Developments of the Trust in Wealth Structuring.

It comes as little surprise therefore, that new structures and products have been created to meet evolving estate and succession planning needs.   What is perhaps more surprising is that the humble trust structure has, in many essential respects, remained remarkably unchanged in the face of these innovations.  It is a testament to its inherent flexibility that it is the uses to which the trust has been put which have developed apace, rather than there being (with one notable exception) fundamental changes to its core principles.

The trust as a concept for holding property has been in existence since Medieval times, when landowners who were about to leave the country to fight in the Crusades entrusted their homes and land to a male relative or close friend, on the understanding that they would manage their estates in their absence, collect taxes and pay what was due to the King.  Sometimes those arrangements included an agreement that in the event of the Crusader's death, the assets would, once his son reached maturity, be passed by his 'trustee' to the Crusader's firstborn son. 

Perhaps inevitably problems arose in relation to such arrangements, particularly when the Crusader returned from battle looking forward to enjoying his land once again. No doubt there were also occasions where the 'trustee' proved reluctant to pass on the expected inheritance to the Crusader's firstborn son upon his coming of age. The Lord Chancellor and courts of chancery would adjudicate disputes in accordance with their conscience and with what they considered fair and reasonable in all the circumstances; thus. the principles of equity were born.

What, then, is a trust and if it has changed at all over the centuries, how has it changed?

Sir Arthur Underhill in an explanation that has been adopted by judges and jurists throughout the English common law world describes it thus:

”A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property (called trust property) owned and controlled by him as a separate fund, distinct from his own private property for the benefit of persons (called beneficiaries) … of whom he may himself be one, and any one of whom may enforce the obligation”[1]

The concept of 'binding fiduciary obligation' based, as it has been since the 12^th century, on the duties of fidelity and good faith, has remained a constant throughout, as has the use of trusts to effect the smooth transition of wealth over generations.

On the other hand, trusts are now commonly utilised in wills, in the management of personal injury settlements, pension funds, commercial transactions, mutual funds, lending and securitisations, to name but a few.  Trustees, with the assistance of experts where necessary, also manage and administer trusts holding a far more diverse range of assets: from jewellery, boats, planes, cars, art and antiques to homes, farmland, commercial property and investment portfolios.

To accommodate the increasing complexity of clients' requirements and the diversity of assets held, the International Financial Centres (IFCs) have introduced a raft of legislative developments in relation to the trust structure; the Cayman Islands leading the way in the 1980s and 1990s with the introduction of anti-forced heirship legislation[2], reserved powers legislation[3], creditor protection[4] and non-charitable purpose trusts, known by their acronym as 'STAR' trusts[5].

Most of the IFCs have followed with their own versions of these concepts.  It is notable that the 'home' of trusts in England and Wales has not followed suit.  For some[6], the introduction of the non-charitable purpose trust, a trust that does not require beneficiaries and is not enforceable against the trustee by any beneficiaries there might be, was a step too far from the 'irreducible core' of trustee obligations[7] owed to beneficiaries and enforceable by them as the 'minimum necessary' to give effect to a valid trust[8].

More recently, some IFCs have also introduced their own versions of the foundation in wealth structuring, as it is more familiar to clients from civil law jurisdictions.   This has found its most innovative example to date in the Cayman Islands where by using a foundation company one can successfully utilise trust principles within a corporate structure.

The non-charitable purpose trust, foundations and foundation companies have proved to be popular innovations in a wide range of wealth structuring circumstances, from business succession planning to commercial transactions and philanthropic projects that may not otherwise fall within the strict definition of 'charitable'[9].

There are, however, other constants in the face of these innovations, the most notable being the inherent supervisory jurisdiction of the court over the administration of trusts and the key role of the courts of the IFCs in the development of international trust law.  While some commentators have decried the willingness of trustees to approach the court for direction on issues relating to the management or administration of trust assets, it has proved to be an 'effective remedial jurisdiction' in a wide range of circumstances[10]. 

