Appendix 1

Guidelines for Settlors, Trustees, Protectors and Their Advisers

1. Do not set up trusts in which the settlor retains a substantial degree of control. Powers reserved to the settlor should not have the effect reducing the role of the trustee to little more than a cipher. The fundamental test is probably "Is the trustee ultimately in control of the trust assets and their distribution to the beneficiaries?"

2. Do not set up structures in which effective control remains with the settlor, for example, by forming a private trustee company controlled by the settlor or forming an asset holding company in which the shares are held by the trustee but the settlor has control of the board of directors and power to dismiss the trustee and appoint a new trustee. Most structures of this sort, if attacked, will be set aside as shams and held to have created a resulting trust to the settlor or some other legal relationship between the settlor and the trustee, such as a bailment of chattels, an agency, a nomineeship or an invalidly executed will.

3. Review marketing materials to ensure that misleading and incorrect information that might suggest that settlors relying on these materials did not understand the trust concept, were misled and therefore never had the requisite intention to create a trust; Where the settlor does not speak English as a first language it is advisable to prepare an explanation of the trust concept in his own language and to minute that this was given to him and explained by a lawyer speaking his first language.

4. Keep trust records with file notes that show that from time time the trustee reviews the trust on its own initiative and has considered the interests of all the beneficiaries. Where the settlor has reserved significant powers the trustee’s file notes should record attempts by the settlor to persuade the trustee to act in a particular way as requests and not as instructions from the settlor.

5. Dummy settlors achieve little and generally should not be used. The dummy settlor invariably acts on the directions of the settlor and therefore is his agent. This is often expressly provided by statute which extends the meaning of settlor to include persons who act on the instructions of the settlor or his advisers. Unless the trust is required be registered on a public register there seems to be little point in concealing the name of the substantive settlor.

6. Do not select the Red Cross or any other charity as a beneficiary if the charity is not to be informed that it is a beneficiary and is never intended to benefit.

7. Select a trustee that has no connection, such as a branch office or an associated company, within the settlor's home territory or any other territory which does not recognise trusts. The trustee should be resident in a low or no tax territory.

8. Any protector should have no connection with the settlor's home territory or any territory which does not recognise trusts and should be resident in a no or low tax territory. It may be advisable to avoid the use of protectors who owe their fiduciary duties to the beneficiaries and not to the settlor as is often assumed to be the case. A reliable trustee who provides a full service should make a protector unnecessary.

9. Keep trust property outside the settlor's home jurisdiction, perhaps by using a holding company incorporated in a well regulated and reputable jurisdiction. Any company must have substance, that is to say real directors who take decisions at real meetings. So-called nominee directors should not delegate their authority by power of attorney. Remember that while powers may be delegated in appropriate situatiions, duties may not be delegated. Avoid holding immovable property in the settlor's jurisdiction in the trust or in a company.

10. Any letter of wishes should usually be confidential, signed sometime after execution of the trust deed and not legally binding. It should also be consistent with the terms of the trust deed but not referred to in the trust deed. The trend of judicial decisions is towards disclosure of information to beneficiaries. Thought should be given to the possibility that a court might order disclosure of letters of wishes and the consequences that might follow. Ideally, do not have a letter of wishes signed by the settlor but, instead, rely upon a trustees' memorandum or file note of the settlor's wishes.

11. The trust deed should exonerate the trustee from the need to give information, other than trust documents and accounts, to beneficiaries unless the court orders otherwise. If there is a letter of wishes which is not to be shown to beneficiaries or third parties, it should be made expressly confidential. The practice of exonerating the trustees from giving any information to beneficiaries is probably repugnant to the trust concept because beneficiaries must be given sufficient information to enable them to enforce the trust. When giving information avoid giving reasons for the exercise of discretions. Beware STAR trusts if the intention is to try to ensure that there are no beneficiaries with rights to income, capital or information. If this appears to a court to have been done to frustrate the claims of an estranged spouse or other close relatives of the settlor, creditors or a taxation authority and the assets are in the jurisdiction of the court most judges will find a way of looking through the trust. If the assets are not in the jurisdiction of the court but the settlor is, in some jurisdictions this may result in imprisonment of the settlor for contempt if the assets are not repatriated.

12. A provision could be included automatically cutting out any beneficiary who challenges the trust. This provision should not be discretionary because this might render the trustee guilty of contempt of court. A provision cutting out any beneficiary who demands information such as copies of trust documents and accounts from the trustee would probably be unenforceable in most jurisdictions.

