TRUSTS

Trusts are a rather different concept. They have no such personality. They are simply an arrangement whereby property is handed over by one party (the ‘settlor’) to another (the ‘trustee’) for the benefit of another (the ‘beneficiary’), on the basis that the property will be held and used as the trustee wishes. The settlor and beneficiary can be the same person. Although legal title is actually transferred from the settlor to the trustee, the beneficiary’s rights are recognisable and enforceable by the courts. As with companies, the use of trusts has come along way since their invention: they were first used to protect the property of medieval knights while away on crusade.

BENEFITS

Now and then, yachts are involved in accidents. Liability could easily exceed the value of the yacht, and, should the owner be held liable, his or her other assets are at risk. More sensible, then, to ring-fence any such source of liability by owning the yacht through a company.

Companies and trusts can also be used, quite lawfully, to reduce an individual’s apparent wealth and personal tax exposure, and to protect assets from creditors where the beneficial owner is asked to provide personal guarantees in respect of the financing of his or her commercial activities.

With very limited exceptions, yachts must, by law, be registered somewhere. In some cases, including during the build stage. Shipping registers being open to inspection by the public, details of a yacht’s owner are readily available. Most owners just don’t like the idea of journalists – or perhaps even former spouses – knowing what they own. Although the identity of company directors and shareholders is often a matter of public record, many jurisdictions allow directorships and shares to be held in the name of nominees.

LIMITATIONS

No amount of corporate structing can prevent the arrest of the yacht itself. Where this happens, the yacht is legally prevented from leaving her mooring. Typically, police or customs officers present the yacht with the court papers – this is the process which used to involve the nailing of a writ to the mast.

Yachts are often arrested following a collision, an allegation of pollution, or where a good or service has been provided to the yacht without the provider (including crew) having been paid. There is no need for judgment to have been given and there may be little or no warning before the yacht is arrested – potentially leaving the owner in an awkward and embarrassing position in the middle of a busy charter season.

The only way to release the yacht from arrest is either to pay the claim or to provide security. Such security may only be acceptable if provided or supported by a large bank. In turn, the bank will require a personal guarantee from the yacht’s beneficial owner.

On occasion it may be possible to look behind the company at the individuals involved. This is known as lifting the corporate veil. The laws of certain jurisdictions, for example, state that where it appears that, in the course of winding-up a bankrupt company, transactions have been carried out with the intent to defraud creditors, a court may declare the individuals involved liable. Criminal sanctions can also apply. Creditors here only includes those owed money at the time the transfer was made, excluding future creditors. The burden of proving the necessary intent lies with the creditors. The same principle applies where it looks as if a company was set up to frustrate a court order to freeze assets.

The use of nominees only prevents the true identity of directors and shareholders being made available to the public. It is not normally possible to offload liability onto the nominees, and there is likely to be a clause in the agreement to set up the company, obliging the actual directors and shareholders to indemnify the nominees.

Privacy cannot be entirely guaranteed in any event. Not unreasonably, international treaties on the exchange of information relating to criminal activities, including tax evasion, can allow require even the strongest privacy laws to be brushed aside. Further, although trusts are usually recognised in common law jurisdictions, and some countries are party to an international convention on the recognition of trusts, known as the Hague Trust Convention, trusts aren’t always recognised.

One final drawback of buying through a company is that the laws which automatically protect consumers only applies to people - not to companies. Such laws are of limited value where a bespoke yacht is being built, but consumers will have ambigous build contract provisions interpreted in their favour.

CHOICE OF JURISDICTION

Offshore jurisdictions still have a reputation as being sunny places for shady people. In fact, virtually all the world’s leading multinationals use offshore companies and trusts to undertake business in a private, tax-efficient yet entirely legal way. ‘Offshore’ simply means a jurisdiction other the one someone is already resident or domiciled. They certainly don’t need to be far-flung islands – although many are as it can form a lucrative boost to otherwise tourist-dependent economies. In fact, a good example of an offshore centre is the United Kingdom – which was becoming increasingly popular long before Brexit.

For yacht owners, the principal advantage of using a respectable, well-known offshore jurisdiction is that there is rarely the need to reinvent the wheel: they are geared up to provide yacht owning structures. As these activities often provide a sizeable proportion of foreign income, their governments make it a priority to make matters simple for those looking for this type of service.

It is important to choose the jurisdiction(s) with care, however. No two are the same. There are bad apples in the barrel, especially with regards the integrity of local practitioners. With companies, but more particularly with trusts – where legal title is transferred to a local trustee who may have discretionary powers – there exists opportunities to extract more from their clients than had been expected.

Other factors to consider include initial and ongoing costs (including local taxes), international reputation, and the strength of their rule of law – in other words how tough their courts are. Political stability is another important factor, as is the time zone, the exchange controls, and any escape provisions – which allow companies to change jurisdictions while maintaining their legal personality and trusts to be transferred without needing to be rewritten. Finally, the most overlooked aspect is the ease, timeframe and expense of winding-up a corporate structure when it’s no longer needed.

Working with a local branch of an international legal or accounting group may provide reassurance, but on the other hand one may end up being steered towards just those places where they happen to have an office. Ideally, guidance in the earliest stages should be sought from an independent, trusted source, capable of providing an impartial, global overview. Reach out to our General Secretary if you need a steer.

With the correct ownership structure in place, it's time to build your team.