As most readers of this will know, the origins of the trust are firmly rooted within English history. This article briefly explores the evolution of the trust concept, from those roots through to today when the use of trusts in corporate planning is becoming far more significant as compared to traditional "private client" applications.
The concept originated during the Medieval period as a means of protecting the property and land of a fellow knight. It was more commonly known as a "use" (from the Latin "ad opus"- to the use or benefit of). During the Holy Wars, knights would depart from their native land for years at a time; the remaining family and friends would effectively become entrusted (the Trustee), holding the knight’s possessions for his eventual return as the beneficiary. The income derived from the land was used to support and protect those left behind during the crusades.
The feudal system was very much in operation, and it was the desire to escape from the rigidity that the trust system was derived. Similar to the Inheritance Tax of today a "relief" was payable to the Lord upon the succession by descent of a tenant. By granting the land, on trust, to a friend, he in turn would grant it to a named beneficiary after the tenant’s death; hence the relief fee was avoided.
The concept could be applied to a variety of situations and for the Franciscan Friars who were forbidden to own land, the trust was a means by which they were able to retain the land that was rightfully theirs, although held by a peer, for their ultimate benefit. And by the early 1500’s, the great majority of English land was held in such a way.
The English system of Equity and the Courts of Equity were integral in the formation of the trust concept and in the late 18th and early 19th century, the latter developed and recognised "equitable rights", "equitable obligations" and "equitable remedies" – distinct from those developed by Common Law Courts.
It is only really in the 20th century that the use of the trust has become widespread for the purposes of tax planning. The trust concept and its application has been developed by decisions of the courts, where the comments of judges in various high profile cases consolidated the concept of tax avoidance versus tax evasion.
Though not necessarily tax driven, there are other visible examples of individuals or families using trusts. It is reported that in the year that Nelson Rockefeller ran for vice president of the United States he spent $20 million but paid no tax. Later when questioned about this he explained that the money he spent had been borrowed from an offshore trust. In differing circumstances, it has been well reported that following Ted Kennedy’s infamous incident at Chappaquiddick he left the scene of the accident for several hours. It is now alleged that when he returned to the scene his net worth was $1,700. The bulk of his estate had, in the interim, been transferred to an offshore trust. An early example of Asset Protection Trusts one could surmise?
It has been suggested that US$5 trillion is placed in offshore funds of which 40% is safeguarded in trusts. One should always be wary of any statistics however - and particularly those involving things which by their very nature enhance confidentiality.
It is obvious from this that the growth in the use of offshore trusts has been dramatic and continues to accelerate, despite the attempts of revenue authorities to curb the offshore activities of those under their jurisdiction. This acceleration is due in part to the globalisation of the trust concept, effectively widening the scope of individuals able, or prepared, to establish a trust. In other ways the trust concept itself is being broadened, with new applications or variations on a theme such as the Asset Protection Trust and the Purpose Trust.
The use of trusts by companies is a comparatively recent innovation, with the advantages in a commercial context beginning to be more widely appreciated.
In commercial terms, whilst the drafting of deeds may vary widely, the following underlying reasons can be identified as driving forward the commercial use of trusts:-
A means of consolidating the interests of a number of persons via one vehicle. For example, a Debenture Trust Deed.
To restrain individuals from dealing freely with property. For example in the case of employee benefit schemes where the shares in a company can be transferred into a trust and the voting rights will vest in the trustee but rights to income and capital distributions vest in the employee.
To transfer legal title from a Settlor company. This device is used to remove items from the Settlor company’s balance sheet and might in addition be used in anti-monopoly circumstances. It is also important when establishing pension funds so as to protect assets in the event of insolvency of the settlor company.
In addition, trusts may be employed for general asset protection, especially when a company is based in a politically uncertain jurisdiction, or one with high tax rates.
It is widely understood that trusts can be established by companies. They do however need to take legal advice from within the jurisdiction where the Settlor company is incorporated. Trust creation is likely to be seen as a gift from the company. Under general English law, a gift such as this would be deemed invalid, unless it was for the benefit of the company.
The most common means by which trusts are used by companies are as debenture deeds (more of a contractual arrangement), security packages (arising when a company enters into an agreement with creditor banks to restructure finances), preferential creditor trusts (such as a subordination agreement where a creditor agrees with the borrower that when the creditor receives sums from the borrower, it will be held on trust for other creditors), employee trusts, off-balance sheet arrangements, anti-monopoly arrangements and for political purposes.
The list is growing, and advisers need now, more than ever, to be aware of the potential for the advantageous uses of trusts in all commercial transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com
