Offshore trust
Encyclopedia
An offshore trust is simply a conventional trust
that is formed under the law
s of an offshore jurisdiction
.
Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor
transferring (or 'settling') assets (the 'trust property') on the trustee
s to manage for the benefit of a person or class or persons (the 'beneficiaries
').
However, a number of offshore jurisdictions have modified their laws to make their jurisdictions more attractive to settlors forming offshore structures as trusts.
Also, two civil jurisdictions, who are sometimes considered to be offshore, Switzerland
and Liechtenstein
have artificially imported the trust concept from common law
jurisdictions by statute
.
which, in practical terms, puts limits on the length of time within which all trust property must be distributed. Because of the strictures of the rule, a number of trusts have been struck down in wildly hypothetical circumstances because of possible infringement of the rule (see, e.g. the fertile octogenarian
).
Most offshore jurisdictions which have sophisticated trust laws have modified their laws relating to perpetuity to allow settlor to select lengthy, fixed, perpetuity periods, to avoid the use of "Royal lives" clauses
. Many have also adopted "wait and see" laws, which mean that trusts which might potentially infringe the rule against perpetuities are no longer automatically invalid, but instead the trust remains valid unless and until the perpetuity period is breached.
No recognised offshore jurisdiction has yet gone as far as some U.S. states and abolished the rule against perpetuities entirely in relation to trusts.
which provides (briefly) that where trust property includes the shares
of a company, then the trustees must take a positive role in the affairs on the company. The rule has been criticised
, but remains part of trust law in many common law jurisdictions.
A number of offshore jurisdictions (notably the Cayman Islands
, with STAR trusts, and the British Virgin Islands
, with VISTA trusts) have created special forms of trust that may be expressly settled without imposing an obligation of the trustees to interfere in management in this way.
Paradoxically, these specialised forms of trusts seem to infrequently be used in relation to their original intended uses. STAR trusts seem to be used more frequently by hedge fund
s forming mutual fund
s as unit trust
s (where the fund managers wish to eliminate any obligation to attend meetings of the companies in whose securities they invest) and VISTA trusts are frequently used as a part of orphan structure
s in bond
issues where the trustees wish to divorce themselves from supervising the issuing vehicle.
Critics in onshore jurisdictions have suggested that these specialised trusts have provisions that so fundamentally undermine the nature of a trust that they should not be recognised in an onshore jurisdiction, but whatever the view of onshore tax authorities and regulators, it seems unlikely that the courts in onshore jurisdictions would be prepared to derogate from the Hague Convention on the Law Applicable to Trusts and on their Recognition.
, but the Bahamas also has a species of asset protection trust) have provided special trusts which are styled as asset protection trusts. Whilst all trusts, to a degree, have an asset protection
element to them some jurisdictions have enacted laws trying to make life difficult for creditors to press claims against the trust (for example, by providing for particularly short limitation periods). In practice the effectiveness of such trusts is limited as the bankruptcy
and/or divorce
laws in the settlor's home jurisdiction will usually operate to set aside transfers to the trusts, and most jurisdictions (including offshore jurisdictions) set aside transactions entered into defraud creditors
.
that they are permitted) a wider range of investments, including higher risk investments such as derivatives
and futures contract
s.
. Such trusts need to enforce a "protector" to be able to enforce the terms of the trust, but doubt remains as to who should be treated as the beneficial owner of the trust funds for tax purposes prior to its distribution.
Interestingly, no offshore jurisdiction yet appears to have made a serious effort to expand upon the flexibility of discretionary trust
s in relation to certainty of objects, as expounded in McPhail v Doulton
. This may be because the common law rules are now considered to be sufficiently flexible to make no widening necessary to attract trust business.
There is a common perception that offshore trusts are predominantly used by wealthy individuals and families as part of their tax planning. This may be true, however there are also other purposes that offshore trusts are used for.
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
that is formed under the law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
s of an offshore jurisdiction
Offshore financial centre
An offshore financial centre , though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds....
.
Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor
Settlor
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
transferring (or 'settling') assets (the 'trust property') on the trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
s to manage for the benefit of a person or class or persons (the 'beneficiaries
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
').
However, a number of offshore jurisdictions have modified their laws to make their jurisdictions more attractive to settlors forming offshore structures as trusts.
Also, two civil jurisdictions, who are sometimes considered to be offshore, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
and Liechtenstein
Liechtenstein
The Principality of Liechtenstein is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east. Its area is just over , and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan...
have artificially imported the trust concept from common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdictions by statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
.
Rule against perpetuities
Trusts in general are subject to the rule against perpetuitiesRule against perpetuities
The common law rule against perpetuities forbids some future interests that may not vest within the time permitted; the rule "limit[s] the testator's power to earmark gifts for remote descendants"...
which, in practical terms, puts limits on the length of time within which all trust property must be distributed. Because of the strictures of the rule, a number of trusts have been struck down in wildly hypothetical circumstances because of possible infringement of the rule (see, e.g. the fertile octogenarian
Fertile octogenarian
The fertile octogenarian and the unborn widow are two legal fictions from the law of real property that can be used either to invoke the rule against perpetuities to make an interest in property void or, alternatively and much more frequently, to demonstrate the seemingly bizarre results that can...
).
Most offshore jurisdictions which have sophisticated trust laws have modified their laws relating to perpetuity to allow settlor to select lengthy, fixed, perpetuity periods, to avoid the use of "Royal lives" clauses
Royal lives clause
A Royal lives clause is a contract clause which provides that a certain right must be exercised within the lifetime plus 21 years of the last living descendant of a British Monarch who happens to be alive at the time when the contract is made....
. Many have also adopted "wait and see" laws, which mean that trusts which might potentially infringe the rule against perpetuities are no longer automatically invalid, but instead the trust remains valid unless and until the perpetuity period is breached.
No recognised offshore jurisdiction has yet gone as far as some U.S. states and abolished the rule against perpetuities entirely in relation to trusts.
Management of underlying companies
Trusts in general are subject to the rule in Bartlett v Barclays BankBartlett v Barclays Bank
Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515 in an English trusts law case. In it Brightman J gave a comprehensive discussion of the duties of trustees in connection with companies whose shares are part of the trust property...
which provides (briefly) that where trust property includes the shares
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
of a company, then the trustees must take a positive role in the affairs on the company. The rule has been criticised
Bartlett v Barclays Bank
Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515 in an English trusts law case. In it Brightman J gave a comprehensive discussion of the duties of trustees in connection with companies whose shares are part of the trust property...
, but remains part of trust law in many common law jurisdictions.
A number of offshore jurisdictions (notably the Cayman Islands
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...
, with STAR trusts, and the British Virgin Islands
British Virgin Islands
The Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
, with VISTA trusts) have created special forms of trust that may be expressly settled without imposing an obligation of the trustees to interfere in management in this way.
Paradoxically, these specialised forms of trusts seem to infrequently be used in relation to their original intended uses. STAR trusts seem to be used more frequently by hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s forming mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s as unit trust
Unit trust
A unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, Malaysia and the UK, unit trusts offer access to a wide range of securities....
s (where the fund managers wish to eliminate any obligation to attend meetings of the companies in whose securities they invest) and VISTA trusts are frequently used as a part of orphan structure
Orphan structure
An orphan structure is a financing term referring to a company whose shares are held by a trustee on a charitable purpose trust. The company is said to be an "orphan" as it is not beneficially owned by anyone....
s in bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
issues where the trustees wish to divorce themselves from supervising the issuing vehicle.
Critics in onshore jurisdictions have suggested that these specialised trusts have provisions that so fundamentally undermine the nature of a trust that they should not be recognised in an onshore jurisdiction, but whatever the view of onshore tax authorities and regulators, it seems unlikely that the courts in onshore jurisdictions would be prepared to derogate from the Hague Convention on the Law Applicable to Trusts and on their Recognition.
