The English trust has always been a flexible and resilient creature, and not more so than in its application and survival in Latin America. Because all South American countries are civil law jurisdictions and adopted the Napoleonic code in one way or another, and because Napoleon was hostile to the ancien regime, which before the French Revolution used trusts to entail their land and great estates, trusts had no place in Latin America. Instead the great landowners tied up their land as the primary source of wealth, just as effectively, under the latifunda system.
Nevertheless, even though the Anglo-Saxon common law trust, developed by the equity judges in the Courts of Chancery, was an alien concept generally not accepted in their countries, Latin American wealthy individuals and their families have been able to use trusts for a number of purposes for many years. This is partly because the civil codes of all of those countries all specifically recognised legal concepts or ‘figures’ as valid in their originating legal systems, so long as they did not offend the public order of Latin American countries. And it was also because the majority of those families had some Anglo-Saxon affiliation, at first through English involvement in the development of those countries, and later with the United States of America, that they used trusts to hold their overseas assets.
Latterly, as Latin American families’ assets became more liquid, for reasons of security, they wished to have the majority of those assets outside their home countries, and so the use of trusts proliferated. For the most part, these individuals were exposed to trusts by North American banks such as Citibank and JP Morgan and brokerage houses like Merrill Lynch and Morgan Stanley who were marketing wealth management services in the region, although Canadian and British banks such as RBC, Rothschilds, and HSBC were also very active.
These families ‘settled’ trusts, not only for succession planning purposes, but also because of unstable governments and dictatorships, currency controls, fear of devaluation and bank account ‘corralitos’, hyper-inflation and fear of kidnapping. Trusts afforded a measure of confidentiality and asset protection which these wealthy clients found very attractive.
Without question, many trusts were settled to add another layer of confidentiality for tax planning reasons. Because, as former colonial dependencies, Latin American countries had a domestic sourced income tax system (some still do), and rudimentary capital and inheritance tax systems (most still do), structures such as a trust that accumulated income independently of the settlor’s tax domicile could simply not be taxed. This was because the fundamental principle behind the creation and existence of a trust is that an absolute transfer of ownership of the trust assets from the settlor to the trustee takes place. As this was a difficult concept for most Latin American clients to understand, many trusts were settled with the power of revocation, or some degree of control being retained by the settlor or a trusted person.
To continue to retain control and management of the trust assets (the trust ‘fund’), most clients preferred to actively participate in the decision-making process regarding their investments (and most wealth managers also preferred advisory management of those assets) rather than passing total discretion to the asset management side of the wealth management firms. This suited South American settlor clients, and it suited the private bankers and brokers as it facilitated the marketing-- and to some extent -- the commoditisation of the trust business in the region.
Mounting Government Pressure
The boom years for the use of trusts for wealth planning were in the 1990s and early 2000s, based largely in the euphemistically named ‘offshore financial centres. But, beginning with the OECD blacklist of many low-tax jurisdictions in the Caribbean and elsewhere in 1998, pressure mounted on banks and trust providers to either, find alternative and more transparent jurisdictions, or to tighten trust structures to have more chance of succeeding in case of regulatory review.
Alternative jurisdictions involved Canada (Newfoundland), Holland (Dutch ‘stichtings’), Scotland (Scottish partnerships), New Zealand and the UK. Even Switzerland got(unsurprisingly) in on the act.
Then came the US investigations into Swiss banks and their assisting American clients not only by offering account secrecy but also in structuring tax evasion/avoidance structures. This had the paradoxical effect of encouraging the development of the trust industry in the United States.
The Banking Crisis and its Aftermath
With the 2008 banking crisis and the need for increased tax revenues, and on the heel of severe fines paid to the US by several Swiss banks, many European governments increased their tax collection and anti-avoidance measures. Exchange of information treaties were adopted and included South American countries which subsequently tightened their controls and, in the case of Argentina, Peru, Chile and Brazil, offered tax amnesties to repatriate offshore undeclared assets.
The disclosure of many South American names in the files of several major banks by ‘whistle-blowers’ only added fuel to the fire.
Banks and wealth management firms in the post-banking crisis era have focused on core markets in the region and have withdrawn their marketing of many South American countries.
This, plus dramatically increased risk management and compliance, AML and KYC have also led to many banks completely collapsing their internal trust departments (not a bad thing as there was always an inherent potential for conflict of interest) and selling their trust companies to non-bank third party providers. In some cases, wealth managers are now completely prohibited from discussing succession planning with their clients; in other cases, they are permitted to do so but must refer the client to ‘preferred approved providers’.
The Good News
The trust business in South America has seen a downturn in the past 20 years Nevertheless, there have been very positive developments in the succession planning in the region overall.
Some of it is attributable to healthy local economic factors which prevailed during the commodity boom years and led to a repatriation of offshore assets, through amnesty programs for clients to invest in their own economies, for example-.
Increased foreign direct investment also contributed to a great deal of wealth creation through divestitures. Many South American wealthy individuals diversified their assets by opening declared offshore accounts and focused on the benefits of succession planning offered through trusts rather than tax avoidance.
The growing sophistication of the local wealth management industry in South America also meant that many advisors in the region began to address their clients’ family governance and succession planning needs.
The region has also seen a proliferation of single and multi-family offices and these entities have also embraced the need to focus on estate planning.
Wealthy clients are always more globally oriented and in the case of South Americans, many of them have family members and/or assets abroad, with a predilection for the US. Certain jurisdictions in the US (such as Wyoming and North Dakota) have their own trust laws which are especially attractive for non-US clients who have US family members or other US ‘contacts’, and this has been a growing recent feature in the evolution of the trust industry for South American clients.
Furthermore, because there is no longer a stigma of secrecy, many lawyers in South America are now more willing to work with clients and their offshore advisors and recognise the need for proper structuring for clients’ local and offshore assets for more efficient (legitimate) tax and estate planning purposes.
The trusts we see being settled in this new era are, more often than not, irrevocable trusts which are more prone to withstanding judicial scrutiny. And many of them are discretionary trusts with family or friend ‘protectors’ guiding the asset managers.
These are all very positive trends in the evolution of the trust industry in the region. With political and economic instability unfortunately still rampant (and growing) in many counties in the region, and fear for physical security in some, the confidentiality offered by trusts is no doubt a deciding factor in clients opting for trusts (but now in their more prevalent irrevocable discretionary form).
But overall, the excellent flexible testamentary aspects of the common law trust will be the principal reason wealthy clients in South America will elect to settle trusts for their estate planning needs.
The trust is a highly flexible and adaptable instrument, as it can perform in a variety of venues and fulfil many needs. That is why it has survived as a cornerstone of wealth planning since medieval times. It can travel across continents and decades of economic change to provide certainty and stability to the patrimony and matrimony of many families. The needs of family groups in Latin America, especially in the absence of reliable institutional and economic sanctuary, make the trust the ideal instrument or medium for wealth protection.
Gerard Aquilina is Partner at Cone Marshall, Greece. His career spans international law and investment banking to senior leadership positions at Merrill Lynch International Private Client, HSBC Private Bank, Barclays, and UBS in the US, UK, Brazil, Greece, and Saudi Arabia.