It's a fairly well known fact that the trust originated in England many hundreds of years ago, and that its purpose was to preserve assets against depredations occurring through death, matrimonial and family squabbles, spendthrift descendants and the like. Taxation at death was one of the incidents that trusts were effective against, but they were not particularly designed to guard against the taxation of income or capital during the settlor's life, because such taxes were not a major threat to wealth at the time, and anyway a domestic trust was a taxable person in itself.
Income tax was first levied in England at the beginning of the 20th century, and in many countries had become worth avoiding by mid-century; but initially at least the best way of avoiding it was to turn income into capital, which was not so heavily taxed. It was only when capital taxes of various types became significant that the offshore trust came into its heyday.
Very rich people had begun to use offshore trusts in the first half of the century, but at least as much because of the additional asset protection that they offered, simply by being in a different jurisdiction, as because they were tax efficient.
The administrative overhead and other complications of dealing with an offshore location were initially very great, so that at first only conveniently close-by jurisdictions like Jersey (Channel Isles) for the Brits and the Bahamas (for Americans) developed as 'offshore' jurisdictions. The first trusts legislation in the Bahamas, surprisingly, dates from 1893. The great expansion of trusts, both in terms of number of jurisdictions and volume of business, came later when telecommunications, air transport and the end of capital controls opened up the world and gave freedom to investors and the owners of capital.
At all events, by say 1980, offshore was burgeoning in response to horrific tax rates, and tax avoidance had taken over as the main driver of offshore growth. In this process, and as more and more countries laid claim to the worldwide income and assets of individuals during life and at the end of it, the trust played a key part. But in two respects at least the traditional English trust was lacking: first in its perpetuity rule, which limited the duration of a trust to 'life in being' plus 35 years, or to 80 years, in order not to permit the alienation of property for more than one generation after death of the settlor; and secondly in its abhorrence of 'spendthrift' clauses, ie wording which prevents a creditor from 'seeing through' the trust to obtain settled assets if the settlor is a beneficiary.
In the US, and in the main island offshore jurisdictions, which all inherited English trust law (since almost all of them were British originally) perpetuities were legislated away during the 1980s and '90s - no-one wants to see assets reverting to family members who may still be living in the country from which the settlor had removed them, with disastrous tax consequences. During this period, tax authorities in high-tax countries gradually began to attack the offshore trust, either through specific legislation or through general anti-avoidance provisions, and as this process whittled away at the tax advantages of offshore trusts, asset protection began to take over as the predominant motive for offshore settlements. The 'spendthrift' problem stood in the way, particularly for non-common-law families, who had to cope with 'Code' country legislation which often incorporates forced heirship provisions and specific creditor protection (both usually absent in common law jurisdictions).
Initially, rich 'continentals' used different techniques to protect their assets, but in time they grew to like the friendly Anglo-Saxon trust, and in the latter part of the 20th century as trust law began to be implanted into the foreign soil of one 'Code' jurisdiction after another, the common-law jurisdictions needed to follow and passed laws which specifically excluded forced heirship and creditor protection provisions. The US itself has largely removed anti-spendthrift wording from its trust legislation - unlike in the unitary UK, there is a kind of onshore offshore in the US because of its federal structure, and there has been a competition between states to offer good trust regimes to residents in other states, and for that matter to compete against the offshore 'offshore', which is nowadays practicable because after the enactment of Section 679 of the Tax Code, the IRS treatment of offshore trusts is now worse than its treatment of onshore trusts.
Even without perpetuities and with asset protection features, the bare offshore trust came to be seen as vulnerable and by the turn of the century was much more likely to be used as part of a more complex framework involving corporate features and multiple jurisdictions than on its own. It's not right in fact to say that a plain trust is ineffective: in the Cook Islands, which may have been the first jurisdiction to offer asset protection trusts per se, only one trust has been penetrated by creditors in 20 years, and that was due to a weakness in the drafting of the governing law which has subsequently been corrected.
