Asset Protection - Why Jersey Trusts And Foundations Appeal To Middle Eastern Clients

Robert Dobbyn is a partner specialising in private capital and trusts work in Walkers' Jersey team. He is a Jersey Advocate who has been practising offshore since 2011, and who worked for a leading firm in London before that. Robert specialises in advice and drafting in relation to Jersey trusts and foundations, and advises international clients including trustees, onshore law firms, accountancy practices, settlors and beneficiaries.
 
In this Q&A, Robert discusses the popularity of Jersey trusts and foundations to clients in the Middle East.

Trusts are enduringly popular with Middle Eastern clients – what are they used for?

Our Middle Eastern clients have traditionally used trust and indeed foundation structures for several reasons and this looks set to continue in future.

As a starting point, the ability to provide for an orderly transfer of wealth to future generations is extremely useful. Sharia law is fairly rigid in terms of inheritance rights and this can impact on what proportion of assets can be left to male and female heirs and spouses. In any event, it often makes sense to think about a gradual transfer of wealth, which may start to take place before the head of the family dies and may continue on past their death, so that younger family members in particular do not receive too much too soon.

For domestic assets, such as real estate or operating companies, local laws often do not allow much structuring flexibility and we are generally not involved with this side of things. But with international assets, such as investment portfolios with Swiss or Singapore banks or real estate in Europe and the US, the senior family members are often more able to transfer these into an offshore structure that is designed to carry out succession planning objectives.

Another, perhaps more topical, reason for using offshore structures is the ability to protect family assets from hostile third parties. This second feature is especially prominent for clients based in jurisdictions that are experiencing political and social upheaval. Families can take comfort from knowing that their assets are located in a safe, well-regulated jurisdiction, and that the assets will continue to be readily accessible even if the family members relocate elsewhere. If that happens, there is no need to open up new bank accounts, transfer title to shares or establish new holding companies.

It is worth noting that such structures are not there to allow people to defraud genuine creditors who have claims at the time the structure is established. However, if a settlor is in good financial health and has no immediate creditor issues, then offshore trusts or foundations can be a robust future-proofing tool.

Other reasons for establishing a trust or foundation include the ability to preserve confidentiality against the public at large (therefore helping to mitigate the risk of extortion, harassment or the invasion of family privacy), and the scope, with appropriate advice of course, to reduce tax where the family members are considering a move to a jurisdiction such as the US or the UK. It is often well worth establishing an offshore structure before a family member becomes resident or domiciled in those jurisdictions.

What about PTCs?

Many of our clients like the sound of a trust or foundation for the reasons I have just mentioned, but they are understandably cautious about placing family assets into the hands of an unknown party. Fortunately, there are a number of ways of dealing with this, and private trust companies, also known as "PTCs", are a really good one.

PTC structuring for Middle Eastern clients has been really popular for a while now. While I could go on for quite a while about PTCs (indeed I have just finished writing a chapter on Jersey PTCs for a forthcoming book), in a nutshell, a PTC is a company that is incorporated solely for the purposes of acting as trustee of a trust or trusts set up for a particular family, and the relevant family members will usually sit on its board. In terms of involving the family, this is a real plus when compared to the traditional model of using a third party corporate services provider as your trustee, where having a family member as a director is generally not possible. Being able to say to wealthy individuals who have built up their business and understand how it works better than anyone, that they will continue to be involved in decisions and have oversight, is a message that really works for them. The jurisdictions that we cover do this very well.

What about the perception and popularity of offshore solutions generally for Middle Eastern 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 families. Clients in the GCC and elsewhere will frequently have connections with the US, but also the UK and other jurisdictions, and if they are moving, they will want to plan carefully before they acquire new tax residencies. So we often get involved before they move to the US or the UK in order to help minimise the tax they might have to pay in future years.

The jurisdictions that we advise on offer tax neutrality and a range of broader structuring options including foundations, LLCs, companies limited by shares and by guarantee, and various types of partnerships, which are often used in a funds and investments context. We see a lot of inward investment into the UK and US from our Middle Eastern and other clients and a well-regulated offshore centre can be a key staging post for that capital flow.

The changes in the offshore world over the last decade or so in respect of transparency – and I am thinking particularly about registers of beneficial ownership, FATCA and CRS – have added to the administration requirements, but have not really fundamentally changed the attractiveness of the offshore option for our Middle Eastern clients when it comes to trusts. This is partly because details about trusts and their beneficiaries are not available to the public at large (as opposed to legitimate tax or other governmental authorities), and also because, in any case, the PTC structure in particular is really geared more towards combining orderly succession and asset protection with continuing involvement by the family members.

Prospects for the future – where is demand heading?

I mentioned political and social volatility earlier, and the effect this has on the uptake of PTC and other offshore structures. This looks set to remain relevant.

Also, more and more when we talk to our contacts in the Middle East, the subject turns to private capital, and how best to structure and service family offices generally. Private capital as a source of investment is growing significantly, and new methods are being sought to protect it and to put it to use. That growth 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, who are increasingly based across multiple jurisdictions.

These family offices all do very different jobs for very different families, but what they have in common is that they need a structure that allows settlors and other family members to play a more active role in the management of trust assets. PTCs play a useful part in this.

Any final comments on what Walkers can offer in particular?

While my practice is exclusively Jersey based, we have a very good cross-jurisdictional team in our offices around the world that also covers the laws of Bermuda, the BVI, the Cayman Islands, Guernsey and Ireland. We are therefore able to advise on all the premium offshore trusts jurisdictions and have a lot of experience with helping our clients find the structure that works best for them. We are also working increasingly with our colleagues who specialise in funds, private equity and the other ways in which private capital is deployed, which our clients find very useful.

Another point to mention is that we have an excellent Dubai office and many of our Middle Eastern clients find it helpful to deal with them, particularly on their Cayman and BVI corporate matters. We travel out to the region regularly and will often see clients and contacts together with our Dubai-based colleagues.

Finally, we are also very well connected with offshore corporate service providers and onshore legal and tax advisers around the world, and we are always happy to assist with matching up clients with appropriate professionals as required.