Balancing the perceptions

Think of trusts and trustees, and you may think of asset shielding, tax evasion, and money laundering.

Media representations sometimes depict trusts as secretive tools used for dubious, unscrupulous purposes. High-profile cases feature wealth owners who use trusts to limit or restrict their heirs’ financial autonomy. And numerous stories detail rogue trustees who exploit their powers, engage in conflicts of interest, and enrich themselves at the expense of family heirs.

Is it any wonder, then, that wealth owners may have concerns about establishing their own trusts?

These negative perceptions are not without basis.

But we believe it’s important to consider a balanced understanding of both the risks and benefits of trusts and other fiduciary wealth planning instruments, and the value they can provide to entrepreneurs, families, legislators, and policymakers.

 

Back to the origin: a brief history of trusts

Our history begins in medieval England.

Trusts initially emerged as a practical solution for knights and landowners who, departing for wars and battles, entrusted their estates to a reliable third party.

This was particularly crucial during the Crusades, when Crusaders left their families for extended periods, leaving their estates to provide for their wives and children (who legally could not hold property themselves). A departing crusader would sign over this property to someone else, with the understanding that upon the crusader’s return, the property would be returned.

This third party managed the estates according to the owner’s wishes, focusing on the well-being and interests of the beneficiaries. As this practice evolved, trusts emerged as a key tool for managing estates from afar.

Throughout the 20th century, the role and use of trusts underwent significant shifts, driven primarily by political and economic instability, along with the expansion of the global financial system. Wealth planning strategies adapted, making trusts a preferred method for “transferring” assets to more stable jurisdictions.

This era saw the expansion of discretionary trusts, empowering trustees to make critical decisions regarding disbursements — be it income or capital, the choice of beneficiary, or the frequency of distributions. Such added flexibility proved essential for accommodating the diverse needs of settlors and beneficiaries, as well as for holding and managing assets on behalf of those unable to do so themselves.

The period also witnessed significant developments in tax havens, creating a fundamentally new application for trusts.

In certain segments of the wealth management industry, trusts (as well as trust-like fiduciary structures in civil law countries, such as foundations) became a strategic tool to ring-fence assets in offshore jurisdictions (i.e. countries different from where the owner resides or does business).

This practice enabled wealth owners to avoid taxes and maintain secrecy from their government, and sometimes even from their families. Consequently, trusts were actively promoted within the wealth management industry for these purposes.

 

The 21st century arrives: regulatory changes and their impact on trusts

In response, many jurisdictions have tightened regulations around trusts, enhancing transparency and accountability. Measures such as the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) have been adopted to combat tax evasion through offshore accounts and trusts. Trusts and trustees are now subject to rigorous scrutiny – often more rigorous than that applied to companies.

International agreements reinforce this commitment to oversight, including:

• The automatic exchange of information
• Establishment of trust registers
• Robust anti-money laundering and counter-terrorist financing legislation

Furthermore, initiatives by the Financial Action Task Force (FATF), such as 2019’s updated standards and comprehensive guidance to trust and corporate service providers, demonstrate a global commitment to preventing the exploitation of trusts for illicit purposes.

This developing regulatory landscape aims not only to increase transparency. It also aims to prevent the misuse of trusts in hiding assets or concealing beneficial ownership.

In a way, the 21st century marks a noticeable shift back to the original purpose of trusts, as established in medieval times. This change is largely driven by global cooperation and initiatives by supranational organisations advocating for fiscal responsibility and transparency.

 

Modern planning paradigms: the changing nature of trusts

Contemporary wealth planning considers far more than the location of assets. It comprehensively evaluates the legal, fiscal, and regulatory environments that affect not only the beneficial owners, settlors, and their businesses, but also the assets themselves, protectors, and other key parties involved in the trust ecosystem.

As globalisation increases, more individuals and families find their assets spread across multiple countries, making trusts essential for responsibly managing international estates. The Hague Trust Convention of 1985 helpfully standardised certain aspects related to the recognition and applicable law of trusts across different jurisdictions, thereby preventing legal conflicts.