The trend towards complexity also reflects growing corporate interest in the trust, and the tendency for the more advanced offshore jurisdictions to offer structures suited to particular purposes - hence the 'purpose' trust. A trust which is suitable for one purpose may well not be suitable for another, and the original English trust law was one more time not ideal for purpose trusts, which has led to a third round of adjustment of trust legislation in many jurisdictions.
When offshore trusts began to be used in a major way, they were usually set up by professionals in the home jurisdiction of the settlor, reflecting the lack of professional expertise in the few offshore jurisdictions that were then available. Eventually the main professional firms began to set up offices in the jurisdictions, and a gradual process began which has resulted in the emergence of sophisticated, multi-disciplinary firms offshore. When these firms work for the corporate sector, they can be referred to as 'corporate service providers', a term which implies a blend of tax, legal and financial expertise.
In parallel with the growth of professional expertise, and sometimes in competition with it, those jurisdictions which encouraged banking usually saw the development of 'fiduciary' companies, often run as departments of banks, which specialised in the setting-up and running of trusts. The banks after all, which were and are rapidly developing their private banking sides, had a ready supply of wealthy clients for a trust business.
In most jurisdictions, professional competence ran ahead of legislative controls, and in many jurisdictions the wall of money that hit offshore from illicit sources in the '90s may have found it all too easy to burrow unseen into the layer of anonymous trusts, IBCs (International Business Companies) and bank accounts that makes up the asset base of offshore. The response of the legislators, sometimes with quite a lot of pushing from the international bodies that have been trying to clean up 'offshore', has usually been to pass a 'Banks and Trusts Act' or similar, which establishes a licensing and 'know your customer' regime for the trust sector.
The horror of 9/11 has of course enormously accelerated this process, and faced with extremely sharp-toothed US legislation, the major offshore jurisdictions have raced to become cleaner-than-clean in terms of their anti-money laundering and anti-terrorist funding regimes, to the point that many of them are by now far 'cleaner' than the very OECD countries which began the anti-offshore process in the mid-90s.
Even the most devoted believer in the rights of humans to dispose of their own assets and to arrange their affairs to their own benefit would have to agree that the trust is an anachronism. But then so is offshore itself. The harmonisers would say that it is irrational and unacceptable to allow a person to separate himself artificially from his property for his personal gain. The tax authorities have dealt with the trust by ignoring it and bypassing it - the few that haven't yet done so will surely fall into line quite soon. So if the trust is not a barrier to a tax collector, why, logically, should it be a barrier to a creditor?
As much as the trust seems to be somehow unethical when used for personal enrichment or protection in defiance of the public interest, it is obviously the right instrument when used to hold assets on behalf of others. The 'Unit Trust', the pensions trustee and other quasi-public guardians of private interests are eminently acceptable, superior to the 'Code' equivalents, and would have had to be invented if they didn't already exist, as is amply proven by their wholesale adoption in 'Code' countries. A genuine generation-hopping anti-inheritance tax trust also seems OK, because this is a morally repugnant tax to many people.
So it's odd, isn't it, that the laws under which individuals gain protection against 'genuine' creditors through a 'fake' disposal of assets should if anything have become stronger, not weaker. This is an area in which the balkanised condition of international law (non-international law, in other words) shows no signs of the creeping globalisation affecting other walks of life. Banking, insurance, pensions, shipping, environment, accounting and a host of other bodies of law are converging. But not trust law, or the national court systems which cradle it. Why is this? Is it because lawyers are rich, too?
Logical or illogical, there is no sign that the trust has run its course, as our review of the main trust-friendly jurisdictions will show. Indeed, in 2006 the Swiss parliament approved the ratification of the Hague Convention on the Law applicable to Trusts and their Recognition.
Modifications to Swiss law to give effect to the Hague Convention concerned the Swiss International Private Law rules dealing with the recognition of foreign decisions and the jurisdiction of Swiss Courts in trust related matters, as well as the introduction into the solvency and bankruptcy law of the principle of segregation of trust assets.