For example, such applications have led to more clarity in:

• The basis for disclosure of trust documents to beneficiaries – see Schmidt v Rosewood[11] in which the question of disclosure was found to be part and parcel of the court's inherent supervisory jurisdiction and not based on any proprietary right which the beneficiary may have in those documents. The question of disclosure is to be a 'balancing exercise' of the interests of the different beneficiaries, the trustee and third parties.[12]
• The grounds for confidentiality orders in proceedings relating to trusts – see Re Delphi Trust Ltd[13] in the Isle of Man and In the matter of the G Trusts[14] and Re BCD Trust (Confidentiality Order)[15] in Bermuda, for three examples out of many.

The principle of public administration of justice and the right to a fair and public trial has underpinned court proceedings in the common law jurisdictions for decades.  The question for trust practitioners has long been the extent to which that principle can sit comfortably within the fiduciary relationship of trust and confidence between a trustee and its beneficiaries, particularly where directions applications involving trustee and beneficiaries and the discussion of sensitive financial and family matters may be discussed.  There is, however, no special exception to the principle of open justice made for trust applications.  Confidentiality orders are not made automatically; proper grounds must be made out.  The courts undertake a balancing exercise between the principle of open justice and the circumstances of each case and will be prepared to make orders preserving the confidentiality of proceedings if the court considers it appropriate.

• Approving the variation of trust structures to keep pace with modern day conventions and changes in a family's personal circumstances and beliefs, see for example the Representation of Y Trust and Z Trust[16] in which the Jersey Royal Court sanctioned a variation of trust to allow for children born outside of marriage or from same sex relationships to be included as beneficiaries, contrary to the settlor's intent and strongly held beliefs when he settled the trusts
• Approving the vesting of powers (which do not appear in the trust deed) in a trustee on the grounds of expediency in order to effect the partition of trust funds, see for example MEP v Rothschild [17] pursuant to s63 of the Trusts Law in the Cayman Islands, cited with approval by the Court of Appeal in Southgate v Sutton [18] in England.
• Ensuring that a trustee is given appropriate directions as to whether it is appropriate to conduct litigation in its capacity as trustee at the expense of the trust fund and if so, to what extent[19].

Clearly, the pace of innovation in wealth structuring has been quite remarkable, particularly over the last 30 years.  However, it is equally plain that the flexibility inherent in the basic trust structure has resulted in its adaptation and use in myriad circumstances, while leaving its core principles and the inherent supervisory jurisdiction of the court over the administration of trusts largely untouched. 

[1] 'Law of Trusts and Trustees' Underhill and Hayton, 19^th ed.

[2] The Trusts Foreign Element Law, 1987, currently enshrined in Part VII of the Trusts Law (2018 Revision)

[3] Currently enshrined in s14 of the Trusts Law

[4] Fraudulent Dispositions Law, 1989, currently in its 1996 Revision

[5] Special Trusts (Alternative Regime) Law, 1997 currently enshrined in Part VIII of the Trusts Law

[6] See for example the debate between Prof Paul Matthews and Antony Duckworth about STAR trusts

[7] The duty to perform the trusts honestly and in good faith for the benefit of the beneficiaries

[8] Armitage v Nurse [1998] Ch 241

[9] As per Lord Macnaghten and the 'four heads' of charity Income Tax Special Purposes Commissioner v Pemsel [1891] AC 531

[10] A v RTCL [2004-2005] CILR 485

[11]  [2003] UKPC 26

[12] Ibid. at paragraph 67

[13] (2014) CHP 13/0120

[14] [2017] SC (Bda)

[15] [2015] Bda LR 108

[16] [2017] JRC 100      

[17] [2009] CILR 593

[18] [2011] EWCA Civ 637

[19] Re Beddoe [1893] 1 Ch 547

Morven McMillan
Partner. She was admitted as a solicitor in England in 1996 and is admitted to practice in the Cayman Islands and in the BVI. Top-ranked in Chambers Global 2013, where she is described as "the best in the business", Morven is a member of STEP and is a co-editor of International Trust Disputes (OUP).

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