The tax treatment of trusts varies worldwide and is often a significant consideration in strategic trust planning. Many jurisdictions aim for tax neutrality to simplify succession planning, while others apply taxes that may impact international estate planning. The choice of jurisdiction for establishing a trust can therefore be crucial for families with global ties.

Today, trusts serve roles well beyond traditional estate planning and asset protection. They are instrumental in supporting:

• Educational initiatives
• Retirement planning
• Elder protection, healthcare funding, and special needs support
• Preserving natural reserves
• Funding charitable endeavours

By fulfilling these diverse functions, trusts meet the evolving needs of individuals and families across generations.

 

Understanding trusts: defining roles and responsibilities

A trust creates a fiduciary relationship involving four key parties:

• The settlor (or grantor), who supplied the trust fund
• The trustee, who holds legal but not economic ownership
• The beneficiaries, who enjoy economic benefits without legal ownership
• The protector (or enforcer), who oversees the operation and ensures checks and balances

The settlor grants the trustee legal ownership (but not economic ownership) of the specified trust fund, ensuring the beneficiaries retain the rights to benefit from it.

The protector is typically a trusted person endowed with significant oversight capabilities. These include receiving accountability reports, replacing the trustee if necessary, and approving certain strategic decisions. Such comprehensive governance helps maintain robust checks and balances.

Trusts separate legal ownership from the economic benefits of the assets. They’re held and managed according to clearly defined legal frameworks. And they offer flexibility and adaptability to meet specific objectives, providing precise guidelines for asset maintenance, utilisation, and distribution. Trusts serve not only to safeguard the assets but also to fulfil the settlor’s intentions, ensuring continuity and cohesion.

The success of a trust hinges on the clear definition of its objectives and purposes, which are core to the settlor’s estate planning. Trusts function like specific codes or algorithms programmed for managing assets, enabling wealth owners to stipulate how their assets should be handled beyond their lifetimes.

The trustee, as a neutral third party, ensures these intentions are honoured, protecting the assets from potential mismanagement or misuse.

 

Flexible strategies: safeguarding wealth across generations

Transferring assets to heirs and other beneficiaries presents wealth owners with a critical decision.

One option is to grant direct ownership. This transfers assets outright, giving recipients complete and immediate control. They have the freedom to use, sell, or dispose of the assets without restrictions.

This approach offers immediate autonomy, but also exposes the assets to potential risks such as personal financial crises, including divorce or bankruptcy. This may conflict with the owner’s long-term goals, such as inter-generational stewardship or support for philanthropic causes.

The other option is to establish a trust, which may offer more substantial protection and strategic advantages. A trust legally separates the assets from the personal estates of both the settlor and the beneficiaries, thereby shielding them from individual financial risks.

It also allows for the creation of governance bodies, comprising family members and trusted professionals, who are responsible for strategic decision-making and ongoing stewardship.

Additionally, trusts provide the flexibility to embed specific, lasting directives into the management of the assets, effectively acting like an ‘algorithm’ that dictates the future use of the asset to ensure the fulfilment of the settlor’s visions.

Unlike ownership structures primarily designed for individual benefit, trusts are intended to benefit groups of people, adding an additional dimension of planning — the purpose of an asset — which is permanently attached to the asset. This purpose typically extends beyond individual interests.

Such a model is ideally suited to serve collectives like families, businesses, entire countries, or charitable ventures. This purpose-driven approach allows trusts to align assets with broader societal, familial, or organisational goals, ensuring that wealth contributes to sustainable and meaningful outcomes.

 

Exploring psychological concerns: trusteeship and the liability of trustees

Some wealth owners have psychological reservations about relinquishing control of their assets to a third party, particularly if they’re not a family member or close business associate.

To mitigate these concerns, a well-structured wealth plan should incorporate rigorous checks and balances. Family members and other trusted individuals can be incorporated into governance roles within the trust framework.

It’s also possible to establish a trust without fully funding it immediately. This approach allows for future asset transfers, without relinquishing current asset control. By funding the trust only nominally at first, owners maintain flexibility and can adjust the trust’s role based on their changing circumstances or intentions.

