The purpose of this briefing note is to set out some of the benefits of Jersey trusts. Primarily, they revolve around wealth management and preservation, but they can serve many purposes and take many forms, depending on the requirements in each particular case.
What is a trust?
A trust is a legally binding arrangement whereby, typically, one person (known as a settlor) transfers assets to another person (known as a trustee) to hold for the benefit of certain other persons (known as beneficiaries) or for a specified purpose. Trusts are highly flexible and can be adapted to the settlor's needs and circumstances of the case. Thus the settlor can number among the beneficiaries or even be one of the trustees.
The terms upon which the trustee holds the assets will be set out in a document known as a trust instrument (the terms "settlement" and "declaration of trust" are also common). This is for the benefit of all parties as it will ensure that the settlor, the trustee and the beneficiaries know precisely what their respective rights and duties are. The trust instrument will usually provide that the trustee has the power to manage the trust assets in accordance with the terms of the trust instrument and the strict duties imposed on the trustee under Jersey law.
In addition to the trust instrument, it is also common for a settlor to indicate to the trustee in a less formal manner the settlor's wishes as to the management and disposition of the trust fund. This is usually by means of a letter of wishes which, although not legally binding, will generally be considered by the trustee to be of persuasive effect when performing its duties and, for example, when determining whether to make a distribution out of the trust fund.
Anonymity and confidentiality
The separation of legal and beneficial ownership, which is the hallmark of a trust, means that the trustee and not the beneficiaries will be the registered owner of the trust assets. For example, if the trust assets comprise shares in a company, it is the trustee that will be recorded as the owner in the company's share register and the register will not normally indicate the name of the trust unless this is specifically requested by the trustee.
The trust instrument itself is not a public document and is not required to be registered in any official or public register maintained by the authorities, except in the case of certain unit trusts used for commercial purposes.
In order to offer even greater anonymity, at least on the face of the trust instrument, the trustee may execute the trust instrument as a declaration of trust. As a result, the name of the settlor will not appear in the document.
It must be borne in mind, however, that any organisation carrying out trust company business in Jersey, which includes acting as the trustee of a trust or arranging for another person to act as the trustee of a trust, is subject to anti-money laundering legislation. Such legislation may require that the settlor of the trust assets and the significant beneficiaries of the trust provide evidence of their identities to the organisation in question, albeit on a confidential basis. That said, it is also worth mentioning that there is no requirement for a Jersey trust to have a Jersey-based trustee; it is reasonably common to see Jersey trusts administered by trustees based elsewhere, eg in Switzerland, Guernsey or the Caribbean. Similarly it is also common to see Jersey trustees administering non-Jersey trusts.
Estate and succession planning
Continuity of ownership
Trusts can be used to ensure the continuity of ownership of a particular asset, for example, a family business. If a person has established a successful business there is a possibility that on his or her death the ownership of the business may be split between a number of people (possibly even individuals outside of the family) as a result of the rules of succession applying to his or her estate. This could have a detrimental effect on the running of the business. If the family business is instead settled into a trust, it will not form part of the settlor's estate on his or her death. Instead, the trustees will own the business and will act in the best interests of the beneficiaries of the trust. The trustee is usually relieved of the responsibility to become involved in the management of the company by the terms of the trust. The settlor can name the persons who are to be beneficiaries at the time the trust is established and the settlor therefore has greater control over who will benefit from the family business. In the case of a fixed trust, as opposed to a discretionary trust, the settlor can set out with complete certainty who will benefit from the family business and in what shares.
Since assets settled into trust do not form part of the settlor's assets on death, a grant of probate or other similar formalities will not be required in order to deal with the assets held in trust after his or her death. The trust will continue to be run and the trustees will continue to take into account the remaining beneficiaries when considering how to invest the assets, whether and to whom assets should be distributed and so on.
A Jersey trust may be used to assist a settlor in choosing the people he or she would like to benefit from his or her assets upon death, notwithstanding any "forced heirship" rules which would otherwise govern the devolution of the settlor's estate. These forced heirship rules are common in civil law jurisdictions. In other words, a Jersey trust may enable a person to dispose of his or her property freely upon death. The Trusts (Jersey) Law 1984, as amended, deals with such issues. In relation to persons domiciled outside Jersey, it states that forced heirship or any other similar rule will not affect any transfer or disposition by such persons into a Jersey trust. As a result, the settlor can place his or her assets in trust free of any restrictions. However, additional practical steps should also be taken to protect the trust from forced heirship rules, for instance by ensuring, so far as is possible, that the trustees and beneficiaries are not resident in countries with such rules and that the trust assets or underlying assets are not situated in such countries either.
Jersey trusts can be used to protect family wealth in the event of divorce. Although the matrimonial courts have demonstrated that a husband or wife cannot simply hide assets away in a trust to avoid their obligations to the other spouse, or claim that they have no funds available to meet such obligations because they are in trust, careful planning involving the creation of Jersey trusts can help to preserve the wealth of the family (such as a family business from which the whole family benefit) from attack by the spouse of one beneficiary.
Trusts may be used for legitimate tax planning purposes in other jurisdictions. This may apply not just to taxes payable on the death of the settlor or any of the beneficiaries but also to taxes payable during their lifetimes. For example, since assets transferred into a trust do not form part of the settlor's assets, this might mean that the settlor may not be liable to income or capital gains taxes on those assets - potentially reducing the amount of the settlor's tax bill. Tax advice in the home jurisdictions of the settlor and beneficiaries should always be taken when establishing a trust and the position kept under review from then on.
Although Jersey resident trustees are, in theory, liable to Jersey tax in respect of all of their income arising as a result of their acting as trustees, by long standing concession such trustees are not liable to Jersey income tax on foreign sourced income or Jersey bank interest if the settlor and beneficiaries of the trust are not resident in Jersey. Jersey does not have capital gains or inheritance taxes.
Jersey law will not enable a debtor to escape his existing creditors by settling assets into trust if the debtor is insolvent at the time the assets are transferred into trust, or if he or she becomes insolvent as a consequence of the transfer and the transfer is made with the intention of putting them beyond the reach of such creditors. However, if a person has no relevant actual, future or contingent creditors at the time the assets are settled into a Jersey trust, the trust should protect trust assets from claims of subsequent creditors of the settlor (and probably from creditors of the beneficiaries).
Trusts can also be used to provide a different sort of asset protection. If a person is situated in a country suffering from political unrest or instability, he or she can protect his or her assets (for example, against possible seizure by the authorities of that country) by settling them into trust - provided, of course, that the trustees and the trust assets are themselves in a stable jurisdiction. Jersey is just such a jurisdiction, having an independent legal tradition dating back more than eight hundred years. It is politically stable, with close links to the UK and the rest of Europe. Jersey has a highly competent and well regulated financial services industry, and a stable and professionally operated court system. In addition, Jersey has well-developed confidentiality laws that provide effective safeguards in relation to the identities of the settlor and beneficiaries of the trust which may bring peace of mind in relation to issues of personal security. At the same time, Jersey has taken the lead in recent times with international efforts to combat money laundering and tax evasion.
Jersey trusts also have a number of commercial uses, particularly in a real estate context, where purpose trusts are often useful. They can be used as unit trusts in the context of collective investments. They are also an ideal vehicle for pension schemes, employee benefit trusts and employee share option schemes.
Trusts have a long history as a wealth-preservation tool and Jersey's trusts regime in particular is highly flexible and well regulated. While it is always important to seek local tax and legal advice before establishing any offshore structure, a Jersey trust can serve many useful purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.