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Choices to Consider

Trustees generally fall within the following categories:

i) subsidiaries of major international banks; 
ii) subsidiaries of private banks;
iii) independent trust corporations; and
iv) trust corporations managed as subsidiaries of accounting firms or legal firms.

It is common for the major international accounting firms to steer their clients to their own subsidiary trust divisions.  Other professional advisors seem to be more open-minded.  Whether a major trustee company or a small company is chosen will usually depend on service, needs and costs.

Many of the smaller trust companies can provide a level of personalized service that subsidiaries or branches of larger trust companies do not always supply.  Some believe that a trust company which is in some way associated with a major onshore financial institution will provide a level of security which is not available from a small, independent company.  These safety concerns can easily be assuaged by having the trust business arranged on a split basis between trust administration and investment management.  A trust can, for example, be established in an offshore jurisdiction using the services of a smaller trustee company with the appointment of an institutional investment advisor and/or custodian bank.  Some clients may also prefer to have two or more co-trustees located in different offshore centers.

Subsidiaries of major banks do provide a sense of comfort and financial security.  On the other hand, some clients are concerned about the bureaucratic nature of institutions and fear that this will translate into the trust management service being less personal.  A number of banks, particularly the so-called private banks, provide excellent personal service.  There has also been some complaint that the larger banks are inflexible in their approach and that they make common transactions quite costly and time-consuming.

The private banks are accustomed to providing personal service on a competitive basis.  As such, their subsidiary trust operations tend to be competitive in terms of both fees and service.  The diversification of private banks into the provision of trustee services is a natural extension of their usual marketing.  This additional facility gives them the opportunity to attract private money for investment management which is their strength.  Generally, where a private bank subsidiary is chosen as the trustee company, the trust assets will be managed by the banks' own investment divisions.

Independent trustee companies are widely available and their performance varies accordingly.  They can be expected to be more aggressive and competitive for new business and may be far more suitable for limited trust operations, especially where price is a consideration.  Many of the independent trust management companies are offshoots of the larger companies.  They have been established by personnel who have training and expertise, but want to provide more flexible and personal service to clients without compromising their duties and responsibilities.

It is common for the accounting practices and legal firms in the tax havens and financial centers to have a subsidiary trust management company.  This is not considered a conflict of interest in the offshore jurisdictions.  These operations are generally quite responsive to client needs, and because of the nature of their relationship with the client, they provide a level of stability which clients find desirable.  As the professional firms may already be providing a significant level of other services to the client, their trust management on a day-to-day basis may be viewed primarily as a bookkeeping operation.

Private trust companies versus professional trustees

Some of the offshore trust jurisdictions regulate the activities of professional trustees while others do not.  There does not seem to be any consensus as to which situation is better.  For those being regulated, there is a licensing process which is usually similar to that used to oversee banking.  The nature of the activities undertaken by professional trustees, however, makes them difficult to supervise.  Most of the duties performed by trustees are private and do not involve matters which can be demonstrated on the financial statements of the trustee itself.

There is some suggestion that comfort can be had from an audit of the activities of a professional trustee company.  Audits, however, do not generally cover issues of fraud and so are deficient in this respect.  In addition, the cost associated with a detailed due diligence and fraud audit, when added to the costs of administering a trust, would be undesirable and rejected by most clients.

At present, there is no universal insurance or bonding of trustee operations and there is no indication that this will become mandatory in the offshore industry.  Remarkably, the present worldwide system of self-regulation appears to be working and the frequency of improvident actions or scandals is decreasing.

Private trust companies

The reputation of an offshore professional trustee company or professional trustee individual is not usually known to the potential grantors or beneficiaries.  As such, there is a natural reluctance on the part of the grantors to part with their assets to, in effect, strangers.  One solution for this dilemma has been the use of the private trustee company (PTC).  The PTC is a corporation that acts as the trustee over a specific trust or a consolidated group of related trusts.  This can be structured using professional advisors who might be involved as nominee officers and directors rather than individual trustees.  The grantor or other family members may be empowered to act in an advisory capacity and may assist or influence various decisions made by the directors of the PTC.

The PTC structure may be enhanced by the use of a purpose trust incorporated to own the shares of the PTC.  A purpose trust will provide a grantor or his family members with the ability to control the affairs of the trust and yet maintain the legal and equitable integrity of the trust structure.  An additional benefit is that a significant degree of privacy can be maintained while the trust engages in various transactions.

Liability concerns

As all professional trustees are concerned about their own liability, there is a natural inclination on their part to restrict the areas in which they will operate or invest trust assets.  Often this may be contrary to the desires of the grantor or the beneficiaries who will want to own assets or make investments which the professional trustee, looking at its own liability, does not deem appropriate.  For example, most offshore professional trustees do not want to own directly or have an interest in real property located in the United States. 

There are also concerns about personal liability under environmental laws that make it impossible to determine exposure to liability.  Using a PTC may solve that problem.  These same problems may arise when certain types of structuring are necessary for tax purposes or when there is concern as to the implementation of particular investment philosophies. 

A trustee is not a guarantor and liability concerns must be carefully reviewed.

Conclusion

Financial and estate planning today is on a global scale like never before.  The movement of money and people across borders creates a need for global planning structures to mitigate taxation, limit exchange control, maintain continuity of investments and businesses, protect assets, and act as an estate-planning vehicle to avoid multi-jurisdictional probate proceeds.  The trust is the most widely accepted planning arrangement to meet these and other offshore planning objectives.  Choosing the right trustee is one of the keys to having a successful trust plan.
 

Denis Kleinfeld is a principal of the Miami, Florida-based Kleinfeld Law Firm.  Mr. Kleinfeld's primary practice focus is on sophisticated national and international income, estate and wealth protection planning for private clients, privately held companies and directors of public companies.  Mr. Kleinfeld graduated from the University of Illinois (B.S. in Accountancy) and received his J.D. from Loyola University of Chicago, School of Law in 1970.  Prior to entering private practice in 1975, he served as an attorney for the Internal Revenue Service in the Estate and Gift Tax Division.  [Copyright 1999 O.F.C. Publications Inc.  This article was published in the May/June 1999 issue of Offshore Finance U.S.A. magazine]

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