OBLB Keywords

The last few decades have seen a global expansion and transformation of both trust law and trust practice. The trust, a legal institution once unique to England and its erstwhile colonies, has now spread to dozens of additional jurisdictions, from the Far East to Russia and Eastern Europe to nearly every Latin American jurisdiction. Many states of the United States (US), English Crown Dependencies and United Kingdom Overseas Territories have developed innovative trust models directed primarily, and sometimes exclusively, at a non-resident clientele. New trust regimes from Virginia to Vanuatu often discard centuries-old rules of trust law so as to provide alternative rules offering maximum appeal to trust service providers’ potential clients. This vigorous development of new trust regimes has been met with a similar expansion in global trust practice. Jurisdictions like Italy, Brazil, Israel, the United Arab Emirates and dozens more are now home to a large and growing number of trust practitioners - professionals providing trust-related services - including lawyers, accountants, bankers, tax advisors and others. More than ever before, the trust is now heavily used across most of the globe as a key means for individual and family wealth planning, for structuring transactions, for secured lending and securitization, for individual and collective investment, for pension management, charitable giving and more.

The great majority of this vast recent worldwide growth and transformation of trust practice has remained empirically uncharted. The sum of existing empirical research on donative trust practice is the following. In early 2002, Europe Economics published some 1990s data on the then UK trust market, including the results of a survey of 23 members of the Association of Corporate Trustees (TACT) regarding their practice in the years 1996-98. This survey covered amounts and types of trusts administered, amounts of beneficiaries and trust capital values across trust types, trust service provider revenues and wages and providers’ impressions of the reasons clients used trusts and of operations which would have been impossible without trust law. Also in 2002, the Law Commission published the results of a survey Alison Dunn conducted of 345 trustees and legal advisors, focusing on settlors’ attitudes towards trustee exemption clauses. American scholars have provided empirical treatments of two questions: (i) the impact of US states' abolition of the rule against perpetuities on the quantity of trust assets administered in each state and the average size of trust accounts administered there, and (ii) the impact of the 1990s reform of US trust investment law on trustees' investment practices and the volatility of trust corpus. In 2014, an Italian law student conducted an empirical study of the Italian trust industry, based on a survey of Italian trust service providers. 

This is essentially all we have: we do not know to what extent each of the many other innovations that dozens of jurisdictions have recently inserted in their trust laws has been utilised, who has been utilizing them, for what purposes, and under which circumstances. This dearth of data casts a pall over the validity of conclusions drawn in normative studies addressing the current proliferation of trusts. Several such studies conclude that many recent trust law innovations are normatively undesirable: that much of the recent rapid proliferation and evolution of the law and practice of private trusts is a harmful race to the bottom, facilitating the erosion of tax bases as well as of traditional protections accorded to trust users’ creditors, spouses, children, and other claimants.

The absence of empirical data pertaining to trust practice renders much of the normative debate conjectural, manifesting the need for a broad empirical inquiry into modern trust practice, extending beyond the United Kingdom and US to the myriad jurisdictions that now serve as busy hotbeds of that practice. In a recent paper entitled ‘Trust Proliferation: a View from the Field’, I report the results of just such an inquiry: a survey I conducted of 409 trust service providers worldwide- the largest, most diverse respondent group ever obtained in survey research targeting trust service providers -complimented by interviews with 28 additional providers in five jurisdictions: the UK, US, Italy, Switzerland and Israel. 

I found the law of Delaware to be the most popular legal system governing trusts, with that of England in second place and the rest of the top ten nearly exclusively populated with trust regimes offered by various offshore jurisdictions. Wealthier clients tend, more than other clients, to settle trusts governed by legal systems other than those of their, or their beneficiaries’, jurisdictions of residence. Wealthier clients also use offshore legal systems to govern their trusts more often than other clients. The tax advantages available by way of using offshore legal systems to govern trusts are the leading reason for their use. Those advantages are followed by the availability under offshore systems of trust features unavailable elsewhere, such as heightened asset protection and extended settlor power retention. Practitioners servicing large numbers of trusts tend to mainly service trusts governed by the law of settlors’ or beneficiaries’ jurisdictions of residence, while trusts governed by 'foreign' legal systems appear to be serviced by respondents involved with relatively fewer trusts. US trust practitioners use 'foreign' legal systems less frequently than trust practitioners based elsewhere. Practitioners using offshore legal systems to govern trusts and practitioners who themselves work out of offshore jurisdictions are likelier than other practitioners to service trusts governed by legal systems other than those of their clients’ jurisdictions of residence.

A large majority of trusts contain forum choice clauses. Their frequency is about double that of the choice of a 'foreign' governing law. A sizable minority of forum choice clauses are inserted in trust instruments in order to avoid norms otherwise applicable to the trust users: some such clauses are inserted because the court which would otherwise have had jurisdiction over the trust would have been unlikely to respect it, others because the chosen court is unlikely to respect foreign rules of law and/or foreign court orders to which the users are subject. Some respondents explicitly said that forum choice clauses are used for tax avoidance purposes.

Information control clauses, restricting or abolishing beneficiaries’ rights to information about the trust and its administration, appear in about a quarter of donative trusts. In many cases, such clauses are an attempt to protect the integrity of the trust fund, its smooth administration, or beneficiaries themselves, settlors believing that supplying beneficiaries with trust information will lead them to unhelpfully interfere in trust administration, to lead lives of sloth, counting on the trust fund for support, or to attack the trust in order to increase their take. In other cases, however, information control clauses are a sign that persons designated as beneficiaries on the face of the trust instrument are not in fact intended to receive any benefit.

The data show the trust services market to fall into two sub-markets. Some firms service relatively large numbers of fairly routine trusts, which only rarely contain such non-traditional trust features as information control clauses, flee clauses, extremely long duration or decanting powers. Other firms service smaller numbers of more sophisticated trusts, which more frequently contain such features. The latter sub-market caters to typically wealthier clients, making more use of legal systems other than those of settlors’ and beneficiaries’ jurisdictions of residence, as well as of offshore legal systems. The US trust industry differs from that elsewhere in that US practitioners’ wealthy clients appear to purchase trust services from larger firms, and perhaps to use more routine trusts, usually subject to the law of their jurisdictions of residence, than wealthy clients elsewhere.

It thus appears that according to trust practitioners themselves, many of their wealthy clients use offshore jurisdictions’ trust regimes to obstruct their creditors and minimise their tax burden. Offshore trust regimes permit, indeed encourage, the settling of trusts the ostensible beneficiaries of which know nothing about the trust and their entitlements thereunder and are unlikely to eventually enjoy any benefit.

The complete paper is available for download here.

Dr. Adam S. Hofri-Winogradow is Senior Lecturer at The Hebrew University of Jerusalem.