Relationships Between Trustee, an Investment Manager and Custodian

Filed under: offshore

Memorandum of wishes.  Assets (cash, stocks, bonds) transferred to the trustee of an offshore trust are invested in accordance with the provisions of the trust instrument or as directed by the trustee.  A non-binding memorandum of wishes, often used by a Settlor in conjunction with establishing an offshore trust, may also provide guidance to the trustee regarding the investing of trust assets.

The settlor’s memorandum of wishes may set forth the desired allocation of assets between stocks, bonds, mutual funds or other assets.  It may provide the maximum percentage of assets that may be placed in securities, including a range of percentages between the U.S. market and all other markets.  The memorandum of wishes may also request one or more investment managers to manage the trust assets; request one or more independent foreign custodians to hold the trust assets; and state the overall goals of investing the assets, such as the desire for current income or long-term capital appreciation.

Contracts.  The trustee and the investment manager should enter into a written contract.  The written contract may include the general or specific goals for investments of the trust assets and the general or specific methods of allocating trust assets in stocks, bonds and other investments.  In some instances, the custodian may be separate from the investment manager.  It is also recommended that a written contract be entered into between the trustee and the custodian.  In addition, some agreement or understanding between the investment manager and the custodian must exist.  The custodian must possess the required technology to make the “trades” as instructed by the investment manager and further, to transfer income or principal to the trustee, when required, to be distributed to trust beneficiaries.

If the investment advisor and the custodian are the same person, attention should be given to potential conflicts of interest.  These conflicts of interest may include investment advisors using their own company, trading and settlement service charges, and other fees.

If the custodian is independent of the investment manager, the investment manager should be knowledgeable regarding the custodian’s trading and settlement service charges, and other fees.

However, if these conditions are met and the IBC is treated as a nominee, investing the trust assets in foreign securities may cause the foreign country to argue that upon the death of the settlor there was no longer any real significance to the IBC.  If the foreign country’s argument is successful, the trustee of the offshore trust will be treated as the direct owner of the foreign securities, resulting in the liability for inheritance taxes to that foreign country.

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