The Use Of Private Trust Companies

INTRODUCTION

When most settlors establish a trust they use a professional

trust company as the trustee. This way they can ensure that their

trustees are professionals with experience gained being the trustee

of many other trusts. However, whilst this is an ideal way to

proceed for many settlors, some jurisdictions have made available

the flexibility of using private trust companies

("PTCs").

The purpose of this guide is to demonstrate the advantages and

disadvantages of PTCs and to give a brief overview of PTCs in

Jersey, Guernsey, Cayman, the British Virgin Islands and New

Zealand.

What is a Private Trust Company?

A PTC is a company whose sole purpose is to act as trustee in

relation to a specific trust or trusts. Such companies do not

provide trust services generally, and it will be a condition that

they must not solicit business from the public at large.

Practical Application

PTCs are valuable in a number of situations, including as

trustees of private family trusts, as trustees of commercial trusts

and to hold SPVs that are used in financial or other

structures.

The most common use of a PTC is to act as trustee of a purpose

trust or a discretionary trust which holds shares in a family

company. Settlors of such trusts often wish to keep control of the

company themselves, and simply desire that the trustees retain such

shares. A professional trustee will often be wary of doing so,

however, as failure to diversify assets will almost always be a

breach of its duty as a trustee as the trustee cannot be said to be

acting in the interests of the beneficiaries.

In the past this has been solved by placing express provisions

in the trust deed which provides that the trustees shall hold the

particular investment and removes all discretion on their part to

deal with the investment. Such a provision will only be effective

if absolutely unambiguous, and even then the trustees may be left

with a residual discretion or the direction may be void for other

reasons (e.g. public policy).

The PTC may provide the solution.

Advantages and Disadvantages

For a settlor, the key advantage of establishing a PTC is the

additional element of control which the PTC can provide. Control is

particularly an issue where the settlor is from a jurisdiction

unfamiliar with the trust concept, as a settlor is often unwilling

to give away control of the assets to strangers in another

jurisdiction. The settlor and/or his or her family could be the

shareholder or shareholders of a PTC and through that shareholding

would be able to appoint and dismiss the directors to the PTC.

Whilst this is an obvious disadvantage to the professional

administrator, the control of the board of the PTC is often a

welcome feature for settlors wishing to retain control. However, if

the settlor and/or his family were minded to be shareholders of the

PTC, the potential tax consequences of that ownership would need to

be fully investigated.

Ownership will generally be recommended to be through a purpose

trust, rather than the settlor himself. A purpose trust is a trust

which is established to achieve a non-charitable purpose, which in

the present case would be to provide trusteeship services to

designated trusts. This holdings structure is illustrated in the

diagram below:

On a practical level, a PTC ensures more privacy in relation to

the trusts, and allows for rapid commercial decisions to be made.

The annual costs are often significantly lower than they would be

should be a public trust company run the trusts.

The PTC does not compromise the validity of the trust structure

and its residency for tax purposes, and can provide immediate and

long-term tax planning advantages.

The main disadvantage of a PTC is the cost. On top of the

creation of the trust, a company must be incorporated. The cost

would be further increased if a purpose trust was used to hold the

PTC, as illustrated above, however...