By Andrew Rogerson LLB (Hons) TEP
Assets are transferred from the legal owner (the “settlor”) to trustees be held on behalf of designated beneficiaries. The main characteristic of this type of structure (or more correctly, relationship) is that the assets are removed from one’s estate. Legal ownership is henceforth vested in the trustees (distancing ownership from one’s creditors). The trustees have a duty imposed upon them by the terms of the trust, to administer the assets on behalf of the beneficiaries. The beneficiaries will typically be any or all of the settlor’s children, wife, and often himself. The trustees may be professional persons such as bankers, lawyers or accountants, or a regulated trust company (many of which are owned by banks). Beneficiaries may have fixed (or “vested”) interests as to set proportions of income or capital. Conversely, the share, if any, they receive may be determined by the trustees, according the trustees’ view as to the needs of a beneficiary at a particular time. This latter regime is known as a discretionary trust and is the most common form of trust found in the offshore environment.
The notion of the setlor attempting to maintain “control” over the trust and its assets runs contrary to the trust concept described above. Nevertheless, the offshore industry in particular has utilised two concepts for a settlor to achieve this end. These are the “Protector” and also the “Letter of Wishes”. Both increase the risk of courts and revenue authorities making a determination that the trustee is the alter ego of the settlor and, therefore, that the settlement into trust should be disregarded (for taxation and execution against assets held by the trust).
A protector is a person whom the settlor has confidence in, who is given, under the terms of the trust, a power of veto over specified actions of the trustees. Typically, this would include making distributions to beneficiaries or varying the trust deed. The result of such appointment is to create a degree of “control” over the trustee by the settlor and / or his nominee. If the protector is located in Canada and the trustees offshore and the powers of the protector are wide ranging; a it would be an easy matter for a Canadian court to hold that the trust was in fact resident in Canada. Depending on the circumstances of settlement and administration of the trust, it is quite possible for a determination that the trust is in fact a “sham”. A settlor should have confidence not only in the regime established (ceding control to the trustees) but also in the trustees so appointed. The trustees should be allowed to discharge their functions without the fiat of a protector.
A Letter of Wishes takes the form of a letter written by the settlor to the trustee setting out how he “wishes” the trustee to exercise his discretion. In reality, such letters are intended to be directive. Where the trustee slavishly follows the contents of a Letter of Wishes then he is clearly failing to exercise the discretion entrusted him. That can expose him to a breach of trust action. Also, by so surrendering that discretion, he is laying the foundations for the trust to be adjudged a sham. The CRA have adopted the following position in Document no 2000 – 0023997. It states that where a Letter of Wishes is signed and dated, it may be construed to be part of the trust deed itself. In particular, where a Letter of Wishes deals with distribution of income and capital upon termination of trust, the CRA consider the trust to be no longer a discretionary one.