Discretionary Benefit Employee by ypt17268


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                  January 2008

                  The Role of Employee Benefit
                  INTRODUCTION                                                     to the trust and the position should the settlor be
                                                                                   liquidated or subject to the demands of its creditors.
                  A common misconception amongst trust industry
                  professionals and clients is that employee benefit trust         Private client relationship
                  arrangements are significantly different to private client
                  trust structures.                                                A true private client or family trust relationship between
                                                                                   the beneficiaries and the trustee develops where the form
                  Although employee benefit incentive structures can be            of incentive compensation is delivered through a cash
                  delivered in a variety of ways, many of them are provided        based employee benefit trust, a pension arrangement or
                  through discretionary trusts. Trustees of such                   a flexible share scheme where awards are segregated
Client briefing

                  discretionary employee benefit trusts have exactly the           into distinct sub-funds for an employee and their family’s
                  same fiduciary responsibilities as those that exist under a      benefit.
                  family trust structure.
                                                                                   The type of benefit associated with a cash based
                  Who is the Client?                                               employee benefit trust is not dissimilar to that of a family
                                                                                   trust. Benefit can be provided in many forms and can
                  This is an age old debate amongst trustees and centres           prove to be very tax efficient due to the fact that the
                  around whether the settlor or beneficiary can correctly be       settlor is a company, with no bounty or gift associated
                  referred to as a “client” of the trustee company.                with the settlements into the trust.

                  This issue creates an interesting conflict within an             It is important that the trustee understands the
                  employee benefit trust relationship, where the company           circumstances of the employee beneficiary and their
                  establishing the structure and settling the assets into the      family so as to enable the trustee to always act in their
                  trust views itself as the client.                                best interest. This often entails meeting not only the
                                                                                   employee beneficiary, but their family members who
                  The structures usually cater for benefit to be provided to       could conceivably benefit from the trust arrangement.
                  current, future and ex-employees of the settlor group and        This level of personal service and attention further
                  will result in the trustee acting in the best interests of an    enhances the beneficiary’s understanding and level of
                  ex-employee, whom the settling company no longer has             comfort surrounding the use and benefits of a
                  any need to motivate or retain.                                  discretionary trust.

                  The experience, independence and professionalism of              Investment responsibilities
                  the trustee is important in these situations to retain
                  integrity and trust between the two conflicting parties.         Trustees of employee benefit trusts have a duty to
                                                                                   maintain and enhance the capital of the trust. This is no
                  Beneficiaries’ best interests                                    different to the fiduciary responsibility attaching to a family
                  The overriding responsibility of an employee benefit trust
                  trustee is to ensure that they act in the best interests of      Employee benefit trustees have a variety of factors to
                  the beneficiaries. This is one of the primary reasons for        consider when investing trust assets that would not
                  establishing a discretionary trust for delivering incentive      otherwise apply to family trusts.
                  compensation to employees.
                                                                                   Pension trusts often need to comply with the UK pension
                  In order to effectively provide an incentive programme for       legislation as to the investment of trust assets. These
                  executives, it is important that the executives themselves       guidelines are acceptable to the trustee as they tend to
                  are comfortable with the arrangement and their                   be conservative and focus on the maintenance of trust
                  relationship with the trustee.                                   assets with growth at an acceptable level of risk. The
                                                                                   more esoteric investments in derivative products are not
                  A discretionary trust, where the settlor is an excluded          allowed and exposure to property investment is carefully
                  person under the trust deed, provides comfort to                 controlled.
                  beneficiaries. Beneficiaries would otherwise have concern
                  as to the settlor’s ability to benefit from assets contributed
                  The Role of Employee Benefit Trustees

                  Share incentive schemes often confine the trust’s                Conclusion
                  investments to those of equity in the settlor company.
                  This level of investment in one, often illiquid asset would      The nature of trusts and the responsibilities and duties of
                  provide a dilemma for the family trustee, but through plan       trustees lend themselves to the provision of employee
                  rules and restrictions on trustee investment powers, the         remuneration planning.
                  trustees are able to manage their investment of trust
                  assets in these schemes.                                         Both companies and employees receive comfort from the
                                                                                   trust relationship. Where experienced, independent and
                  The cash based incentive scheme has the widest scope             professional trustees are involved, the company is able to
                  of investment possibilities and mirrors the investment           save on internal administration costs and time, as well as
                  profile in private trusts. A trustee’s first choice is to have   remain confident that their employees are receiving
                  the trust assets managed by a discretionary investment           service excellence for a scheme that was designed to
                  manager. This provides the trust with professional               motivate and retain them.
Client briefing

                  investment expertise that is carried out in line with the
                  trustee‘s investment risk profile. This risk profile would be    About Ogier
                  developed based on the trustee’s discussions with the
                  beneficiaries and will provide for trust investments that        Ogier is an award winning offshore legal and fiduciary
                  are aligned to the best interests of the beneficiaries.          services provider. The group advises on all aspects of
                                                                                   BVI, Cayman, Guernsey and Jersey law and associated
                  Confidentiality and taxes                                        fiduciary services through a global network of offices that
                                                                                   cover all time zones and key financial markets.
                  An employee benefit trust assists in preserving
                  confidentiality of award and discretionary bonus details         Ogier continues to be recognised as a leading law firm by
                  for small to medium size companies where the human               the principal legal directories, including Legal 500 and
                  resources function may not be of a large enough size to          Chambers.
                  handle the communications of award and vesting details.
                  The usual duty to maintain client privacy and
                  confidentiality extends to employee benefit trusts. Due to
                  the family trust relationship between trustee and
                  beneficiary in a cash based employee benefit trust, the
                  trustee is often involved in discussions as to how benefit
                  from the trust may change, should an employee resign
                  from the settlor company. It is therefore not appropriate
                  for the trustee to inform the settlor of the potential loss of
                  a staff member.

                  Confidentiality as to benefit provided is not possible
                  where the trustee has an obligation under the trust deed
                  to report to the company for tax reporting purposes of any
                  taxable benefits enjoyed by an employee beneficiary.
                  This form of reporting extends, post employment, in the
                  case of cash distributions as the payroll taxes associated
                  with such a cash benefit extend past the beneficiary’s

                  Certain beneficiaries may be bound by the compliance
                  rules of investment banks and similar organisations with
                  respect to personal investment.

                  Although the trust assets are wholly under the
                  management and discretion of the trustee, in
                  circumstances where an employee is able to make
                  investment recommendations to the trustee and to the
                  extent to which these recommendations are followed, the
                  trustee may be under an obligation to report all
                  investment transactions to the employee’s compliance
                  department to ensure compliance with local legislation.

                  The Role of Employee Benefit Trustees
                  Contact details

                  Clive Chaplin
                  +44 (0) 1534 504240

                  Philip Le Cornu
                  +44 (0) 1534 504225

                  Simon Willing
Client briefing

                  +44 (0) 1534 504457

                  Philip Norman
                  +44 (0) 1534 504430

                  Tania Bearryman
                  +44 (0) 1534 753936

                                                    This client briefing has been prepared for clients
                                                    and professional associates of the firm. The
                                                    information and expressions of opinion which it
                                                    contains are not intended to be a
                                                    comprehensive study or to provide legal advice
                                                    and should not be treated as a substitute for
                                                    specific advice concerning individual situations.

                                                    Ogier includes separate partnerships which
                                                    advise on BVI, Cayman, Guernsey and Jersey
                                                    law. For a full list of partners please visit our

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