Recently we were approached by a client looking to form a Private Trust Company.
During the course of the discussion it became apparent that the client either hadn’t considered or wants aware of the weaknesses of a PTC and the possible alternatives.
What is a Private Trust Company (“PTC”)?
A Private Trust Company (PTC) is a company specifically set up to act as a Trustee for one or more trusts. PTCs are often used by wealthy families or businesses to maintain control and confidentiality over their assets. The PTC can be owned and controlled by the family or business, allowing them to have greater input and control over the management of their assets.
Weaknesses of a PTC
The weakness of using a Private Trust Company to act as Trustee of a Trust (ie where you are in control of the PTC) is that any of your Creditors could file a law suit claiming that the Trust is a Sham Trust. (To learn more about what a Sham Trust is check this link: https://www.lexisnexis.co.uk/legal/glossary/sham-trust )
If the Court agrees/finds that the Trust is a Sham Trust, assets held by the Trust would be returned to you, which then leave those assets liable to seizure by any creditor who may have obtained a judgment against you.
The other weakness of using a Private Trust Company (if you live in a country that levies income or company tax) is the Management & Control issue.
In short, most jurisdictions have laws which provide that if a Trust is seen to be managed/controlled from onshore it can be taxed onshore. If you are using a PTC to act as Trustee of an Offshore Trust – and if you are in control of the PTC – it could be arguable that the Trust is being controlled from onshore (ie your country of tax residence) and thus liable for taxes onshore.
To summarize if you want to minimize the chances of (a) Creditors being able to attack assets held by the Trust or (b) if you wants to minimize the chances of the Trust being called upon to pay taxes where you live you would be better off to set up a stand alone Asset Protection Trust with an Independent Trustee. Popular jurisdictions for such Trusts include Belize, Cook Islands, Nevis etc.
Insurance against rogue Trustees
If you have any concerns about a Trustee turning rogue, you could be appointed as Protector of the Trust. Such an appointment would prohibit the Trustee from doing certain things (eg selling assets/buying assets/making payments) without the Protectors prior written consent (For more details of what a Protector is check this link: https://offshoreincorporate.com/faq/what-is-a-protector/ )
Alternatives to a PTC???
Another disadvantage of utilizing a PTC is that, when establishing a PTC you are in effect committing to set up 2 Entities ie a Private Trustee Company PLUS a Trust (which can be expensive).
If you’re committed to setting up a PTC the other option I’d implore you to explore is to consider setting up a Private Foundation rather than a PTC.
A Private Foundation is essentially a Corporatized Trust. Ie it looks and smells like a Trust but the main difference is that – unlike a Trust – (which is in effect an arrangement, like a contract, between the Settlor and the Trustee) a Foundation is a separate legal entity; It can sue and be sued in its own right.
A Foundation, like a Trust, is a 3 headed creature ie:
- Its set up by a Founder (ie the equivalent of a Settlor in the case of a Trust)
- Its managed day to day by a person (or entity) called a Councillor (ie the equivalent of a Trustee in the case of a Trust); &
- Like a Trust a Foundation typically has beneficiaries ie persons who are designed ultimately to benefit financially from the set-up of the Foundation or Trust as the case may be
The other key difference as between a Trust and a Foundation is that if a Trust owns an asset the legal owner of the asset is the Trustee but the beneficial owner of the asset is the beneficiary/s of the Foundation.
This can leave assets held/owned by the Trust liable to attack from creditors of the Settlor.
It can also open the door to the local taxman.
You see, the beneficiary of a Trust has a legally recognizable interest in Trust property. This interest entitles the beneficiary to receive a Distribution (ie payment) from the Trust (indeed, in certain instances, a beneficiary can use this interest to compel/force the Trustee to pay him/her a distribution). Hence many jurisdictions now have laws that say if you’re the beneficiary of an Offshore Trust -given you have a legally recognizable interest in Trust property – and are entitled to receive distributions – you are liable to declare and pay tax at home on any income or capital gains realised by the Trust.
