An offshore service provider, Globus International Trustees Limited (‘Globus’), has appointed you to advise on trusts. Discuss the factors to consider in the establishment, maintenance and review of setting up new trusts. (25 marks)

what is the main purpose of trust reviews?

to ensure compliance, effective administration, and proactive risk management

why are trust reviews important for offshore service providers?

they help identify risks early, prevent breaches, detect suspicious activity, and protect reputation

what are the main risks managed through trust reviews?

regulatory risk, financial risk, repetitional risk, client risk, and money laundering risk

when is an initial trust review usually conducted?

around 60-90 days after establishment

what is checked during the initial trust review?

whether the trust operates as expected, administration is complete, and transactions match the client profile

why is the initial review important?

it acts as a key control over business acceptance and helps determine future review frequency

how often should high-risk client be reviewed?

every 12 months

how often should medium-risk clients be reviewed?

every 24 months

how often should low-risk clients be reviewed?

every 24-36 months

what is assessed during a tax advice review?

whether tax advice remains appropriate and relevant to the settlor and beneficiaries

why is reviewing tax advice important?

changes in circumstances can make a trust structure tax inefficient

what risks arise if tax advice becomes outdated?

financial risk and client risk

what is assessed during a legal advice review

whether the correct trust structure was chosen and whether the trust operates properly

what is a sham trust?

a trust where the settlor still effectively controls the assets despite the trust structure

how can trustees avoid allegations of a sham trust?

by demonstrating independent judgement and real control over trust assets

what risks are linked to sham trusts?

client risk, financial risk, and litigation risk

what should trustees check when reviewing client records?

whether records, bank accounts, and legal ownership of assets are properly maintained

what must trustees demonstrate regarding trust management?

“mind, management and control” of the trust

which assets are considered high-risk in trust administration?

property, chattels, and physical assets

what is customer due diligence?

the process of verifying client identity and source of wealth/funds before transactions occur

what is enhanced due diligence?

additional checks required for high-risk clients and politically exposed persons (PEPS)

what is the main AML purpose of CDD and EDD?

preventing money laundering and terrorist financing

what are trigger events in trust reviews?

events that require enhanced scrutiny or additional review

give examples of trigger events

divorce, beneficiary disputes, large transactions, adverse reports, or a client becoming a PEP

what can trigger events lead to?

suspicious activity reports (SARs) and increased monitoring

what is the purpose of performance monitoring in trusts?

to ensure trustees preserve and prudently enhance trust assets

what should performance monitoring assess?

investment performance, trustee decision-making, and asset protection strategy suitability

what are common questions asked during a trust review?

whether risk ratings, due diligence, and trust administration remain appropriate and compliant

why is proper trust administration important?

poor administration can invalidate protections and increase litigation risk

what must trustees demonstrate during administration?

independence, proper record keeping, and compliance with the trust deed

what is a discretionary trust?

a trust where trustees decide distributions and beneficiary amounts

what are the advantages of a discretionary trust?

independent and unfettered discretion

what must trustees show in a discretionary trust?

independent and unfettered discretion

what is a reserved powers trust?

a trust where the settlor retains certain powers

what is the main risk of a reserved powers trust?

excessive settlor control may weaken the trust and increase sham trust risk

what is a fixed interest or life interest trust?

a trust where a beneficiary has a fixed entitlement to income or assets

what are common uses of fixed interest or life interest trusts?

estate planning, tax planning, and providing income for a spouse

what is a STAR trust?

a Cayman Islands trust that can exist for persons, purposes, or bothw

who enforces a STAR trust?

an enforcer rather than beneficiaries

what are common uses of STAR trusts?

holding business, intellectual property, and long-term family structures

what are the advantages of STAR trusts?

asset protection, estate planning, and specialist management

what is a purpose trust?

a trust created for a specific purpose rather than beneficiaries

what are common uses of purpose trusts?

holding companies, complex structures, and Private Trust Company arrangements

what is a VISTA trust?

a BVI trust allowing greater settlor involvement in investments

what are the advantages of a VISTA trust?

greater settlor involvement and sustainability for family businesses

who should design trust review procedures?

qualified compliance professionals and experienced risk managers

why should compliance professionals design review procedures?

to ensure full risk coverage, regulatory compliance, and proactive risk management

how can trust reviews create business development opportunities?

by identifying new client needs and strengthening client relationships

why are ongoing trust reviews essential?

they help prevent regulatory breaches, repetitional damage, sham trust risk, and financial loss

why should trust structures be reviewed regularly?

to ensure they remain suitable for clients’ changing circumstances