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.