Plus ça change
MICHAEL GIRAUD AND VERENA ROBERTS EXAMINE THE EVOLUTION OF THE TRUST AND ITS RETURN TO ITS ORIGINS AS A TOOL FOR ESTATE AND SUCCESSION PLANNING.
It is well documented that trusts originated in the Middle Ages with departing lords who left their estates in the care of trusted individuals when travelling away, usually
to take part in the Crusades in Europe. The assets were either held until their return or administered in line with their wishes for the benefit of their chosen successors.
We can be quite confident that tax avoidance was not a principal driver when these medieval trusts were being established, and that asset protection, estate planning and succession planning were key priorities.
If we leap forward several hundred years, tax planning did gradually come to the fore as a reason to establish trusts, and the traditional benefits of a trust, while still seen as useful, were considered less relevant. This may have been due to the rudimentary nature of tax legislation in relation to trusts, which allowed persons to establish trusts with immediate quantifiable benefits.
Although the industry thrived on this type of planning, in hindsight, it was a shame to sideline the estate and succession planning flexibility that a trust may allow a family
(subject, ironically, to tax constraints).
As settlors increasingly established trusts primarily for tax planning reasons, the general public’s, and invariably governments’, perception of trusts, settlors and the people who worked in the trust industry changed.
TRUSTS, TAX AND TRANSPARENCY
This has had consequences, with tax regimes evolving to become, at times, punitive with regard to the establishment of trusts; and the ongoing taxation of trust structures leading to potential tax liabilities on trustees, settlors and beneficiaries, depending on their country of residence and the nature of the assets held. Existing trust structures might have been rendered obsolete due to changes in applicable tax legislation or become less beneficial provided that their establishment was solely driven by tax planning.
As well as tax measures, we have also seen a global push to increase transparency with relation to the control of trust structures.
The introduction of the UK trust register in June 2017, threats of public registers and the global automatic exchange of information through the Foreign Account Tax Compliance Act and Common Reporting Standard regimes are just recent examples.
With this in mind, the need for expert advisors to be well informed and primed to help clients navigate these complexities in the day-to-day administration and setup of structures has never been greater.
The changes have also resulted in a shifting of the fiduciary landscape, and several high-level trends have emerged across the trust industry. Without doubt, there has been a flight to quality, with an expectation that service providers will add quantifiable value to their services and ensure transparency with regard to how they operate, their ownership structure and fees.
BACK TO ITS ORIGINS
It appears that, as a result of these developments, the motivation for establishing a trust has returned to its origins. New structures are being established for many of the traditional reasons first considered by medieval lords departing on the Crusades. These include:
• will and succession planning: to ensure that wealth passes down through the generations of a family in a controlled manner, safe from any family dispute that may break up a family legacy, and to avoid forced heirship (to the extent permitted by law);
• asset protection: to ensure segregation of assets from a personal estate, and to provide protection from political and economic instability; and
• asset administration: to benefit from the experience and know-how of a professional service provider that is better able to ensure compliance with the increasingly complex day-to-day administration of cross-jurisdictional financial assets, real estate, chattels, rights, patents, carried interests and so on.
These are dynastic in nature with a greater value and complexity (particularly with regard to the multi-jurisdictional residence of settlors/beneficiaries and the complex cross-jurisdictional investments held in the structures).
Given the increased complexity, it is important not only that the trustee is committed to providing private client trustee services, but also that the business has strength and depth in each area so that it can properly service the structures and help them evolve as legal and regulatory requirements change.
There is no denying that matters are now very carefully considered in advance of a structure being established. However, when considering the reasons why families continue to establish offshore trusts, perhaps it really is a case of ‘Plus ça change, plus c’est la même chose.’
STEP Journal (Vol27 Iss1), p.27, February 2019