As we all know, the trust has been the traditional arrangement for holding wealth and assets for hundreds of years. Indeed, such is the all-pervasive nature of trusts in the UK that, in order to qualify as a lawyer in the UK (also in USA, Australia, Canada, New Zealand and all Anglo-Saxon jurisdictions), it is necessary for law students to pass the trust law paper which is usually one of the four elements of the second phase of any university examination. Hence Anglo-Saxon lawyers are automatically versed in trusts,and are completely familiar with them. This ‘familiarity’ with trusts has led to a ‘blind faith’ in their use.
Lawyers automatically, it seems, turn to the use of a trust even though there are far more modern structures available which are: (a) superior to the trust; and (b) more in tune with today’s modern commercial world. It is the view of the writer of this article that trusts have well nigh outlasted their utility in today’s modern commercial world and, as a result, there have been various attempts to drag the trust into a more modern method of operation. Yet there remains alternative structures with are superior to trusts which guarantee absolute confidentiality, wealth protection, and succession.
A Thumbnail History of the Trust
Traditionally, and as we all know, the trust was used to hold landed estates and they developed from landed estates and feudal ownership. Hence, in the 12th Century we saw the emergence of the ‘use’. Uses, or (as we know them now) ‘trusts’, then underwent 400 years of development until the 16th Century when the Statute of Uses was introduced in 1536. This, arguably, was the first historic attempt at cracking down on ‘tax avoidance’ which trusts (‘uses’) had enabled. The attempt, by force of the Statute of Uses, to void any conveyance of land under trust except where the beneficiaries were expressed to be the legal owners (not the equitable ones) of the land the subject of the trust conveyance. Land tax, thus, could still be levied upon the beneficiaries qualegal owners. In the event, the Statute failed in its purposes due to the fact that lawyers then conveyed land upon the basis of a double use: a ‘use upon a use’. An example would be a conveyance of land to ‘the use of (in trust for) such person and persons, and of such estate and estates, as I shall appoint by and in my Will’.
Fast forward to 1918 and we see post First World War taxation in an extreme form. The response from the legal profession was seen in the 1930’s with the Vestey family who accumulated assets with Trustees overseas in order to escape confiscatory UK taxes. Hence, we see that during the second half of the 20th century the functions and forms of settlements had changed beyond all recognition, and to a radical degree1. Trusts were no longer involved with landed estates but had moved into new ground with business and commercial enterprises. The introduction ofCapital Gains Tax in the UK in 1965 made the use of trusts in a modern commercial environment even more appropriate. Hence there was aninexorable change in the nature of trusts, as business and commercial enterprises became the dominant client base.
In the United Kingdom and Europe, trusts no longerfit in today’s modern commercial world. The solution and alternative, superior vehicle has been around for many years – yet Anglo-Saxon educatedand trained lawyers, still insist on trying to get square pegs into round holes.
Ownership and Control
Now trusts had become established, indeed well-entrenched, in the commercial world, owners of businesses were, so far, happy because they hadprotected their wealth for the benefit of future generations. But commercial owners were unhappy that, by doing this, they had essentially lost control of their wealth. They liked the protections, tax advantages and succession solutions a trust could provide, but they disliked the loss of effective ownership and, worse, control.
There then began a series of inventive statutory amendments to trusts in offshore jurisdictions which have been consistent attempts to givegreater control to the Settlor (former owner). This began in 1989 in Bermuda where, for the first time, we see a wide range (nine in all) of ReservedPowers granted to the Settlor.
This was followed in 1997 in the Cayman Island where ‘Star Trusts’ were introduced. Here, the Settlor was empowered to appoint an ‘Enforcer’who could enforce the terms of the trust. In addition, the rights of beneficiaries to take enforcement action against the Trustee were eliminated. Theoretically, and if appropriately arranged, this gave control to the Settlor.
In line with these attempts in improving settlor control, in 2004 we saw the BVI introduce ‘Vista Trusts’ whereby a Settlor or his appointee could have control of the assets within a trust’s underlying company, thereby giving the Settlor de facto real control of the investments and assets, without any Trustee involvement.
The Private Trust Company is yet another method of seeking to increase Settlor control. However, there are distinct disadvantages with a PTC inthat, whilst the Settlor can also be appointed to the board of the PTC, external professionals are also appointed – and these professionals must constitute a majority of Board members. This effectively means the Settlor is in the same boat as he has been trying to get out of, as again he has lost ‘control’. In addition there are dangers of ‘dog-leg’ claims, and further, the meticulous corporate administration which must be performed is extremely expensive and time-consuming. Lastly, the directors may well be ‘shadow’ directors’, and the danger of ‘sham’ becomesobvious.