Investec Trust Switzerland Managing Director Xavier Isaac stated at the time that the ratification had sent a clear signal to the international finance community that Switzerland recognised the importance of the Anglo-Saxon trust concept as an essential component of the wider wealth management proposition and of the need for an adequate legal framework when dealing with trust structures.
“It is a major development in the trust landscape internationally and for Switzerland,” he announced, continuing: “Ratification is great as it dissipates much of the uncertainty for trusts in the Swiss legal system.” Mr Isaac added that high net worth individuals (HNWI) coming to Switzerland expect a secure environment for the structuring and management of their wealth.“It is therefore the clients who will benefit most from ratification as more and more HNWI will continue to place their confidence in the Swiss financial sector, opening bank accounts and viewing trusts as sound vehicles for wealth management,” he observed.“It will also give additional international credibility and standing to Switzerland as a proper jurisdiction for wealth management activities in a context where Switzerland is too often the target of some EU and other countries. Switzerland is adjusting its existing rules so that Swiss law can now interact with trusts from a legal perspective. The Swiss Tax Conference is reviewing the tax treatment on trusts. While the taxation of settlors and beneficiaries in Switzerland is the most complex and sensitive part of the discussion I hope that trusts, which have non-resident settlors and beneficiaries but have Swiss trustees and/or are being administrated in Switzerland, will be treated on tax neutral basis."
By mid-2009, evidence was emerging that the trust and wealth management industries were adptiong to the new age of transparency instigated by the OECD countries in response to the global financial metldown and subsequent economic crisis. Participants in a survey conducted by the Society of Estate and Trust Practitioners agreed that three key trends would develop in the industry over the course of the coming years. These include:
The end of secrecy will mean families will seek out advisors and trustees who can master global tax advice. Economic conditions will mean tax competition between countries will increase and the distinction between offshore and onshore will disappear;
The industry will modernise its practices to attract a wider audience; increasing its market share through adopting best practices in investment management and enhancing compliance processes to reduce risk;
Products and services will continue to be combined together to create new revenue opportunities for wealth structuring professionals. Trust and Estate Planning practitioners will have to be increasingly innovative to expand the number of strategies in its ‘toolbox’ to create bespoke solutions in higher value structures.Shortly after the results of this survey were published, STEP released figures which indicated that sentiment was improving amongst practitioners, with 41% of the organization's members predicting that trust and estate business would "improve" or "significantly improve". This was almost double the number that held this view earlier in the year.
STEP Chief Executive David Harvey said: “The move to positivity among STEP members is a great indicator that, despite the economic downturn and the regulatory environment providing new challenges for trust and estate practitioners, the industry is looking to the future with renewed confidence. Our members are looking to embrace the opportunities afforded by the needs of international families to plan and to be compliant on an increasingly global, rather than national, basis."
The Swiss Association of Trust Companies was officially launched in September, 2007, in Zurich and Geneva, in a bid 'to encourage the professional and ethical development of an industry in full expansion in Switzerland'.
The trust business is witnessing rapid growth in Switzerland, having more than doubled in size over the past five years. In 2007, as previously stated, Switzerland ratified the Hague Convention on the Law Applicable to Trusts and their Recognition.
The primary objective of the association was to encourage the growth of the trust industry while upholding a high standard of quality, integrity, and professionalism. SATC has already enacted its bylaws and a code of ethics and conduct that members undertake to observe. It also aims to encourage the federal bodies to develop a set of specific rules applicable to trust companies that complements the existing regulations under the Swiss anti-money laundering regulations, drawing inspiration from SATC’s professional qualification criteria for membership and from the principles contained in its code of ethics and conduct. SATC will therefore also act as a partner for dialogue with the Swiss government.The Swiss Association of Trust Companies comprises twelve founding members whose primary activity is trust administration and who illustrate the diversity of this industry in Switzerland: small and large, independent or bank-owned companies which are active in various regions of the country. They are: Barclaytrust (Suisse) SA, Bonhôte Trust SA, Cantrade Trustee Ltd, Close Trustees (Switzerland) SA, Experta AG, Investec Trust (Switzerland) SA, KENDRIS private AG, Paicolex Trust Management AG, Quiltrust Ltd, Rothschild Trust (Switzerland) AG, Settlements SA and VALUEworks. The Association expects to grow rapidly.
