Long-term Trends In Trust Law Favour IFCs

Three important trends in the long-term evolution of trust law are shifting its centre of gravity from England to the world of international financial centres. First, there is a growing demand for trust law to meet new needs. In particular, the growth in sophistication of IFC clientele to include much more complex matters – both for high-net-worth clients and for business clients – than the older ‘hold assets and cut cheques’ business is increasing the demand for innovation offshore. Over the last few decades, this has put IFCs at the forefront of trust law’s development of new means of solving ever more complicated problems.

Second, part of the means of meeting that demand has been statutory innovations in trust law, from comprehensive trust laws on the Jersey model, to more targeted innovations such as Cayman’s STAR trust legislation. These are enabling significant innovations in trust law to develop. Using collaboratively designed statutes drawing on private sector expertise, IFCs have been able to give their trust law large jumps in capacity.

Third, at the same time, IFC judiciaries have developed both their own bodies of case law and the calibre of judicial personnel necessary to take a leading role in trust law’s development, through decisions in contentious matters and their supervisory jurisdiction. Thus, IFCs have the means to meet the demand for development of trust law through both statutes and case law.

Growing Demand

Perhaps trust law’s most important characteristic is its considerable flexibility. In the right legal environment, skilled lawyers can craft solutions to a wide array of problems through careful drafting of the trust documents. Given this flexibility, trusts turn up as part of the solution to complex estate plans, pension schemes, asset securitisations, investment funds, and dozens more problems individuals and businesses face. The advantages of trusts in solving these problems go beyond drafting flexibility; crucially, having access to the supervisory jurisdiction of courts to address unforeseen issues faced by trustees gives trusts an advantage over many other competing solutions using various business entities.

Demand for IFC trust law is also growing because of the increased wealth in a wider array of countries around the world. Every major IFC is targeting clients from Africa, Asia, Latin America, and the Middle East as these regions develop, and businesses and high net worth families from those regions look for global solutions to their problems. These clients bring much more complex problems than merely locating assets outside of their home jurisdiction, as was often the case in the early days of the offshore trust business.

Statutory Innovations

Many IFCs began with trust law inherited through English law received during colonial or other affiliation with Britain. In many cases, this was supplemented by local statutes, usually based on largely procedural UK Trustee Acts. The early IFC trust business – built around nonresident trusts that acted primarily as a means of separating the ownership of assets from settlors resident in Britain for tax purposes – required little more. Over time, however, IFCs began to seek competitive advantages by introducing innovations in their trust law through local statutes. The first round of these tended to be extensions of the perpetuities and accumulations periods, increased flexibility with respect to trustee duties, and aggressive choice of law rules. Soon, however, IFCs embarked on a second round of more ambitious statutory efforts. Jersey’s 1984 comprehensive trust statute was soon copied and adapted by other jurisdictions, and the introduction of the non-charitable purpose trust by Bermuda inspired similar moves among other IFCs. Such innovations have continued, with the most recent examples including the adaptation of the civilian foundation into common law jurisdictions, and the passage by many IFCs of statutory “Hastings Bass” remedies (along with restatements of the law of mistake).

These statutory innovations not only introduced new concepts into trust law, but transformed IFCs’ case law into a more indigenous body of law. This can be seen by comparing the citations in various editions of The Jersey Law of Trusts, a treatise authored by distinguished trust law experts. The 1989 edition, published just after the first amendment to the Jersey statute, cites mostly English precedent from the years before 1960, roughly equal amounts of Jersey and English precedent for the period 1960-1979, with Jersey precedent taking a substantial lead for the 1980s. By the 2013 edition, even the earlier citations to English precedent have fallen away, with post-1984 Jersey precedent overwhelmingly dominant. Examination of treatises covering other IFCs’ trust laws show a similar pattern.

Growing IFC Precedent

As IFCs’ trust business expanded, so did the experience of their courts. Judges in IFCs such as Sir Michael Birt in Jersey, Ian Kawaley in Bermuda, David Doyle in the Isle of Man, and Anthony Smellie in Cayman, developed international reputations, and many took positions on courts abroad or appellate after completing their service at home (Birt and Smellie now serve on the Cayman Court of Appeal, Kawaley and Doyle on the Cayman Grand Court.) Judges like these regularly write opinions that influence trust law beyond their own jurisdictions, providing important decisions on issues such as the role of protectors, choice of forum, the power to vary trusts, and many more.

