Using the trust framework for overseas investment and financing management

Using the trust framework for overseas investment and financing management

As the only tool which can be used for investment and financing in the currency market, capital market, and the physical market, the trust has already been widely applied in the fields of investment and financing. In foreign countries, the trust can be used not only to design an investment’s share-holding framework, its protection framework, and its tax-planning, but also to manage investment and financing for the purpose of saving costs, retaining the control of the trustor, and maintaining the confidentiality of information.   

  1. I. Management through the establishment of aprivate trust company

The private trust company is established by one or several family members in order to function as the family trust’s trustor. A private trust company can function as the “family office” for one or several related families. It can transfer different kinds of family properties to the family trust, offer greater flexibility for family trust planning, and design a trust governance framework and a trust property management framework for families. Ordinary licensed trust companies enjoy advantages in terms of management over cash assets, but they don’t have special management experience or management facilities for special assets such as stock rights, real estate, antiques, and calligraphic art, for example.

Some licensed trust companies with special property management capabilities charge high administration fees. In contrast, a private trust company can set up several trusts according to asset categories to satisfy the diversified demands of high net-worth individuals who set up family trusts. At present, offshore centers which allow the establishment of private trust companies include Jersey, Guernsey, the British Virgin Islands (BVI), the Cayman Islands, the Isle of Man, Nevis, the Cook Islands, Gibraltar, Mauritius and Singapore.  

According to the Cayman Islands’ Private Trust Companies Regulations, private trust companies in the Cayman Islands which are only engaged in “connected trust business” and registered with the government can be exempted from supervision. The so-called “connectedness” means that every trustor or investor must have a relationship by blood or by law with one other. Relationshipsamong companies within a group and parent-subsidiary company relationships are also included. In practice, most private trust companies are established by private families or for private families, so the requirement for “connectedness” can be easily met.

To establish a private trust company, the following requirements should be met: it has to be established in the territory of the Cayman Islands; it should have a registered office provided by a qualified licensee; it should have copies of relevant trust contracts and other trust documents kept in the office of the registry; it has to use “Private Trust Company, PTC” in its name. The cost of establishing and running a private trust company is lower than a professional trust company. Its organizational structure features extreme flexibility and confidentiality. The trustor and his/her relatives can be members of the board or hold PTCstocks, which can be either directly held or held via purpose trusts, charity trusts or other private trusts.

  1. II. Management through the establishment of a VISTA trust

In overseas investment trusts, the trustee usually doesn’t have the professional knowledge required to run the business. If the trustee (as a shareholder) makes improper decisions, he/she may assume liability for compensation for the investment’s failure. For the sake of confidentiality, the trustor and his/her family members are often not willing to involvethe trustee in the running and management of the family business. To solve this contradiction, BVI has enacted theVirgin Islands Special Trusts Act (VISTA) – amended in 2013 –with a special system as follows:

Firstly, the shareholder of a company uses his/her stock rights to set up a trust. The trustee directly holds the stock rights but doesn’t have the rights to run or manage the company, so the trustee is exempted from the corresponding duty of care in the trust. Secondly, the control of the trust lies with the board of directors. VISTA also sets up Office of Director Rules (ODRs), which allowfor stipulation of the eligibility of directors (or the eligibility of those who can select directors) within the trust documents. For instance, the trustor may stipulate that the directors have to be a family member of the company’s shareholders, or that a designated person or special committee is responsible for the selection and dismissal of company directors

  1. III. Restricting the trustee by retaining certain rights in the trust

Inany trust, the trustee has significant discretionary power over the trust property and is entitled to determine the beneficiaries that receive profit distribution, and the time and proportion of such distributions based on the principles of maximizing the overall interests of the beneficiaries. The trustor of discretionary trusts intends to personalize the rights awarded to the trustee instead of granting the trustee significant discretion. Meanwhile, in order to restrict the trustee, the trustor can retain certain power while establishing a discretionary trust.

For example, it is stipulated in Article 9A(2) in Jersey’sTrust Lawthat the trustor can retain the power to revoke, alter, or modify all or part of the trust terms; make prepayment; dispose of or appoint property beneficiaries; pay or use trust assets; give instructions on the above-mentioned matters; purchase, retain, sell, manage, lend, pledge, collect or execute the powers and rights arising from the trust property, give instructions to the trustee; appoint or remove any trustee, executor or beneficiary, retain power over personnel, discretionary power, or other rights related to the trust; appoint or remove investment managers or investment consultants.    

Offshore trust laws have provisions on the retaining of many rights, but such right retention isnot unlimited. The traditional Anglo-American legal system insists on the “trustee-centered principle”,which requires that after the trustor establishes a family trust, the trustor cannot retain certain rights which would involve the corresponding legal relationshipnot conformingto the definition of a trust. Otherwise, it shall not be deemed as a trust. Excessive retention of power by the trustor may risk the cancellation of the trust. To avoid such a risk, a trust protector mechanism can be established. The relative or friend of the trustor can act as the protector of the family trust and shall be entitled to require the trustee to adjust the management methods of a trust property. The right to revoke trusts, the right to supervise and elect new trustees, and the right to dissolve and extend trusts are also granted to the protector.

  1. IV. Establishing a self-managing structurefor a collective investment trust

Compared with mainland China, the establishment of trusts in Hong Kong involves a more flexible management structure. For example, by establishing a collective investment trust, a self-managingstructure can be set up for the board of directors. Under the board, an investment decision-making committee can be set up to take charge of matters related to the investment decisions and an executive committee can be set up to take charge of the daily management of the board of directors.

According to Hong Kong’s Code on Unit Trusts and Mutual Funds, a unit trust or mutual fund that applies for accreditation must appoint a management company accepted by the Securities & Futures Commission, except for self-managing programs. According to the Code, the Commission of Securities & Futures only accepts management companies that meet the following requirements:

1. The main business of the company is fund management;

2. The company is capable of using sufficient financial resources to manage the business and assume liabilities. In particular, the issued and paid-up capital stock and capital reserve of the company should be at least 1,000,000 Hong Kong dollars or theequivalent amount in foreign currency;

3. The amount lent by the company cannot account for a significant proportion in its assets;

4. It shall maintain a positive net asset value at all times.

As is clear, the management companies accepted by the Commission of Securities & Futures will increase the operating costs of the collective investment trust. 

The Code also stipulates that if the board of directors can fulfill the functions of the management company, such a program can be managed by the board of directors itself, and accordingly becomes a self-managing scheme. However, the rules on self-managing schemes have to include the following regulations:

Firstly, if the directors of such a program are no longer deemed suitable to manage such a scheme, the holders can convene a meeting and remove such a director via ordinary voting. Secondly, the remuneration of the director can be decided on by the shareholders at the shareholders’ meeting. Managing a collective investment trust via a board of directors can improve the management efficiency of the trustand reduce the operation costs. 

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