Some do's and don'ts for those wishing to arrange private discretionary trusts

PUBLISHED : Friday, 05 August, 1994, 12:00am
UPDATED : Friday, 05 August, 1994, 12:00am

MAKE sure your financial interests - not the fund management group's - come first when planning a private discretionary trust, a senior trust adviser says.

Trusts are a convenient way for individuals to arrange their tax and investment affairs, particularly those planning ways of limiting inheritance tax or considering emigration.

A trust is a vehicle in which assets are held by a trustee who administers the assets for the benefit of other parties, called beneficiaries.

The generally low-profile world of trust managers was this week in the spotlight when Bank of Bermuda announced it had agreed to acquire the private trust business of the Standard Chartered Group.

John Hawkins, executive vice-president of Bank of Bermuda, alerted those considering setting up trusts to a potential conflict of interest that could arise when the trustee and asset manager came from the same organisation.

The person setting up the trust - known as the settlor - sets out the purpose of the trust when devising the empowering document, or trust deeds.

It is generally advisable to seek the help of a specialist trust practitioner, such as a lawyer, banker or accountant.

Most trusts have a wide range of assets that require management. These can range from property, to equities and bonds.

Frederik van Tuyll, managing director of Brumby and Co, a trustee specialist, said: ''If the assets do not perform - that is, provide a competitive return - then there might arise a conflict of interest between the trustee and the fund manager.

''If a fund manager is going badly, I cannot easily see the trustee, in one part of the company, attempting to sack the fund manager in the same company.'' Mr Hawkins said: ''I think that where a trust company knows there are better skills available than those on offer in-house, then it should be put to the client.'' In practice, however, it is highly unlikely that a company will recommend a competitor.

Mr van Tuyll believes a trustee should either put the management in the hands of another company or set up an investment committee.

''The trustee can delegate to someone else the role of monitoring the performance of the underlying assets,'' he said.

The trustee would still have ultimate responsibility for its administration, but a specialist aspect of its running could be handled by expert independents.

''It is up to the beneficiary or settlor to make himself aware of what is going on in the market,'' Mr van Tuyll said.

This could be done by ensuring that beneficiaries are sent regular reports on the performance of the assets, perhaps twice a year, with a comparison to the performance of an acknowledged benchmark.

In the case of a trust being responsible for an equity portfolio, a suitable index might be the Hang Seng or London's FT-SE.

''The only caveat is to ensure that the performance is relative to the investment instructions he has received,'' Mr van Tuyll said.

Therefore, it was no use comparing the returns on Japanese warrant funds to a portfolio intended to track the performance of the Hang Seng Index.

''The client needs to make an evaluation of the risk profile they are willing to accept,'' he said.

Mr van Tuyll said that another safeguard a settlor could build into a trust was the appointment of a protector - an independent third party vested with special powers to intervene in the trust's administration.