In this Q&A, partner Rupert Morris and senior counsel Sevyn
Kalsi explore the appeal of Channel Islands trust structures as
asset protection solutions for clients based in Hong Kong and
across Asia.
Jersey and Guernsey trusts are enduringly popular to Asian
clients – what are they used for?
There are three main motivations for the use of Jersey and
Guernsey trust and foundation structures for Asian clients:
protection, direction and succession.
The first point is the most relevant in terms of what we're
hearing from clients and intermediaries in Hong Kong: trusts and
foundations are an effective way to protect assets from hostile
claims, whether that's from creditors, criminals, or
corruption. To be clear, they are not there to allow people to
defraud their legitimate creditors at the time they set up a
structure, but if a settlor is in good financial shape and is not
trying to defraud creditors they can set up trusts or foundations
and in future years that can be a robust way of segregating them
from people who might make claims against the settlor's
assets.
The second relevant point is direction. Jersey and Guernsey law
allow settlors to reserve powers, or to play a role on the board of
a Private Trust Company (PTC) or as a Protector of a trust, and
have some role in directing the way that the trust operated. In the
UK, that does not necessarily work as the tax regime prohibits
anything other than a very, very light involvement, so you cannot
reserve lots of powers when you set up a trust or be a director of
the trustee. But under the Jersey and Guernsey model you can be a
director of a PTC – for successful business people who have
made money, being a director of the entity that runs the trusts is
really attractive, and there's some familiarity and resonance
to it.
The third relates to forced heirship and the requirements of Sharia
law, and is particularly relevant in Muslim countries such as
Indonesia, Malaysia and Brunei, as well as to Muslim families in
non-Muslim majority countries across Asia. Many countries have some
forced heirship requirements, but placing assets in trusts can
offer settlors more testamentary freedom. Sharia law is fairly
rigid in terms of inheritance rights and can impact what proportion
of assets can be left to male and female scions. For local assets
such as real estate or local operating companies the local law does
not allow as much flexibility, but with international assets such
as investment portfolios in Switzerland or real estate property in
Europe or the US, patriarchs can achieve more flexibility by
putting them into an offshore structure which can be designed to
carry out succession planning objectives.
What about PTCs?
PTC structuring for Asia clients has been really popular –
being able to say to wealthy individuals who have made a lot of
money that they will be able to maintain some degree of control and
a wider involvement is a message that really works for them, and
both Jersey and Guernsey do that model very well.
The backdrop is that private – as opposed to institutional -
capital is growing significantly, and this is one of the new
methods that is being used to protect it and to put it to use. It
has been reported that private wealth has doubled since the 2008
financial crisis, and that last year alone saw global personal
financial wealth grow by 12%.
This has been a feature of our work with Asian clients for some
time, partly because of the way that PTCs dovetail so neatly with
Family Office structuring, where they offer services to one or a
select handful of Family Offices.
Why do Jersey and Guernsey stand out in this market place?
The reality is that the Jersey and Guernsey products offer
effective and cost efficient solutions to meet the needs of UHNW
individuals and families all over Asia. Decisions about which
jurisdiction to use are often down to familiarity and word of
mouth. Both jurisdictions have been in use by people in Asia
–particularly in Hong Kong and Singapore - for decades and
are seen as tried and tested, and with a very long history of court
judgments and a leading judicial infrastructure that gives some
certainty about what will happen if things go wrong.
Whatever the reason, when we see people for private wealth work,
Jersey and Guernsey remain front and centre, certainly among the
best used of the four main offshore jurisdictions, and we often see
a mix of jurisdictions in complex structures – and that might
include Jersey, Guernsey, Cayman and BVI. It's fair to say that
both Jersey and Guernsey are doing a good job of flying the flag as
trusts jurisdictions - part of that is that both jurisdictions have
been active out there for a long time and so have Jersey and
Guernsey trust companies and law firms, marketing not just in Hong
Kong, but in Singapore, Shanghai and more widely.
From our point of view, we're helped enormously in that we have
a significant presence in the region on a permanent basis –
our long-established Hong Kong and Singapore offices are led by 21
partners specialising in dispute resolution, funds and finance law,
so we have a firmly established and substantial offering in the
region.
What about the perception and popularity of offshore solutions generally for Asian clients?
A lot of our work involves acting in conjunction with tax
advisers and lawyers, and they often turn to offshore lawyers when
advising internationally mobile UHNW families – advisers in
Hong Kong tend to be focused on families in China, and those in
Singapore tend to be focused on families there, in Malaysia, and to
some extent in Japan.
But because UHNW families are increasingly mobile, clients will
frequently have connections with the US, the UK and other
jurisdictions, and if they are moving, they will want to plan
carefully before they apply for new residency. So we often get
involved before they move to the US or the UK to minimise the tax
they might have to pay if they become, say, UK resident and
domiciled.
Like most offshore jurisdictions, Jersey and Guernsey offer tax
neutrality and a range of structuring options including foundations
(and Private Trust Foundations, which mirror PTC arrangements). In
addition, the usual benefits that apply to doing any kind of
financial services work in Jersey and Guernsey are applicable to
the use of PTCs. The Islands are home to skilled service providers
who work with up-to-date laws that are continually under review
(Jersey's main trusts law was amended for the seventh time in
2018, and Guernsey's next update is planned for 2020), and both
offer the backdrop of a world-leading regulatory framework and a
court system that is highly regarded internationally, as well as
firewall provisions that ensure certain legal disputes around a
trust can only be determined in accordance with Jersey and Guernsey
law
The changes in the offshore world over the last decade or so in
respect of transparency – and I'm thinking most about
registers of beneficial ownership, and the UK Register of Persons
with Significant Control – have not really changed the
attractiveness of the offshore option. That's mostly because
confidentiality was never the main driver, it always tends to come
back to those three points about succession, protection and
direction.
What are the prospects for the future – where is demand heading?
More and more when we talk to contacts in China, Hong Kong and
Singapore, the subject turns to private capital, and how best to
structure and service family offices.
Private capital is growing significantly, and new methods are being
sought to protect it and to put it to use. That growth – and
the emergence of new UHNW families in Asia motivated by succession
planning and asset protection as well as the usual concerns –
has led to the growing trend in the creation of family offices
focused on the assets and sometimes the philanthropic activities
and administration of a specific family.
These family offices all do very different jobs for very different
families – but what they have in common is that they need a
different structure that allows settlors and family members (or
those that want it) to play a more active role in the management of
trust assets.
Rupert Morris is a partner in Walkers' Private Capital and
Trusts team, based in the firm's Guernsey office. He is a
Guernsey Advocate specialising in all forms of non-contentious
trusts work including structuring trusts for UHNWs motivated by
asset protection and succession planning, and is also experienced
in semi-contentious and contentious matters. Rupert is a member of
the STEP Worldwide Council and is instructed by many leading
fiduciaries, financial institutions, government departments and
UHNW individuals in respect of all aspects of local and
cross-border trusts work.
Sevyn Kalsi is a senior counsel based in Walkers' Jersey
office. He is a non-contentious private wealth lawyer experienced
in advising corporate trustees, settlors, beneficiaries and
intermediaries on matters relevant to Jersey trusts and
foundations. Sevyn also has particular expertise with
cross-jurisdictional trust and corporate restructuring matters
including the re-domiciliation of companies both into and out of
Jersey.
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.