Trusts, a pandemic-proof solution?

Several plagues hit Elizabethan England in the late 16^th and early 17^th Centuries and William Shakespeare supposedly made best use of his time under quarantine during the plague of 1606 to write his masterpiece, King Lear. The historic proof of this causal link is thin but nevertheless, the play enunciates several universal and timeless truths about the fragility of human relationships which will resonate with post-pandemic trust practitioners over 400 years later. In particular, Gloucester’s terse remark:

“Love cools, friendship falls off, brothers divide; in palaces, treason; and the bond cracked ’twixt son and father … we have seen the best of our time” [1]

is arguably the pithiest and bleakest justification for why high net worth individuals have always favoured the use of trusts for their private wealth holding structures in modern times and why they will continue to do so.

Trusts have been a mainstay of English law for many centuries primarily because they are capable of ensuring that a corpus of wealth is preserved for the benefit of a defined class over the course of many years and notwithstanding any actual, potential, current or future discord between family members. At its core, a trust provides a settlor with a simple and straightforward mechanism for the deferred transfer of wealth. The property which is settled into the trust will ultimately end up in the hands of one or more of the beneficiaries but at a time and in a manner of the settlor's choosing.

In an increasingly complex and ever-changing business environment, trusts endure in the financial services landscape as a means to protect, preserve, and generate wealth for current and future generations. This makes sense as they are well-established, widely recognised and capable of managing whatever foreseeable or unforeseeable risks arise from time to time. Such risks might include, in Shakespearean language, claims arising from the cooling of love (a future spousal claim), a friendship falling off (a claim by a former business associate), brothers divided (a forced heirship claim in relation to a deceased parent’s estate) or, if not quite high treason in palaces, then some element of political instability (several foreign governments of "less happier lands" have been known to impose arbitrary seizure orders on their citizens with little or no prior notice). Lastly, and being mindful the impact of the COVID-19 pandemic, it has never been more important to save something for a rainy day or, to coin the title of another work by the Bard, the next Tempest.

Pandemic-Proof Wealth Management

The recent pandemic has, in one sense, acted as a global "pause" button. Not many people could claim to have written a complete play during lockdown but for a good proportion of high net worth individuals, the "break from the norm" became an opportunity to take stock of their personal affairs and to undertake some long-overdue succession planning. Exact numbers are hard to come by but anecdotal evidence from trust practitioners and the wider private client industry would suggest that there was a general upswing in the number of trusts being established during this period which, in all likelihood, was due in part to the enforced period of self-reflection. This was probably not surprising as the separation of legal and beneficial ownership, which is the hallmark of a trust, means that the trustee and not the beneficiaries will be the registered owner of the trust assets. This basic division of ownership provides that trusts have several key features which have always made them ideally suited for long-term and "pandemic-proof" wealth management and preservation.

Firstly, a trust has always been an inherently private arrangement and a trustee is under a general duty to keep information regarding the trust and the trust property confidential. The trust instrument is not a public document and is not required to be registered in any official or public register maintained by any governmental authority, except in the limited case of certain unit trusts used for commercial purposes.

Since the property which is settled into a trust does not form part of the settlor's estate on death, a grant of probate or other similar formalities will not be required in order to deal with the property held in trust after the settlor's death. There is also the scope for a settlor to use a trust to free himself/herself from any "forced heirship" rules which might otherwise apply to his/her estate. Jersey law, for example, has advanced "firewall" provisions which state that, in relation to a person domiciled outside Jersey, the forced heirship or any other similar rules of foreign law will not affect any transfer or disposition of property by a settlor into a Jersey proper law trust. As a result, the settlor can place his/her assets into a Jersey proper law trust free from any domestic restrictions. For this reason, one sometimes sees trusts being established by settlors from the Middle East who wish to ensure that their sons and daughters each receive an equal share of their estate, rather than, say, a fixed proportion as determined by a particular school of Shar'ia law.

Trusts are also a natural fit with structures which are intended to carry out philanthropic work. Most international finance centres have now enacted specific laws so as to permit trusts which have a mix of charitable and non-charitable purposes to be validly created. The STAR trust and the VISTA trust regimes in the Cayman Islands and the British Virgin Islands respectively are just two of the better known examples. It is also common to see trusts being used by high net worth families as vehicles for their philanthropic work. Moreover, philanthropic projects are often a key component of a family constitution (a formal document which sets out the rights, values, responsibilities and rules applying to stakeholders in that family's business/wealth and provides plans and structures to deal with situations which arise in the course of the family business' operations) as they can help to create the "glue" which will bind a particular family together in the future. Again, there is a dearth of clear evidence but anecdotally most professional trustee services providers have seen an increasing demand for charitable trusts from high net worth clients recently, which is perhaps one of the good news stories from the lockdown.

It is true to say that a properly drafted and well-administered trust will provide the settlor and/or the beneficiaries with an appropriate level of effective asset protection, but it is important to bear in mind what that might mean in practice. One sometimes sees a trust being actively marketed as "an asset protection trust" but there is no particular legal significance in this label. At the heart of any trust is the onerous obligation on the trustee to safeguard the trust property and so, a so-called asset protection trust is, in reality, no different from any other sort of trust in that regard. More often than not the words "asset protection trust" tend to be used as an informal description of a trust, the primary purpose of which is to protect certain assets from actual or potential claims which may be made by creditors and/or claimants against the settlor or one or more of the beneficiaries. The class of potential creditors/claimants is a wide one and, by way of example, it could conceivably include a trustee in bankruptcy of the settlor and/or any beneficiary.

Most jurisdictions impose some general, common-sense limits on debtors and provide creditors with some general, common-sense "claw-back" rights. For instance, Jersey law does not enable a debtor to escape his existing creditors by settling property into a trust if the debtor is insolvent at the time of the transfer, or if he becomes insolvent as a consequence of the transfer and the transfer is made with the intention of putting the property beyond the reach of those existing creditors. Any transfer made in contravention of that particular "clawback" rule is liable to be set aside by the Jersey Court. However, if a settlor has no actual, future or contingent creditors when he transfers property to trustee, then the trust should protect the trust property from claims of subsequent creditors of the settlor (and, in all likelihood, from any creditors of each of the beneficiaries) especially if the settlor has given proper consideration to the selection of his trustees and situs of the trust property.

In summary, trusts have a long and credible history as a wealth preservation tool. The pandemic has had many consequences for us all, some good, some not so, but it has, if nothing else, created a renewed interest in the use of trusts for long-term wealth planning and charitable giving; something positive for us all to bear in mind next time "a plague is on our houses".

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[1] King Lear, Act 1 Scene 2 (1606)

An original version of this article was first published by IFC Review, January 2022.

© Carey Olsen 2022.