In our previous article, we broadly summarized the different types of trusts. What if none of those trusts seem suitable? Some clients, especially business owners, may be concerned with setting up a typical discretionary trust because they would like to retain control over the assets to be transferred into trust and because of some professional trustees’ unwillingness to take on certain types of assets. Consequently, several jurisdictions introduced a specific trust structure known as Private Trust Companies (PTC).
What is a PTC and why you may need it?
A PTC is an entity set up to act as a corporate trustee for the settlor’s trust (or connected trusts). Licensing is not required in some offshore jurisdictions so long as the PTC does not offer trust or fiduciary services to the general public (persons unconnected to the settlor) or other unconnected trusts. A PTC can be managed by the settlor or any person(s) designated by the settlor who will act as director(s) of the PTC. For example, if shares of an operating business are to be transferred into trust, a PTC is useful because the settlor (or designated individual) can continue to manage the business and have an active role in the business operations. A professional trustee may not be willing to interfere with the business management or it may not be familiar with the relevant industry to effectively run the business. Another common use for a PTC is a platform to carry out investments – the settlor and/or the family can have the control to make all investment decisions.
Another benefit of a PTC is succession planning, in particular when the trust holds shares in a family business. The board of directors of the PTC can vary from time to time, existing directors can be removed and new/additional directors can be appointed by the settlor or the settlor’s successor. For example, the settlor can observe which of his children and/or grandchildren have genuine interest, talent or experience in the business and select such individuals to be future directors of the PTC.
With that said, if a beneficiary under the trust is appointed by the settlor to be a director of the PTC to manage the trust, such beneficiary must be educated as to his/her fiduciary position – this means he/she must make decisions in the best interests of all beneficiaries as a whole and cannot simply be motivated by his/her self interest and personal circumstances. If it is anticipated that a beneficiary is or may be perceived by the other beneficiaries as always preferring his/her self-interest, then to prevent future disputes, perhaps it is better not to appoint that beneficiary as director of the PTC. It may also be useful to appoint professional directors to assist with the management and administration of the trust.
Setting up a Hong Kong PTC and transferring assets into a PTC
Typically, a PTC is incorporated in an offshore jurisdiction (such as Cayman Islands, Jersey, or Bermuda) but it is also possible to incorporate a PTC in Hong Kong. A PTC set up in Hong Kong can be incorporated as a private company limited by shares or a company limited by guarantee. The process is not too complex, and it is not necessary for such PTC to obtain any license in contrast to other trustee companies. However, a PTC limited by guarantee would have to do annual financial reporting as required by the Hong Kong Companies Registry. Such reporting will be made public, which would reveal the management and finances of the PTC. For clients who place a high value on privacy and confidentiality, such structure may not ideal.
In order to avoid the probate process (which could potentially be lengthy) which must be completed before bequests under the will can be carried out, it may be worth considering transferring assets into a PTC during the settlor’s lifetime by way of gift. However, it is important that before any lifetime transfer is done, relevant tax advice must be obtained. For example, if the assets to be transferred are located in Hong Kong, a lifetime transfer may result in liability to pay Hong Kong stamp duty to the Hong Kong Inland Revenue Department.
Alternatively, a VISTA trust (which is only available in the British Virgin Islands (BVI) and governed by its laws) can be considered to achieve the aforesaid purposes. The board of directors of the holding company (which must be a BVI company) under the VISTA trust retains control in the management and operations of the family business while the professional trustee merely holds the shares (legal ownership). The trustee may retain such shares indefinitely and the trust deed usually provides that the trustee shall not dispose of such shares unless with the consent of the board of directors or other designated individuals. Moreover, a VISTA trust deed governs how the trustee must exercise voting rights especially with respect to the appointment and removal of members of the board of directors of the holding company as well as the special circumstances where the trustee could intervene (in the absence of the special circumstances, management of the trust assets is entirely left to the board of directors).
How we can help
If you would like to carry on your family business for successive generations and you feel that the retention of such shares is of utmost importance and that you do not want a third-party trustee to interfere with the management of the business, then a PTC or a VISTA trust may be the solution for you. You can also consider these structures if you would like the trust to act as an investment platform or if you would like the trust to only hold a single asset and you do not wish to pay high operating/administration costs. The set-up of such structures requires liaison with a professional trustee and assistance from an experienced legal professional.
Our team at Hugill & Ip has extensive experience in dealing with Hong Kong’s complicated Private Client, Probate and Trust issues – so if you need further advice on these subject, get in touch with us to find out how we can help.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.