Finally, we see many trusts containing ‘Reserved Powers’ shadowing the original Bermuda legislation, and we see the Trustee’s powers of investment may be delegated by the Settlor.Legislation in Singapore and, recently, in Hong Kong evidences this.
Attempts to increase Settlor control have been criticised, certainly, and ironically, in theCaymans, and in the BVI – although so far no trustshave been challenged for being either ‘shams’ or being nullities. This is a distinct possibility, because what we have seen over a significant period of time is the progressive devaluation the office and functions of the Trustee, whether it is handing over dispositive powers to the Settlor, other powers which are normally within the sole province of the Trustee, or by giving positive control to the Settlor whether via an enforcer or a protector. These are essentially contrived attempts to transform the Trustee into a compliant agent of the Settlor. As we know, there is an ‘irreducible core’2 of trust obligations owed by the Trustee. The tension between giving Settlors increased control and effectively diminishing, if not eliminating, the role of the Trustee is now an extremely acute problem for Equity and Chancery Courts.
International Attacks on Trusts
In addition to the problems trusts introduced because of the constant influence of equity, and trust law, they have been under attack in Europefor over ten years:
The Situation in France
The Rectifying Finance Law no. 2011-900 dated 29 July 2011 enacted a specific tax regime applicable to trusts in a Decree which was finally published in the official publication of enacted laws and regulations in France (Journal Officiel) on 15 September 2012.
The Situation in Spain
Law 7/2012 published on 30 October 2012, developed by Royal Decree 1558/2012 of 15 November.
The legal concept of trusts does not exist in Spanish law and so it is not recognised by the Spanish tax authorities or the Spanish courts.
The Situation in Switzerland
‘Swiss President Eveline Widmer-Schlumpf told leaders of the G20 countries that Switzerland will not accept automatic tax information exchange unless ‘offshore financial centres which adhere to Anglo-Saxon trust law improve their identificationof beneficial owners of trusts’.
STEP Journal 23.04.2013
The Situation in Germany
A Bundesfinanzhof decision twelve years ago has clarified that distributions by US trusts are subject to German gift tax as well as income tax. The court ruling confirms that substantial tax risks arise when using a trust as an estate-planning tool for a beneficiary resident in or otherwise linked toGermany.
McDermott Will & Emery 09.04.2013
The Common Reporting Standard (‘CRS’)
If the European attacks were not enough to stigmatise trusts as ‘problem vehicles’ from the perspective of tax jurisdictions, the CRS hasachieved what governments have been straining at the bit to achieve, the closing down of offshore tax avoidance which, of course is perfectly legitimate. In a crowning demonstration of legal ignorance the OECD, being the attack dog of the EU, proclaimed that not only should the beneficiaries of trusts be disclosed, but also the settlors and protectors – those that have no interest whatsoever in the trust corpus.
The Solution and Obvious Alternative
A suitably arranged Company Limited by Guarantee (or Limited by Guarantee with share capital), if carefully and suitably drafted, can replace a trust, because it will act identically withthe mechanics of a discretionary trust – despite being a corporation. The main difference and benefit is that a client may ‘Give and Retain’ which is not possible with a trust3.
Further, the onerous duties of Trusteeship imposed by equity are now eliminated, and instead of trustees, there is a board of directors which can make executive decisions instantly. No need for the often-required Counsel’s Opinion for the Trustees which inevitably slows down decision making and adds to the expense of the trust.
My trust companies in Mauritius and Hong Konghave been using these structures for 20 years totally trouble-free guaranteeing HNWIs and Ultrastotal confidentiality, wealth protection, and succession.
See:
Chancery Partners Limited, Hong Kong (‘chancery-partners.com’)
Corporate & Chancery Group Limited, Mauritius (‘chancery-group.net’)
Jonathan Shaw is a barrister of Gray’s Inn, and has spent over 35 years in private practice dealing with commecial issues and trust and tax-related matters.Since 1997 he has specialised purely in international tax law and trust law and advises HNWIs and Ultra HNWIson their international affairs and wealth structuring.
For the last 20 years Jonathan has been at the cutting edge of using Special Purpose Vehicles for tax planning and wealth structuring for HNWIs and Ultras using ‘Corporate Discretionary Trusts’. Although he is a trust specialist he advises against the use of trusts in today’s trust hostile environment, particularly since the introduction of the CRS, as there is now a globalcommercial climate which finds trusts no longer confidential and not suitable for tax planning or wealth protection.
1. See: Lord Walker in Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] UKPC 26 (27 March 2003) at Para 34: ‘It is appropriate to reflect that during the long period covered by these authorities (but especially during the second half of the 20th century) the forms and functions of settlements have changed to a degree which would have astonished Lord Eldon’.
2. See: Armitage v Nurse [1997] EWCA Civ 1279
3. See: Rahman v. Chase Bank [1991] JLR 103
