Trusts are demonised by politicians, tax administrations, journalists and international organisations. The trust, said by the early 20th century historian and jurist F. W. Maitland to be the 'greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence', has more recently become the symbol and scapegoat of the 2008 financial crisis and it is accused of being the main tool used in 'aggressive' tax avoidance or for nefarious purposes, from corruption to criminal tax evasion.
So what happened? There is no doubt that the flexibility of the trust structure has often facilitated holding assets in a tax efficient way and, more particularly, resulted in the deferral (rather than avoidance) of taxation of income or inheritance up until that income or assets are distributed to beneficiaries who can enjoy them. After all, not being subject to tax as long as there is no enjoyment of income and/or ownership of an economic interest in capital does not seem wholly unreasonable. Indeed, and to the contrary, it is not uncommon in certain countries for assets held in trust to be subject to more stringent tax treatment than is otherwise the case for assets held directly.
In any event, it is rare that a trust is established exclusively for tax reasons. Where this is the case, this amounts to a misuse of the trust structure. That said, it is true that trusts have all too often been sold as a mere device to conceal assets and facilitate tax evasion with the result that those who use trusts in this way are directly responsible for the antagonistic attitude adopted by almost all governments worldwide towards the trust, including that of the very country that invented the trust.
A frequent reaction on the part of tax authorities, for whom trusts are often considered an "abuse", is to disregard the trust itself for tax purposes and, rather, to tax the settlor of the trust as if he or she were still the owner of the trust's assets. Whilst this is the situation in the United States of in respect of the "grantor trust", such treatment only occurs where the settlor can benefit from the trust's assets, which is not unreasonable. On the other hand, France and certain other civil law countries tax trust income and assets (for wealth and inheritance tax purposes) in the hands of the settlor even if he is not a beneficiary and does hold any interest in the trust; and sometimes beneficiaries are subject to income tax whether or not they receive a distribution from the trust. Another approach is to subject the transfer of assets into the trust to a transfer tax.
Such unfavourable tax treatment of trusts has the effect of discouraging their creation. The main issue is that, as a general rule, the distinction between tax avoidance (which is legal) and tax evasion (which is illegal) has become blurred and the phrase "aggressive tax planning" has been coined so as to mean that tax planning in itself might fall on the wrong side of the line. Likewise, politicians and journalists go so far as to talk about "immoral tax avoidance"; in doing so, they infer that there may be an obligation, at least for the rich, to pay more tax than owed. Against this backdrop, use of the trust as one of the more traditional tax planning mechanisms has resulted, in certain countries, in greater exposure to taxation than for direct ownership.
Yet, in spite of the tax treatment to which a trust is currently subject, there is still no equivalent to the trust that provides a means of allowing international families with members in different jurisdictions to protect and preserve their wealth and to hold assets safely for a spouse or vulnerable or disabled child; to transfer it to the most competent of them; to avoid liability issues associated with direct ownership assets such as yachts and aeroplanes; or to protect the family wealth from an unfortunate marriage, to name but a few examples. Whilst the creation of a trust (once known as an "asset protection trust") might commonly be used to distance professionals liable to malpractice suits from their assets, more and more often the main objective for holding assets in trust is to protect families against political risk and/or insure the physical safety of family members. In a number of countries on both side of the Atlantic, where significant assets is not held with sufficiently discretion, there is a risk of expropriation and/or kidnapping. The trust is the only institution that may afford some protection. Of course, this is only possible if the identity of the beneficial owners of the trust is kept confidential and, unfortunately, the recent move towards "transparency" through indiscriminate exchange of information without proper safeguards against potential leakages, registers of beneficial owners; or, even worse, publicly accessible registers, might put an end to such a protection altogether.
Simply because a few criminals use the trust for improper purposes, this institution which according to a French lawyer1 "is the guardian angel of the Anglo-Saxon, who accompanies him everywhere, impassively from the cradle to the grave" should not be buried. With any luck, responsible politicians will understand that the fight against tax evasion should respect the fundamental right of privacy and that the trust should be saved.
- Pierre Lepaulle, Les fonctions du trust et les institutions équivalentes en droit français (Imprimerie Moderne 1929).