The initial Committee was comprised of Kecia Barkawi-Hauser, VALUEworks (President), Xavier Isaac, Investec Trust (Switzerland) SA (Vice President), Adrian Escher, KENDRIS private AG (Treasurer), Mark Barmes, Settlements SA, and Daniel Martineau, Close Trustees (Switzerland) SA, (Members).
An advisory board was also established, composed of leading professionals mainly from the trust industry. Professor Luc Thévenoz, Professor at the University of Geneva’s Centre for Banking and Finance Law and Member of the Swiss Federal Banking Commission is one of its members, along with Stephanie Jarrett, attorney and partner with the law firm Baker & McKenzie, Geneva, and Vice-Chairman of the Suisse-Romande Branch of the Society of Trust and Estate Practitioners (STEP).The project for founding this association was conceived almost two years previously by two of the Swiss branches of the Society of Trust and Estate Practitioners. STEP, which brings together more than 700 individual members within Switzerland, is particularly focused on professional training and development for the trust professionals making up its membership. SATC intends to complement STEP and plans to unite trust companies of a sound reputation operating in Switzerland.
According to Kecia Barkawi-Hauser, President of SATC, Switzerland is a very favourable market for trusts: “The status Switzerland enjoys as an international financial market, the proximity to private banks, internationally renowned management and investment companies, along with the resulting synergies, all represent a major asset for the growth of the trust industry in this country. Furthermore, Switzerland benefits from an extremely qualified, multilingual and multicultural workforce that proves particularly valuable to trust activities. In this context, SATC will provide trust companies in Switzerland with an industry association devoted to best standards."
The Society of Trust and Estate Practitioners is the leading worldwide professional body for practitioners in the fields of trusts, estates and related issues. It is a unique global body which provides its members with a local, national and international learning and business network focusing on the “responsible stewardship of assets today and across the generations.” STEP members help plan family successions and to navigate the complex laws and tax rules surrounding trusts, estates and inheritance. Founded in 1991 by George Tasker, a senior trust manager with a big five UK accountancy firm, STEP was initially intended to be a discussion forum for the profession in the UK. However, since its first meeting in London, the organization has grown rapidly and STEP now has more than 14,500 members in 66 countries, ranging from the US and the UK to New Zealand and Mauritius. STEP branches can be found in 33 countries in Europe, Asia, North America, the Caribbean, Central and South America and Australasia.
STEP provides education, training, representation and networking for its members. Members advise clients on the broad business of the management of personal finance. Full members of STEP are the most experienced and senior practitioners in the field of trusts and estates.
STEP supports a wide-ranging education and training programme and more than 3,500 students worldwide are currently studying for STEP qualifications. STEP members are subject to a rigorous code of professional conduct and the public can identify if their adviser is a STEP member by the use of the designation TEP (Trust and Estate Practitioner) after their name. STEP also actively promotes continuing professional development among its members through briefings, publications, special interest groups, courses and seminars.
Although politically non-aligned, STEP campaigns for fair, transparent and consistent tax rules so that families making long-term plans have “clear tax rules that do not change repeatedly if they are going to have the confidence to enter into long-term commitments.” One recent notable example was STEP’s highlighting of the potentially damaging impact of proposed changes to the UK rules on the taxation of non-domiciled taxpayers, giving technical evidence to a House of Lords Committee and securing significant changes in legislation. STEP has also worked closely with the European Union in ensuring that proposed changes to the EU Savings Directive are “robust and practical for professional advisers to implement.” In addition, STEP has been with several jurisdictions on the practical implementation of the G20/OECD programme for improved international tax transparency.
Offshore Trusts News
New Zealand Updates Virtual Currency Tax Guidance Wednesday 16/9/2020New Zealand's Inland Revenue on September 7, 2020, announced the release of updated guidance on the tax treatment of crypto-assets in New Zealand, including virtual currencies.