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Introduction to the Offshore Trust
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The concept of the trust originated in English law and the idea has been exported
from England to all those territories which adopted and embraced the common law
system.
Considered to be the magic wand of English law, the trust splits legal ownership
from beneficial ownership, the property being legally vested in one or more trustees,
but in equity held for and belonging to others. Sir Galahad (later the Galahad Trust
Company) owns the trust funds in law, but your children and grandchildren are entitled
to the equitable benefit of the income from the trust funds and eventually to the
trust funds themselves. This feature of the trust is the most important contribution
of English equity to jurisprudence. It is not derived from Roman law institutions
such as fidei commissa, and its origin is doubtful. Significance in its development
attaches to the idea of conscience, which was treated as important by the early
chancellors, who were ecclesiastics. Statutes have only to a small extent affected
English trust law, though the few statutes are important.
There is no universal trust law. Many different territories have adapted English
trust law as necessary for their own purposes. For example, under English trust
law, a trust must be for a natural person or established for charitable purposes
only. Some common law jurisdictions, however, may allow for a “purpose” trust, i.e.
a trust established for a particular purpose which may or may not be charitable.
The application of the tax rules is problematical in relation to civil law jurisdictions
which do not recognize trusts. Such jurisdictions often have their own civil law
concepts which may in some ways resemble trusts but which may be characterized under
local law, or other legal systems, as contract or agency. The Hague Convention on
the Law Applicable to Trusts and on their Recognition has been signed by certain
of the civil law countries.
According to The Oxford Companion to Law, a trust is an arrangement for the holding
and administration of property under which property or legal rights are vested by
the owner of the property or rights (settlor) in a person or persons (trustees)
which they are then to hold or to exercise for or on behalf of another or others
(the beneficiary/ies) or for the accomplishment of a particular purpose or purposes.
The trust concept has only analogies with, but is essentially distinct from, the
fidei commissa of civil law systems – really a different concept altogether. Trustees
stand, broadly speaking, in the shoes both of the creator of the trust, who may
be living or dead, and of the beneficiaries. Their powers of dealing with the property
entrusted to them are to be gathered from the true construction of the trust instrument,
if any, as supplemented or restricted by the principles of equity and by statutory
provisions. In most countries, the court exercises ultimate control over all trusts.
In the normal course, a trustee is not personally liable for tax. It is the trust’s
assets that will be used to pay the taxes, not the trustee’s personal assets.
With its span of eight hundred years, a few flashes into the history of the trust
give some illumination of how trust magic comes and goes. The trust (at first called
the “use”) goes back some eight hundred years to the time of the Crusades. The Medieval
use became an English tax avoidance technique which worked so effectively to hold
property that Henry VIII could lay his greedy palms on the Church lands in no easier
way than by abolishing the use. Henry did not primarily break with the Papacy just
to divorce Katherine of Spain (wife number one) for the love of Anne Boleyn (wife
number two, who took the rap. The theft of the Church lands through the abolition
of the trust under the Statute of Uses was Henry’s real reason for exposing himself
to excommunication and burning in hell for all eternity.
Not only Henry, but the French revolutionary leaders and then Napoleon saw the trust
as being in the way of the confiscation of the Church lands, much of which were
held under trusts. So the abolition of the trust by the Revolution, such abolition
being subsequently enshrined in the Code Napoleon, had done the necessary. Prior
to the Revolution, the Church had held much of its land and its wealth in trusts,
and these were duly confiscated. By one simple stroke of the pen, the greatest pool
of wealth in the realm fell into hands of the most committed atheist regime the
world had ever seen. And then wherever Napoleon’s troops went, so did the Code Napoleon,
and with them the non-recognition of the legal concept of the trust.
As distinct from France and the other European and Latin American countries that
received the Code Napoleon, the trust got a second innings in England, no longer
called the “use”, but under the current name “trust”. The trust eventually returned
to England, and, by the end of the 19th Century, the trust (by now known under the
name of “trust” or “settlement”) was well and truly in position to fulfil its prime
vocation of income tax and estate tax avoidance. Not so in France. Louis Napoleon,
the nephew of the Emperor Napoleon Bonaparte is preparing to invade France. Remembering
that his revered Uncle had made the eagle his imperial mascot, Louis sends his henchmen
to the London Zoo to steal an eagle to accompany him on his invasion of France.
They can’t find the eagles’ cage, so they steal a vulture instead. In his excitement
and in the darkness of night, poor Louis fails to notice the difference and invades
France with a scavenger vulture instead of an imperial eagle. But there’s worse
than that waiting for him in Paris. Louis Napoleon at once notices that severe treasury
problems were in the way of his working the type of imperial miracles performed
by his Uncle Bonaparte. Louis finds that there are no church land trusts left to
be confiscated. Strapped for cash, Louis Napoleon is eventually defeated by the
Prussians and overthrown.
Let that be a lesson to everyone planning to work miracles. Get it right from the
very beginning! You won’t make a lot of mileage with a vulture instead of an eagle,
and you won’t raise a good army without being able to fund it. By the time Louis
Napoleon invaded France with his vulture, there were no more fat trust (or trussed)
geese waiting for the plucking.
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Next - How Trusts Work
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