The continuing popularity of the trust

The Anglo-Saxon trust, with its origin in medieval knights departing for foreign wars (perhaps never to return) entrusting their assets to a bishop to look after for the benefit of wives and children, remains one of the most commonly used wealth planning tools 800 years or so later.

In spite of unwelcome – and often misguided – publicity associating trusts with tax evasion or concealing assets for nefarious purposes, the trust is alive and popular. Perhaps this is because of the comfort derived from the court – at any rate in a common-law jurisdiction – having a supervisory function which can be called upon to guide trustees, determine issues of difficulty, give comfort on momentous (ie, seriously difficult or contentious) decisions and hold trustees to account. It is more likely due to the trust's ability to be framed to meet an almost infinite variety of circumstances (provided those purposes are not unlawful) and to adapt over the years to the needs of the family or the purpose for which it was intended to provide. As some of England's oldest trusts attest, they can keep up with the times or be changed by the court to enable them to do so, for example to enable modern forms of investment (as in Anker-Petersen v Anker-Petersen1), shield young adults from the dangers of accessing too much capital too soon (Wyndham v Egremont and others2), be varied to include same-sex relationships and illegitimate and adopted children in the beneficial class (In the Matter of the Representation of the Y Trust and Z Trust3), allow the structure to be fundamentally redesigned when the family is pulling in different directions, or to pass the interest on to a similar charity when the charitable purposes for which the trust was made are no longer practicable.

Whatever the advantages of foundations, family investment companies, family limited partnerships, companies, limited liability partnerships and other modern asset-holding structures, the trust retains its attraction, not least with settlors in regions with little or no common-law heritage such as Russia and the CIS, Central and Latin America, the Gulf and South East Asia. They value the trust's potential to help them provide business succession and assist in protecting them and their families from personal and political pressure. A key element of the trust's attraction in achieving these aims or minimising risk is the division between the legal and beneficial ownership of the assets.

It is by no means exclusive to settlors from such regions that they like to retain control. But when taking into account the lack of familiarity with the concept, experience of abuse of power in their own or neighbouring countries, the single-minded ambition which has often driven the creation of the wealth and the absence of an established relationship with trust service providers in far-off jurisdictions, it is hardly surprising that some settlors have difficulty parting with legal title, possession and particularly control of their assets to their trustees.

The framework within which flexibility can be achieved

There is almost no limit to the ingenuity which can be applied to the draftsmanship of a trust but it is always worth going back to basics to consider what the essential components of a valid trust are. If these are not borne in mind, the 'trust' may not be valid or may be incapable of withstanding pressure. Any inventive solution must always be tested against a list of the trust's essential components – certainty of intention, of subject matter and of objects, accountability of power holders, not ousting the jurisdiction of the court and not being for an unlawful purpose or contrary to public policy. While there are cases dealing with certainty of subject matter and objects, such as the unhappily named re the Double Happiness Trust4 where an attempt to introduce a letter of wishes into the provisions of a fully discretionary trust resulted in the Jersey court not being able to work out what the trust meant and so it failed, the issue which is at the centre of the control versus invalidity debate is the issue of an intention to settle a valid trust.

At its most basic the trust entails the settlor parting with legal title, possession and control of his assets to a trustee or trustees to manage according to the trust's terms and relevant statutory and case law for the benefit of the beneficiaries to whom (as well as to its supervisory court) the trustee is accountable for the exercise of its powers.

As to English law trusts or those in jurisdictions which have taken the English trust as their model and adapted it to their circumstances (the Bahamas, the Cayman Islands, Canada, New Zealand, Australia, Hong Kong, British Virgin Islands, Bermuda, Jersey, Guernsey, Isle of Man, Cyprus, Mauritius, Gibraltar, to name a few):

  • The settlor must intend to part with his assets at the time he puts them into trust. A trust which springs into life only on the death of the settlor is a will by any other name and is not a trust during the lifetime of the settlor (Cock v Cooke5; the Canadian case Re Pfrimmer6 and more recently re AQ Revocable Trust7). This latter case is interesting because it entailed a trust agreement in New York form being created under Bermudian law by a US settlor who, the court decided, had not intended to part with control of his assets and as a matter of fact did not do so. The court also considered that as a matter of construction the deed did not create a valid trust under Bermudian law: in particular a clause common in US trusts seeking to absolve the trustee of liability to the beneficiaries if the settlor agreed with the course of action which would otherwise be a breach of trust was contrary to the principle that trustees are accountable to the beneficiaries and the supervisory court.