13. Consider settling the trust property in accordance with the forced heirship entitlements of the related beneficiaries.

14. Where assets are to be held in a company, consider incorporating in a different jurisdiction to that of the trustees if confidentiality is particularly important. Ensure that the assets are correctly transferred to the company and, where relevant, the appropriate stamp duty is paid. Ensure that the shares in the company are correctly transferred to the trustees and that the transfer documents are, where this is relevant, correctly stamped and registered with the company. NEVER use bearer shares. The settlor should not have de facto control over the trust assets through control of asset holding companies because this may be evidence of a sham trust structure.

15. Be extremely wary of jurisdictions which offer incorporation of companies that is cheap but unregulated. Remember the flight from Panama in the 1980s and think long term for a trust structure. It is probable that courts will look through trusts and companies where justice requires this. International business companies are particularly open to this form of attack.

16. Be very wary of jurisdictions which offer user friendly trust laws which enable the settlor to retain control or seek to set aside fundamental core concepts: they may not create valid trusts in the view of other jurisdictions.

17. Be extremely wary of so-called asset protection trusts and the jurisdictions that peddle them. Most trusts have always been set up to protect assets in the general sense and it is only in recent years that the term "asset protection trust" has acquired a particular meaning restricted to protection of debtors from creditors. So-called asset protection trusts are really debtor protection trusts and should be recognised as such. If provocative they are unlikely to be recognised in the home jurisdiction of the settlor where either the settlor or the assets are present in that jurisdiction.

18. As a trustee be very wary when taking over from an existing trustee. Unless it is clear that the trust has been properly administered and all the assets are under the control of the trustee do not be tempted to take on the responsibility for commercial reasons without a thorough assessment of the risks involved.

19. Remember that once assets have been transferred to a trustee the settlor should no longer have direct control over them irrespective of what the trust law of the Island of Utopia may say. Too much indirect control through a protector or an asset holding company should also be avoided as this may put the trust at risk of being held to be a sham, an invalid will or some other legal relationship which is not a true trust. Alternatively the trustee will be acting in breach of trust where there is failure to exercise independent discretion.

20. If the settlor wants to retain extensive control consider using a guarantee company or a guarantee company with a share capital. These can be incorporated in the Isle of Man, Alderney and Guernsey, as well as in some of the Caribbean jurisdictions. Remember that there will often be entirely different tax considerations if a company rather than a trust is used. On the other hand, jurisdictions that do not recognise foreign trusts usually recognise foreign companies. An LLC might also be considered.

21. Where a draft trust deed is provided by a proposed trustee the settlor should receive indpendent legal advice. Exculpation clauses, in particular, should be fully explained to the settlor. A lawyer who fails to advise fully on the effect of an exculpation clause or other provision which might put the beneficiaries at a disadvantage might be liable in negligence to the settlor, the settlor’s estate and the beneficiaries.

22. Administer trusts conscientiously and meticulously. Do not cut corners. Hold proper meetings regularly and keep minutes and records, but do not refer to the settlor as the "client" or the "customer" in relation to an existing trust because this may indicate that the trustee is a mere nominee for the settlor. Investment strategies require very careful consideration, take expert advice if in doubt and remember the modern importance of portfolio risk management.

23. Trustees should administer asset holding companies meticulously and hold proper board meetings. Avoid paper meetings as these usually indicate artificiality which could be attacked under anti-avoidance tax legislation or in litigation alleging that the company is a mere alter ego dancing to the bidding of the settlor or a beneficiary of the trust. Keep complete file notes of meetings. Directors of asset holding companies should perform their duties scrupulously and should not delegate them to others. Require full reports of family companies where the trustee holds shares. Intervene if the directors decide to embark on risky ventures.

24. When the settlor dies look out for applications by an heir for a grant of representation to the estate which might affect the trust assets.

25. Where a trustee is sued by any heirs, especially if any of them are beneficiaries, an early application should be made to the court for directions whether to defend at the trust's expense.

In preparing these guidelines I would like to acknowledge the assistance I have gained from the excellent article "Offshore trusts: illusion and reality" by John Mowbray QC published in Trust Law International, Vol.8, No.3, 1994. These guidelines have appeared in articles written by the author but have since been extensively revised for "Misplaced Trust".