This century has seen enormous changes in legal entities and relationships. Powerful influences have included two World Wars, a serious Depression, vast global socioeconomic change, and phenomenal advances in technology, communications and transport. Regulations, constraints, administrative demands and general liabilities of individuals and business entities, from being reasonably predictable and manageable, have burgeoned to a point where the management of business and personal affairs, including risk management, have become more essential and much more sophisticated.
Features of the 'trust essence' are:
- it is a legal relationship, not an entity (although US law recognises an element of separate legal existence), under which a trustee looks after assets for a 'beneficiary';
- A 'settlor' creates the terms of the relationship in agreement with the trustee. This gives the appearance of a quasi-contract. While English law does not recognise a contractual element, US law goes part of the way;
- the onerous duties of the trustee are owed not to the 'other contracting party' (settlor) but to third parties ('beneficiaries');
- it is the beneficiaries who have locus standi to enforce the terms of a trust, a process from which the settlor (as such) is excluded.
The trust may be likened to a simple form of prism:
The 'total' ownership beam is divided by the trust prism into legal and beneficial primary forms of ownership. It is the trustee's task, in accordance with the obligations, powers and rules imposed by the trust deed, to conserve, administer and distribute both legal and beneficial ownership. Also to enhance the latter, while minimising risk. Eventually, and possibly after interim enjoyment of the beneficial interests by lifetime or limited period beneficiaries, and within the perpetuity period, the trustee will vest legal title in the ultimate beneficiaries. At this point both forms of ownership vest and merge in such ultimate beneficiaries. Obviously there are many variations on the theme.
It would be a gross exaggeration to suggest that nothing much of significance in the trusts world happened for the first 75 years of the nineteenth century. During that time there was some statutory development, and more case-law definition of trust law. The basic motives of conservation and enhancement manifested themselves in situations which became steadily more diverse. However, tax and estate duty efficiencies, protection from family and external attack, insulation from high-risk political situations and the orderly distribution of one's estate represented most applications of the private trust. Mention should also be made of pension, debenture holders and unit trust applications.
Well into this century the trust remained pretty much where its mediaeval beginnings had led it into the Victorian era. Apart from odd abuses, the world of trusts was not an exciting one, although this writer recalls Professor Douglas Whalan, then of the University of Auckland, New Zealand, vouchsafe that 'the first duty of every trustee is to commit judicious breaches of trust' (1961). Much more recently, a legal colleague took a more robust view - that 'the first duty of a trustee is to stand up and be shot at' (1992). These two statements are indicative of the changes in attitude and application that have occurred in the trust field.
What has happened and is to happen in the latter part of this century?
A plethora, if not a plague, of offshore jurisdictions has sprung up, ranging from islands large and small, and in (Bermuda) and out (Isle of Man) of the sun, through small principalities and undeveloped nations to substantial ones. Depending on definition, one can identify 70 - 80 domiciles. Perhaps 10 have validity as trust domiciles.
Civilised professional people have adopted jargon and 'buzzwords' more fitted to the world of advertising or public relations: trust 'industry', 'designer' and 'user friendly' jurisdictions, 'APT', 'state of the art legislation' are just a few examples of just how living a language can become.
Fax machines, computers, modems, and all that goes with the electronic office have replaced the quill, the typewriter, carbon paper, parchment and many human relationships. Regrettably, integrity, ethics, loyalty and putting the client first have all declined, weakened by the selfish activities of those who capitalise on fear and greed.
Gone are the days when only dukes, earls and old families took advantages of opportunities offered by trusts. A rapidly expanding cross-section of 'society' is turning to the concept, resulting in a phenomenal increase in numbers of trusts established by private individuals. Henry Ford would have understood.
The trust, formerly almost exclusively a private client institution, spread into the corporate department with considerable success. It has now returned thence to the private client department having acquired certain commercial characteristics useful in private situations. It is the trust partners' turn to be brought out into the sunshine and provided with the kind of recognition and reward that corporate colleagues have been expecting or exacting since conveyancing went out of fashion.
The use of trusts in all forms is spreading globally, including into lands where the concept has been unrecognised, if not unknown.
Many jurisdictions which formerly had no recognition (or understanding) of the principles of trust law are legislating to embrace the concept in response to market demand for example, France, Switzerland, Russia, and Italy. Not for them the tortuous development through centuries of case law. Trust legislative codes are likely to appear. The hard work has been done.
New species of the genus are evolving - for example the purpose trust (both in private and commercial applications), the asset protection trust (in all interpretations of that ubiquitous phrase from criminal to perfectly proper), voting trusts, trading trusts and common law trust.
More and more professional advisers, whatever their discipline, are recommending trust structures to private and corporate clients - often with an imperfect understanding of the concept.