    The trust could not operate as a will either because it would have been revoked by remarriage: indeed, in most cases an attempted trust will not have been executed in a way which would enable it to stand as a will if it fails as a lifetime trust. This can result in failure to have accomplished any planning for succession.

    Re AQ Revocable Trust8 was a salutary lesson against not intending to part with control (made worse by the settlor appointing himself trustee and continuing to behave as though nothing had changed) and also of expecting concepts in one jurisdiction to work, without more, in another. In the United States a revocable trust such as that envisaged by Article 6 of the US Uniform Trust Code is used primarily as a will substitute to avoid probate. Such a trust is not intended to be effective against creditors – it does not achieve the passing of assets to another to that extent – but it is still regarded as valid in the United States. Revocable trusts are not invalid per se in Anglo-Saxon trust jurisdictions following the English model but, if it is really intended that the trustee has no powers until after the settlor dies, or that the trustee's obligations can be overridden by the settlor, it will not be a valid trust. Further, revocable trusts are vulnerable to divorcing spouses, fiscal authorities and other claimants as discussed below.
  • Has the settlor given sufficient powers to the trustee such that he has not retained overall control? It is possible to create a 'thin' trust where the trustees have few powers and the remainder are held by the settlor or his appointees but care needs to be taken to ensure that the trust is not too thin and that the conclusion may be that the settlor has too much power and the trustee not enough duty – there has to be an irreducible core of obligations: "there is an irreducible core of obligations owed by trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts" (Millet, LJ, Armitage v Nurse9).
  • The absence of intention is also apparent in cases where the trust – or rather the documentation in which it is set out – is intended to be a cloak, a device or a mask to deceive others as to the true nature of the relationship. The true relationship may be that the assets are actually held by the trustee as nominee for the settlor instead of for the express beneficial class or that the trustee holds the powers but it is always intended that it will be the settlor who directs how they are exercised. It is generally recognised to be a point of vulnerability if the way in which the trust operates is not in conformity with the way it is supposed to operate: anyone with an interest in upsetting the trust (whether a creditor, divorcing spouse, disappointed heir or fiscal authority seeking to take the assets of the trust) will point to such inconsistencies in the management of the assets and allege that the trust is a sham.

In the United States a revocable trust such as that envisaged by Article 6 of the US Uniform Trust Code is used primarily as a will substitute to avoid probate.

If the trust is a sham then there was no intention to create a valid trust. But that does not mean that in every case where there is a lack of intention there is a sham. For example, the lack of intention could be due to lack of mental incapacity (an issue we can expect to come up quite frequently with increasingly elderly and/or frail settlors), lack of understanding on the part of a settlor who does not have a knowledge of trusts or has not read a copy in the language with which he is most familiar, one who does not understand the effect of what he is reading or simply that the settlor has a shaming intent but the trustee knows nothing of it. For a trust to be a sham there must, as matters stand at present, be a common intention on the part of the settlor and trustee not to act in accordance with the terms of the express trust but in some other way – usually as nominee for the settlor. It is a document conceived dishonestly to distract from the true relationship between the parties. Mere artificiality of arrangement or a sense of general dodginess is not sufficient (Hitch v Stone10 and A v A11).

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1 [1991] 16 LS Gaz R 32.

2 [2009] EWHC 2076 (Ch).

3 [2017] JRC 100.

4 [2003] WTLR 367.

5 (1865–69) L.R. 1 P&D 241.

6 [1936] 2 DLR 460.

7 [2010] SC (Bda) 40 Civ.

8 [2010] SC (Bda) 40 Civ.

9 [1997] EWCA Civ 1279.

10 [2001] EWCA Civ 63.

11 [2007] EWHC 99 (Fam).

Originally Published by the International Family Offices Journal

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