A trust structured in this way can serve as a “standby beneficiary” in the owner’s will. Upon the owner’s death, specified assets are transferred to the trust, activating its substantial financial and strategic role. This setup ensures that the assets are managed according to the owner’s wishes without immediate relinquishment of control.

It’s important to note that trustees are legally bound to manage the assets with as much diligence as if they were their own, strictly for the benefit of the beneficiaries. Contrary to some misconceptions, trustees can face significant financial liabilities for mismanagement. They are required to prioritise the beneficiaries’ interests and can be held personally liable for decisions that result in financial losses. This ensures a high level of accountability.

Wealth owners should therefore choose trustees who operate within jurisdictions known for stable legal systems, robust regulatory frameworks, and effective judicial processes. Careful selection helps alleviate concerns and enhances the safety and efficacy of trust arrangements.

 

Practical applications of trusts and fiduciary instruments: three scenarios

Now that we understand the foundations of trusts, let’s explore three different scenarios in which a trust can be employed.

It’s important to recognise that not all assets are well-suited to trusts. Personal items like jewellery or wristwatches are typically better passed on directly, while more complex assets — such as businesses, art collections, or funds designated for educational and charitable purposes — often require the structured oversight provided by fiduciary arrangements.

Trusts are exceptionally adaptable, able to align with a wide range of settlor values — from business and investment strategies to religious beliefs and ethical principles.

For example, a trust can be tailored to enhance social or environmental benefits, extending beyond traditional family support. Another application could be a trust structured in compliance with specific religious values, like Sharia law.

Integrating shared values into a trust fosters a strong sense of purpose and can unite a family, ensuring its success and continuity across generations.

But incorporating these values into trust planning presents challenges. It’s crucial to establish trust arrangements and select trustees who promote positive outcomes — education, entrepreneurship, financial independence, and responsibility — while avoiding potential conflicts and tensions.

The selection of the right trustee is critical. Trustees must not only have a business model that aligns with the wealth owners’ needs, but also be capable professionals with a holistic approach. They should be ready to challenge the status quo and ask tough questions. Trustees are responsible for co-ordinating the trust’s objectives with the evolving needs of both settlors and beneficiaries through long-term cooperation. A well-chosen trustee ensures that the trust operates effectively, in line with its intended purpose, and positively impacts the beneficiaries’ lives.

Ultimately, whether for asset protection or succession planning, a clear purpose and carefully selected trustees are vital to ensure the trust achieves its goals effectively and harmoniously.

 

1. Family matters: utilising trusts with strong checks-and-balances to navigate complex family dynamics

Trusts can be instrumental in family governance – particularly in families navigating complex, inter-generational and cross-border dynamics.

They are effective in managing relationships and avoiding contentious inheritance procedures, crucial for families with diverse configurations, such as multiple partners and sets of children.

For families navigating these intricate dynamics, trusts provide:

• Structured support during critical life events, such as a parent’s remarriage, where it’s important to protect children’s assets from previous relationships from unintentional transfer to new family members
• Assurance and peace of mind for ageing populations globally, securing finances for elder care and supporting those experiencing declining health and wellbeing
• Capacity-building tools, enabling family members to pursue individual ventures and manage their wealth responsibly. These tools include access to educational programs and mentoring support, tailored to each family member’s needs.

Trusts also adapt to the evolving global definitions of ‘family’, offering flexible solutions that cater to the needs of surrogate children, cohabitees, and other family members.

To further enhance the governance framework, it’s essential that the family comprehensively understands the mechanics of the trust and its forward-looking design. A deep understanding of the checks-and-balances-system is crucial as these safeguards go beyond mere formalities.

Determining who holds critical powers is key, such as the ability to revoke the trust or replace the trustee or protector. These roles are susceptible to mismanagement and could be compromised by protectors. To mitigate these risks, integrating family committees into the decision-making process to select and oversee protectors can provide a robust mechanism.

In essence, trusts provide a versatile and effective framework that enables individuals and families to safeguard assets, plan legacies, and enhance relationships and cohesion, ensuring their wealth serves as a positive influence across generations.