Asset protection
Certain jurisdictions (notably the Cook IslandsCook Islands
The Cook Islands is a self-governing parliamentary democracy in the South Pacific Ocean in free association with New Zealand...
, but the Bahamas also has a species of asset protection trust) have provided special trusts which are styled as asset protection trusts. Whilst all trusts, to a degree, have an asset protection
Asset protection
Asset protection is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments...
element to them some jurisdictions have enacted laws trying to make life difficult for creditors to press claims against the trust (for example, by providing for particularly short limitation periods). In practice the effectiveness of such trusts is limited as the bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
and/or divorce
Divorce
Divorce is the final termination of a marital union, canceling the legal duties and responsibilities of marriage and dissolving the bonds of matrimony between the parties...
laws in the settlor's home jurisdiction will usually operate to set aside transfers to the trusts, and most jurisdictions (including offshore jurisdictions) set aside transactions entered into defraud creditors
Fraudulent conveyance
A fraudulent conveyance, or fraudulent transfer, is a civil cause of action. It arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees...
.
Powers of investment
Most traditional jurisdictions only permit trustees to make very conservative financial investments. Most offshore jurisdictions permit (or allow the settlor to specify in the trust instrumentTrust instrument
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
that they are permitted) a wider range of investments, including higher risk investments such as derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
and futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s.
Purpose trusts
Whilst in most common law jurisdictions, trusts must either be formed for the benefit of persons, or charitable purposes, many offshore jurisdictions have also amended their laws to permit trusts to be formed for non-charitable purposesPurpose Trust
A purpose trust is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind. In most jurisdictions, such trusts are not enforceable outside of certain limited and anomalous exceptions, but some countries have enacted legislation...
. Such trusts need to enforce a "protector" to be able to enforce the terms of the trust, but doubt remains as to who should be treated as the beneficial owner of the trust funds for tax purposes prior to its distribution.
Interestingly, no offshore jurisdiction yet appears to have made a serious effort to expand upon the flexibility of discretionary trust
Discretionary trust
In British and Canadian law, a discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia...
s in relation to certainty of objects, as expounded in McPhail v Doulton
McPhail v Doulton
Re Baden's Deed Trusts or McPhail v Doulton [1971] AC 424 was a landmark decision of the House of Lords in English trusts law.-Facts:...
. This may be because the common law rules are now considered to be sufficiently flexible to make no widening necessary to attract trust business.
Anachronistic common law rules
Many offshore jurisdictions have also legislated to abolish certain anachronistic common law rules which sometimes cause difficulty for trust planning. These include:- Rule in Howe v Earl of Dartmouth
- Rule in Maloney v Alveranga
- Rule in Re AtkinsonRule in Re AtkinsonRe Atkinson [1904] Ch 160 is an English trusts law case, which lays down a rule of equity relating to the disposition by the trustees of an authorised mortgage security where the security forms part of a trust fund, and the beneficiaries of the trust fund include a tenant for life and a remainderman...
Use of offshore trusts
Official statistics on trusts are difficult to come by as in most offshore jurisdictions (and in most onshore jurisdictions), trusts are not required to be registered.There is a common perception that offshore trusts are predominantly used by wealthy individuals and families as part of their tax planning. This may be true, however there are also other purposes that offshore trusts are used for.
- Offshore trusts are also sometimes formed as unit trusts to operate as a mutual fundMutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
. - Offshore trusts are often used as part of an orphan structureOrphan structureAn orphan structure is a financing term referring to a company whose shares are held by a trustee on a charitable purpose trust. The company is said to be an "orphan" as it is not beneficially owned by anyone....
in capital markets or trade finance transactions. - Pan-national non-governmental bodies are sometimes established as offshore trusts. For example, the International Cricket CouncilInternational Cricket CouncilThe International Cricket Council is the international governing body of cricket. It was founded as the Imperial Cricket Conference in 1909 by representatives from England, Australia and South Africa, renamed the International Cricket Conference in 1965, and took up its current name in 1989.The...
is formed in the British Virgin IslandsBritish Virgin IslandsThe Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
.