There are very clear indications that trust litigation is building up inexorably in both domestic and offshore domiciles. Settlors are dying and beneficiaries are reaching their majorities expecting a very expensive lifestyle. Trusts are 'ripening' nicely (for attack by family, creditor, legal and revenue predators alike). Skeletons of 'black hole' and 'charitable' trusts which have never contributed to anything more charitable than the upkeep of the family business jet, will emerge from cupboards in plush offices from the City to the Caribbean, Polynesia to the Pyrenees and almost everywhere in between. Rich pickings for some but potentially destabilising for others.
There could well be a welter, if not a bloodbath of such litigation ahead, arising out of maladministration or non-administration, failure to recognise basic principles, over-active settlors as well as frustrated or 'cheated' claimants.
The doctrine of the constructive trust (trailing behind it that of unjust enrichment) is being imposed by the judiciary on ever-more varied situations, leading, one feels, to a grand finale in which absolutely everybody is absolutely liable for absolutely everything. That aside, the constructive trust has more in common with the early principles of equity (pricked conscience) which spawned the trust concept in England during the Middle Ages. Unfortunately it is all too often possible to discern 'deep pocket' and 'stick it to the rich' philosophies behind an increasing number of decisions made in the name, but not the spirit, of fairness. This is occurring not just in the USA as some might wish to think, but in the British Commonwealth and elsewhere.
From being an 'ideal', skilled occupations, professions and commercial undertakings are becoming increasingly vulnerable, stressful, and unable to insure at economic rates against the kind of error or bad luck they might make or encounter. This is a serious threat to the development of and enjoyment by society of quality goods and services, as well as such fundamentals as good health and a balanced and comfortable lifestyle.
Notwithstanding (or perhaps because of) all the above, the trust vehicle will continue its accelerated development and use. Trustees, while being under pressure from legal systems, conservatives and academics to exercise high standards of prudence ('stodginess'), are being forced by settlors and beneficiaries into activities bordering in the entrepreneurial ('being flexible').
Why a trust for the future?
There is more inherent flexibility in the trust relationship than in the corporate structure both from a policy and administrative point of view. Limitation of liability through use of a corporate entity is becoming ever more administratively demanding and less effective. Directors, officers and even shareholders (why not, they are the ones meant to reap the rewards) have become more and more exposed. While traditionally English law has not developed trusts to offer limitation of liability it has assisted in the preservation of assets and their enjoyment. It is not something of a sophistry to draw a distinction between the use of trust and corporate structures.
Trusts enjoy a degree of privacy and autonomy to a much greater extent than that accorded to corporate entities and the Will/Probate process.
The degree of competence of a professional trustee is likely to be greater than that to be found at least in the lower echelons of company management. One never hears about 'nominee' trustees, but that highly undesirable concept, the 'nominee' director is still very much in evidence and at risk.
The governing law of a trust may be chosen by the settlor who to that extent, and in consultation with the trustee, sets the rules through the trust deed. That of a corporation will be determined by its domicile.
The flexibility of equity, as opposed to the rigid requirements of legislation imposed on corporate entities, provides an environment where fair play can be more easily accommodated.
In what circumstance are trusts being used?
The motives for and goals of trusts are proliferating exponentially. Once, as we have seen, preservation of assets and relatively simple fiscal efficiencies prompted nearly all trusts. Now, trusts can assist in the following (and still more) circumstances:
(a) to make provision for someone under a legal disability (e.g. minority)
(b) to reduce substantially or eliminate death duties in respect of the settlor's assets
(c) to the extent permitted by law and public policy to protect assets against attacks by future, unknown creditors
(d) to protect family assets from the extravagance or bankruptcy of a beneficiary (protective trusts)
(e) to lessen or eliminate probate formalities on the death of the settlor, while distributing assets in accordance with the settlor's wishes
(f) to set aside both legally and physically, assets to be used in a flexible way in the future, thus as a financial planning tool for a family
(g) to ensure the continuity of a family business
(h) to provide for charitable institutions and for benevolent but non-charitable purposes (purpose trusts)
(i) In the context of commercial transactions where it is useful to separate legal and beneficial ownership
(j) to avoid forced inheritance laws, thereby to maintain freedom to dispose of assets in a manner deemed desirable by the settlor rather than legislators
(k) as a will-substitute, or supplement
(m) to function as trading trusts and voting trusts
(n) to hold life insurance policies
(o) to segregate risk in commercial and individual situations
(p) to protect assets from political, regulatory, exchange control or economic risk at home or abroad
(q) to enable a family or business to conduct transactions with enhanced privacy and flexibility
(r) in specialised investment applications:
- pension trusts
- trusts for debenture holders
(s) in accident and general insurance applications
(t) in specific applications (e.g. restorative funds in mining operations)
(u) to protect a reasonable level of assets from unreasonable awards. That is not to say that debtors should not pay back in full money they have borrowed, rather than a portion of the original debt minimised by sharp practice. Further, damages (including on occasion punitive damages), must be awarded and paid to those who have suffered injury or loss.
