The Trust Concept

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.