Despite the ongoing fluctuations in the global economic environment, Trusts continue to be extensively employed by many Administrative Service providers worldwide. Primarily utilized for Asset Protection, safeguarding family and/or beneficiaries, and integral components of tax planning, Trusts remain a prevalent choice for a spectrum of related reasons.
Trusts are allowed to operate in almost all countries, contingent on their legal and socio-economic situation at the time. In most countries, they undergo registration, and in many cases, the Trustee must be licensed.
However, if not used properly and legally, a Trust can become a hideout for worldwide illegal activities and the concealment of real ownership. Due to these risks, Trusts are considered High-Risk Instruments. Consequently, most banks exercise caution and implement numerous precautions when onboarding Trusts or legal structures, including complex ones, ultimately owned by a Trust(s).
This underscores why FATF (Financial Action Task Force) recommends continued reform of Trusts, especially as concerns about transparency become increasingly universal. Now, let us take a deep dive into understanding Trusts, exploring their definition [2], evolution, and key features and characteristics.
Trust Governance and Compliance
A Trust, at its core, represents a tripartite relationship involving the Settlor, Trustee, and Beneficiaries. In this arrangement, the Settlor transfers property —whether tangible or intangible — to the Trustee, who assumes legal title, holding it for the benefit of the Beneficiaries. The Settlor’s role is pivotal, initiating a comprehensive Know Your Customer (KYC) process to verify their identity. This separation of control and ownership underscores the trustee’s fiduciary duty to the beneficiaries, who, as equitable owners, hold rights to the trust property.
To ensure the validity of a trust, it needs to comply with various essential components, including intention, subject matter, and objects.
Intention
The foundation of a valid trust lies in a clear intention to establish one, as defined by legal precedents such as the Re Adams and the Kensington Vestry UK case law.
Subject Matter
The property entrusted to the trust must be precisely identified, following guidelines set in the Palmer v Simmonds case law [3]. Vague descriptions like “the majority of my estate” are unacceptable, as they hinder the determination of the exact extent. Trust property encompasses diverse forms, whether Real or Personal, Tangible or Intangible, commonly involving assets like real estate, shares, or cash.
Objects
Beneficiaries must be explicitly identified or, at the very least, be ascertainable, in line with principles outlined in the Re Hain’s Settlement case. In discretionary trusts, where trustees wield the authority to determine beneficiaries and asset distribution, the settlor must define a clear class of beneficiaries, as exemplified in the McPhail v Doulton case [5]. This class might extend to individuals not yet born at the trust’s inception, such as “my future grandchildren” or “my future great-grandchildren” (as observed in Dynasty-type trusts). Alternatively, the trust’s object could be a charitable purpose rather than specific beneficiaries.
Origins and Development of Trusts
Trusts have a rich history, dating back to Roman Testamentary Trusts that served as early wills for property distribution. In England during the 12th and 13th centuries, amid the Crusades, Personal Trust Law began to develop. Landowners, departing for military endeavours, would temporarily transfer ownership to trusted individuals. However, legal complexities arose upon their return, leading to the establishment of the principle of “Equity” by the Lord Chancellor [4]. In contemporary times, trust regulations are largely shaped by UK Case Law, with some countries adopting similar structures called foundations, which exist as distinct entities.
Over the years, trusts have evolved into versatile instruments, serving specific needs across various purposes. They provide privacy for beneficiaries and their families, limit unwanted beneficiaries through Spendthrift Protection, and play integral roles in Wills and Estate Planning, Charitable endeavours, Asset Protection, Pension Plans, Corporate structures, General Tax planning, Co-ownership, and Remuneration (where all or part of income goes directly to the Trust account). Conventional trusts have paved the way for Unit Trusts in contemporary finance, facilitating collective investments by regulated investors on behalf of their clients. These diverse purposes have given rise to distinct trust types, each tailored to meet unique objectives in the ever-evolving landscape of wealth management [6].
For example, the Dynasty Trust caters to wealthy families across generations, while the Express Trust relies on explicitly outlined written terms, leaving no room for interpretation. In contrast, the Fixed Trust allows Settlors to define precise asset distribution. A flexible approach is seen in the Hybrid Trust, combining unit and discretionary trusts for dynamic asset distribution. The Implied Trust infers Settlors’ intentions circumstantially, while the Incentive Trust entrusts the Trustee to manage and distribute assets under strict conditions. Trusts active during the Settlor’s lifetime, such as the Living Trust, seamlessly integrate into post-mortem administration, while the Irrevocable Trust firmly establishes permanence [ibid].
On a global scale, trusts take on strategic roles, with the Offshore Trust positioning management outside the Settlor’s home jurisdiction and the Personal Injury Trust managing compensable injury funds. Public Trusts serve charitable purposes, contrasting with Private Trusts that cater to individual needs. Driven by singular purposes, the Purpose Trust aims for specific objectives. In collective financial endeavours, the Unit Trust allows multiple investors to pool funds, while the Discretionary Trust empowers the Trustee to decide property distribution. Each type of trust weaves a unique story, meeting diverse needs and aspirations within concise and purpose-driven structures.
The present-day significance of trusts is undeniable, as they stand as one of the most groundbreaking contributions to the English Legal System. In the contemporary legal landscape, trusts play a pivotal role in all Common Law systems, prompting several Civil Law jurisdictions to integrate trust concepts into their Civil codes. For instance, France introduced a concept similar to trusts in its legal system, known as la fiducie. La fiducie, unlike the trust, is characterized as a contract and underwent modifications in 2009 [2]. The recognition of trusts extends globally through the Hague Convention on the Law Applicable to Trusts and on their Recognition [1], which also governs conflicts related to trusts.
In the contemporary setting, Trusts, in the various forms described above, have emerged as indispensable tools, gaining heightened relevance and applicability in our increasingly intricate and dynamic world. The evolution of Trusts over the past five decades has endowed them with unprecedented versatility, rendering them adaptable to a myriad of situations and combinations. This adaptability is a testament to their capacity to cater to the diverse and evolving needs of individuals and families. Beyond their foundational purpose of asset protection, Trusts have become instrumental in leveraging tax advantages, presenting a strategic financial planning option for clients. The key to maximizing the benefits of Trusts lies in a judicious selection of elements, including a robust country jurisdiction for registration with a flexible and effective legal system, a meticulously regulated trustee, and the indispensable guidance of a proficient Legal Counsel and Auditor. In essence, Trusts have evolved into sophisticated instruments that not only safeguard assets over time but also offer a strategic and customizable approach to wealth management, underlining their enduring significance in the present-day financial environment.
References
- 30: Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition https://www.hcch.net/en/instruments/conventions/full-text/?cid=59
- Dictionary of Private Law: Definition of Trust
https://www.dictionnaire-juridique.com/definition/fiducie.php - English Reports Citation: 61 E.R. 704: HIGH COURT OF CHANCERY: Palmer and Simmonds
https://vlex.co.uk/vid/palmer-v-simmonds-805836241 - History of Equity and Trusts
https://en.wikipedia.org/wiki/History_of_equity_and_trusts - House of Lords: McPhail and Others v. Doulton and Others
https://www.trusts.it/admincp/UploadedPDF/200712061718120.jEngHouseMcPhailDoulton19700506pdf.pdf - Types of Trusts
https://www.findlaw.com/estate/trusts/types-of-trusts.html
Nicos Pilavas
Banking Officer
Eurofast Nicosia
nicosia@eurofast.eu