WEALTH MANAGEMENT

The Middle Easts increasing use of offshore trusts

More Middle East-based wealthy individuals are turning to offshore trusts. Gavin Ferguson, Managing Partner of Appleby in Guernsey, explains the appeal of offshore trusts as well as the options they offer

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n recent years, there has been increasing interest from Middle Eastern clients in offshore trusts and in the benefits they can offer the wealthy individual. Clearly there is more at play here than simply the explosion of wealth within the region over the past few decades: what advantages do they offer the discerning individual who may already have expertly managed their wealth in order to reach their present status? How can moving responsibility offshore simplify arrangements rather than create another layer of bureaucracy? And how can you ensure that you retain sufficient involvement in the structure? In short, when appropriately structured by trusted professionals, offshore trusts can provide great flexibility, stability and reassurance to clients with a range of different needs.

What is a trust? A trust is a useful and practical concept that has been around for centuries. Both the Romans and early Islamic societies developed similar structures. For example, donations to charitable causes via a waqf use a very similar concept: they involve delegating responsibility for certain specified property to a trusted individual who must then, as a matter of law, look after it for the benefit of other named individuals or purposes. Whilst the trusted individual has the legal title or official ownership of the assets (for example their name will appear on any share certificate) they have no legal right to benefit from it. A typical trust structure may look something like the following:

Trusts are normally established in writing in a formal trust instrument which sets out the rights of the beneficiaries and particular duties of the trustees. Why offshore? Whilst the trust concept has been used in many jurisdictions, it is England and its various affiliated countries (in particular the Crown Dependencies of Guernsey, Jersey and the Isle of Man and British Overseas Territories such as the Cayman Islands, British Virgin Islands and Bermuda) which were at the forefront of developing the concept, in particular for use by private individuals. In the latter half of the twentieth century, many of these affiliated countries flourished as trust destinations in part due to tax and exchange control considerations.
Cont. overleaf...

Trusted person holds assets to manage them for the benefit of other persons: the Trustee

Optional person whose role is to watch over the Trustee and protect the Trust Fund: the Protector

Responsibility

Wealthy individual transfers assets into the Trust: the Settlor

The Trust Fund: all the assets put into trust by the settlor (or other persons)

Named individuals or purposes who benefit from the assets: the Beneficiaries

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...cont. from page 21

Whilst these motivations have now considerably declined (and in particular in relation to Middle Eastern clients where, in our experience, tax is rarely a key driver), the wealth management expertise built up to service those clients has remained. Alongside this, many of the offshore jurisdictions developed sophisticated and practical trust laws which are now at the forefront of the area and are up to date with dealing with the interests and considerations of modern clients. The offshore countries which we operate in, also benefit from reliable and stable legal and regulatory systems which prevent corruption or mismanagement of money and can provide efficient and impartial courts, should a dispute arise. How Middle Eastern clients use trusts In our experience, one of the principal attractions of trusts for Middle Eastern clients is the great opportunities that

Trusts are normally established in writing in a formal trust instrument which sets out the rights of the beneficiaries and particular duties of the trustees

they offer in respect of succession planning. Worldwide, remarkably few family businesses survived to the second let alone third generation and in the Middle East this potential problem is especially acute some commentators report that as many as 80 per cent of the businesses within the region are family-run and are expected to be handed down to the next generation within the next five to 10 years. Planning how to pass these businesses down

successfully to the next generation, whilst making adequate provision for family members who will not be involved with the business, can be difficult, especially when the complex inheritance laws and restricted structuring opportunities of many MENA countries are also taken into account. Trusts are ideal vehicles for dealing with these problems as they remove the assets from the settlors estate and legal ownership is passed to the trustees. Whilst the right to benefit from the property remains with the persons who the settlor has specified in the trust instrument (the beneficiaries which can include the settlor himself), the assets are not legally part of the settlors estate on death. This means that on death, probate is simplified, there is minimal disruption to the running of the business (as legal ownership has already transferred and processes for managing the property have been set up in advance) and, depending on the location of the assets, forced heirship rules may be avoided (see overleaf for how this can be Shariah-compliant). Offshore jurisdictions are particularly helpful in this respect because the sophisticated laws of many jurisdictions allow great flexibility in the level of control and involvement that the family or settlor may maintain over the structure. In our experience, this typically persuades reluctant settlors that the structure is suitable for their needs. Ways in which the settlor can retain control include: They, or other chosen persons, can be appointed as an Investment Advisor so that the trustees must follow their instructions in respect of investments. The trust can hold assets via an underlying company of which the settlor, or chosen advisor, can be directors. The trustees then merely act as shareholders of that company. The trust instrument can be drafted to require the trustees to obtain the consent of a specified person (the

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protector) for certain actions for example appointing money to beneficiaries, selling assets, voting as shareholder. A more complicated structure, and one in which we are seeing increasing interest, is establishing a trust in the normal manner but arranging for the trustee to be a private company (known as a PTC) which is run by the settlors trusted advisors and family members who make the decisions in respect of the underlying trust. This can ensure that the trustee (the PTC) is always aware of the situation of the beneficiaries and is responsive to their needs. Where ensuring the efficient running and handover of a business is a priority, purpose trusts may also be attractive. These are often used in conjunction with PTCs and are, by and large, unique to offshore jurisdictions. Their advantage is that they can be set up solely for a specific purpose such as maintaining a company and do not need to identify beneficiaries. Some jurisdictions allow trusts for both purposes and beneficiaries. Such hybrid or dual trusts have a number of uses including, in the family business context, allowing for the company to run as normal during the settlors lifetime with income reinvested into the company while successors are slowly introduced to the management, with the aim that they eventually become beneficiaries. It is always important however to take professional advice when setting up

a trust structure, as the safeness of the assets may be compromised if it is not clear who has responsibility for various aspects, or if so many powers are retained that the validity of the structure can be challenged. In addition, where an individual is uncomfortable with the trust concept, several reputable offshore jurisdictions (including Guernsey) have recently introduced laws enabling them to offer foundations as an alternative. These laws are similarily very flexible in respect of the level of involvement that can be retained and the benefits and protection

Whilst the right to benefit from the

that they offer, are much the same as trusts. The chief difference however is that instead of legal ownership of assets being held by trustees, the foundation is an independent legal entity in itself (much like a company) and holds assets in its own name. Here in Guernsey, we have recently received several instructions from clients wishing to use foundations instead of trusts purely because the client is more comfortable passing assets to a registered independent entity instead of the trusted professionals. The wealth management motivation and goals that are reached however are exactly the same. Foundations can also be used in conjunction with trusts in more complicated structures. For example, they can act as an alternative to the private trust company, explained above. Offshore trusts: Shariah compliance From a Shariah perspective there are several ways in which the trust, or foundation, can be created so that it is as compliant as the settlor desires. For example: The trust instrument (or foundation constitution) can specify that the assets are distributed in accordance with the proportions set out in the Quran. Certain investments can be expressly prohibited or the trustees can be obliged to follow the investment decisions of a committee which for example, can include an Islamic scholar.

property remains with the persons who the settlor has specified in the trust instrument (the beneficiaries which can include the settlor himself), the assets are not legally part of the settlors estate on death

About the author: Gavin Ferguson is the Managing Partner of Applebys Guernsey office and practises in the Private Client & Trusts department. Gavin provides contentious and non-contentious fiduciary services to high net worth individuals, corporate clients and charities. He advises on all aspects of trust and foundation law, including in respect of their creation, reorganisation and administration. Appleby is one of the worlds largest providers of offshore legal, fiduciary and administration services.

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