusts in private wealth management.

Key issuesIt is essential that the purposes aredrafted clearly and with sufficientcertainty to ensure that they are valid(from a legal perspective) and also thatthey work (from an administrativeperspective). They should reflect thesetdor's intentions and requirements andthey should leave the trustee in no doubtas to what it can and cannot do with thetrust property.For instance, a common purpose is

simply "to hold shares in X Limited".Whilst that is a lawful purpose (thelegislation states that a purpose maybethe holding or ownership of property),

if that is the sole purpose of the trust,how will the trustee know how to voteon matters put to it as a shareholder andwhat should it do with any dividendsor other distributions received on theshares? A reference to exercising rightsas a shareholder at the trustee's discretionshould be included in the purposes at the

very least. Guidance in respect of matters

such as voting and distributions shouldideally also be given to the trustee. Thiscould be done by including additionalpurposes (for example, for the trusteeto vote in a certain way on particularmatters, such as the appointment andremoval of directors or a change inthe constitution of the company, orthat distributions should be paid ortransferred to a particular person orused to support another business).Alternatively (or additionally) guidancecould begiven in anon-binding letterof wishes which has the benefit that itcould be changed more easily and soretain some flexibility in the structure

if circumstances were to change. Theappropriate solution will depend on howprescriptive the settlor wants to be.Each purpose should also be drafted

as specifically as possible so, in theabove case, "X Limited" should be fullyidentified in terms of its full name, where

it is incorporated and its registrationnumber (and possibly also its registeredoffice) to ensure there is no room foruncertainty.

The above considerations apply to anypurpose, whether it be holding othertypes of assets or carrying on certainactivities. When setting up a purposetrust, it is well worth stress- testing thepurposes to determine whether theydeal with all possible outcomes andeventualities, and whether the trusteeshave the guidance they need to fulfiltheir duties in the manner intended bythe settlor. It is usually appropriate totake legal advice to ensure the purposes

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are valid -any ambiguity as to what isintended or whether a particular actionis within the purpose could render apurpose (and possibly the whole trust)uncertain or even invalid.

Uses of purpose trustsAs with other types of trusts, purposetrusts are very useful and versatileand can be used in a range structuresand transactions, both for holdingand managing private wealth and incorporate and commercial transactions asan orphan vehicle.The simplest and most common use

of the purpose trust is to hold sharesin one or more companies. In a privatewealth structure, those companies wouldusually own the underlying assets, bethey properties, boats, planes, portfoliosof shares or other investments. Thestructure can be as simple or as complexas necessary, ranging from the purposebeing to hold shares in X Limited (andexercising rights in respect of thoseshares), where X Limited holds one asset,to the purposes being to hold shares ina number of identified companies eachofwhich holds a particular asset or classof assets. The purposes could be quitedetailed in terms of how those assetsshould be administered, for examplethey could include ensuring boats areregistered and/or based in a particularjurisdiction and made available for useby certain persons at certain times.A purpose trust as an asset holdingstructure is particularly useful if theassets are not intended to generate aregular income which is to be distributedamongst family members but are insteadintended to be held and preserved andyet put to specific uses.Another common use is to hold shares

in a private trust company which willact as trustee of one or more familytrusts. This is particularly useful forhigh net worth individuals and family

offices that may require an independentstructure with added layers of controland confidentiality. The use of a purposetrust in this way has the benefit ofproviding for succession and continuityof the PTC as the shares fall outside ofthe estate of any one or more individuals.Upon the death of the older generationthat may have otherwise held them, theshares in the PTC can continue to beheld within the purpose trust withoutbeing distributed amongst familymembers. These benefits apply equallywhere shares in a family business are heldin a purpose trust.Purpose trusts are also very useful in

philanthropic endeavours where assetsare to be used to promote or furthersome cause which is not regarded as"charitable" bylaw This allows for trustsfor purposes which lack an element

of public benefit (and so would notbe regarded as charitable), but whichnonetheless are for worthy philanthropicpurposes, to be created and run in asimilar way to charitable trusts (albeitthat an enforcer must be appointed).

ConclusionPurpose trusts are a useful andpopular solution where assets need tobeheld and used for particular purposeswithout giving any person or classof persons an interest in those assets.They are flexible structures as they canbe used for a whole range of purposeswhich could be combined with beneficialtrusts and/or charitable trusts, providedalways that sufficient care is taken overthe drafting of the purposes to ensurethey are clear, valid and administrativelyworkable. r

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