In the case of a Foundation a Foundation is presumed at Common Law to be both the legal owner AND the beneficial owner of any asset that it holds. The beneficiary of a Foundation has no legally recognizable interest in property held by the Foundation. Moreover, the beneficiary of a Foundation is not entitled to receive a distribution from the Foundation unless or until such time as the Foundation Council actually resolves to pay a distribution. This feature:
(a) Arguably makes it harder (than in the case of a Trust) for creditors of the Settlor/Founder to attack assets held by the Foundation; and
(b) Makes it virtually impossible for an onshore jurisdiction to use CFC rules to tax income/gains earned by the Trust/Foundation (CFC rules say if you are the beneficial owner of an Offshore entity/asset you must declare and pay tax at home on any income/gains generated by that entity)
Foundations & Control
The other key advantage of a Foundation over a PTC/Trust is that with a Foundation you can be handed defacto control of the Foundation through the back door without affecting the legal integrity of the entity.
Howso?
A Foundation is managed day to day by a Councillor.
BUT, in almost all jurisdictions where Foundations can be formed, the Councillors key rights, powers and responsibilities can be reserved to the Foundation Founder.
AND in one jurisdiction powers reserved to the Founder (which is usually a Nominee for privacy purposes) can be assigned to a third party eg you.
What this means is OCI can, if you’d prefer, give you all the powers of a Founder without you having to be named as the Founder in the Charter (ie the document which is filed publicly to give birth to the Foundation).
This is because Seychelles law allows:
- That certain powers can be reserved to the Founder; and
- That the Founder’s rights can be assigned to a 3rd party post registration
- 1. What Powers Can Be Reserved to a Founder?
On the face of it the power to administrate a Foundation from day to day rests in the hands of the Councillor (or Board of Councillors if there is more than 1 Councillor).
Certain powers however can be reserved by the Foundation to the Founder including the power to:
(a) direct or approve the appointment or removal of a councillor of the Foundation;
(b) direct or approve: (i) the addition or removal of a Beneficiary; or (ii) the exclusion of a person or class of persons from being a Beneficiary;
(c) direct or approve the continuation of the Foundation as a foundation registered or otherwise established under the laws of a jurisdiction outside Seychelles;
(d) direct or approve the Council to effect the forfeiture by a Beneficiary of his benefit, right and interest under the Foundation if he (the Beneficiary) challenges in writing: (i) the establishment of the Foundation; or (ii) the transfer of any assets to or by the Foundation; or (iii) the Charter or any provision of the Charter; or (iv) the Regulations or any provision of the Regulations; or (v) any decision of a councillor, the Protector or the Founder;
(e) direct or approve the amendment of the Charter and/or the Regulations;
(f) direct or approve the dissolution of the Foundation;
(g) direct or approve investment activities of the Foundation, including the acquisition and disposal of investments by the Foundation;
(h) direct or approve the rights, entitlements and restrictions relating to each Beneficiary, including the power to direct or approve the making of any distribution of Foundation Assets (or any part thereof) to a Beneficiary by the Council acting by resolution of councillors.
- 2. Assigning the Founder’s rights
In the case of a Seychelles Foundation all rights conferred upon the Founder in the Foundation Charter (see list above) can/will be privately and confidentially assigned to you as the “underlying Founder”. See section 26(1) of the Act (See attached or click on the following link to view the Act: https://www.fsaseychelles.sc/wp-content/uploads/2018/12/Foundations-Act-2009.pdf).
This is achieved by the Nominee Founder signing, immediately following registration a Deed of Assignment – see sample attached.
Note you can at any time transfer those assigned rights (ie as received by your client from the Nominee Founder) to some other third party (eg if your client decides to sell a/the Company owned by the Foundation).
To facilitate such a change you would simply need to email us a request to make a change from the email address noted in your original Foundation order form and you’d need to email us KYC (as per the usual requirements) in respect of the new Assignee Founder.
To set up a Foundation costs $1,900 + $350 for 1st years Accounts admin (+ $400 for a Nominee Founder if required + $600 for a Nominee Councillor if required). From 2nd year to maintain it costs $1,600 for the annual renewal fee + Accounts + nominee Councillor (if required).
Summary
If you’re committed to setting up a PTC you’d be wise to consider instead setting up a Private Foundation rather than a PTC because:
(a) It will save you the additional cost (and admin hassle) of having to set up & maintain 2 entities,
(b) It will give you greater control over your asset holding/asset protection entity;
(c) It will deliver potentially superior asset protection features
(d) It should deliver you tax planning options
Would you like to know more? Then please Contact Us:
info@offshorecompaniesinternational.com
DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