 

2. Business and beyond: trusts in sustaining family businesses

For business-owning families, trusts offer a strategic tool to navigate the complexities of business succession while ensuring a successful legacy endures.

These families often face unique challenges due to the involvement of diverse members who may hold different roles, from shareholders and active participants to board members and advisors.

A trust can provide a structured approach to address several critical questions:

• What is the intended role of the family business, both now and in the future?
• What rules will govern the transition of the business to the next generation?
• Under what terms can individuals enter or exit the family business?
• Who will take strategic decisions, and how will these decisions align with the family’s values and business goals?

These questions help clarify the pathway for continuity and ensure the business not only survives, but thrives under successive leaderships.

Trusts can also help solidify governance structures within the family business. By clearly defining roles and responsibilities, trusts help mitigate potential conflicts and ensure strategic decisions reflect both business needs and the family’s long-term objectives. This setup is crucial in managing relationships between family members and non-family executives, who might also play essential roles in the business.

For businesses that include trusted non-family members such as board members, managers, and advisors, trusts can play a crucial role. They provide guidelines that define the involvement and influence of these stakeholders within the business structure.

By outlining roles and recognising contributions, trusts promote long-term commitment from these key individuals. This commitment is vital for enhancing the stability of the corporate governance structure, especially during transitional phases. Effective trusts help ensure smooth continuity in leadership and ownership, which is critical during such changes.

Ultimately, the strategic implementation of trusts supports the sustained growth and prosperity of family businesses over the long term.

Furthermore, trusts can be used to safeguard the business legacy against unforeseen circumstances such as sudden incapacity or disputes. By pre-emptively addressing these issues within the trust’s framework, businesses can avoid the pitfalls that often accompany transitions in leadership and management. This proactive approach provides peace of mind to all stakeholders, ensuring the business remains stable and secure.

 

3. A tool for sustainability and planning for impact

In recent times, the role of trusts has expanded beyond traditional philanthropy to include initiatives aligned with specific ethical principles and sustainability practices. This shift is significant not only for entrepreneurs and individuals without direct heirs – who often plan to bequeath the majority of their wealth to broader society – but also for those who intend to instil their values and principles in future generations in a structured way, aiming to ensure their wealth contributes positively to societal goals.

Trusts are increasingly used to integrate concerns such as environmental stewardship, corporate responsibility, and overall sustainability into succession planning.

This approach allows wealth owners to extend their impact beyond mere wealth preservation or growth, making a significant, positive impact on society and the environment. For example, trusts can be structured to:

• Provide ongoing support to charitable institutions
• Adapt support for community initiatives over time
• Ensure family businesses or entrepreneurial ventures uphold strong environmental and social standards.

The strategic use of trusts plays a crucial role in encapsulating a settlor’s vision for a sustainable future, ensuring their wealth actively supports initiatives they care about. These could include environmental conservation, social welfare, and community development.

In this context, trustees act as custodians of this vision, tasked with integrating ethical principles into both investment and operational decisions. Their responsibilities include guiding investments to align with ethical standards, promoting responsible business practices, and fostering a commitment to societal well-being among beneficiaries.

Moreover, ethical investing guidelines within trusts can influence how assets are allocated, ensuring investments not only yield financial returns but also contribute to social and environmental objectives. This is increasingly important as both investors and the public hold businesses to higher ethical standards. Trusts can support this through clear, structured directives.

 

Balancing ethics and efficacy in wealth planning

Like any wealth planning tool, trusts and similar fiduciary structures have a dual nature. Yes, they can be misused, but they can also serve as powerful tools for purposeful wealth planning.

This duality highlights the ethical and legal challenges inherent in planning, underscoring the need for a robust legal framework that aligns with contemporary international standards and regulations. Such a framework is essential not only to prevent misuse, but also to safeguard the legitimate protection and transfer of assets.

While public discourse often focuses on the negative aspects of trusts, it’s crucial not to overlook the positive outcomes and ongoing reforms in trust law and practices.

Acknowledging these advancements offers a more balanced perspective, affirming the indispensable and valuable role of trusts in effective wealth planning.