The development of the judiciary’s role in IFCs also grew through the exercise of supervisory powers. IFC-based trustees seeking judicial blessings for potentially controversial major decisions helped develop both judicial expertise and the advantage of IFCs as trust jurisdictions by enhancing the jurisdictions’ reputations for handling complex matters, creating a positive feedback loop that helps IFCs maintain their position in the global law market for trust law.

Handicapped Competitors

At the same time as IFCs were building their capacity as trust jurisdictions, IFCs’ onshore competitors have handicapped themselves in multiple ways. Australia, Canada, New Zealand, the United Kingdom, and the United States all suffer from important disadvantages in meeting the demand for innovations in trust law. First, their legislatures are often too busy to take up trust law matters and their courts rarely have the concentration of trust law expertise present in IFCs to generate the necessary evolutionary precedent. In each of these countries, various law reform commissions have recommended the introduction of innovations now common offshore, such as non-charitable purpose trusts. Few of these calls to action have been headed by onshore legislatures, which often view trust law as a niche issue. They are not wrong to do so, for from the point of view of a large jurisdiction, the direct and indirect revenue impacts of a vibrant trust industry are quite small. It is thus no accident that the few US states that have been responsive to calls to modernise their trust laws or adopt particular innovations have tended to be smaller ones, such as South Dakota (asset protection trusts), and New Hampshire and Wyoming (private foundations). The few larger jurisdiction exceptions to this, such as Ohio (asset protection trusts), are jurisdictions where trust professionals have been able to build coalitions with other financial industry partners that are large enough to be able to get the legislature’s attention.

Further, most large jurisdictions appear far more interested in using their tax laws to eliminate any tax advantages that might be gained through use of a trust, reducing the demand for innovation in their trust laws. For example, the evolution of British revenue acts’ anti-avoidance rules aimed at trusts from the 1960s has both produced a complex web of statutory language filled with traps for the unwary and decreased the room for innovation in trust law. Of course, trust law isn’t going to disappear in any of those jurisdictions – trusts are far too useful even in their simplest forms for that to happen – but neither will innovations develop in them.

The Future Of Trust Law

What does the shift of trust law’s centre of gravity offshore mean for the future? There are at least three important consequences. First, a trust law whose future is largely being developed offshore will be a more nimble, more innovative trust law. IFC practitioners and governments are strongly incentivised to find ways to solve problems for clients and potential clients. Trust law’s flexibility makes it an important part of their toolkit in developing such solutions.

Second, the IFC-centeredness of trust law is likely to grow over time. While onshore courts have access to offshore precedents (just as offshore courts have access to onshore precedents), the continued expansion of IFCs’ trust business means that IFC courts will expand their competitive advantage in expertise. And as IFCs continue to introduce innovations via statutes, they will expand their lead over the big jurisdictions by having those innovations on the books and by their courts’ growing expertise in implementing them. For example, IFC courts are the only place where there is expertise in overseeing noncharitable purpose trusts, and even in the unlikely event that an English statute was passed to recognise them, IFCs’ experience would make their versions less uncertain. Similarly, those IFCs with statutory Hastings-Bass and mistake rules are continuing to build expertise in fixing problems with trustee decisions with unforeseen negative consequences, a safety net no longer available under English law.

Third, the diversity among IFCs makes offshore trust law more robust as a whole. Not every IFC adopts every innovation, and even jurisdictions that both choose a similar direction for an innovation often do so in different ways. A STAR trust is not a VISTA trust, and even close geographic neighbours with similar histories such as Guernsey and Jersey are not in complete alignment. The many different forms that a particular innovation may take allows the global law market a wider array of products, and lets the competition among them determine which is the superior solution for a particular problem.

Andrew Morriss
Andrew Morriss is Professor of the Bush School of Government & Public Service and School of Law at Texas A&M University. Prior to this position, he was the Dean of the Texas A&M School of Innovation, the Dean of the Texas A&M School of Law, the D. Paul Jones & Charlene A. Jones Chairholder in Law at the University of Alabama, the Ross & Helen Workman Professor of Law at the University of Illinois, and the Galen J. Roush Chair in Law at Case Western Reserve University.