How to use a flee clause in a trust

The name “flee clause” sounds very sensible. It is a clause in a trust deed which, on the occurrence of a certain event, triggers the resignation of the present trustee and the transfer of the trust fund to another trustee in a different jurisdiction.

Triggers will cover classic asset protection touchpoints; typically war, rebellion, and any law introduced which is aimed at appropriating trust assets or removing fundamental tax advantages.

Clients often ask about these very logical-sounding clauses.

However, we rarely see them in modern trust deeds.

Why is that?

Flee clauses actually exist to counter not one but two issues; uncertainty of jurisdiction and also uncertainty of trustee.

This is because in a situation of war or nationalisation, speed is essential to avoid the clutches of that nationalising government or creditor.

Although virtually all modern trust deeds have the power to change the jurisdiction of the trust and the power to change trustee, the arguments in favour of flee trusts assume a slow and unresponsive professional trustee.

It is feared that the trustee will waste precious time in considering the position, drafting the necessary documents, or requesting an indemnity.

Ingenious solutions are suggested to have the trustee reign automatically; to write in indemnities into the trust deed; or to give a protector or other third party the initiative rather than the trustee.

Some of the commentary verges into cynicism and begs the question: why not just find a more responsive trustee?

Issues

The primary issue with such solutions is that they do not address the fundamental issue of the legal ownership of the trust fund, which is after all the thing that you are trying to put beyond reach.

We suggest a nationalising government would not be concerned about niceties like beneficial ownership.

The trustee legally holds the assets.

No automatic resignation can remove the trustee’s input entirely because in practical terms they will, for example, still need to sign the share transfer which transfers the assets to the new trustee, other than when this is mandated by the relevant court, which would seem extremely unlikely in the type of situation envisaged.

The courts would either be too busy or closed in the event of revolution.

It is not possible to circumvent this principle of basic point of legal ownership, for example, to have the trustee pre-sign share transfers, to be dated later if necessary, would obviously be a fraudulent act.

Worse situation

Aside from this primary issue, flee clauses must also be very carefully thought through when drafting because there is a strong possibility of just making the situation worse.

For example:

Should the trustee automatically resign on a trigger event or should the trustee or protector have discretion?

• The problem with specifying trigger events is that clients will be tempted to draft too widely. We have when reviewing trust deeds noted that arguably, at least one automatic resignation event has occurred without the client or trustee noticing. Meanwhile leaving it for the parties to decide will create the delay that flee clauses are intended to avoid.

Should the flee clause itself specify the jurisdiction the trust should move to or should the parties at the time choose one?

• One often sees England specified, but owing to tax or government changes that might prove an unwise choice by the relevant time, which is by then too late. Is a choice of the US really watertight in the current changeable climate? No, jurisdiction can guarantee to remain favourable forever.

Should the flee clause itself specify the new trustee or should the parties at the time choose one?

• Even if the trust deed specifies a new trustee, they would still most likely insist on undertaking their usual due diligence at the relevant time before taking on the trusteeship, for compliance as well as their own reasons. The draftsman would need to be certain that the trustee will remain comfortable with taking on a trusteeship in a fraught situation like this. One answer may be a private trust company entirely owned by the family.

Alternatives

So, we have raised lots of issues with flee clauses. What do we suggest instead?

One can imagine ways to soften the primary “vesting” issue discussed above.

Under certain types of reserved powers trust; such as the statutory British Virgin Islands “Vista” Trust, the trustee delegates the management of the trust fund to the directors of an underlying BVI company which then holds the substantive assets underneath.

A flee clause could be coupled with an instruction to the directors to immediately transfer the underlying assets to the new trustee on a trigger event.

However, to do so without obtaining trustee shareholder approval may be technically breaching corporate law.

Choices

Fundamentally, flee clauses are problematic ways to counter those basic issues of uncertainty of jurisdiction and uncertainty of trustee.

The best way to solve such uncertainties is to carefully choose the most appropriate jurisdiction and the best trustee.

Of course, this is a trite answer but it is correct. The standard powers to change jurisdiction and to remove trustee should be enough, even in a situation of a crisis-hit government. And although nothing is certain in this life, there are ways to “stack the deck”.

As regards the choice of jurisdiction, we might be biased but suggest that the BVI or Cayman Islands are the ideal choice.

Both offer the stable governments and London-trained trust industries of British Overseas Territories.

And, most importantly to this question, with well over half of their revenues coming from their financial services industries, any detrimental change would be long-shadowed and debated before enactment, with plenty of time to change trustee and jurisdiction.

As regards the choice of trustee, we would recommend choosing one with significant legal representation, or associated with a law firm.

This means that you will be kept informed of any upcoming issues, and the trustee will also be able to move more quickly in a crisis rather than waiting on external counsel.

This article was first published on International Adviser.