Introduction: The History Of
It's a fairly well known fact that the trust originated in England
many hundreds of years ago, and that its purpose was to preserve
assets against depredations occurring through death, matrimonial
and family squabbles, spendthrift descendants and the like. Taxation
at death was one of the incidents that trusts were effective against,
but they were not particularly designed to guard against the taxation
of income or capital during the settlor's life, because such taxes
were not a major threat to wealth at the time, and anyway a domestic
trust was a taxable person in itself.
Income tax was first levied in England at the beginning of the
20th century, and in many countries had become worth avoiding by
mid-century; but initially at least the best way of avoiding it
was to turn income into capital, which was not so heavily taxed.
It was only when capital taxes of various types became significant
that the offshore trust came into its heyday.
Very rich people had begun to use offshore trusts
in the first half of the century, but at least as much because of
the additional asset protection that they offered, simply by being
in a different jurisdiction, as because they were tax efficient.
The administrative overhead and other complications of dealing
with an offshore location were initially very great, so that at
first only conveniently close-by jurisdictions like Jersey (Channel
Isles) for the Brits and the Bahamas (for Americans) developed as
'offshore' jurisdictions. The first trusts legislation in the Bahamas,
surprisingly, dates from 1893. The great expansion of trusts, both
in terms of number of jurisdictions and volume of business, came
later when telecommunications, air transport and the end of capital
controls opened up the world and gave freedom to investors and the
owners of capital.
At all events, by say 1980, offshore was burgeoning in response
to horrific tax rates, and tax avoidance had taken over as the main
driver of offshore growth. In this process, and as more and more
countries laid claim to the worldwide income and assets of individuals
during life and at the end of it, the trust played a key part. But
in two respects at least the traditional English trust was lacking:
first in its perpetuity rule, which limited the duration of a trust
to 'life in being' plus 35 years, or to 80 years, in order not to
permit the alienation of property for more than one generation after
death of the settlor; and secondly in its abhorrence of 'spendthrift'
clauses, ie wording which prevents a creditor from 'seeing through'
the trust to obtain settled assets if the settlor is a beneficiary.
In the US, and in the main island offshore jurisdictions, which
all inherited English trust law (since almost all of them were British
originally) perpetuities were legislated away during the 1980s and
'90s - no-one wants to see assets reverting to family members who
may still be living in the country from which the settlor had removed
them, with disastrous tax consequences. During this period, tax
authorities in high-tax countries gradually began to attack the
offshore trust, either through specific legislation or through general
anti-avoidance provisions, and as this process whittled away at
the tax advantages of offshore trusts, asset protection began to
take over as the predominant motive for offshore settlements. The
'spendthrift' problem stood in the way, particularly for non-common-law
families, who had to cope with 'Code' country legislation which
often incorporates forced heirship provisions and specific creditor
protection (both usually absent in common law jurisdictions).
Initially, rich 'continentals' used different techniques to protect
their assets, but in time they grew to like the friendly Anglo-Saxon
trust, and in the latter part of the 20th century as trust law began
to be implanted into the foreign soil of one 'Code' jurisdiction
after another, the common-law jurisdictions needed to follow and
passed laws which specifically excluded forced heirship and creditor
protection provisions. The US itself has largely removed anti-spendthrift
wording from its trust legislation - unlike in the unitary UK, there
is a kind of onshore offshore in the US because of its federal structure,
and there has been a competition between states to offer good trust
regimes to residents in other states, and for that matter to compete
against the offshore 'offshore', which is nowadays practicable because
after the enactment of Section 679 of the Tax Code, the IRS treatment
of offshore trusts is now worse than its treatment of onshore trusts.
Even without perpetuities and with asset protection features, the
bare offshore trust came to be seen as vulnerable and by the turn
of the century was much more likely to be used as part of a more
complex framework involving corporate features and multiple jurisdictions
than on its own. It's not right in fact to say that a plain trust
is ineffective: in the Cook Islands, which may have been the first
jurisdiction to offer asset protection trusts per se, only one trust
has been penetrated by creditors in 20 years, and that was due to
a weakness in the drafting of the governing law which has subsequently
The trend towards complexity also reflects growing corporate interest
in the trust, and the tendency for the more advanced offshore jurisdictions
to offer structures suited to particular purposes - hence the 'purpose'
trust. A trust which is suitable for one purpose may well not be
suitable for another, and the original English trust law was one
more time not ideal for purpose trusts, which has led to a third
round of adjustment of trust legislation in many jurisdictions.