Why offshore?
This question is simply answered: to get away from 'onshore'. The right offshore jurisdiction will offer a legal regime and infrastructure which, while sensibly regulated, permits family and commercial ventures greater flexibility, privacy and a nil or reasonably taxed environment. This in contrast to the over regulated, confiscatory, politically amoral, bureaucratically egg-bound places that many individuals throughout the world nowadays refer to generically as 'home'. We can see more and more families and businesses setting up their 'headquarters', and keeping substantial assets, offshore. So established, such assets can be used in 'full value' transactions if necessary, subject to some taxation as well as simply being gifted, to make life and business onshore more rewarding, pleasant and secure. It is the availability of wealth (not the physical possession of it) which, with proper structures and practices, can provide security and efficiencies to the wealthy and the would-be wealthy.
The choice of jurisdiction
This is a critically important decision. Trust work demands as a domicile a jurisdiction having appropriate laws and experience and offering a long history of excellence in this highly specialised area. While many jurisdictions can offer convenient corporate facilities few reach the standards required to ensure security and proper administration for trusts. Too often, jurisdictions are chosen without enquiry and without any in-depth knowledge of a particular country or region. A visit to the proposed location, at least for substantial work, is strongly indicated. Regard must be paid to suitability in respect of individual client's proposals. The selection process should, for each client, involve identifying the following minimum characteristics:
- a politically, moral, uncorrupt and economically stable domicile. Who in his or her right mind would locate a trust in a seriously-troubled third world nation, however threatened they might feel at home a high per capita income for local inhabitants (gives rise to social and political stability) accessible - convenient both from geographical and time-zone points of view; not only does accessibility promote administrative efficiency, it facilitates a closer client/trustee working relationship proven track record for trust administration, 20 years at a minimum availability of an unfettered choice of reputable banking and custodian services
- first class communications
- low-tax or tax-free environment (for non-resident entities)
- long and successful self-governing (but not necessarily independent) constitutional status
- appropriate official language (likely to be English for now) sophisticated and uncorrupted infrastructure and excellent support services, and a good choice of first class legal and accounting firms with relevant international experience sensible and effective regulation and supervision of trustees. Don't be taken in by cosmetic or window-dressing regulatory regimes not enforced in practice
- conduct of legal cases on a contingency fee basis forbidden by local Bar rules, or legislation, discourages nuisance suits
- high ethical standards in government, the professions and commerce
- clear and fair trust laws, applied by a competent Judiciary.
Nearly all jurisdictions claim these hallmarks, very few deliver.
The future for trusts
We have reached a crossroads. In the early part of this century, trusts were stolid, conservative and super-secure, in complete harmony with the Victorian era. One can picture the 'professional trustee' sternly refusing to make distributions for anything so frivolous (for example) as educating women. The modern and future trustee will necessarily have a much less constrained role. The range of investments and objects will broaden immensely. The trustee will have to exercise a more flexible, indeed almost entrepreneurial, approach to satisfy the business, family and pleasure needs and wants of beneficiaries. Further, the business, and commercial use of trusts in the global village will become increasingly imaginative and prolific.
The challenge to the trustee will be to cope with liberalisation while conserving assets in a prudent way. The standards expected of trustees will have to reflect their changed and more worldly roles. Riskier investments will be made and tolerated. The trust structure will, for good or ill, have to develop in a way consistent with the high-pressure consumer lifestyle sought after by present generations. The game will get livelier. Trustees will need to examine their role and the levels of protection they should reasonably enjoy in the light of these revolutionary demands.
Specific projections
1. The present undisciplined and inconsistent growth in, and spread of, the use of trusts will continue until market forces intervene to impose more consistency internationally. 2.There is not much more room on the bandwagon. There can't be many more waifs and strays with delusions of international business grandeur. Some may, however, fall right off the said bandwagon. 3.Nations which prostitute their sovereignty for quick money will encounter serious external problems of comity as well as an internal inability to control the tigers they have by the tail.
Finally, it is beyond the scope of this article to consider the merits and demerits of various jurisdictions. However, those long established offshore centres with good reputations, sound laws and suitable skills will continue to attract the huge amount of quality trust work which will be the feature of early 21st century international and 'mainland' activity.
Those jurisdictions however well intentioned, which vie with each other in the production of tailor-made 'designer' legislation will find the suit so tailored a bad fit.
Law reform should not be an isolated or individual process, nor one prompted by competition for doubtful work. For all the sophisticated applications of trusts now and beyond 2000, it will be the conservative jurisdictions and traditional ones prepared to move with the times, which stay the course.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought for your specific circumstances.
